CURRENT SITUATION ON THE RFE PHARMACEUTICAL MARKET

Current Situation in the Russian Far East Pharmaceutical Market

December 2006

Author: Andrey Vasenev, BISNIS Representative in Khabarovsk, Russia

General Market Trends

The pharmaceuticals markets in different regions of the Russian Far East (RFE) Federal District have their own specific characteristics. However, for most of them, the general trends in the Russian market hold true, including the current strong competitive environment that is forcing pharmaceutical companies to adapt and change.

During the 1993-2003 the average annual growth rates of the RFE pharmaceutical market were similar to those of the population’s income and were slightly above Russia’s overall economic growth rates. Later on, the market growth was slightly affected by the introduction of the value added tax and the new certification procedures and several other factors. The market size and structure was also considerably influenced by the Federal Program for Supplementary Medicine Provision (SMP).

During the past 10 years, Russia’s pharmaceutical market grew twofold. The retail sector was the primary contributor to the increase. Its share grew from 68% in 1996 to 86% (with SMP) in 2005. While in 1996, the market was only 50% dependant on consumer purchases, 10 years later in 2006, this factor has become a key determinant of pharmacy market development.

In 2006, the Russian market is expected to grow 7.5%, which is a minor increase compared to 2005 growth rates associated with introduction of the SMP Program. However, experts claim that in the next few years the growth rates will rise significantly throughout the country and in the RFE regions. At the same time, decrease of the SMP Program medications list and tough competition will cut profits in the sector resulting in consolidation in all segments of the RFE pharmaceutical market.

Key Players

The pharmaceutical market of the RFE has a complex structure has been shaped over a number of years. It is divided into two primary segments: the private (commercial) and the state segments.

The private sector includes retail sales of patented medicines and parapharmaceuticals (bandages, syringes, drip trays, etc.), not taking into account sales under the SMP Program. State segment covers sales of patented medicines under the SMP Program through drugstores, as well as sales through hospitals and clinics.

Pharmaceutical distributors play a very important role in wholesale trade of medicine. The pharmaceutical companies are usually divided into regional, interregional, and national. The national distributors that have leading positions in the Russian Far East include SIA International, Protech-25 – a branch of Protec Implementation Center JSC, ROSTA JSC, BIOTEC Group, Katren JSC, and Shreya Corporational. Most of these companies have been operating on the market since the early 1990s. Today, the market positions of these companies are subject to continuous variation. As a rule, these companies have primary wholesale warehouses in Vladivostok (Primorsky Krai) and Khabarovsk (Khabarovsk Krai). Other cities of the Russian Far East receive pharmaceuticals from these two locations.

Most large distribution companies seek to expand the range of goods sold. For example, SIA International plans to initiate production of anti-tuberculosis medications. Under agreement with Eli Lilly, SIA International will begin production at Skopinskiy Pharmaceutical Plant (Ryazan Oblast) using substances purchased from U.S. suppliers. The company apparently took notice of Russian Minister of Health Mikhail Zurabov’s proposal for foreign producers to relocate manufacturing facilities to Russia and a promise of future barriers for imported medications, including those purchased under the SMP Program.

There are no trends towards combining the functions of distributors and producers of pharmaceuticals on the RFE market. The competition among distributors in the pharmacy sector is extremely high and the marginal extra charge of 15% (e.g., Primorskiy Krai) is not included in the product cost. Distributors, however, are generally working to decrease the cost of their products.

In this respect, overall Russian statistics differ from those of the RFE. Distributors obtained an opportunity to get an extra profit through production under the SMP Program. As the distributors’ margins fall (5-7% today and is expected to decrease further to average world levels of 1-2%) production of pharmaceuticals under the state programs becomes a way for the distributors to diversify business.

Local (regional) distributors are becoming increasingly active in the Russian Far East. The levels of interregional and regional distributors are to some degree coincident and interpenetrating. For example, Katren JSC is referred to as an interregional distributor. However, unlike other large pharmacy distributors that supply the drugstores from Khabarovsk and Vladivostok, Katren possesses a large warehouse in Yuzhno-Sakhalinsk also.

The largest national companies intend to invest in expansion of their regional networks through mergers with local pharmacy enterprises. For example, in 2004, BIOTEC Group purchased a controlling share of Pharmaceya JSC (Vladivostok).

Distribution Chain

The path that medicine takes on the way from distributor to drugstore varies in each region of the Russian Far East. As a rule, former state drugstore agencies that were transferred into state unitary enterprises now function as retail traders (thanks to a wide drugstore chain), and as regional distributors through wholesale trade of pharmaceuticals and sometimes enter the interregional level. Such enterprises also usually receive tender contracts to supply medicines under the state program of medication provision to certain groups of citizens.

One of the peculiarities that Primorsky Krai pharmaceuticals market used to have for many years was lack of state-owned drugstore network. In 1994, Pharmaceya JSC was established on the basis of the state pharmacy. In 2001, Primorskaya Krayevaya Apteka State Unitary Enterprise was established under the support of the Krai administration. In 2006, the enterprise initiated development of its own retail network.

