When the Russian Federation emerged from the former USSR in 1991 all the structures of the past social net that provided for the complete healthcare needs of citizens were just a memory of the past – nothing was left when the centralized distribution of medication of the former USSR stopped. No drug registry existed during the first few years of independence and foreign pharmaceutical companies were able to sell just about anything they had in stock into the newly created private distribution structure. As the production of consumer goods including pharmaceuticals had taken place in other socialist countries in Central and Eastern Europe, regional players were able to leverage name brand recognition and functioning production assets to dominate the Russian market. Multinationals entered the fray but many retreated when the economy was crushed in 1998 by the rouble meltdown which made the currency 300-400% less valuable against the US dollar almost overnight. However, the Russian economy quickly rebounded from the crisis thanks to its immense natural resources, and is now a bona fide petro-economy with net creditor status. President Vladimir Putin’s dominant United Russia party has been able to achieve budget surpluses large enough to put billions of dollars away for the future while also funding tremendous works in four national priority presidential programs, the largest being healthcare (Zdorovie), a seemingly embarrassing issue in such a prosperous country in the past.
World Health Organization (WHO) statistics speak volumes about the negative effects of more than a decade without any type of real national healthcare coverage. The health of Russia’s population has dipped to 127 out of 192 WHO member states and the public health system is even worse – #130. Communicable diseases share a substantially higher share of the disease burden than in Europe and Russia has posted the world’s highest increase in HIV incidence rates. Russian men have suffered the most severe health deterioration and now die at the average age of 59. This is principally due to cardio diseases and external causes (accidents, poisoning, and injuries), mostly attributed to unstable economic conditions, unhealthy lifestyles and widespread neglect of risk factors. Additionally, more than two thirds of the population lives in areas affected by air pollution and 63% of males smoke, so respiratory diseases have a high prevalence and cardiovascular diseases cause 56% of all Russian deaths. The two major killers, ischemic heart disease and cerebrovascular disease, both cause at least 400% more deaths per 100 000 people per year than in the EU.
Today, living standards vary widely across Russia’s 11 time zones, 89 federal entities, and 20 cities with a population greater than one million throughout the largest geography of any country in the world. Today, 80% of Russians are ethnically Russian, yet immigration from over 100 other ethnic minority groups has created a real public health challenge. A large number of children live in disadvantaged social and economic conditions and gross inequalities in personal and regional income are significant determinants of ill health. The population is aging, fertility rates have fallen to 1.3 children born per woman and mortality rates in all age groups except infants are on the rise. The former population of 150 million has been reduced to 143 million today and is steadily falling at a rate of 800 000 per year.
This declining general health coupled with an increased annual federal healthcare budget worth $5.7 billion total in 2006 – targeting improvement in medical staff compensation, facility upgrades, new equipment, and a new focus on preventative care throughout the whole country – have suddenly made Russia a hotbed of pharmaceutical industry activity. The controversial first large-scale federal social program since the creation of the Russian Federation, the DLO, was launched in the beginning of 2005 to bring greater access to modern pharmaceuticals to an entitled population of pensioners and low-income families of about 8 million people. The inaugural $1.8 billion budget has steadied at $1.2 billion in 2006 and 2007, and was the major catalyst behind the Russian pharmaceutical market’s rise to the #12 global ranking in 2005 before surpassing Mexico and Brazil to become the world’s 10th largest ready-to-use drugs market in 2006.Through world-leading 28% growth, Russia is now an $8.4 billion market.
The DLO led the state-financed sector’s 82% growth and upgraded its contribution to the overall Russian market to 39%. However, plenty of industry insiders are concerned about the hasty implementation and corruption in the unsophisticated Program which has very recently resulted in budget overruns and more than $1 billion in outstanding bills and subsequently greatly reduced or halted drug deliveries in many cases. The result is a massive ongoing scandal which in November 2006 first involved the dismissal of the leadership of the Federal Mandatory Medical Insurance Fund (FMMIF), the Ministry of Health and Social Development (Minzdrav) entity responsible for processing DLO payments, and most recently in March 2007 the dismissal of Ramil Khabriev, head of the Federal Service for Health and Social Development Supervision (Roszdravnadzor), which was created in 2004 to supervise the overall quality assurances of medicines and to run the DLO. All this could mean that while the DLO has essentially made the market it will soon be dismantled. Nonetheless, even the commercial market alone should be enough to attain 10-20% annual market growth in the next several years.
Getting back to basics
Milos Petrovic, the Serbian head of Russian representation of Roche, the #2 player in the overall Russian (ethical) prescription segment and #2 in the DLO reimbursement segment (according to preliminary 2006 data by Pharmexpert), believes that “if one can assess the success of a product launch in 3-6 months in an average European country, here we need to talk about one to two years. Two factors are responsible – the size of the country and a conservative attitude amongst many Russian physicians. But when the product is well accepted, its life cycle is longer than in Western Europe.” Nonetheless, Roche’s leading products in Russia – MabThera, NeoRecormon and Herceptin – are the same as in most other European countries and three big launches where recently conducted in three months: Bonviva, MabThera for rheumatoid arthritis, and Tarceva.
