Between 2010 and 2014, Russia’s pharma industry witnessed a record number of mergers, acquisitions and greenfield investments. However, recently enacted sanctions against the country have increased the concerns of pharma executives over how this situation will affect their local investment plans. These developments have also raised the question of whether the attractiveness of the vast Russian market will begin to falter in the near future.
Russia’s disputed annexation of the Crimean Peninsula from Ukraine in March 2014 has pushed several Western countries to impose sanctions on Russian government officials and businesses. The United States, for example, will be freezing the assets of selected Russian individuals and firms and will ban them from doing business with American companies, especially in the high-tech industry. The US has also pressured its chief executives to refrain from attending the St. Petersburg International Economic Forum in late May. In parallel, the European Union has opted for limited sanctions such as visa restrictions and minimal asset freezes. The EU’s softer approach is largely attributed to both legal and economic considerations, as it relies heavily on the imports of natural gas from Russia. While both the EU and US have mentioned their intention to introduce sectorial sanctions specifically targeting Russia’s energy and finance industries, this remains highly unlikely.
Pharma 2020: Capitalizing on a Major Industry
Russia has been steadily improving its socio-economic standards and investing in raising the quality of its healthcare system. The Pharma 2020 Strategy, initiated in 2010, is aimed at modernizing the country’s pharma industry and reducing the reliance on imported medicines. The government has already allocated over USD 4 billion in order for Russia to be partially self-sufficient in medicines (50-70%) by 2020. The Pharma 2020 Strategy entails the creation of several biopharmaceutical clusters
and provides preferential procurement treatments for locally-produced medicines, among other incentives. However, the strategy fails to highlight the important role that multinational pharma companies would play in its success. In fact, Russia’s pharma industry in its current form cannot compete with other developed or developing markets in terms of both complexity and cost effectiveness. Thus, the localization of production in Russia by major pharma companies, as well as the increase in funding for R&D activities, should provide a suitable platform for the local pharma industry’s organic growth. Currently, Russia’s growing pharma market is mainly dependent on imported innovative medicines from the US, Europe, and India.India has abstained from imposing sanctions on Russia in order not to affect the strong performance of its companies, especially as several India-backed projects are becoming operational, such as Cadila Pharmaceuticals’ USD 150 million plant currently under construction.
The Rising Localization Trend
Following the initiation of the Pharma 2020 Strategy in 2010, many European pharma companies announced concrete plans to invest in Russia through greenfield projects, acquisitions, or alliances; examples being German Fresenius’s alliance with Russian Binnopharm and Belgian Janssen’s partnership with Russian NewVac. On a parallel note, American companies were not proactive in making major investments in Russia although their Russian counterparts have been funding several R&D projects and acquiring biopharmaceutical companies in the USA. Nevertheless, some rare examples of American companies investing in Russia include Abbott’s expected acquisition of Russian Veropharm and MSD’s partly outsourced production to local producer Akrikhin. Such activities can be explained by the fact that companies are striving to nominally comply with Pharma 2020 in order not to lose access to one of the most promising emerging markets worldwide.
How Far Will Sanctions Go?
Russia’s suspension from the G8 was one of the most notable measures imposed by the EU and US. In effect however, sanctions are more political than economic in nature and are unlikely to significantly affect Russia’s economy in the long term. The lucrativeness of Russia’s pharma market for European companies, and to a lesser extent for American companies, will insure that any future sanctions will be strongly lobbied against; especially since Russia’s pharma market is projected to grow from USD 24 billion to USD 35 billion in the next 4 years. Already, France has signaled that it would not thwart major economic deals for political motives. Russia, from its side, made it clear through its USD 400 billion gas deal with China that it is starting to open up to its Asian neighbors.
The Russian Standpoint
The Russian government has avoided retaliatory measures against the EU and US, although it has threatened to do so on several occasions, as any retaliation would undoubtedly hinder the implementation of the Pharma 2020 Strategy. Restrictions on pharma imports are therefore unlikely to be introduced, especially when it comes to innovative medicines, as the local industry is still very far from being able to supply the market with such products. In fact, the Russian parliament’s Public Health Committee recently stressed its aim to facilitate the access of “highly effective Western-invented medicines” to the local market. Additionally, given the current delicate geo-political situation, the government will try not to shed light on its reliance on imported medicines from Western countries. (Tables 1&2)
On a parallel note, participating in public tenders has become harder for non-resident companies and sanctions will only serve as a stimulus for Russia to continue its policy of localizing pharma production. The Kremlin will be more assertive in its rhetoric in demanding a local full-cycle production of medicines, as this would ensure its control over such a strategic industry. Ensuring the localization of pharma companies should also guarantee that, in case of future political disputes, any decision to ban or reduce innovative medicine exports to Russia will not affect the country.
The Result
Russia’s predetermination to become a major player of the global pharma landscape has been put into question. Thecountry’s strong economic performance, which has been a major growth driver of the pharma sector, is now fading out and local financial markets are becoming volatile.
Additionally, the already-existing fears of public or private property expropriation will only increase, as any future escalation between G7 countries and Russia will be reflected on foreign investments.
Recently, Bloomberg News confirmed the negative repercussions of Vladimir Putin’s policies on the investment environment. Russia has lost some of its appeal as a reliable and predictable investment partner, an image it has been tryingto build for over a decade.Additionally, some government officials have
started discussing radical steps such as nationalizingkey production facilities or significantly limitingthe freedom of capital repatriation, especially since2014 may witness record-high capital outflows from Russia, estimated at over USD 100-150 billion.
STEM-Pharma expects that, in the short term, the end goal of the Pharma 2020 Strategy will be negatively affected by Russia’s deteriorating investment climate. Nevertheless, Russia’s government is unlikely to take radical measures to repel multinational pharma companies from investing in the country, as their input is vital to the success of Pharma 2020. Multinational companies that were initially aiming to invest in local production facilities are likely to continue with their investment plans, even if at a slower pace, as the anticipated benefits still outweigh the risks. In parallel, many foreign companies will likely rely on local contract manufacturers in order to minimize substantial investments. Companies still considering their strategy to enter Russia should account for the
expected rise in market access hurdles for non-residents companies. Additionally, foreign companies opting for mergers/acquisitions or alliances should be very cautious about the ownership structure of their Russian counterpart.
This article is based on STEM-Pharma’s report entitled 2014 Pharmaceutical Growth Opportunities in Russia.
Contact information:
E-mail: m.sraj@stem-pharma.com
www.stem-pharma.com
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