Grayling — 1Grayling Think Piece: HealthcareImplementation of the Pharma 2020 StrategyChallenges from the Russian Producer...
Grayling — 2ContentsResearch Rationale and Methodology 4Implementation of the Pharma 2020 Strategy: Setting the Scene 5Cha...
Grayling — 3Dear reader,I am delighted to present this thinkpiece from the Healthcare & Pharmaceutical government relation...
Grayling — 4Research Rationale and MethodologyRationaleThe Ministry of Industry and Trade’s Strategy of Pharmaceutical Ind...
Grayling — 5Implementation of the Pharma 2020 Strategy: Setting the SceneThe Strategy of Pharmaceutical Industry Developme...
Grayling — 6Selected key projects (“Group One”) to be supported by the state (as examples):6Generium- To be completed in 4...
Grayling — 7- Upon completion of the project it is planned to develop and market upt ten geneticallyengineered drugs per y...
Grayling — 8Challenges of the Pharma 2020 Strategy Implementationfrom the Russian Producer and Expert Perspectives: Key Fi...
Grayling — 9centrate on orphan drugs7to have a unique selling point. Respective legislation is planned to bedeveloped by S...
Grayling — 10- Due to complexity of the matter localization criteria for the pharmaceutical industry will not bedeveloped ...
Grayling — 11practices (GMP).11Experts say that out of 450 producers operating in Russia, only 50 are capableof accomplish...
Grayling — 12- The question of WTO membership has not been settled; Russia is on the fence: whether toenter the WTO alone ...
Grayling — 13factor”). “Both Russian and international associations are yet to earn the respect of the government.Their ad...
Grayling — 14Recommendations for Foreign Investors- Rules of the game for foreign investors are not defined by the Pharma ...
Grayling — 15- On 27 May US FDA and Roszdravnadzor signed a protocol of intentions to harmonize Rus-sian and international...
Grayling — 16are unique in securing regional leverage and strong in ensuring federal endorsement for yourplans on the Russ...
Grayling — 17About Grayling- With 900 staff in 70 offices around the world Grayling has a global footprint with offices ac...
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Think piece pharma 2020 june 2010

  1. 1. Grayling — 1Grayling Think Piece: HealthcareImplementation of the Pharma 2020 StrategyChallenges from the Russian Producer Perspectiveand What It Means for Foreign InvestorsMoscow, June 2010Written and published by Grayling16, bld. 2, Ul. Krasnoproletarskaya, 127473 Moscow, RussiaT: (+7 495) 788 6784© 2010 Grayling
  2. 2. Grayling — 2ContentsResearch Rationale and Methodology 4Implementation of the Pharma 2020 Strategy: Setting the Scene 5Challenges of Implementing the Pharma 2020 Strategyfrom the Russian Producer and Expert Perspectives: Key Findings 8Recommendations for Foreign Investors 14About Grayling 17Contacts 17© 2010 Grayling OOO Grayling Eurasia, Krasnoproletarskaya Ulitsa, 16, Building 3, 127143, Moscow, Rus-sian Federation.All rights as to copyright reserved. No reproduction, copying or transmission in full without permission; quo-tation in part permitted subject to reference and credit. Every reasonable effort has been made to ensurethe accuracy of the research and conclusions presented herein: no liability is accepted for errors or omis-sions, nor in the case of persons or organisations who act upon the conclusions herein without further appli-cation to us. While errors or inaccuracies are entirely the authors and not the responsibility of any namedcontributors. Grayling works for many pharmaceutical companies in many countries and a full disclosure listcan be applied for at the above address: no client or other body dictated the determined the analysis or con-clusions in this research
  3. 3. Grayling — 3Dear reader,I am delighted to present this thinkpiece from the Healthcare & Pharmaceutical government relations team atGrayling Russia. It is the sister companion piece to the 2009 thinkpiece we published: “What’s killing Rus-sians and who cares?” and is one of a series of thinkpieces that Grayling in Russia publishes in Russia,across Eurasia and beyond each year.This last year has seen a remarkable shift in opinions, values and outcomes for pharmaceutical in Rus-sia. Western pharma, and the analysts that follow them, have for some years been talking up the Russianpharma sales environment as healthy for both top- and bottom-line growth for global firms, just as the Rus-sian government then gave strong indications that it wishes to reduce both the relative and absolute propor-tion of its state drug purchasing budget that goes to western pharma. Indeed, in some ways 2009 was ahighpoint for western pharma in Russia, celebrating a decade of straight growth. Of the 82.6 billion RUR(over $2.1 billion) the Russian government budgeted for state drug purchasing in 2009, almost 94% by valuewas assumed for Western pharma producers.1Equally, combined with this, the government, especially driven by Prime Minister Putin, wishes to radicallyoverhaul the domestic innovation and export abilities of the domestic pharmaceutical industry: innovationand export