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Survey o the

Pharmaceutical

Industry in Russia

2010





1Survey o the Pharmaceutical Industry in Russia, 2010

Introduction

It has become traditional or Ernst & Young to prepare regular surveys o various

sectors o Russian industry. This year we have or the rst time conducted a survey

o the pharmaceutical industry in Russia.

At a business dinner held in January 2010 Ernst & Young employees discussed the

situation in the industry with 25 senior executives o major oreign pharmaceutical

companies operating in Russia. The event occurred just as industry reorms were

beginning, and market leaders expressed concerns as to what measures the

Government would take and how the market would operate under the new conditions.

This survey covers a period o active reorm o the industry by the state. Measures

taken by the Russian Government in recent times with a view to developing

pharmaceutical production within the country and strengthening the competitive

position o domestic companies have provoked much debate and dispute.

This report uses the results o the survey to show how representatives o various

companies view the current trends in the development o the industry, outlines key

legislative changes and their signicance and examines the growth potential o the

pharmaceutical market.

We would like to thank all participants in the survey who shared their opinions with us,

and look orward to uture co-operation.



2 Survey o the Pharmaceutical Industry in Russia, 2010

Contents

Main conclusions 3

Brie economic overview 5

Reorm o the pharmaceutical industry 7

Factors aecting the development o the industry in 2010 14

Analysis o market development 16

Participants in the survey 20

Contact inormation 21




Main conclusions

The comments made to us in January 2010

indicated that representatives o pharmaceu-

tical companies were in a state o conusion.

The determination on the part o the state

to change the rules o play, the rapidity with

which those changes were being implement-

ed and the scale o the changes led company

directors to express uncertainty as to the

prospects or development and as towhether the changes had been properly

thought out. Now that 2010 has passed, the

participants in our survey indicate a denite

imbalance between the prospects or the

development o the Russian pharmaceutical

market (which were rated airly high) and

the level o transparency o the existing

legislative regulatory ramework (Figure 1).

Generally speaking, Russian manuacturers

rate the clarity o current legislation higher

than oreign importers. They have a clearer

understanding o the recently proposed

changes in the regulation o the pharmaceu-tical industry.

The results o the survey indicate that

Russian manuacturers take a slightly more

optimistic view o the situation than oreign

importers. In 6% o cases Russian manuac-

turers show greater condence in the

prospects o the Russian pharmaceutical

market, which is undoubtedly a consequence

o the state’s import substitution policy.

Nevertheless, a number o analysts believe

that Russia is still attractive to investment

by oreign companies thanks to high prot

margins, the potential or market growth

and prospects or market consolidation,despite the slower pace o development

compared with other BRIC countries.

2010: the beginningo changes2010 was a momentous year in the history

o the industry, as it was the year in which

most o the reorms undertaken by the state

took eect. The reorms aected the entire

sphere o circulation o medicinal drugs,

including:

• The procedure or the registration/

re-registration o medicinal products

• The rules or the regulation o prices or

medicinal products included in the list o

vital and essential medicinal products

(ormerly the list o vital and essential

medicinal drugs), including the proce-

dure or determining and registering

maximum manuacturer supply prices

and new maximum wholesale and

maximum retail mark-ups or sales

o such products

• The importation o medicinal productsinto the territory o the Russian

Federation

• Procedures or the conduct o pre-clinical,

clinical, international multicentre clinical

and post-registration clinical research

• The manuacture and marking o

medicinal drugs

Market participants are already noting the

impact o the changes on the results o their

activities, but the eect so ar is minimal:

diculties in registering products andprices, local changes in prices and sales

volumes and the review o relationships

between participants. The current dicul-

ties are largely attributable to the rapid

pace and deciencies in the planning o the

reorms, and have not yet caused changes

in the market shares o the 15 key market

participants.

However, general orecasts made by the

respondents suggest that the geography

o the market may change as a result o the

nascent localization o the manuacturingo imported goods, the redistribution o the

market shares o key players as a result

o the reorm o the compulsory medical

insurance system and the growth in the

market shares o Russian companies

by virtue o the state support available

to them. It is quite possible that major

structural changes in the market will in act

occur in 2011. These would be the result o

substantial reorms in the state regulation

o the sector in 2010 and urther legislative

changes which may shape the uture

structure o the market.

3,7

2,2

3,3

3,6

2,1

3,1

3,8

2,3

3,5

1 2 3 4 5

Rate how far you understand the recentlyproposed changes in the regulation of the

pharmaceutical industry on a scale of 1 to 5(where 1 - do not understand them

and 5 -fully understand them)

Rate the level of clarity of legislative /regulatory acts governing the Russian market

and the transparency of regulatory bodieson a scale of 1 to 5 (where 1 - low level

and 5 - high level)

Rate your level of confidence in the prospectsfor the Russian pharmaceutical marketon a scale of 1 to 5 (where 1 - low level

and 5 - high level)

Figure 1. Rating of prospects for market development and clarity of legislation

All

Foreign manufacturers / importers

Russian manufacturers




PricingThe respondents point to a generally

unavourable legislative background as the

actor which most impacts their activities

and give a negative assessment o initia-

tives to strengthen price regulation,

believing that they are ineective and need

to be revised. Over a hal o companieshave seen prot margins all under the new

conditions (oreign companies have elt this

more acutely), but this is in keeping with

the objectives o the legislative measures

aimed at price regulation.