Petrovic offers a historical perspective on his product portfolio. “In the late 1990s only the City of Moscow had any type of basic healthcare which might be considered adequate. For the very first time in 2005, some regions started to seriously treat patients with oncology or virology diseases or set up proper dialysis stations. In the regions that were inexperienced in the usage of innovative products, we saw a reluctant to use them for fear that patients might die “of such strong medicines.” The massive educational efforts on physicians and nurses were left to us. Once they discovered that they could treat Non-Hodgkin’s Lymphoma with MabThera as doctors do in Germany or the USA, they then had to overcome the lack budget in hospitals for infusion pumps needed for the drug to be administered. We had to assist healthcare authorities to solve such issues, from finding where to buy infusion pumps, all the way to serious education on how to diagnose and treat.”
As a specialty drug provider it is no surprise that about 60% of Roche’s sales in Russia come from the DLO program but Petrovic sees the DLO of today as far from sufficient. Nonetheless, “we need to give healthcare policymakers a chance to work with the community to improve the system. First of all, Russia needs to gain a full understanding of epidemiology. Secondly, the Ministry of Health must continue its work to establish uniform treatment guidelines for common diseases so physicians know which drug or group of drugs to give first. Only then will it become relatively easy to define the budget required to cover the needs of a population. The current gap in the Ministry of Health budget for 2006 is simply a consequence of inadequately calculated needs of the sick in Russia. Nobody knew what to expect for the DLO because there was no history on which to base funding decisions. Somebody needs to make these calculations and feed the defined needs into the regional and federal funding mechanism. Once this happens, the potential of Russia can be unlocked. This is the key, as the cost of the reimbursement of medicines is not such big money for the #3 country in the world in foreign currency reserves, higher than the whole European Union. The issue is now if the Russian Federation really wants to bring its healthcare system to the European level,” assets Petrovic.
You must eat one less piece of cake!
Just as foreigners have been brought in to lead the Russian operations of many multinationals in the past, many believe that the tables will turn within the next 5-10 years. The Russian middle managers of today have experienced first-hand many stages of development: communism, fast-changing Perestroika, and now a more regulated market. In 2001 Sergei Smirnov became the youngest vice president at Novo Nordisk worldwide. As vice-president international operations, he is responsible the 13-market Commonwealth of Independent States (CIS) region in which a single annual tender for all critical medical products is often the norm. Nonetheless, the Russian reimbursement system which Smirnov considers “similar to what we find in Europe” is ideal. Diabetes is the #2 category in the Russian DLO program after cytostatics and receives more than the global 10% of overall healthcare expenditure. Since 70-80% of people with diabetes have the “disabled” status necessary to be included in the DLO program, it is no wonder that more than 85% of Novo Nordisk’s sales, the highest ratio of all top players, come from the program.
While many multinationals are still marketing old-generation products like 17 year-old antibiotics and ace-inhibitors that no longer exist in the West, the DLO has improved access to more modern and efficient insulin like the short-acting insulin Aspart (NovoRapid®), thus improving predictability and control. The clear advantage, according to Smirnov, “is that the majority of people do not know exactly how much or what they are going to eat, and our dosage is based on exactly what they eat. Giving treatment adequate to diet has helped us to reduce the HbA1c significantly.”
Novo Nordisk’s global medical ambition is to reduce HbA1c to 7%, the point of adequate control, but the majority of people in Russia have an HbA1c above 10%. To Smirnov, “even to reduce it by 1% can provide a significant reduction of risks such as heart attack, micro-vascular complications, cardiovascular disease and death. That’s why we have always worked very closely with specialists and healthcare authorities in order to realize this medical ambition particularly by treating patients with Type 2 diabetes better.” Despite the common view that diabetes may be the only disease which has been given special priority by the Russian authorities, only 2.3 million of the estimated 8 million people with diabetes have been diagnosed, and the average consumption of insulin per capita in Russia is 57 international units compared to 350 units in Germany.
Novo Nordisk has been working for years now to do diagnosis late complications of diabetes and screen for diabetes in different regions through specialists from the Endocrinological Scientific Centre of the Russian Academy of Medical Sciences who work in the Novo Nordisk Mobile Diabetes Centre. “Another good outcome from this project is the creation of awareness amongst the population, general practitioners, and public policy makers. This is magic,” asserts Smirnov. He adds: “by spending a little more money earlier, we can definitely save a lot of money later on since diabetes is dangerous because of its complications.” It is for this precise reason that Novo Nordisk placed its Mobile Diabetes Centre next to the Inter-Parliamentary Assembly of CIS Countries in Saint Petersburg when parliament deputies were to discuss the Model Law on diabetes. “After they had been tested and educated about diabetes, they adopted this because they already knew what it was all about. Closing the gap between the treatment currently offered and what could be offered based on available guidelines and scientific knowledge saves both money and lives and is part of the sustainable development of healthcare systems.”
Smirnov is comfortable that Novo Nordisk’s advocacy of a more seamless system of care in which medical treatment is just one element will serve as an ample defense of his stable 50% market share from three new Russian insulin manufacturing ventures which are planned to come online with enough capacity to meet the overall demand of the Russian market. “We have very good relationships because we consider education, effective data management and clarity on roles and responsibility as equally important elements. Our stakeholders know that we are very reliable in terms of superior quality in everything we do: high quality products, security of deliveries and supporting service activities. Our aim is to encourage a more collaborative approach as part of the solution for better health outcomes. Whatever happens, we are always ready to help,” concludes Smirnov.
A double-edged sword: Zero Tolerance compliance policies in Russia Or No good deed goes unpunished
Stefan Jentzsch, Head of Representation – Russia and CIS at Eli Lilly Vostok, came from the fairly structured Saudi Arabian market in 2003 to find quite a different situation in Russia. Jentzsch believes “this country needs to transition to a better funded, insurance-based system, while strengthening outpatient care (which accounts for only 35% of public health resources versus 60% in the EU), and developing treatment standards as the main basis for reimbursement decisions in order to ensure better access to innovative medicines.”
