Cyrus Chowdhury, vice president global market access for Insight Strategy Advisors, on how understanding Russian legislation and Russia’s domestic pharma industry is paramount to success
2011 welcomes substantial opportunities for multinational pharmaceutical companies in Russia, in part due to the past two years’ new legislation.
During the next 18 months, the government will launch more disease categories to be covered by the state reimbursement program, expanding from seven to 14 areas.
However, all that glitters is not gold. Uncertainty lies ahead for companies high on the budgetary impact radar as the race to localization forces some companies to make seemingly imprudent investments.
Understanding the legislation and the direction of the country's pharmaceutical industry is paramount to success in Russia during the next decade.
Five years ago, few pharmaceutical executives would have believed that 2011 would bring a feverish scramble to invest in Russia.
At the time, many understood that Russia was to be considered a high potential emerging market like China, Brazil, and India.
However, the interest was always in the number of patients who could consume pharmaceutical products and their associated evolution in ability to pay.
Perhaps not surprisingly, and in a very customarily Russian way, the government has masterfully created an international environment where refusal by foreign multinational pharmaceutical companies to make significant investments in the country will result in diminishment of revenue opportunities.
Examples of Russian investments are numerous, but the following form some of the most notable.
Sanofi-Aventis signed an agreement to invest significantly in research and development as well as manufacturing through the creation of pharmaceutical parks. Sanofi-Aventis was chosen as the sole source for inactivated polio vaccine in 2008.
Novartis has committed $500 million to Russia to be invested over a five-year period. The centerpiece of this agreement is the creation of a manufacturing plant in St. Petersburg. Russia was the first country in the world to give regulatory approval to GILENYA.
In 2009, the company agreed to out-license several pre-clinical HIV assets to Viriom, a Russian pharmaceutical start-up. While not a cash transaction, Roche is expected to earn royalties on any future revenues from the product, while Viriom will gain from Roche’s development and commercial mentorship. Among MNCs, Roche has the third highest sales in Russia and is expected to gain ZhNVLS listings within the coming months.
In 2007, Servier became one of the first MNCs to make an investment in Russia, focusing initially on Moscow for its manufacturing operations. The company ships API from France to Moscow for drug production, with a focus on hypertension, diabetes, CNS, and oncology. Servier’s drug sales grew by 50% in 2008 but fell in 2009.
It is highly possible that these companies would have achieved Russian success regardless of their investments.
Indeed, some of these investments were negotiated in advance of the commercial success experienced by the company.
Still, it is difficult to find an MNC that made significant investment in the local market while continuing to struggle commercially.
Russian intelligent design
Some will argue that MNC success and the coincidental foreign investment occurred with the momentum of natural Russian progress.
However, a closer look at Russia’s macro policies reveals a series of steps orchestrated by a government that is more sophisticated and purposeful than some may be willing to admit.
While Russia’s first reimbursement system began as a broad safety net for that society’s at-risk individuals, a more specialized program arose from it called the VZN, also known as the Seven Nosologies program.
Today, this program focuses on the highest cost therapeutic areas, which also happen to be fairly low prevalence diseases, which, by extension, are higher-priced.
Some drugs that fall within this area include VELCADE, GLIVEC, and MABTHERA for non-solid tumors as well as CEREZYME for the very-low prevalence Gaucher’s Disease.
Even Multiple Sclerosis, a higher total budgetary impact area, is included within VZN, which means that high-cost interferon betas are also reimbursed.
The government continues to improve this financing mechanism, and at the end of 2010 announced an expansion of the program to 14 nosologies.
Grant-free and unregulated pricing
Until April 2010, Russia was a free pricing system.
Pharmaceutical companies were allowed to price however they liked, which caused several very unique economic phenomena to occur, including inverse price elasticity (patient consumers exhibiting higher demand for higher priced products).
Things have changed during the past 12 months, but most new drug launches are still allowed to price freely until placed on the essential’s list (ZhNVLS, see below).
Prior to and especially during the peak of the economic crisis, drug prices climbed progressively higher year-over-year.
Price hikes peaked in 2009 when drug prices increased 30% in the local currency, driven largely by substantial ruble devaluation through the beginning of that year.
Taken in aggregate, it is easy to see why MNCs find the Russian market so attractive: free pricing, a market that withstood significant price increases, and a federal payer for the costliest therapies produced by the industry.
For these reasons, it is also easy to see why the government is responding to the situation.