The survey data show that 95% o all

manuacturers managed to register

maximum supply prices or all products in

the list o vital and essential medicinal

products, excluding the 17% o Russian

manuacturers who were unable to reach

agreement with supervisory authorities on

a number o items. In this respect, 29% ooreign manuacturers / importers lowered

the prices or some items relative to the

prices stated in their applications (as

opposed to 17% o Russian manuacturers).

Despite the negative assessment o the

changes, many participants in the business

dinner organized by Ernst & Young at the

beginning o 2010 acknowledged that

pricing on the pharmaceutical market is a

prerogative o state policy. They asserted

that the time has now come to apply the

experience o European countries in the

area o price regulation.

Reaction to the changesMarket participants and experts have

expressed the view that the state has

implemented the changes too quickly and

without due regard to the opinion o the

business community, and that it ailed to

grant representatives o the business world

the opportunity to infuence the reorm

process. In this respect, Russian and

oreign companies have dierent reactions

to the changes. Russian companies arenegotiating with state bodies and consider-

ing ways o adapting marketing and

commercial strategies. Foreign enterprises,

meanwhile, are preparing or more

extensive changes in the model or doing

business in Russia, as well as carrying out

changes in their commercial, production

and distribution operations.

In our view, the diering opinions expressed

by the respondents indicate that the

companies have not yet been able to orm

clear new strategies in the context o the

adoption o the new rules governing state

regulation o the market. The eects which

the respondents expect to see include a

cardinal redistribution o market shares

among the principal players (primarily inquantitative terms), a growth in the market

share o Russian manuacturers, the ending

o supplies o certain medicinal products to

Russia and the need to change elements o

their business model.




Brie economic overview

State o the pharmaceuticalmarket in 2010 and growthorecastsAccording to data compiled by industry

experts, the total volume o the medicinal

products market in 2010 was around 17.7

billion dollars (based on end consumer

prices), which is 13% higher than in 2009(8% when expressed in rouble equivalents).

The market volume in quantitative terms

increased by 9% (the highest growth gure

since 2005).

Forecasts made by CMI Pharmexpert

suggest that in 2011 the market or the

consumption o medicinal drugs in Russia

will grow by a best-case 15% and a worst-

case 8%. The rate o growth o the Russian

market, which is ahead o the global market

growth rate (5-7%), will remain steady over

the next ew years.

In 2010, like the year beore, imported

products made up a large part o the overall

volume o consumption, accounting or

around 66% in monetary terms. It is

anticipated that in the next ew years the

proportion o imports will gradually

decrease: according to a ederal special-

purpose programme it is planned that the

proportion o imported medicinal drugsshould be reduced to 50% o overall

consumption by 2020. According to data

issued by the Ministry o Economic Develop-

ment, by 2013 the quantity o medicinal

drugs manuactured in the Russian

Federation should almost double relative

to 2009.

A number o analysts believe that the

Russian pharmaceutical sector is at present

showing greater protability than develop-

ing markets, and particularly India and

China. However, Russia will lag behind other

BRIC countries in the terms o the pace o

growth in the next ew years owing to its

declining population and lower per capita

consumption o pharmaceutical products.

Brie overview o thehealth care sphereTotal state expenditure on health care

in 2010 amounted to 675.59 billion

roubles, which is 0.7% lower than the

previous year. In this respect, the share

o regional budgets in that expenditure

rose considerably in 2010.

Health care expenditure in 2010 accounts

or 3.6% o GDP. The Russian Government

has said that by 2013 health care expendi-

ture will grow by 40% and will be close

to 5% o GDP.

Figure 2. Volume of pharmaceutical market in monetary terms: optimistic forecast

310

495538

619

706

797

893

0

100

200

2008A 2009A 2010A 2011E 2012E 2013E 2014E

300

400

500

600

700

800

900

1000

b l n .

R u b .

CAGR 13%

*CAGR — Compound annual growth rate, A — Actual, F — Forecast

Source: CMI Pharmexpert, analysis by Ernst & Young.




Table 1 State health care expenditure (billion roubles), 2009-2010

Indicator Federal budget Consolidated budgets

o constituent entities

o the Russian Federation

Budgets o territorial state

unds

Total

2010 2009 2010 2009 2010 2009 2010 2009

Health care expenditure, total * 201,40 219.84 450.13 434.04 24.07 26.75 675.59 680.3

Health care expenditure

as a proportion o totalstate expenditure (%) 2.42 2.69 8.21 8.42 4.66 5.43 4.72 4.92

* Excluding expenditure on tness and sports; applied and scientic research in the eld o health care, tness and sports; other matters pertaining to health care, tness

and sports.