Jentzsch’s local unit lags far behind Eli Lilly’s Pharmaceutical Executive #10 global ranking in 2005 yet he explains that unwavering global compliance standards and a disconnect between charitable acts and product inclusion in the DLO are the causes. While up to 80% of prescribed drugs are sold with prescriptions in Russia, Jentzsch claims: “We are complying with the highest ethical standards in Russia. We are not encouraging patients to buy a prescription drug in a pharmacy without having received a prescription from a physician.” Lilly has taken a leading role in the process of updating the Code of Marketing Practices of the Association of International Pharmaceutical Manufacturers (AIPM), the main industry voice of the international pharmaceutical community, in 2006. “We want every company in the Russian market to play by the same rules, in full compliance with all applicable laws and regulations,” asserts Jentzsch. However, it is clear that the entire AIPM membership does not stand behind such a vision as its last executive director, Sergei Boboshko, recently stepped down partly due to lack of consensus in its membership of both innovative and generics companies over such matters.
Despite all its frustrations with the DLO, Lilly is committed to the program because “access to innovative, often life-saving medicines is still limited in this country,” asserts Jentzsch. While Lilly has historically had a clear focus on diabetic care in Russia – which still accounts for 50% of Russian sales – it takes second seat to the leading role of his organization in Lilly’s global multi-layer philanthropic initiative on MDR-TB in partnership with the WHO. The program supports essential activities in the MDR-TB hot spots in the world – China, India, Latin America, South Africa, and Russia where the WHO states that 86 new cases of TB are recorded per 100 000 people per year, more than 6.5x the EU average. Jentzsch explains the Russian role: “we started by funding training activities in a specialized treatment center in Tomsk which have greatly decreased mortality. This now forms the basis of training conducted in specialized research centers throughout Russia. We also transfer drug-manufacturing technology for two MDR-TB antibiotics – capreomycin and cycloserine- to SIA International, one of Russia’s top two diversified distributors and pharmaceutical holdings. Their personnel will be provided with the specific training required to best utilize this technology in accordance with good manufacturing practices and to help ensure the quality and sustainability of drug-manufacturing.” Lilly could have simply imported these drugs from its UK production but instead decided to help to build local capacity at no financial gain. “The premise is that local partners know better what is right for their country and are able to optimize the supply situation of these two crucial drugs. We are in Russia for the long run and are here to improve or even save the lives of numerous patients,” concludes Jentzsch.
Taking full advantage of Russian medical manpower
Russia’s long-established tradition of solid medical and public health science has left the legacy of a health workforce that is substantial in size and has high professional qualifications. Despite poor working conditions and the general feeling of dissatisfaction that is probably linked to the fact that physicians no longer earned as much as everyone else with a similar degree of qualifications as they did in 1991, Russia still has nearly 50% more doctors per capita than in the EU. While all Russians are technically guaranteed free medical services, those that find jobs as doctors make ends meet by soliciting bribes. Others seek out substantially better compensation as medical representatives (90% of the nearly 10,000 medical representatives in Russia completed a medical specialization) or in clinical trials. This applies particularly to St. Petersburg, the unlikely epicenter of local CRO activity.
Russia has become a bona fide hot spot for clinical trials. The country participates in more global clinical trials than China and India combined. Its population of 143 million is largely treatment-naïve so, according to A.T. Kearney report Successful Clinical Trials Management, patient recruit is up to 10 times faster than in the United States. For example, a recently completed trial in Russia saved Eli Lilly an entire year in getting product to market. However, some challenges do exist: IP protection is relatively weak, complicated customs procedures can hold up clearance for trial supplies, a higher 18% VAT applies, and improvement in the ethics of patient recruitment is not coming fast enough. In fact, a criminal investigation has just been launched against GlaxoSmithKline in Volgograd following troubling symptoms in babies involved in trials of injected vaccines.
Such nightmares may be the perfect illustration of why Benjamin Munblit, Analytics and Consultancy Director at COMCON Pharma and always controversial industry pundit, states: “Russia may account for 1% of overall sales of multinationals yet it is labelled a priority market only because the ripple effect of failure in compliance issues could create a disproportionately large negative impact.” This fear does not stop most of the big companies from including Russia in their multi-center clinical trial programs.
Schering AG started its first Russian Phase 3 study just two years ago and increased its activity to three Phase 3 and six post-marketing studies in 2006. Through this experience contracting Russian centers and hospitals, Dr. Manfred Paul, General Manager – Moscow Representative Office, of Bayer Schering Pharma, shares: “they fulfil international standards like GCP 120%.”
Paul sees more than that obvious benefit. He explains: “Russian physicians have very good knowledge and are very well experienced, but they have less opportunity to participate as speakers in international congresses because they formerly were not able to participate in clinical studies. Once Russian opinion leaders have the experience, they will be able to present at international congresses and enhance their image as well as that of Russia and Bayer Schering Pharma. Also, through first-hand experience, a Russian speaker can testify that it is a top product to his Russian colleagues. This poses a big advantage in the marketing sphere.” Paul will continue in this direction as he prepares a phase 3 study for a Bayer product under the new merged Bayer Schering Pharma structure.
