Russia: Localisation vs. Isolation - Part Two
Pharma2020 – Towards 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 Programme.
Although there were other aspects involved in Russia's broader pharmaceutical industry strategy, one goal was clear: Mr. 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, namely:
- 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 observe 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 will need to examine the cost-benefit of continuing to endorse these sorts of local manufacturing activities.
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, Mr. Putin has stated an interest in fostering greater collaboration between MNCs doing business in Russia, and the local industry.
- Reimbursement advantages
As a form of coercive incentive, it has been indicated that only Russian-made drugs would be eligible for reimbursement under the country’s DLO programme, 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.
- Pricing Advantages
Another type of unofficial incentive being offered by the Russian government includes pricing advantages, which are, at best, vague. Russian officials suggest that localised production can grant certain pricing allowances for those products which 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.
- Tendering Advantages
The third potential benefit may be that MNCs commercialising locally manufactured products may have advantages in regional tenders. Regional and state tenders should favour locally manufactured products - it is less clear whether this holds true for cases where a product is offered by a locallymanufacturing MNC, and an analogue distributed by a domestic manufacturer.
To localise or not localise: Key considerations
With all of this said, many companies are left to ponder whether localisation 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 specialised enough?
Assuming the goal of the localisation 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 localisation process.
Unavoidably, Russia’s local industry will learn good manufacturing practices for less specialised therapies with broad demand. For example, as MNCs like Bayer and Novo Nordisk may already recognise, it is inevitable the local industry will learn to produce interferon or clotting factors with significantly improved efficiency – and 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 localise.
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, Mr. Putin and his French counterpart, François Fillon, closely coordinated foreign direct investment to Russia across several industries, including pharmaceuticals. Ostensibly, this has improved 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 localisation 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.
Is a manufacturing investment the only type of localisation we are open to?
Russia is interested in more than just foreign investment to bolster domestic manufacturing capabilities. Indeed, Mr. Putin has stated that 'import substitution' is not an end in itself, but rather new centres 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. Localising 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 decisionmaker 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 which is already high-priced or generating high budgetary impact for the state DLO programmes, 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 localisation 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 localisation into the market may be suitable. The Russian market is complex and requires long-term planning. Short-term gainspresently 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.