Russia: Localisation vs. Isolation - Part One

The Rise of Russia: Not Just a BRIC Anymore

Five years ago, few pharmaceutical executives would have believed that 2011 would bring a feverish scramble to invest in Russia. At the time, many believed that Russia was to be considered a high potential emerging market worthy of the same breath as China, Brazil and India. However, the interest was always in the number of patients who could consume pharmaceutical product, 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 indiminishment of revenue opportunities.

Observations of Investment & Success:

Examples of Russian investments are numerous, but the following form some of the most notable:

• Sanofi-Aventis
  • Sanofi-Aventis signed an agreement to invest significantly in both 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
  • Novartis has committed $500m to Russia to be invested over a five year period. The centrepiece 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.
• Roche
  • 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.
• Servier
• • In 2007, Servier became one of the first MNCs to make an investment inRussia, focusing initially upon 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 supplies 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 a poorly performing MNC in Russia, which also made a significant investment in the local market.

Russian Intelligent Design:

Some will argue that MNC success and the coincidental foreign investment occurred within the scope of natural Russian progress. However, a closer look at Russia’s macro policies reveals a series of steps orchestrated by the government which could only have occurred with the tenacity and aptitude of a Russia the world knew 30 years ago.

• Create a specialty payer
  
  While Russia's first reimbursement system began as a broad safety net for that society's at-risk individuals, a more specialised programme arose from it called the VZN, also known as the 'Seven Nosologies' programme. Today, this programme 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 nonsolid tumours, as well as CEREZYME for the very-low prevalence Gaucher’s Disease. Even Multiple Sclerosis, a higher total budgetary impact area, is also included within VZN, which means that high-cost interferon betas are also reimbursed.
   
• 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).
   
• Allow prices to rise
  
  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.

Pricing Regulation, a Red Herring:

Taken in aggregate, it is easy to see why MNCs found 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 responded to the situation.

Several legislative moves were made during 2009 and 2010, including the breakthrough law, “On Drug Circulation in the Russian Federation." Perhaps incorrectly, pricing regulation has been the item upon which most observers have focused. Indeed, pricing regulations are not as forceful as some may broadcast.

• ZhNVLS Price Controls

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 programmes. 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.

• Reference Pricing
  
  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.

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 localise pharmaceutical production.

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