When Paul returned to Moscow in 2004 to manage Schering AG’s Russian business after spending 1985 to 1990 here as the representative of the East German foreign trade company for medicines, he noticed that “the equipment in some hospitals and specialized centers in Russia is now even better than the European average. Russia has specialists who are excellently trained on how to use this equipment. On the other hand, many doctors in hospitals have an average knowledge that does not fit with the latest equipment or technical news.” In Russia, specialists are still relatively more numerous than primary care physicians, so Paul has been busy offering training programs such as one designed to show radiologists the difference between investigations with and without contrast media.
This educational focus extends to MS treatment where Schering AG started to visit all main neurologists countrywide five years ago and established a one of a kind nurse system that provides patients with a wide range of free 24-hour support. As a result, Betaseron has grown quickly to become the overall Russian market leader and the #5 drug overall in the DLO program in 2006.
A focus on education is also necessary on oral contraceptives since, according to Paul, “the average Russian woman supposedly has 5 to 6 abortions in her life. This is a remnant of the past when abortion was the typical way of family planning in the USSR. Despite a shift in political systems, the acceptance rate of the use of oral contraceptives has only risen from 3-4% to 5.5% in the last 20 years, compared to 35% in Europe.” This has prompted players in the fertility control field, including Schering AG as holder of 52% market share in Russia, to invest heavily in the preparation of campaigns targeting the new generation of physicians and gynecologists about the modern style of family planning. At the same time Paul is formulating a clear response to the concern that oral contraceptives are counter-productive to President Putin’s new program to increase the birth rate. “In fact, oral contraception will not decrease birth rates: “The opposite is true: it offers the opportunity to choose the right moment to have children, to plan the family. We do in fact support the program of President Putin.” It is through such a focus on education that Bayer Schering Pharma expects to emerge as a €190 million turnover Top 10 pharmaceutical company in Russia in 2007.
Understanding the mysterious Russian psyche
The most successful foreign managers in Russia agree on some basic principles – beyond the preference for a Russian bride. A Russian proverb illustrates the Russian reality: “People know each other when they have eaten one pud (16 kg) of salt together. It would take a lot of time for the two of us to eat a pud of salt together.” It is not so easy to cultivate close relationships with the Russian people; it takes time, but if they trust you, they will trust you until the end. Thus, five to ten years is the best term to stay in Russia. This is the view of Jostein Davidsen, managing director, Russia-CIS for Denmark’s Nycomed, who has continuously worked longer than any other foreigner in the Russia pharmaceutical industry, since 1988.
Today, the leader of the consistent Top Ten market player believes that while Russia is still an emerging market with a system that is not completely transparent or in compliance, it is no longer “a jungle where you need to build your home for yourself” as it was in the early and mid 1990s. Today, “I see no difference in doing business here than in any other market, but you must be clever, have a proper business strategy, the right human resources, and brands in order to succeed in developing a Russian pharmaceutical business. The 2005 Platinum Ounce “Top-Manager of the Year” and winner of the prestigious joint Ministry of Health and Russian Orthodox Church “Profession-Life” award, advises people entering Russia to focus on long-term thinking, professionalism, awareness of the Russian language and culture, and adaptability.
The companies that historically have been the most successful in Russia – Sanofi-Aventis, Gedeon Richter, Berlin Chemie and Nycomed – have had a very mixed portfolio adapted to the market with many products not sold in the West. Nycomed, which has the largest field force in Russia, 800, still benefits from the strength of some Soviet-era products while also building on innovative, high tech hospital products, branded beta blocker, Type 2 Diabetes and pain generics, as well as a large OTC portfolio. Also, up until the Altana acquisition gave Nycomed R&D capabilities, he had been extremely successful in independently negotiating and concluding in-licensing agreements. Nycomed built up the Merck KGaA Russian business from $3 million in 2001 to more than $70 million in 2006.
The “old” Nycomed derived 26% of €750 million Group revenues from the Russia-CIS region as its biggest market. Even following the acquisition of much larger Altana, Davidsen, is confident that his region will still be the second biggest market after Germany. “While the new Nycomed will be less dependent on the Russia-CIS market I’m very doubtful that the focus will be less.” The question now is whether or not Davidsen will set up a Greenfield factory in Russia, but he believes: “from both a capacity and cost perspective it’s probably easier and cheaper to import products into Russia at the moment. Greater participation in reimbursement programs will never be the sole criterion in a decision to produce locally; however, given a strategic five or ten year plan, when I believe that Nycomed and all the Top 10 or Top 15 companies probably plan to exceed the $1 billion annual revenue mark in Russia, it might become quite beneficial from a logistics point of view.”
While there is a lot of excitement about who will be the next president and the recent indication that the value of unofficial bribes to officials nearly matches the State’s total official revenue of $250 billion, to Davidsen, “conservatively speaking, I see Russia as a Top Five European pharmaceutical market in five years and as the biggest in Europe in ten years time.” Despite the 70%+ increase in the total healthcare budget for 2007, “when compared to overall Russian GDP growth, this represents no increase at all as a percentage of GDP from 2006 as it will still account for only about 3.5-4% of GDP. Healthcare expenditure per capita in Russia, even when including the DLO, is still only around $60-$70 compared to levels as high as $300 in other Eastern European markets. By taking into account these extremely important figures we can understand the enormous potential for growth,” concludes Davidsen.
Given such expectations, it is no wonder that for Davidsen, “the #1 challenge today is to manage high corporate expectations of sustainable percentage growth that has been in the 50-100% range in the last couple of amazing years. The ‘easy years’ of 2001-2004 are now gone. We will eventually follow the Central and Eastern European path of less than 10% current growth.”
