Improving economic conditions and a billion-dollar state healthcare initiative helped to make Russia Europe's fastest-growing major pharmaceuticals market last year, and that growth looks set to continue, analysts say.
Pharmaceutical companies are seeing rampant sales growth, highlighting the steady transformation in Russia's economic fortunes and increase in individual wealth. Russians' disposable income grew by an inflation-adjusted 8.7% in 2005, far in excess of European or U.S. growth rates, while its pharmaceuticals market saw sales of $9 billion last year, up 35% from 2004, according topharmaceutical research and development company DSM in Moscow.
Add to this a state-run drug program and Russia's aging population, and multinational corporations looking to increase sales have an attractive mix analysts say.
Large-scale foreign investment in Russian pharmaceutical manufacturing has yet to emerge, but industry experts say this could change if sales growth continues to accelerate, European manufacturing standards are more widely adopted and local companies continue a wave of new investment.
Already, major European pharmaceutical companies are benefitting from rising Russian demand for their products, and with the average price of medicinein Russia last year just $1.90, compared with $4.39 in Poland, $15.05 in Italy and $31.46 in Germany, there is plenty of scope for margin growth.
French company Sanofi-Aventis SA (SNY), Europe's largest pharmaceutical company by sales of prescription drugs, is "expanding rapidly" in Russia, according to the company.
Patrice Layrac, general manager for Sanofi-Aventis in Russia, told Dow Jones Newswires that the state drug program, given the acronym DLO in Russian, now accounts for around 25% of the company's sales in Russia.
"The federal reimbursement program is a very important step for Russia's healthcare system and is having a great impact on the development of the country's pharmaceutical market," said Layrac.
The DLO program, which provides pensioners and low-income families with free medicines, received $1.4 billion from the state on its launch in 2005. Around 85% of the program's 2005 budget was spent on foreign-made drugs, but the government is trying to reduce this figure to provide a stimulus to local manufacturers. Although a small proportion of the $9 billion Russian pharma market, this could tempt more foreign companies to invest in local production, analysts say.
"The DLO program will be widened in 2007 and 2008 to include all men over 65 and all women over 60, and other social groups including pregnant women and young children," said Ramil Khabriev, the head of Roszdravnadzor, the Federal Supervisory Service for Health and Social Development Issues.
And the country's older citizens are rapidly increasing in number. "The fastest-growing section of the population is the 60-64 year olds, which is expected to expand by 78.5% over 2006-2016, while the second fastest-growing group, 50-64 year olds, should increase by 39.3%," according to a report by Moscow-based investment bank Troika Dialog.
DSM sees Russia's pharmaceutical market generating revenue of $15.5 billion by 2010. Already, the 35% growth in pharmaceutical sales generated in Russia in 2004-2005, albeit from a lower base, far outstrips growth of 4% in the U.S., between 2% to 9% in Western Europe and 28% in China.
European pharmaceutical companies with a Russian sales presence are already benefiting from this growth. France's second largest pharmaceutical company after Sanofi-Aventis, privately-held Servier, posted a 58% increase in its Russian sales to $146 million last year, and it has started to build a $45 million drug manufacturing plant outside Moscow.
A spokeswoman for Novartis AG (NVS) of Basel, Switzerland, the world's fourth-largest pharmaceutical company by prescription drug sales, called the Russian market "very exciting." Novartis has categorized Russia, along with China, India and Turkey, as a priority emerging growth market.
Still, despite strong sales growth, the Novartis spokeswoman said that it was too early to talk about acquisitions or large-scale investment in manufacturing. Analysts agree the principal focus right now is sales.
"Most big drug companies already have a sales presence in Russia, but many are hesitant about going that one step further and actually establishing a Russian manufacturing base," said Mitra Thompson, a London-based analyst with consultants Global Insight.
Thompson said aging infrastructure and few production sites with European-standard Good Manufacturing Practice, or GMP, mean few European companies are prepared to invest in manufacturing. But Khabriev said this will change.
"We are definitely going to switch the sector to all-GMP, starting with infusion drugs, although we don't have a specific date at this stage," said Khabriev, adding that all new producers must meet the standards.
About 60% of intravenousdrugs manufactured in Russia conform to GMP standards, according to Khabriev.
One of Russia's most attractive manufacturers, Nizpharm, was snapped up by Germany's Stada Arzneimittel AG (SAZ.XE) for EUR80 million in 2004. Nizpharm saw revenue surge 51% to EUR36.26 million in the first half of 2006.
Since then, though, M&A from abroad has been limited to the U.K. company Alliance Unichem's - now known as Alliance Boots PLC (AB.LN) - GBP20 million acquisition of Russia's fifth-largest distributor, Apteka Holding, in February. Only Hungary's Richter Gedeon RT (RICHTER.BU) and Slovenia's Krka (KRKG.LJ) so far have direct manufacturing capacity in Russia. Richter Gedeon and Krka retain a strong presence originally gained during the Soviet era when medicine production was farmed out to Eastern Bloc countries.
In terms of acquisitions, "wholesalers could be a more attractive option (compared with manufacturers)," said Global Insight's Thompson, given their involvement in supplying medicines to the DLO program.
Local manufacturers are starting to find their feet after struggling over recent years because of a lack of financial clout. The demand stimulated by the DLO program is encouraging them to raise money to invest in growth.
"The situation is changing," said Vadim Muzayev, chief executive of the country's top pharmaceutical distributor, Protek. "Companies now have access to cheap financing and are preparing to list their shares, if they haven't already," he said. Protek, with 2005 revenue topping $2 billion, also produces four products for Sanofi-Aventis at a new GMP-standard production facility in Moscow, built and owned by Protek.
Generic drug manufacturer OAO Verapharm, controlled by OAO Pharmacy Chain 36.6 (APTK.RS), sold just under 50% of its shares domestically in April for $140 million, while OAO Otchestvenniye Lekarstva, Russia's second-largest drug maker, has plans to go public in the next couple of years.
"Russia was the world's 12th largest (pharmaceutical) market last year and it still has huge potential," said Muzayev.
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