Source: Federal Treasury o the Russian Federation.

In 2011, 134.9 billion roubles will be

allocated to the high-priority “Zdorovye”

national project (6% more than in 2010);

49.3 billion roubles will be allocated or the

purchase o expensive medicinal products

under the “Seven High-Cost Nosologies”

programme (11% more than in 2010); 41.3

billion roubles will be allocated or the

purchase o medicinal products under the

programme or the supply o essential

medicinal drugs (ONLS).

Table 2 Volumes o fnancing under the “Zdorovye” project

2010 (Law

No. 308-FZ)

Revised budget

spending report as at

September 1, 2010

Calculated volumes o fnancing

2011 (drat) 2012 (drat) 2013 (drat)

Volume (billion roubles) 126.9 126.9 134.9 139.5 100.5

Change relative to preceding year:

billion roubles +8.0 +4.6 -39.0

% +6.3 +3.4 -28.0

Source: Ministry o Economic Development o the Russian Federation.

In 2011 it is planned to increase the per

capita level o nancial support orconcession recipients to 952 roubles per

person, which is 26% higher than in the

preceding year according to inormation

rom the Ministry o Health and Social

Development.

2011 will witness the start o the biggest

health care reorms or 20 years with

a budget o 460 billion roubles. The

reorms will include inormation systemdevelopment, renovation and re-equipping

o medical institutions, the raising o

salaries or medical workers and standard-

ization o medical services.

The state is taking a number o measures

to increase nancial support or the health

care sphere (through the programme or

the supply o essential medicinal drugs,

the hospital segment and state procure-ment). In this respect, in view o the aging

population and the consequent growing

requirement or medicines, consumer

expenditure on medicines is set to increase.

All o these actors point to the potential

growth o the pharmaceutical market as

a whole over the next ew years.




Key legislative changesThe “Strategy or the Development o the

Pharmaceutical Market o the Russian

Federation in the Period up to 2020”, which

was adopted in 2009, signalled a transition

to an innovative model or the development

o the pharmaceutical industry o the

Russian Federation. At present, as part othe rst stage o the transition aimed at the

localization o the manuacturing and devel-

opment o medicinal drugs in the territory

o the Russian Federation, the Government

is implementing reorms to the regulation

o Russia’s pharmaceutical industry.

The most signicant events o 2010 in the

area o the state regulation o the Russian

pharmaceutical industry may be identied

as ollows:

• The adoption o Law No. 61-FZ “Con-

cerning the Circulation o MedicinalDrugs”

• The issuance o Decree No. 865 o the

Russian Government o October 29,

2010 “Concerning the State Regulation

o Prices or Medicinal Products Included

in the List o Vital and Essential Medici-

nal Products”

• The adoption o Federal Law No. 326-FZ

“Concerning Compulsory Medical

Insurance in the Russian Federation”

• The development o the drat law

“Concerning the Fundamental Principles

o the Protection o the Health o

Citizens in the Russian Federation”

• The approval in October 2010 o the

Conceptual Plan o the Federal Special-

Purpose Programme (FSP) “Develop-

ment o the Pharmaceutical and Medical

Industry o the Russian Federation

in the Period up to 2020 and Beyond”

(the Conceptual Plan has now been

approved by Decree No. 91 o the

Government o the Russian Federation

o February 17, 2011)

The FSP has dened the major measures othe development o the pharmaceutical

industry o the Russian Federation,

including raising the proportion o domesti-

cally manuactured drugs to 50% o total

consumption in the Russian Federation in

monetary terms and raising the proportion

o domestically manuactured drugs to 90%

o total consumption o products on the list

o vital and essential medicinal products in

monetary terms. The FSP envisages

investment o 188 billion roubles in theperiod up to 2020.

Special measures are planned to improve the

competitiveness o domestic medicines and

replace imports. Those measures include:

• Tough price restrictions on medicinal

products included in the list o vital and

essential medicinal products

• The adoption o a list o strategically

important medicinal products whose

production within Russia must be

arranged by 2015, and updating o the

list o vital and essential medicinalproducts

• Planned transition to international

standards or the manuacture o medici-

nal drugs.

Eects o regulatorymeasures in 2010Measures adopted in 2010 or the state

regulation o the sector have aected

Russian and oreign manuacturers in

dierent ways. This is particularly the case

with Law No. 61-FZ “Concerning the

Circulation o Medicinal Drugs”.

63% o respondents indicated that the

measures carried out or the regulation

o the industry aected their nancial

perormance. Legislative changes led

to a growth in sales and reduction in

protability or 33% o Russian manu-

acturers surveyed, and to a decrease

in sales and reduced protability or 38% o

oreign manuacturers-importers (Figure 3)

Reorm o the pharmaceuticalsector

Figure 3. How have the recent changes in legislation governing the circulation

of medicinal drugs affected your company’s financial results?