The rule of law
Paul Melling, founding partner of Baker & McKenzie – CIS, the first western law firm to be registered with the then Soviet authorities in 1989 and one of the largest practices in the region, advises: “There are two common misconceptions about Russia; one is that Russia is the same as everywhere else, and the other is that it is so different that none of the usual rules of prudent business practice apply. Both misconceptions will result in disappointment.” One must understand the unique features of the Russian pharmaceutical industry such as its heavy dependence on distributors. Two diversified national distributors, SIA International and Protek, control nearly 50% of the market with $1 billion plus turnover each. There was no pharmaceutical network in Soviet times so at the time of the financial crisis, the business was in the hands of a small number of relatively inexperienced companies that were not very well financially managed or transparent. As the Russian market started to open up, multinational pharmaceutical companies began offering longer credit lines to their distributors to win market share. It worked very well until the rouble crashed and only half of $350 million in outstanding balances was collected. “The pharmaceutical sector, aside from the banking sector, was the hardest hit,” explains Melling.
Today, in light of additional money in the healthcare system, it is no surprise to see the last holdouts – like Wyeth – and the first global biotech giant, Amgen, enter the market. “Russia is now a genuine market. More companies will start packing here and will eventually move into manufacturing. This may not start with patented drugs destined for the DLO but rather OTCs. The trend will develop and multinationals will be more “Russian”,” states Melling. While such intentions are clear, imports still account for three quarters of the Russian market by value, and even more in the DLO.
Due primarily to obstacles in bureaucracy, IPR concerns such as data exclusivity, as well as persistent political and economic risks, few companies have a direct manufacturing presence in Russia. Regional player Gedeon Richter was first, KRKA followed in 2002, and now Servier and Egis are in the process of bringing local production online. Nonetheless, an AIPM and PricewaterhouseCoopers joint study in 2005 shows a clear trend towards localization: 18% of respondents already had some manufacturing activity and 50% expressed interest in gaining some kind of production in Russia within five years with a preference for full-cycle production.
For Baker & McKenzie, the industry-focused practice which has been legal advisor to the AIPM since its inception ten years ago and is widely regarded as the legal partner of choice to the pharmaceutical industry due to its breadth of services which includes IPR, the greatest legal demands are on the regulatory side. Also, tax and customs concerns are quickly emerging as even the most conservative companies are moving beyond representative offices to establish Russian subsidiaries as they seek to avoid formalities while expanding. Melling explains the basic challenge: “the temptation is to do business as the Russians do. The temptations to cut corners here are so enormous, because companies are less likely to get caught and results are almost immediate. While every pharmaceutical company will tell you that compliance is at the top of its agenda, even companies with a global Zero Tolerance policy, the vast majority of the research-based industry here, can be successful, very profitable and grow their Russian business.”
IPR legislation has been in place since 1992 and covers most of the issues it should. However, there was no enforcement until 2002 when the Coalition for Intellectual Property Rights (CIPR) and the Union of Professional Pharmaceutical Associations (SPFO) sprang up to organize the industry and win a high profile battle of persuading the authorities that patents must be protected or Russia will never have a research based-industry. To date no major anti-counterfeit legal offensive has been launched by a research-based company in Russia but it may be because the initial victory has not translated into sustainable political to pull production licenses of the major violators rather than issuing nominal administrative fines. Nonetheless, according to Gennady Shirshov, who leveraged his background in managing tobacco logistics to take the position of executive director from Day One in the SPFO, a group formed specifically to bring together and create a common language for all six different sub-sectors of the pharmaceutical industry – suppliers of active ingredients, foreign manufacturers, domestic manufacturers, distributors, pharmacy chains, and analytical companies – on the critical task of combating illegal imports and illegal domestic manufacturing in Russian, “the problem is no more acute than in Europe.” As a result, the SPFO has expanded its scope to take aim at ensuring the quality of the overall Russian pharmaceutical supply chain through a recent proposal to Roszdravnadzor to implement a new pilot system of quick counterfeit identification based on NIR (Near Infrared Spectrography). If this is implemented and successful Shirshov would be quite keen on extending the NIR program to APIs, 80% or more of which are imports are widely varying quality.
A unique heritage of names and brands that stand the test of time
Of the more than 800 drug manufacturers represented in Russia today, companies with a regional focus, such as Germany’s Berlin-Chemie Menarini, Hungary’s Gedeon Richter and Egis, Slovenia’s KRKA and Lek (now part of Sandoz), and France’s Servier, still enjoy outstanding success in Russia which guides their corporate growth and leaves many global players in their wake. While pre-financial crisis market leader ICN opted out, a new group of companies with a Soviet heritage has been working its way up the Russian ranks.
Croatian leader PLIVA Hrvatska, the company best known for its collaboration with Pfizer to develop one of the world’s best antibiotics, original blockbuster azithromycin, is a perfect example of this trend as Russia has become more important to PLIVA’s performance than its home market. After the azithromycin breakthrough, PLIVA changed its strategy to focus exclusively on its generics business. Barr Laboratories saw tremendous value in its long-standing tradition in Central and Eastern Europe and acquired PLIVA in late 2006 to create the third largest pharmaceutical generic company in the world with revenues in excess of $2.5 billion. PLIVA will remain the name of Barr’s generic business outside of the United States and will remain focused on Europe and Russia. Slovenian Alojz Pungarsek, PLIVA’s Country Manager – Representative Office in Russia, is excited about the situation: “There is minimal overlap between the two companies, something very difficult to find in the industry. This is a pure synergy – it is one of the best acquisitions ever made in the history of pharmaceuticals.” He aims to improve his Top 25 status in Russia to Top Ten as a leading market in the combined Group within five years in part through the introduction of a broader range of new value added products from Barr that have previously only been available in the United States.