are watchwords for an administration that wishes to diversify the economy from hydrocar-bons. To date it has been only marginally successful in this endeavour, which is why so much governmentintellectual resource and time has been put into ‘Pharma 2020’ the government’s strategy for Russian phar-maceutical development upon which this paper focuses. Relative to the Russian state budget overall, sub-stantial amounts appear to be pledged, from state funds, to support this. However, even assuming thesesubventions all reach their intended destination, it has to be said they represent a tiny amount, compared theannual R&D spend of even the smallest of the world’s top 15 pharma firms: it is a lot to expect this to revolu-tionise an entire industry. Thus, the challenge facing the government to achieve these aims, is huge (andarguably bigger, and in a shorter timeframe, than any other economic transformation sought during the ‘Putinyears’).Against this background, we are seeing many western pharma firms ‘rush to Russify’ in terms of localisedpackaging, manufacturing and R&D. One route many firms follow is M&A of existing local producers, or theirdomestic assets, or enter ‘local partnerships’. Some critics argue that this may be an example of ‘fools rush-ing where angels fear to tread’. Speed is important for corporate success of course, but as this paper re-minds, by 2014 all Russian pharma domestic productions assets ought to be producing manufacturing ac-cording to international ‘GMP’ standards. In reality, as our polled experts noted, very few will achieve this:some wily Russian owners, therefore, are looking for gullible western investors. Some Russian manufactur-ers may find ways around this, as it were, some western acquirers will struggle to turn their assets around intime. It may, indeed, be better for western investors to adopt a greenfield route, rather than buy existing ca-pacity. Whether the risk-adjusted, rate of return justifies this, however is (Grayling knows) the subject ofhard-fought conversation at the board tables of the west’s largest pharma firms.Yours sincerelyStephen LockGlobal Head of Healthcare & PharmaceuticalRegional Operational Director in charge, Grayling Eurasia1
  4. 4. Grayling — 4Research Rationale and MethodologyRationaleThe Ministry of Industry and Trade’s Strategy of Pharmaceutical Industry Development in Russiaup to the year 2020 (the Pharma 2020 Strategy)The Pharma 2020 Strategy with a declared goal of “transitioning to innovation development modelof the Russian pharmaceutical industry” has recently been updated to accommodate final com-ments of the federal and regional government.The Strategy is ambitious, and differing views are being shared as to challenges facing implemen-tation of the Ministry’s plans. The greatest difference in these views is generally perceived to bebetween international pharma companies and Russian producers (the latter are often thought to bealigned with thinking of key experts and government officials). Would the reasoning of domesticmanufacturers indeed be in stark contrast with widely known opinions of AIPM2and InPharma3members? In our research we focus on understanding domestic manufacturers trying to comparetheir visions with those of key international pharmaceutical producers arriving at recommendationsfor foreign investors in the Russian pharmaceutical industry.MethodologyIn February-April 2010 Grayling team completed more than twenty in-depth interviews with repre-sentatives of Russian pharmaceutical companies, industry experts, ministerial officials, analystsand heads of trade associations. Among those contributing to the research were:- Timofei Petrov, General Director, Farmsintez;- Ivan Glushkov, Head of the Department for Corporate Development, Nizhpharm;- Anatoliy Martynov, Head of the Health Sector Committee, Russian Union of Industrialists andEntrepreneurs;- Sergey Shulyak, General Director, DSM Group;- Pavel Vorobyev, Head of the Society of Pharmacological Research;- Kirill Danishevsky, Head of the Society for Evidence-Based Medicine;- Viktoria Petrova, analyst, Credit Suisse;- Eldar Vagabov, analyst, Finam;- Yekaterina Andreyanova, analyst, Rye, Man & GorThe other 17 interviewees have asked Grayling to stay anonymous for the research but offeredmost revealing and candid views. Opinions reproduced in the research have therefore beenanonimised in many instances. Grayling team thank all participants in this research.2AIPM - The Association of International Pharmaceutical Manufacturers, a noncommercial organization, act-ing on the territory of the Russian Federation, and representing the interests of 52 of the world’s leadingpharmaceutical companies. AIPM implements various programs to support a dialogue between Russianhealthcare authorities and foreign pharma companies, such as meetings with officials, inviting them to speakat the AIPM events and cooperating with them on a number of issues, etc. It advocates for a transparent,non-discriminating pharma market conditions in Russia3InPharma - an association of international innovation investors in the Russian healthcare sector.