31,3%

50%

16,7%

33,3%

37,5%

25%

6,3%

0

10%

20%

Foreign manufacturers /importers


30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s

Increased sales and higher profit margins

Increased sales and lower profit margins

Decreased sales and lower profit margins

No effect




Both oreign and Russian manuacturers

encountered diculties in 2010 in connec-

tion with the new rules governing the

circulation o medicinal drugs. The problems

most requently encountered as a result

o the new law are with obtaining state

registration o medicinal products, register-

ing maximum manuacturer supply prices

or products on the list o vital and essentialmedicinal products, obtaining conrmation

o the registration o a medicinal product

and making changes to the registration le

or such a product.

In this respect, a greater proportion o

Russian manuacturers than oreign

indicated diculties with the state registra-

tion o products and the registration o

maximum prices or vital and essential

medicinal products. In particular, dicul-

ties with the registration o products were

claimed by 57% o oreign and 83% o

domestic manuacturers.

Regulation o prices or products on the list o vital andessential medicinal productsAt the business dinner organized by Ernst &

Young at the beginning o 2010, senior execu-

tives o various pharmaceutical companies dis-

cussed the prospects or changes to the rules

or price regulation in the Russian Federation.

They expressed doubts as to the ability o stateauthorities to implement changes in the

industry within a short period o time and as to

whether the new pricing conditions would be

transparent or all market participants.

Despite the rapidity with which the changes

were brought in and the strict monitoring o

compliance with the rules in 2010, 95% o all

manuacturers managed under the new

regulatory environment to register maximum

supply prices or all products on the list o

vital and essential medicinal products, and

indeed most respondents (70%) did so at the

prices stated in their applications.

In contrast to oreign manuacturers, which

registered prices or all items, 17% o Russian

manuacturers were unable to reach

agreement with the supervisory authorities

on a number o items. However, 29% o

oreign manuacturers were orced to reduce

the prices or a number o items. Among

Russian manuacturers this happened to 17%

o respondents.

40%20%0 60% 80% 100%

State registration of medicinal products

Registration of maximum supply pricesfor products from the list of vitaland essential medicinal products

Confirmation of the registration of a medicinalproduct and making amendments to the

registration file for a medicinal product

Obtaining authorizationto conduct clinical trials

Obtaining authorization to import medicinalproducts for the purpose of conductingclinical trials

Compliance with maximum regional wholesalemark-ups for products from the list of vital and

essential medicinal products

Peparation of pricing protocolsupon the sale products from the list

of vital and essential medicinal products

Other (constant update of the registerof medicinal products and inclusion

of pharmaceutical substances in the register)

Figure 4. Which changes in regulation have led to the most difficultiesfor your company?



57%

57%

29%

21%

21%

14%

21%

0%

83%

67%

50%

17%

17%

0%

0%

17%

% respondents




A more pronounced reduction o prices or

products o oreign manuacturers (Figure

3) was also noted by market analysts.

According to CMI Pharmexpert, the

regulation o supply prices and o wholesale

and retail mark-ups caused the average

level o prices on the commercial retail

market to all in 2010. In this respect,

prices or imported products ell by anaverage o 4.5%, while those or Russian

products actually increased by 4% over

2010. The explanation given by CMI

Pharmexpert analysts or this is that

Russian manuacturers partially compen-

sated or the decrease in retail prices or

products on the list o vital and essential

medicinal products by increasing prices or

other drugs.

Figure 5. Did you succeed in registering maximum supply prices for all products

supplied by your company?

0

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s

Yes, all our products have been registered at the declared prices

Yes, but we had to negotiate with the relevant authorities

Yes, but we were forced to reduce the prices for a number of items

No, have been unable to reach agreement with the supervisory authorities on a number of items

40%50%

17%

30%

21%

50%

25%29%

17%

5%17%


All Russianmanufacturers

Figure 6. Have you considered discontinuing the production of particular

pharmaceutical products in Russia owing to the fact that they

have been registered at a low price and it is therefore commercially

inefficient for the products to be distributed in Russia?

33%

67%

86%

14%

0

10%

20%



30%

40%

50%

60%

70%

80%

90%

100%

% r e s p o n d e n t s ( e x c l u d u i n g

t h o s e , w h o h a v e

n o v i t a l a n d e s s e n t i a l m e d i c i n

a l p r o d u c t s )

Yes No

On the other hand, Russian manuacturers

produce medicines which are in a lower

price segment, which means that there is

probably less scope or reducing prot

margins. The survey data indicate that the

reduction o supply prices was more painul

or Russian than or oreign manuacturers.

67% o Russian manuacturers (compared

with only 14% o oreign) were consideringwhether to discontinue the production o

certain drugs on the basis that price

reductions made it commercially inecient

(Figure 6).




Both Russian and oreign manuacturers

express displeasure at the current price

regulation ramework. 50% o those

surveyed are inclined to the view that the

price regulation system as it stands could

result in the discontinuation o supplies o

certain medicinal products to Russia and

the “laundering” o cheap pharmaceuticals.

This is due to the act that the pricereductions hit products in the lower price

segment which have a lower margin.