Since the quality of drugs is a concern, Russia is a market where people will pay more for recognized brands and quality. Even though generic prescribing by INN is the law, it is not fully applied. Tavinder Jit Singh Vasudeva, country head – Russia of Ranbaxy forecasts: “the Russian market will stay brand-oriented for a minimum of five years simple because medical professions know more about MNNs than INNs.” Pungarsek adds: “the concept of marketing in the branded generics industry is absolutely the same as it is in the innovative industry in Russia. From time to time, it happens that branded generic products are even more popular than the originals against which they compete. In Russia, brand promotion and marketing policy are in fact the most important consideration rather than a company’s pricing policy. However, Russia will eventually develop into a pure generics market. As a result, we will continue to invest heavily in PR and branding and promotion of the PLIVA name and products.” This makes particular sense since many people believe that the price of branded generics in Russia, one of the few true premium price markets left in the world across a wide range of consumables, is amongst the highest in the world. Also, the expectation that Russia will also shift back to a commercially-driven market in the next few years, especially as private insurance becomes more prevalent, certainly bodes well for concerted marketing efforts in Russia. Even though Serge Scotto, country manager – Russia-CIS, AstraZeneca, shares that the average Russian doctor only prescribes 30-35 different drugs, most of which are 20-35 years old, at a very minimum this proves their loyal nature so it stands to reason that the branding of affordable first-generation generics with therapeutic and bio equivalence, such as those of PLIVA, is probably time well spent in Russia.
Buying Russian market share
Many international companies are intent on picking up a suitable local company to get their Russian beachhead, particularly to capture the DLO opportunity. Most real interest has come from generics companies that look to be first to the Russian market with first generation generics. Oleg Feldman, general manager of COMCON-Pharma, a leader in ad hoc studies, sees buying local manufacturing capacity as the equivalent of buying market share. Germany’s STADA agreed in buying Nizhpharm, a top local producer led by Andrey Mladentsev, who is widely regarded as the brightest mind in the new Russian pharmaceutical industry. This year Actavis acquired Zdorovie and Polpharma won the contentious bidding process for Akrikhin. Apparently, even though companies like Polpharma are reducing their DLO exposure, they still believe that Russia’s pending WTO succession talks will not keep authorities from looking favourably upon domestic producers.
Poland’s largest producer of pharmaceutical substances, Polpharma, established Russia operations only five years ago with the main objective of selling cardiovascular, gastroenterological and neurological branded generics and OTC products. When Marina Veldanova joined Polpharma Russia, as managing director in July 2006, she entered with experience from Astra Zeneca and OTC leader Berlin-Chemie Menarini. Polpharma owner, Jerzy Starak, split the CIS and Russia into separate businesses and Veldanova now reports directly to the new CEO. “Russia might not be #1 based on current sales – since we account for 10% of all Polpharma sales through $20 million sales in 2006 – but we are #1 based on ambition and market growth potential in a $350 million company,” claims Veldanova.
Veldanova’s view is that “it is possible to change both patient and doctor behavior towards a medication just by applying the proper marketing tools, mostly in the branded generic market.” In line with this thinking, Veldanova has strategically decreased the share of DLO by five times to 3% of the company’s portfolio for 2007 because “it is not certain money,” and has opted instead to focus on launching “the first ever OTC campaign in Russia with TV spots. Direct to consumer marketing guarantees sales. This – as well as a focus on less crowded space like neurology – is the right strategy to prevail with a fairly small and unknown product portfolio,” concludes Veldanova.
Any doubters of Polpharma’s focus on the Russian potential were silenced this past March when the company outdid itself (and its #75 commercial market position in Russia per DSM Group) by succeeding where other larger companies like Ranbaxy had failed in acquiring a majority stake in Akrihin, the Top Five Russian pharmaceutical manufacturer with 2006 turnover topping $60 million through particular strength in preparations for heart diseases, diabetes, and tuberculosis. Aggressive moves like this serve as ample backing to Veldanova’s aspiration to “grow step by step to be the leader company in the Russian pharmaceutical market.”
Constant adjustments to operations and strategies are characteristic of the unpredictable Russian market so Russia managers have to be imaginative to create the future. According to Actavis’ Jonas Trygvasson, the Russian-speaking executive vice president – CEE & Asia, “the recipe for success in Russia is as unique as the country, a proud nation that is neither Asian nor European and has its own soul. We have to put in the time to penetrate the cold façade of this kind-hearted nation.” Trygvasson pioneered development in the region for the Icelandic group, which is now the largest, most important, and fastest growing geographic area for the generics powerhouse. Russian sales now exceed $70 million and the region the region, Central and Eastern Europe as well as Asia and Australia, accounts for about €500 million of €1,4 billion total sales at the world’s 7th largest generics house.
While the Russian representative office was only established in 1999, Actavis cemented its long-term interest in the region through the acquisition of a €47 million 51% stake in ZIO Zdorovie in November 2006. Trygvasson explains the move: “This is the best company I’ve seen in Russia. They have built the site from scratch with Western European design and the most modern equipment. This may be the only ISO and European GMP certified facility in Russia. This will be important when Russia enters into the WTO. Zdorovie hopes to be the first Russian plant to export its products to the EU.” After trying out the relationship through a secondary packaging of a selection of products for joint promotion since May 2006, Trygvasson claims: “it seemed that we were a very good fit – they have a good quality production site and we have a good quality product line and new product pipeline.”