Several legislative moves were made during 2009 and 2010, including the breakthrough law “On Drug Circulation in the Russian Federation.”
Pricing regulation has been the item upon which most observers have focused, though it seems their focus should be elsewhere.
It cannot be stressed enough that the new price controls are only for those agents on the ZhNVLS list.
While this list has taken on many different forms and uses over the years since its advent in 1991, its current use is as a determinant for treatment guidelines.
Further, it is only once a therapy is on the ZhNVLS that it can become viable for the state reimbursement programs.
In other words, a drug must be on this list, and therefore price-controlled, before it can be added to the reimbursement financing mechanisms.
However, it is not guaranteed to be reimbursed just because it is placed on this ZhNVLS list.
It is undeniable that the government has developed a set of reference markets (21, ranging from Western Europe to Central Asia) to use in setting prices for imported products.
However, it must be stressed that this reference policy would only be applied for products on the ZhNVLS.
Furthermore, the reference price policy has scarcely seen the light of day since its announcement, due mostly to the fact that the price of imported products has been limited to the average importation price from the previous six months, not considering the reference markets announced by the government. (For insight into reference pricing in China, see Cyrus Chowdhury’s ‘Market access: China and international reference pricing’.)
Indeed, the focus should be less on the pricing regulations and far more on the dictations and desires stated by Vladimir Putin’s Pharma2020 strategy.Since 2008, Russia has been very clear about its intentions to localize pharmaceutical production.
Pharma2020: Self-reliance or the WTO?
In late 2008, The Russian Federation’s Ministry of Industry and Trade announced the Pharma2020 strategy as part of the Healthcare Development Program.
Although there were other aspects involved in Russia’s broader pharmaceutical industry strategy, one goal was clear: Prime Minister Vladimir Putin wishes to boost the domestic industry to make up at least 50% of total pharmaceutical expenditure.
While the milestone is projected for 2020, this is hardly a minor objective. The domestic industry only made up approximately 19% of pharmaceutical expenditure in 2008.
When the government first announced its 50% local sourcing goal, many observers were apprehensive that this may mean that local manufacturers would resort to violation of international intellectual property standards to attain this goal.
Such a scenario is hardly improbable; Russia is, after all, not a member of the WTO. It is difficult to look past certain activities by local manufacturers.
RONBETAL: Biocad manufactures this analogue of Bayer-Schering's BETAFERON product.
MILANFORE: Pharm-Sintez manufactures this analogue of VELCADE (distributed by Janssen-CILAG).
COAGIL VII: Pharmstandard and Lekko manufacture this analogue of NOVOSEVEN, from Novo Nordisk.
It is not the intention of this piece to explore the merits of these analogue therapies, but their existence remains factual and nontrivial.
It is difficult to scrutinize these overt moves by local manufacturers to challenge MNCs’ innovative products while turning a blind eye to the government’s bias for these sources during tenders.
Nevertheless, Russia is likely to attain WTO membership by 2012 and ongoing negotiations around free trade with the European Union may smother long-term challenges for intellectual property violations.
Eventually, Moscow must examine the cost-benefit of endorsing these local manufacturing activities while seeking the investment by MNC innovators.
While the source of consumed pharmaceuticals should change substantially during the next decade, it does not mean that MNCs are necessarily to be left in the cold.
On the contrary, Prime Minister Putin has stated an interest in fostering greater collaboration between MNCs doing business in Russia and the local industry.
As a form of coercive incentive, it has been suggested that only Russian-made drugs would be eligible for reimbursement under the country’s DLO program, the only significant federal reimbursement system at this time.
While this is evidenced by the inclusion of RONBETAL, MILANFORE, and COAGIL VII, it does not preclude locally manufactured MNC products (BETAFERON, VELCADE, and COAGIL VII, respectively) from winning their share of tenders.
Another type of unofficial incentive being offered by the Russian government includes pricing advantages, which are, at best, vague.
Russian officials suggest that localized production can grant certain pricing allowances for those products that are price-controlled.
However, the specifics around this are fairly limited and few real-world examples are available to look to for precedence at this time.
The third potential benefit may be that MNCs commercializing locally manufactured products may have advantages in regional tenders.
Regional and state tenders should favor locally manufactured products. It is less clear whether this holds true for cases where a product is offered by a locally-manufacturing MNC and an analogue distributed by a domestic manufacturer.