Compulsory medicalinsuranceThe law “Concerning Compulsory Medical

Insurance in the Russian Federation”

entered into orce rom January 1, 2011.

It envisages a gradual change in the system

o compulsory medical insurance and health

care in the Russian Federation, and likewise

has a signicant impact on participants in

the pharmaceutical market.

Manuacturers expect to see changes in

the structure o the market both in terms

o the transormation o product segments

and rom the point o view o the position

o major players. 83% o Russian manuac-

turers expect to see a cardinal change in

the relative market shares o the major

players as a result o the new law. In this

respect, most oreign manuacturers are

more concerned by the act that manuac-

turers o cheap non-branded productsmight assume a leading position on the

market (Figure 8).

40%20%0 60% 80% 100%

Current price regulation is ineffectiveand needs to be reviewed

Current price regulation may result in thecessation of supplies of certain medicinal

products to Russia and the “laundering”of cheap pharmaceutical products

Current price regulation favoursRussian manufacturers

Current price regulationis favourable to distributors

Current price regulation is effectiveand no changes are needed

Current regulation of supply prices causesretail prices to be reduced

Other

Figure 7. How do you assess the situation with regard to the state regulation

of prices for pharmaceutical products in Russia?


Russian manufacturers% respondents

17%

13%

13%

27%

0%

0%

0%

0%

0%

50%

53%

67%

73%

17%

40%20%0 60% 80% 100%

There will be a cardinal change in thedistribution of shares among

the main players

Manufacturers of cheap non-brandedproducts might gain a leading position

on the market

The effect will be negligible

Other

Figure 8. How do you assess the impact of the compulsory medical insurance law

on the Russian pharmaceutical market?



0%

8%

17%

15%

46%

83%

31%

0%




75% o Russian manuacturers believe

that they will gain rom the adoption

o the law, while more than hal o oreign

manuacturers believe that the new law

will not aect their activities (Figure 9).

Figure 9. Have you assessed the impact of the compulsory medical insurance law

on your company?

0

10%

20%

Foreign manaufacturers /importers


30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s

Yes, the new law will have a negative impact on our company’s activities

Yes, our company will gain from the adoption of the law

No, the law will not have any impact on our company’s activities

47%55%

25%

75%

18%

27%40%

13%

Figure 10. Do you conduct / organize clinical research in Russia?

0

10%

20%


All Russuianmanufacturers

30%

40%

50%

60%

70%

80%

90%

100%

%

r e s p o n d e n t s

No, we do not conduct clinical trials in Russia

Yes, we conduct clinical trials ourselves

Yes, we conduct clinical trials with the aid of specialized companies

57% 60%50%

50%

7%

33%38%

5%

Clinical researchThe survey results indicate that Russian

manuacturers conduct 50% o clinical

research independently and 50% with the

aid o specialized companies. Foreign

manuacturers use specialized companies

or the majority o their research (60%).

According to data rom the Association o

Clinical Research Organizations (ACRO), the

Russian market or international clinicalresearch shrank by 25% in 2010. ACRO

attributes that decline to the enactment o

the Law on the Circulation o Medicinal

Drugs, administrative barriers caused by the

adoption o that Law and the need or

appropriate regulatory bylaws. ACRO

representatives ear that this could result in

signicant delays in the appearance o

innovative medicines in Russia.




However, most survey participants (47% o

oreign and 67% o Russian manuacturers)

responded negatively to the question o

whether it would be possible to restructure

clinical trials o new medicines.

On the whole, thereore, the current

situation is orcing manuacturers

to cut down on trials o innovative products.

However, only 40% o oreign manuactur-

ers have plans to review this area o

activity in Russia in the uture.

Figure 11. Have you considered the need to restructure clinical research

arrangements in connection with the enactment as from September 1,

2010 of the new law on the circulation of medicinal drugs?

0

10%

20%


Russianmanufacturers

30%

40%

50%

60%

70%

80%

90%

100%

No

Yes

Our company does not conduct / organize clinical trials in Russia

38%

7%

67%

33%

53%

40%

5%

57%

All

% r

e s p o n d e n t s




40%20%0 60% 80% 100%

Studying operating conditionsin regions of the Russian Federation

Modifying arrangementswith Russian distributors

Holding talks with State authorities

Proposed introduction of criteria for defininga domestic medicinal product

Updating the company’s marketingand commercial strategy

Updating the company’s business model

Production localization

Raising the company’s awarenessof regulatory issues

Other

Figure 12. Indicate the most serious problems faced by your company in light of the

proposed changes in the regulation of the industry.