The move opens doors to preferential sales into government-funded programs. Trygvasson explains: “We expect more pressure from the government to produce locally. It’s not only about basic job creation but also about security of supply, consistency, and bringing high-tech jobs to Russia. You can find cheaper products in places like China and India, but Russia is not about that; it’s about consistency, quality, and going forward.”
In a market that has one of the highest low-cost generic drug penetration rates in the world, 70% by volume, Trygvasson is taking aim at the more novel, modern, and higher priced sector “where price erosion has not caught up yet.” He aims to tap into recent global acquisitions that bring in advanced controlled release products and cutting edge oncology generics to create a unique market opportunity in Russia. For Trygvasson, “we are now selecting our line-up. It’s a bit like being a kid in a candy store because you have all of these products to choose from but at the same time have to see how much you can swallow. We want to play with everything from that is advanced, good quality, makes profits, and can be first to market or unique in some way. We are focusing on cardiology and CNS while “putting more legs under the table.” The Russian OTC market accounts for 70% of our sales and offers potential for line extensions as old established generics are slowly leaving.” Actavis also looks to enter DLO tenders with niche products where the number of competitors in the space is not excessive while leveraging the ZIO Zdorovie hospital range, including twelve products that go into the federal hospital purchasing program.
The ZIO Zdorovie acquisition should add about $40 million annual sales immediately and while it is breaking into the Top 10 in the generic space, Trygvasson projects, “we will be #1 one day. The issue for us is to manage our growth because if you try to “swallow too much candy you will have some digestive problems.”” One might wonder how a company from the country which is #1 in the world in transparency, Iceland, could have such aspirations in Russia, which slipped to the #121 position in the 2006 Transparency International corruption perceptions ranking. Trygvasson’s answer is quite simple: “Russia is surely moving in the right direction. It is now becoming more predictable and easier to manage systems that are transparent in Russia.”
GMP OR BUST!
While local CROs and other pharma-focused service companies like Remedium, Pharmexpert, DSM Group, and COMCON-Pharma have carved out a very meaningful role for themselves, the same cannot be said for local manufacturers. Only two, Pharmstandart and Otechestvennye Lekarstva, are consistent Top 20 overall market participants in a highly fragmented local landscape of about 600 pharmaceutical companies that are mostly relics of the Soviet era with not much of a semblance of internationally-accepted quality control mechanisms or capacity to innovate. About 10 Russian companies have any production under European GMP standards. These companies constitute the membership of the Association of Russian Pharmaceutical Manufacturers (ARFP). It was created in 2002 on the premise international GMP standards must be the foundation for the future. The ARFP prioritizes this main principal as the only manner to show to health authorities, doctors, and the general population that the industry produces high quality drugs which can compete with foreign drugs.
Defining whether any GMP standards exist in Russia at all is even tough to determine. Ms. Titova Liliya Viktorovna, ARFP general director since 2005, states: “Russian factories operate under less comprehensive internal standards and the document from 1998 which was our country’s first attempt to create GMP standards on a national level.” However, the Ministry of Health failed in its attempt to hand down an unrealistic timeline for mandatory adoption of international GMP standards by 2005. This essentially brought an end to GMP in Russia.
Titova now has high hopes for a document pending Ministry of Health approval that would effectively harmonize Russian GMP with leading European GMP requirements. Such a breakthrough will probably be linked to Russia’s entry into the WTO and would pave the way for investment – both foreign and local. A similar harmonization of pharmacopeias would logically follow to enhance export opportunities for a Russian industry that is by and large focused exclusively on Russia. 2005 exports were worth less than $200 million and went mostly to Russian-speaking CIS countries where there is Soviet heritage, Russian medical doctrine, loyalty to Russian brands, and no GMP or ISO requirement. Titova concludes: “Many companies will never be able to switch to international standards – so they will have to get out of the pharmaceutical industry. Only by implementing international GMP standards will we reverse the trend toward imports.”
A few Russian companies have leveraged a good science base to emerge as niche producers of modern generics and innovative drugs. Polysan, one of the few notable companies based in St. Petersburg, produces the original antivirus Cyclopheron, which accounts for a sizeable chunk of Russian pharmaceutical exports, and Moscow-based Pharm Sintez exclusively replicates and produces drugs that have just come off patent. Within two years of its creation, Pharm Sintez reached the $20 million sales mark in 2006 and ambitiously targets the #1 position amongst Russian pharmaceutical manufacturers and $200 million within the next two to three years, through the help of new exports of its first generation generics to Western European markets. As one of the largest Russian companies realizing the full chain of production through an API production facility which feeds is final drugs plant, Oleg Mikhailov, general director, tells us that Pharm Sintez is in the process of building a full complex with GMP standards. It will be ready in 2008.
“We were already the first Russian company in terms of volume, research possibilities, and export possibilities. We aspire to continue on that road through very interesting products in the last steps of registration. This capacity has its roots in the precursor company to Pharm Sintez, a little group of professional chemists who created the drug form of buseriline acetate. After this form was in the market, “Pharm Sintez became one of only five or six companies in the world to possess depot form technology. Now, we have some peptide drugs in depot forms as well as in other forms such as the micro capsule form,” explains Mikhailov.