To localize or not localize: Key considerations
With all of this said, many companies are left to ponder whether localization is the right move in Russia.
Simply because some companies have chosen to migrate selective operations, it does not mean it is the right move for every company.
To help evaluate options for this decision, there are five key questions that must be answered.
Is our portfolio specialized enough?
Assuming the goal of the localization initiative is to develop the capability of Russia’s domestic industry to manufacture medicines and sustain efficient healthcare development, it is unavoidable that the domestic industry will also retain many competitive advantages imported by MNCs during the localization process.
Inevitably, Russia’s local industry will learn good manufacturing practices for less specialized therapies.
For example, as MNCs like Bayer and Novo Nordisk may attest, it is inevitable the local industry will learn to efficiently produce simple large molecules.
When it comes to competitive tenders, the Russian government may choose Russian-manufactured products over those from MNCs.
To further support this argument, look no further than the types of therapies already being replicated by local manufacturers: interferon and clotting factors.
Small molecule products lacking sufficient patent protection may also be high on the priority list, particularly if they register high prices (e.g., VELCADE) and do not choose to significantly localize.
Is the Russian government already in trade and investment talks with our headquarter’s government?
It should come as no surprise that Sanofi-Aventis and Servier are making such substantial investments in Russia.
The history connecting France and Russia runs long and deep, but more importantly, Prime Minister Putin and his French counterpart, Prime Minister François Fillon, closely coordinated foreign direct investment to Russia across several industries, including pharmaceuticals.
Ostensibly, this has reduced entry barriers like corruption hurdles ordinarily in place for foreign companies like Sanofi-Aventis and Servier.
However, Russia has been entertaining many heads of state, so it is possible that a localization investment carries less risk for companies derived from one country than another.
Germany, for instance, appears to be the lead source for private health insurers moving into Russia.
An assessment of inter-governmental affairs should be carried out as part of any investment evaluation.
Is a manufacturing investment the only type of localization we are open to?
Russia is interested in more than just foreign investment to bolster domestic manufacturing capabilities.
Indeed, Prime Minister Putin has stated that ‘import substitution’ is not an end in itself, but rather new centers of expertise for innovation is the goal.
If this is true, then opportunities to take advantage of Russian scientific know-how can also be pursued with similar benefits.
Keep in mind that the goal for the Russian economy is not just more efficient healthcare, but also a healthier economy through job creation.
Localizing packaging, rather than drug production, may be an option as well.
Is investment in a green-field project required or would participation in one of several bio-clusters in Russia be sufficient?
The upfront costs associated with a green-field investment are quite significant and can involve a significant amount of infrastructure investment.
Shared approaches can be adopted where a company pools resources, so the cost and risk can be reduced.
Furthermore, corruption among officials can be mitigated through a shared approach.
If an independent, green-field approach is adopted, financial corruption among officials should be an expectation and projects can easily be derailed if an ethical approach is adopted by the MNC.
By sharing contributions to the project, officials are limited in their ability to play to a single decision-maker or company and instead must be wary of their dubious business practices being brought to light by a government facing increasing international pressure to extinguish corruption.
How high on the radar are we for the Russian government?
The current performance of key brands within Russia for the company is a key question.
If the company has a brand that is already high-priced or generating high budgetary impact for the state DLO programs, then it is likely the government will incent domestic manufacturers to develop suitable analogues to subvert some of the expenditure and possibly divert the profitability to local industry capable of longer-term innovation.
If, however, there is limited impact on the DLO budget, then it is highly likely that staying out of the Russian localization race will not have wholly negative repercussions on revenues during the next five to ten years.
Future launches should, however, take this point into consideration: If DLO reimbursement is a priority, some measured steps of localization into the market may be suitable.
The Russian market is complex and requires long-term planning.
Short-term gains presently availed in the marketplace are likely to diminish unless appropriate steps are taken to develop a stronger partnership with the state and local industry.
With sufficient planning, the Russian market can become any pharmaceutical company’s jewel of Europe.
Cyrus Chowdhury is vice president, global market access for Insight Strategy Advisors, a strategic decision-making support and consulting firm on healthcare and life science issues. You can contact him firstname.lastname@example.org.
To discuss Russia and other crucial emerging markets, join the sector’s key players at Sales and Marketing Excellence Russia CIS on October 24-25 in Moscow and Emerging Markets Commercial Excellence on November 15-16 in Berlin.
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