17%

17%

27%

27%

67%

27%

33%

33%

40%

50%

53%

47%

33%

13%

0%

0%

0%

0%

% respondents

Manuacturers’ reactions

to regulatory measuresThe changes in the system o regulation

meet with dierent reactions rom oreign

and Russian manuacturers. Foreign

manuacturers are orced to revise their

model or doing business in Russia, while

their Russian counterparts only have to

update their commercial and marketing

strategy. Specically, 53% o oreign

manuacturers consider it necessary to

change their business model. 43% o

oreign manuacturers view the impending

introduction o criteria or dening adomestic medicinal product as a serious

problem. For Russian manuacturers,

meanwhile, the most serious problems are

updating their commercial and marketing

strategy (indicated by 50% o Russian

manuacturers) and negotiating with state

authorities (67%) (Figure 12).

Figure 13. Are you conscious of support given to domestic manufacturers?

40%

60%

54%

46%

0

10%

20%



30%

40%

50%

60%

70%

80%

90%100%

% r

e s p o n d e n t s

Yes No

60% o Russian and 46% o oreign manu-

acturers are conscious o support given

to domestic manuacturers. Russianmanuacturers point in particular to the

15% preerences in the area o state

procurements which are granted on the

basis o Federal Law No. 94-FZ “Concerning

the Placing o Orders or Supplies o Goods,

Perormance o Work and Rendering o

Services or State and Municipal Needs”

and have been in eect or a number

o years.




Adverse actors aectingcompanies’ activitiesAt present the survey participants view the

overall picture as promising in the context

o the adoption o the “2020 Strategy”.

At the same time, they point to the

problems and diculties aced in the

transitional period. Paramount amongthose problems are unavourable legisla-

tion, a shortage o proessional personnel,

corruption and general economic

conditions (Figure 14).

Representatives o both Russian and

oreign companies view the impact o

legislation on their activities as the most

important actor. In this respect, they draw

attention to the adverse eects and the

need to rectiy the situation.

Since they do not yet have large-scale

localized manuacturing operations inRussia, oreign manuacturers are less

dependent on the skill level o pharmaceuti-

cal production sta, and yet they point to

the lack o qualied personnel just as local

producers do – 63% against 83% o respon-

dents respectively.

Curiously, even in the context o the

economic downturn neither local nor global

players reer to problems with nancing –

only 13% o companies indicated this as a

negative actor. Similarly, only 21% o

respondents are worried by the growth in

competition. Despite this low relative

assessment, however, in absolute terms

competition is rated as higher than average

in all segments (Figure 17).

Shortage o skilled personnelResearch results or 2010 indicate that the

shortage o skilled personnel on theRussian labour market continues to be one

o the most acute problems acing the

pharmaceutical industry – a view expressed

by 71% o all respondents.

The results o the survey indicate that or

the moment this is more o a problem or

Russian participants in the market than or

oreign importers. 83% o Russian manu-

acturers are concerned at the lack o

skilled personnel in the Russian Federation,

compared with 63% o oreign manuactur-

ers-importers (Figure 14).

The personnel shortage is expected to

become a more acute problem or oreignmanuacturers in view o the trend towards

the localization o manuacturing in the

Russian Federation in the next ew years

under the infuence o import substitution

policies. Some o them have already turned

their attention to this problem: participa-

tion in the process o the harmonization o

educational programmes and the training

o highly qualied personnel is on the list o

business development priorities noted by

oreign manuacturers in the course o the

survey.

Factors aecting the developmento the industry in 2010

40%20%0 60% 80% 100%

Unfavourable legislation

Lack of qualified personnel

Corruption

General economic conditions

Circulation of counterfeit products

Growth of competition

Lack of investment / financing

Figure 14. Which of the following factors represent the greatest threat

to the industry?



17%

17%

17%

6%

25%

31%

50%

25%

33%

69%

83%

63%

75%

100%




With a view to addressing this problem

in the context o the implementation o the

strategy or the development o the industry

in pharmaceutical cluster regions o the

Russian Federation there are plans to invest

in the development o personnel potential,

which involves the launching o new

educational programmes and co-operation

with leading Russian medical and pharma-ceutical centres and international educa-

tional centres. According to the ederal

special-purpose programme, 5000 special-

ists are to undergo training and retraining by

2020 in order to provide sta or enterpris-

es o the pharmaceutical industry.

CorruptionThe survey results show that oreign

companies see corruption in Russia as the

second biggest problem or the industry.

Russian companies, meanwhile, placecorruption in ourth place in the list o

threats aced by the industry (Figure 14).

This dierence in assessments is easily

explained – oreign companies pay greater

attention to the problem o corruption

owing to the long-standing culture o ethical

business practices based on their own

internal policies and the requirements o

regulatory acts such as the US Foreign

Corrupt Practices Act.

That Act and similar acts adopted in other

countries have an impact on the way inwhich oreign companies do business in

Russia. For instance, under the UK Bribery

Act any companies which do business in

Great Britain may be prosecuted or the

corrupt practices o their partners. For this

reason companies class the management o

corruption risks as a priority objective.

Interaction with the stateOne o the conclusions drawn on the basis

o the year 2010 by senior executives o

oreign companies who took part in the

business dinner was a conscious need to

improve dialogue between the business

world and the state. The survey results

show that representatives o Russian andoreign companies place equal value on the

role o proessional associations in the eld

(83% and 73% respectively).