Similar enterprises of the drugstore network may be found in all regions of the RFE. For example, Kamchatpharmacy Unitary Enterprise holds leading positions in Kamchatka and Koryakiya with 15 drugstores and four minor drugs selling sites. Drugstores owned by entrepreneurs but not registered as legal entities are also very active on the region’s market. Such regional distributors as Khabarovsk Pharmaceya, Intermedservice and Dalmedpharm hold positions on the wholesale trade market.

The largest drugstore network in Amur Oblast is Amurpharmaceya. It includes 105 drugstores. Since 2005, the company operates an authorized pharmaceutical warehouse under the federal SMP Program.

Unlike the transformed drugstore agencies, Khabarovsk Pharmaceya was the result of the merger of three Khabarovsk companies: Svetoch, Dikson and Vostoc. The company operates as a holding structure. Novaya Apteka drugstore network with affiliates in Khabarovsk, Komsomolsk-on-Amur, Yuzhno-Sakhalinsk and Vladivostok is a part of the holding. The primary share of sales is performed through drugstores. The average monthly sales growth of Khabarovsk Pharmaceya is approximately 10%. The company sells 2,000 medications. Khabrovsk Pharmaceya is a consigned warehouse of Gedeon Richter; it has established working relations with Pfizer, Ranbaksi, etc. Pharmaceya State Unitary Enterprise (former drugstore agency) also operates on the Khabarovsk regional market. It is an active participant of Government-sponsored competitions for pharmaceuticals supply.

Pharmaceuticals

The pharmaceutical market of the Russian Far East is well supplied with a wide variety of products. Large distribution companies are reported to have up to 6,000 drugs. Local producers account for a minor share. Domestic pharmaceuticals prevail in the drugstore sales. As of May 2006, the share of Russian-made medications was 70%. Although people generally prefer to purchase cheaper Russian-made medicines, and buy imported pharmaceuticals less often, because imported medicines are significantly more expensive, the share of imported goods in the sales volume is 76%.

In May 2006, Viagra was ranked top product in the cost volume (1.03%), hawthorn was second (0.94%) and Aktovegin was third (0.83). Bioactive supplements and galena medications account for a large sales share - up to 9% in value terms.

During the past 10 years, representations of foreign pharmaceutical producers have become very active in the RFE, these include Gedeon Richter, Bofour Ipsen International, Schering Plough, Ranbaxy, Novartis, Egis, and Servier. Most of these companies have representative offices only in Khabarovsk and Vladivostok, but extend their interest to Kamchatka, Sakhalin and Magadan.

Western companies invest large sums in promotion of the branded drugs (advertisement, cooperation with local doctors, actions in drugstores, conferences, work with pharmacy distributors). Local producers have a hard time competing with representatives of the western companies in this area.

U.S. Representation

Three U.S. representations are currently active in the RFE. During the several past years they have been successfully increasing the volume of sales and diversifying their assortment. The major factors for successful performance of the U.S. companies include efficient management systems, high-quality goods and services, and aggressive marketing and promotion activities.

The Pfizer representative office in the Russian Far East located in Khabarovsk is not engaged in direct sales, but performs marketing and promotion activities only. Six local pharmaceutical companies sell 13 of Pfizer’s medications on the RFE market.

Baxter representative has been operating in the Khabarovsk Krai since 1996 selling various medical supplies, including hemodialyzers and their disposables, to local hospitals and clinics. As of today, the largest hemodialysis centers in Blagoveschensk, Komsomolsk-on-Amur, and Khabarovsk are equipped with Baxter devices. These devices have a good reputation and helped to solve the problems of patients with chronic nephritic insufficiency in these cities. The company successfully markets transfusion therapy devices and disposables as well as blood collection sets and the eighth coagulability factor. In 2005, Baxter’s overall sales in Russia totaled $43 million. The company plans to establish an official representation office in Khabarovsk.

Useful Links & Contact Information

BISNIS in Khabarovsk

18 Muravyov-Amursky Street, office #401

Khabarovsk 680000, Russia

Tel/Fax: (7-4212) 306-421

Email: bisnis@vasandr.kht.ru

Contact: Andrey Vasenev, BISNIS representative

BAXTER

Valentin Panzhinsky,

Regional Sales Representative

121 Frunze Street, # 32

Khabarovsk, Russia 680028

Tel/Fax: 7(4212) 309-305 or 771-655(cell)

E-mail: Valentiv_Panzhinsky@baxter.com

In Khabarovsk, the company sells hemodialyzers and supplies for them, vaccines and other pharmaceuticals.

Branch of BAXTER JSC based in Moscow.

Contact in Moscow: 1 Suvorova Square

Moscow 103473, Russia

Tel: (7 905) 284 5857/4431

Fax: (7 905) 956 3840

Pfizer International Inc.

Artyom Zhuravlyov, Sales Representative in the RFE

5 Sheronova Street, office 91

Khabarovsk 680000

Tel/fax: 7 (4212) 233-141 or 771-759 (cell)

E-mail: Zhuravlev.Artem@pfizer.com

Pharmacy Bulletin – online version of the national magazine, includes regional market information: http://www.pharmvestnik.ru

For information about government-sponsored tenders on pharmaceuticals in the Khabarovsk Krai see: http://www.adm.khv.ru/invest2.nsf/pages/ru/custom/custom.htm

For more information on the Russian Far East, visit BISNIS online at http://bisnis.doc.gov/bisnis/country/fareast.cfm

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).