  5. 5. Grayling — 5Implementation of the Pharma 2020 Strategy: Setting the SceneThe Strategy of Pharmaceutical Industry Development in the Russian Federation for the Period Upto the Year 2020 (, hereinafter referred to as “Pharma 2020 Strategy” or“Pharma 2020”) was approved by the Ministry of Industry and Trade (hereinafter referred as “MIT”)on the 23rdof October 2009.The strategy has recently been amended: the Government of the Russian Federation requested foradding INNs4(non-proprietary names given to a pharmaceutical substance) to be produced inRussia; regional authorities asked to add provisions pertaining to establishing local pharmaceuticalclusters; and the Russian Ministry of Defense, Ministry of Economic Development and Federal An-timonopoly Service made further comments, which have been accommodated by the MIT.According to the MIT’s decree the Strategy is to be implemented in three stages:Selected key strategic drugs to be produced in Russia by three companies of Russian origin –ChemRar, Generium and Biocad5, which are the first to get a state support (more on them onthe next page):4International Nonproprietary Name, (международное непатентованное наименование (МНН) – Russian),the official non-proprietary or generic name given to a pharmaceutical substance, as designated by theWorld Health Organization5Presentation by Viktor Khristenko, Russian Minister of Industry and Trade
  6. 6. Grayling — 6Selected key projects (“Group One”) to be supported by the state (as examples):6Generium- To be completed in 45 months- Invested 600m RUR (approx. 19m USD)- Further investment required: 2 billion RUR (approx. 63.6m USD, private funds)- Full-cycle modern production. Total production space is more than 7100 square meters.Number of jobs to be created by Generium is over 140.- 150 scientists work at a private biotechnological institute (founded in 2002) and a state-of-the-art lab- Simplification and fast-track registration of drugs developed by Generium- Implementation of Generium’s plans is claimed to save 4.8 billion RUR (approx. 153m USD) peryear for the Russian state (import substitution effect)- Four genetically engineered drugs have already been marketed (Somatropin, Filgrastim,Diaskintest (DST) and Factor VII Coagulant)- Other four drugs in the pipeline are:6
  7. 7. Grayling — 7- Upon completion of the project it is planned to develop and market upt ten geneticallyengineered drugs per year.ChemRar- ChemRar was among key authors of the Strategy Pharma 2020- International pharma and biotech companies have been outsoursing their researches toChemRar since 1991- ChemRar has succeeded in transfer of technologies and reversing brain drain- 4.29 billion RUR (approx. 136m USD) is needed for the implementation of the project: 2.244billion RUR (approx. 71m USD) from own funds and 2.046 (approx. 65m USD) from jointinvestments; 400 million RUR (approx. 12m USD) already invested- Targeted results: 5-10 innovative drugs with high export potential, 20 generics for imprortsubstitution- Targeted budget savings: up to 2 billion RUR (approx. 64m USD) in 3-5 years- One of the directions in which ChemRar wants to develop is finalization of foreign projectswhich were halted because of the crisis.Biocad- Drugs based on monoclonal antibodies- Targeted complete substitution of Rituximab, Trastuzumab, Bevacizumab- 217 million RUR (approx. 6.9m USD) already invested, 10.7 million RUR (approx. 340 thousandUSD) from federal budget and 787 million RUR (approx. 25m USD) of extra budgetary fundsneeded.