In this respect, Russian and oreign

manuacturers have dierent attitudes to

the making o private representations to

state authorities. 100% o Russian

companies surveyed use this approach,

compared to only 33% o oreign

companies.

40%20%0 60% 80% 100%

Non-commercial organizations /associations of pharmaceutical companies

Private communications from individual

companies to representativesof State authorities

Open communicationsin the independent press

Other

Figure 15. Assessment of most effective methods of communication between

pharmaceutical companies and the State

All



% respondents

13%

10%

13%

10%

33%

52%

83%

73%

76%

0%

0%

100%




Distribution o the marketshares o major playersAccording to data rom industry experts

consisting o sales gures or the year

2010 expressed in monetary terms, the

15 largest companies (an absolute majority

o them being oreign companies) control

around 46% o the market. The remaining54% o the market is divided up between

a large number o Russian and oreign

players. The experts consider that this

shows that the market is ragmented and

likely to undergo urther consolidation.

There were no signicant changes in the

distribution o market shares in 2010

compared with 2009. The combined market

share o the 15 largest manuacturers

remained virtually unchanged (the dier-

ence was just slightly above 1%). Virtually all

15 key manuacturers retained their places,with partial shits in position within the

group.

Despite the act that the respondents

indicated changes in sales volumes and

protability in 2010 (Figure 3), these

movements were not refected in respective

market shares.

Assessment o competition

on the marketThe survey results indicate that, as things

stand, 25% o oreign manuacturers and

only 17% o Russian manuacturers class

competition as a risk actor (Figure 14).

This is probably due to the act that only

one Russian manuacturer is on the list o

the 15 largest companies (in terms o

revenue levels) and is competing or top

places with the other 14 oreign players.

The survey participants rate the level o

competition in particular segments as

ollows:

• Competition was rated as greater than

average (i.e. not lower than 3.4 points

out o 5) in all segments

• The highest level o competition was in

the Russian distributor segment, while

the lowest was in the local manuacturer

segment.

The shits in positions among companies

on the top 15 list (during 2009-2010)

corroborate the view o the survey partici-

pants that competition or top places is

more acute among oreign players.

Market orecasts

Foreign and Russian manuacturers whotook part in the survey have divided opinions

regarding the prospects or changes in the

respective shares o market players.

To the question o how the pharmaceutical

market will develop in Russia over the next

ve years, Russian manuacturers answer

that the share o Russian companies will

naturally increase thanks to state support.

Furthermore, state support will, in their

opinion, encourage oreign manuacturers to

create production enterprises in Russia.

44% o oreign manuacturers envisagesetting up production operations in Russia,

while they regard other possible develop-

ments, such as the acquisition o Russian

companies, as less likely (only 18% o

respondents mention such possibilities).

It may be assumed that a qualitative change

in the distribution o orces will begin in

2011, aided by the ollowing actors:

Analysis o market development

Figure 16. The market shares of the 15

largest pharmaceutical companies

based on revenues for 2010

15 largest companies

Other

54%

46%

Source: CMI Pharmexpert,

analysis by Ernst & Young

1 2 3 4 5

Russian distributors



Pharmacy networks

Figure 17. Rate the level of competition within segments of the Russian

pharmaceutical market on a scale of 1 to 5.

All

4,0

3,8

3,4

3,5




• The nascent localization o the manuac-

turing o oreign products

• The urther growth in competition and

existing deragmented state o the

market

• The eect o price regulation and

compulsory medical insurance laws

adopted in 2010

• The already ormulated strategy or the

development o the pharmaceutical

industry and the ederal special-purpose

programme.

Forms o businessdevelopment and trendstowards localizationo manuacturingThe survey results indicate that the

majority o Russian manuacturers (83%)

plan to expand their existing production

acilities, and two thirds o those surveyed

(67%) intend to begin building new

production sites.

In view o the state import substitution

strategy oreign companies are generally

considering two main business develop-

ment scenarios. Hal o oreign companies

express an interest in setting up their own

production operations in Russia. Slightly

less interest is shown by oreign companies

in establishing contract manuacturing with

Russian manuacturers – around 44% orespondents (Figure 19). Contract

manuacturing may become more attrac-

tive in the uture thanks to state support or

the process o the transition to internation-

al manuacturing standards (GMP).

The survey results show that oreign

companies have little interest in closer

co-operation with Russian manuacturers,

e.g. through the transer o patents and

technologies. There are currently only a

very ew examples o such co-operation on

the market.At present, many major oreign players on

the market are already at various stages o

production localization: they have an-

nounced their investment intentions or

have already begun construction. The

survey results show that oreign pharma-ceutical companies tend to choose Saint

Petersburg, Yaroslavl and Kaluga as the

most preerred places to set up production

(these cities were mentioned by respon-

dents three times more oten than any

others in the course o the survey).

