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Drug firms starting to drag themselves out of the gutter
Last December the head of a large Russian pharmaceuticals company was arrested in the Urals. His crime? The group’s laboratory at the Irbit plant near Sverdlovsk was being used to manufacture illegal drugs — 5kg of amphetamines a week for sale to users in Moscow.
In the rough-and-tumble world of Russian pharmaceuticals, such tales raise few eyebrows. As in many other areas of Russian life, corruption and a lack of state control have fostered an environment in which legitimate businesses often feel as if their backs are against the wall.
For all the obstacles, however, a growing number of companies believe that their efforts are worth it. The legitimate Russian drugs market is booming, and the potential rewards for Western companies, as well as domestic competitors, are huge.
Last year the Russian pharmaceutical market was worth $8.4 billion, a 32 per cent increase from 2004, making it the fastest growing one in the world. It is expected to reach $15 billion (£7.7 billion) to $17 billion by 2010. This brisk expansion is driven by a flourishing economy, which, engorged by billions of dollars from the oil and gas industry, is itself growing at more than 7 per cent a year.
As living standards rise, newly affluent Russians are choosing to spend more and more of their income on their health — little surprise, as Russia is facing a profound healthcare crisis. Since the collapse of the Soviet Union, death rates have soared, with infectious diseases such as tuberculosis, hepatitis and HIV/Aids spreading rapidly alongside traditional killers such as heart disease, cancer and alcoholism.
Even with significant immigration from other former Soviet republics, the Russian population has shrunk from 147 million in 1989 to 143 million today. Among Russian men — who have been hit particularly badly — average life expectancy stands at only 59 years, lower than in Pakistan or Bangladesh. If trends continue, the Russian population could drop to 100 million by 2050. Last year concerns about the long-term economic and political implications prompted the Government to announce the creation of a $1.7 billion federal reimbursement scheme to provide subsidised drugs for sick and elderly citizens.
The programme, the first of its kind since the state-sponsored health system imploded in the early 1990s, works by setting out a list of more than 2,000 drugs produced by 225 manufacturers that the Government has agreed to subsidise under certain conditions. The programme, which is being financed from the Government’s windfall of oil-related taxes, has provided a massive overnight boost to the domestic drug industry and a massive incentive for Western and domestic suppliers of pharmaceuticals.
"The extra investment has been a huge opportunity," Robert Szymanski, the Moscow-based vice-president for Eastern Europe and Russia at the Anglo-Swedish drugs giant AstraZeneca, said. The company has trebled its presence in the country since 2004 from 200 to 600 full-time employees and is growing fast.
Novartis, of Switzerland, and Sanofi-Aventis, of France, are the biggest foreign players in Russia, with more than 11 per cent of the total market between them. GlaxoSmith-Kline is the largest UK player there but, with only a 2.1 per cent share of sales, the company has plenty to play for.
"The market is developing extremely fast and there is tremendous potential for growth," said Alex Marcek, a director of Zentiva, a Czech company 25 per cent owned by Sanofi-Aventis and one of the five largest pharmaceutical companies in Eastern Europe. Although the potential is huge, so, too, are the hazards of operating in the fast-growing but unpredictable Russian drugs market, Mr Marcek said.
The reimbursement scheme has delivered a big shot in the arm for the industry, but it remains a shambolic affair, prone to sudden changes in policy and, sometimes, worse.
Midway through its first year in operation, participating drug companies were told that the annual budget had been used up. One Western drug firm had to wait more than 11 months before it was repaid by the Government for drugs that had been supplied to patients. Paul Melling, a partner at the Moscow offices of the US law firm Baker & McKenzie, has graver concerns.
"The reimbursement programme has provided opportunities for unscrupulous providers to cheat the system," he said. Corruption is not restricted to pharmaceutical companies trying to defraud the Government — a predictable enough ruse. The list of pharmaceuticals covered by the programme frequently is revised with little explanation given about why products have been dropped or added. Rumours abound of payoffs and bribes paid to ensure that particular products are included.
This month police arrested six senior officials from the Health Ministry on charges of bribe-taking. They included Andrei Taranov, the director of the state medical insurance fund.
Mr Melling said that in addition to this kind of endemic corruption, Western drug companies operating in Russia suffer from slack law enforcement. He said: "The substantive legislation is now in place in Russia, but the day-to-day reality of enforcing intellectual property rights is a real challenge."
Counterfeits are thought to account for up to 20 per cent of the total market for drugs in Russia, Mr Szymanski said. Such problems are compounded because the industry remains highly fragmented, with hundreds of tiny local manufacturers competing against large Western firms. Nevertheless, there are signs that the Russian drugs market is maturing. Mr Melling said: "There is a growing understanding of the importance of the rule of law. In fact, the environment is a million times better than it was in the mid to late 1990s, when very few Western companies were interested."
To most observers this is a welcome sign, as it represents the development of a credible home-grown industry that will encourage greater stability and the rule of law in Russia. Optimists hope that OJSC Pharmstandart and companies like it represent the future of the emerging Russian pharma industry.
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