Pharm Sintez differentiates itself by specializing in difficult to produce APIs and final drugs in areas like oncology, urology, gynaecology and endocrinology. “Our competitive advantage in Russia our exclusive technology to create difficult first generation generics,” exclaims Mikhailov. In its first analogue of a multinational’s original product, tamsulosine, Pharm Sintez takes care of each of the 34 different API stages involved in-house. While Pharm Sintez’s most interesting products include Octreotide depot and a first generation Resorba analog, “we also think about going beyond Russia’s border with original products. This is why we conduct clinical trials in our research programs. We have two original products in the last stages of registration and I think within one or two years, we will make it happen. In less than five years, our research programs will be good enough to allow us to produce original drugs.”
RUSSIAN INNOVATION: FACT OR FICTION?
History books of the 19th century and the early 20th century serve as proof of the Russian heritage of discovery, chemistry, and science in general. However, multinational companies managed to extract almost all discoveries of worth as well as the greatest minds behind them following the fall of the Soviet Union, and little advanced research remains. Today, successful innovation in Russian terms refers to registering first-generation generics. However, there are some instances of world-leading innovation. MICROGEN, the largest pharmaceutical holding public or private in Russia, is a sort of non-commercial company of strategic importance under the Ministry of Health. This federal state scientific-industrial company was established in 2003 as an integration of 14 state unitary enterprises which employ 7,500 people throughout Russia and produce the whole spectrum of vital immunobiological medicines: vaccines for dangerous infectious diseases and flu vaccines. In this field MICROGEN produces over 70% of the total Russian volume even considering separate collaborations between Bristol Myers Squibb, Solvay, and local partners. The company took global headlines last year for its breakthrough vaccine for avian flu in humans.
The reason for this competence may be that under the Warsaw Pact, the production of research related to biotechnology and immunology was focused in the Soviet Union. Anton Katlinsky, former deputy minister of public health and current CEO of MICROGEN, adds: “Despite the fact that a lot of our specialists moved abroad, our potential in these fields and the fight against infectious disease is still considerable. Russia is one the top five countries worldwide for possessing staff potential with the ability to efficiently promote, research, and development biotechnology efforts.” Through an investment of more than $25 million the company has prevented the disappearance of domestic production of immunobiological preparations.
Within this realm; Katlinsky is quick to point out that Russia has not heeded WHO recommendations to expand the time schedule for preventative vaccinations as has been done in the EU and the USA. He explains: “The Russian calendar is narrower and does not include such important elements from an epidemiological point of view as Haemophilus Influenzae Type B (Hib), rotavirus, and cervical cancer.” The unavoidable expansion of Russian preventative vaccination calendars leads to good prospects for MICROGEN to launch joint projects with major transnational pharmaceutical companies.
While its focus on serving the national interest is clear, MICROGEN also clearly seeks to gain global success. In November 2006 MICROGEN received a delegation from the WHO which confirmed the high quality of the results obtained by Russia vaccine for avian flu in humans. “The WHO experts recognized that this development is one of the leading substances in Europe, so I expect the drug to be certified this year. Our chances are not bad to take the leading position in the production of medicines of biotechnological profile, especially drugs to combat infectious diseases,” asserts Katlinsky.
MICROGEN is now out to show that it is not a “one hit wonder.” It is focused on developing vaccines against standard flu based on a new MICROGEN invention: egg-free technology. Katlinsky explains: “It’s a tissue-culture flu vaccine based strictly on mammalian cell production technology. This will be achieved by the end of 2007. I only know of one other company in the world, Solvay, which is working in the same direction. The potential of this vaccine is very high. The basic technology for flu vaccines implies the use of chicken embryos. In the situation when we would confront a pandemic outbreak of avian flu that would probably affect chickens as well the production of vaccines against flu, including bird flu, the use of chicken embryos would be impossible. Thus, we need to find another technology that doesn’t use chicken embryos. International experts recognize that this has to do with cellular technology.” The possession of such a technology creates a competitive edge even in the production of vaccines against typical flu and the potential to export such a vaccine to South East Asia where the risk of avian flu is much higher. “Undoubtedly, this is a high-potential new market for our new-generation vaccines. It is worth fighting for,” concludes Katlinsky.
At the same time, MICROGEN is working closely with foreign partners like Oxford University to develop new non-injection drug delivery systems for vaccines. Katlinsky explains, “There are new advanced technologies that allow us to use in situ drug delivery to reduce dosage, substantially reduce side effects, and achieve more clear results.” A third promising area for MICROGEN lies in its efforts to develop combined vaccines that contain several antigens in one injection.
While the increasing volumes in the market of today allows a number of companies to afford their own R&D, considering the substantially lower cost of R&D in Russia than in industrial countries, Katlinsky warns: “This trend looks like it will lead to partnership; but life is a strange thing and this can change. Just look at India. Never think that you are the strongest and the fastest. You can always find someone who is stronger and faster than you.”
All that glitters is not gold…or is it?
Many insiders believe that no Russian company will be able to survive in the long term without an active strategic foreign partner and a focus on innovation. A few years ago it was true that taking out a bank loan was not a viable option since banks saw pharmaceutical R&D as “speculative” and interest rates in Russia were around 25%; however, Polysan managed to sustain R&D and build a new $30 million plant thanks to the credibility associated with his company’s 150 patents and booming local economy which has made banks more eager to lend a helping hand. Alexandr Itin, general director of Otechestvennye Lekarstva, adds, “It’s not hard for us to attract money from the market today since money is quite cheap. Projects require “long” money, not just cheap money. We have positive experience in placing bonds.”