40%20%0 60% 80% 100%

Introduction of new products to the market

Extention of existing production facilities

Building of new production sites

Entering foreign markets

Acquisition of other manufacturers

Own wholesale distribution development

No such plans

Contract manufacturing

Figure 18. Which of the forms of business development listed below is your company

considering? (Russian companies)

Russian manufacturers % respondents

0%

0%

33%

33%

50%

67%

83%

100%

100%

40%20%0 60% 80% 100%

Introduction of new products to the market

Setting up own production operations in Russia

Transfer of a patent for an end product and/orthe technology for its manufacture in the

territory of the Russian Federation to aRussian legal entity

Other

No such plans

Contract manufacturing

Figure 19. Which of the forms of business development listed below is your company

considering? (foreign companies)

Foreign manufacturers / importers % respondents

0%

44%

6%

13%

50%

100%94%




The survey results are consistent with

actually announced investment projects,

in which the Yaroslavl and Kaluga provinces

and Saint Petersburg are chosen as

locations or production operations.

In particular, according to data rom the

Committee or Economic Development,

Industrial Policy and Trade o Saint

Petersburg, nine investment projects wereinitiated during 2010 or the construction

o new actories in the city in addition to the

seven already existing medicine manuac-

turing organizations.

Wholesale distributionmarketThe wholesale distribution market may be

tentatively divided into two segments:

• The market o medium and small

distributors, characterised by a highlevel o competition as also noted by

analysts o DSM Group

• The market o large national companies,

in which the top positions are held by

ve major enterprises which are

represented in all regions o Russia and

have a ar-reaching distribution system.

There is a airly high degree o concentra-

tion in the second market segment, owing

partly to the act that top companies have

increased the proportion o indirect sales,

and particularly sales to smaller wholesal-ers.

Strict regulation and monitoring o

compliance with maximum wholesale

markets have made things even tougher or

small and medium-sized distributors.

Russian distributors have divided opinions

regarding the business prospects o

medium/small distributors: 80% o manu-

acturers believe that small and medium-

sized distributors will be taken over by large

players, while 20% take the view that small

wholesalers will simply be squeezed out o

the market (Figure 21).

Figure 20. Do you plan to set up a production enterprise in one of the pharmaceutical

centres (clusters), such as Saint Petersburg, Yaroslavl and Kaluga?

33%

50%

17%

13%

7%

27%

40%

13%

0

10%

20%



30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s

Yes, we are examining the opportunities in one of the pharmaceutical centres and (or) havealready concluded an investment agreement in one of the pharmaceutical centres

No, we have no plans to localize production activity in Russia

No, we have no expansion plans to other Russian regions

We are examining the opportunities in other regions of Russia and (or) have alreadyconcluded an investment agreement in another region of Russia

Other

Figure 21. How do you assess the business prospects of medium / small distributors?

0

10%

20%

There will be market consolidation,medium/small distributors wil be aquired

by large players

Medium/small distributors willbe squeezed out of the market

30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s


20%

80%




The survey results show that legislative

changes have aected oreign manuactur-

ers’ relationships with distributors more

than Russian manuacturers’ relationships

with them. In this respect, 40% o oreign

manuacturers believe that relationships

within the supply chain have changed in

avour o distributors (Figure 22).

Figure 22. Have relationships within the manufacturer-distributor chain changed

as a result of changes in the legislation governing the circulation

of medicinal drugs?

0

10%

20%



30%

40%

50%

60%

70%

80%

90%

100%

% r

e s p o n d e n t s

Changed in favour of manufacturers

Changed in favour of distributors

No change

10%

53%

20%

60%

20%

40%

7%

57%

33%




The respondents most comprised oreign

manuacturer-importers (67% o those

surveyed) and Russian manuacturers o

pharmaceutical products (25%). The

remaining 8% o survey participants were

Russian distributors o pharmaceutical

products and pharmacy networks.

Participantsin the survey

Figure 23. Composition of respondents



Russian distributors and pharmacy networks

8%

25%

67%




Dmitry Khalilov

Partner, Tax Services

Head o Pharmaceutical Group in the CIS

Tel.: +7 (495) 755 9757

[email protected]

Tatiana Shustova

Partner, Transaction Advisory Services,

Pharmaceutical Group

Tel.: +7 (495) 755 9867

[email protected]

Ivan Butyagin

Partner, Advisory Services,


Tel.: +7 (495) 705 9713

[email protected]

Evgenia Veter

Partner, Tax Services,


Tel.: +7 (495) 660 4880

[email protected]

Sergei Steanishin

Partner, Legal Services,


Tel.: +7 (495) 755 9872

[email protected]

Alexander Khorovitch

Director, Audit Services,


Tel.: +7 (495) 755 9844

[email protected]

Contact inormation

The inormation contained in this publication is presented in abridged orm and is intended only or general guidance. It must not be

regarded as a substitute or a detailed survey report or other reerenced materials or serve as the basis or a proessional judgement.Ernst & Young cannot accept any responsibility or losses incurred by any person acting or reraining rom action as a result o any material

in this publication. Advice on specic matters should be sought rom a specialist in the relevant eld.



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