  8. 8. Grayling — 8Challenges of the Pharma 2020 Strategy Implementationfrom the Russian Producer and Expert Perspectives: Key FindingsRange of opinionsRussian expert and professional communities are generally skeptical towards the strategy andwhether the instruments offered by Pharma 2020 can in fact lead Russian pharmaceutical industryto the innovation model. One of the experts even went as far as tosay that the Government might eventually give up on the strategy,because it “simply doesn’t contain workable methods of attractinginvestments”.Other experts noted, however, that the Pharma 2020 Strategy wasperceived to be the MIT’s success and generally supported by theRussian Government. It is testified by the fact that recently the Min-istry of Industry and Trade has took on a task to develop a similarstrategy for the medical devices sector. The document will envisagethe development of the industry by the year 2020 and will be readyby the end of 2010.Nearly all experts agree that reaching 50-60% of localized produc-tion during the following 5-7 years and produce 10-20 innovativedrugs locally per year are not entirely realistic targets.However, more than 50% of experts who took part in our researchare proponents of the Strategy. They insist that Russia needs to ensure its biological security,which is well reflected in the Strategy “between the lines”. Other experts, however, say that thisbiological security issue is over-dramaticised citing an example of the USA where antibiotics haveallegedly “not been produced locally for already two years, which does not raise major concerns in-country”, adding that “there isn’t a country in the world, which is self-sufficient in terms of producingdrugs. 90% of substances are produced in India and China due to low costs of production”.Financing implementation of the StrategyAnalysts and experts who took part in our research agree that funds planned to be allocated for thestrategy (roughly 6 million USD for 10 years) are unlikely to cover all the bulk of the costs neededto achieve the set tasks. Strategy advocates say, however, that Russia does not essentially needto produce first-in-class drugs. “Russia can take molecules, which didn’t do well in trials, but theyare still good and suitable for usage inside the country and it would cost less money” – is the uni-versal mantra, repeatedly spoken out loud by different experts. At the same time this approach,note some of our interviewees, raises another issue (apart from the arguable quality of the endproduct): with low export capabilities and export restrictions domestic and foreign investors thatplan to open plants in Russia are unlikely to get any substantial economy of scale and a return oninvestment. As a departmental head at one big Russian pharma company underlined: “if currentlegislation creates obstacles for exporting drugs produced in Russia, import substitution will be aslow process”. Having understood that it is not enough to produce simply innovative drugs as theymay fail on the international market, some experts suggest pharma companies should further con-Russia is supposed to be-come a great pharmaceut-ical power, but if we look at7-8 tenders over the lastsix months, it is clear thatthe winners are yet thosewho submit new synthesisof the old molecules.General director of aleading marketresearch company
  9. 9. Grayling — 9centrate on orphan drugs7to have a unique selling point. Respective legislation is planned to bedeveloped by September, 2010.Representatives of the Russian pharma companies note that the Ministry of Industry and Trade isconsidering buying licenses for circa 57 strategically important drugs in order to produce them inRussia. This task is however complicated by the fact that around half of these drugs are patented.At the same time companies and investors are not motivated to invest in R&D, as there is no guar-antee it would pay back: according to some experts’ assessments it is twice as expensive com-pared with the rest of the world. That’s why Russian companies prefer to focus on distribution andpackaging. In fact, one of the Russian producers said that it had been increasingly hard to get ROIin the pharma sector (“unless you are Pharmstandard”, he adds). Another expert notes that if com-panies used to double their investments in the first year, the best-case scenario now is that forevery 10 dollars invested, the company will get 11 dollars in 5 years.Needless to say that effective use of monies allocated for the implementation of the strategy is pa-ramount. In October 2009 the Ministry of Industry and Trade has approved a list of 29 promisingpharma projects which receive support from the Government. The Presidential Commission forModernisation of the Russian Economy approved five projects in the beginning of the year whichare to receive 1.1 billion RUR (more than 33m USD) in investments. On 14 May, 2010 the WorkingGroup “Medical Devices and Pharmaceuticals” under the Presidential Commission for Modernisa-tion headed by Minister of Industry and Trade Viktor Khristenko approved another four projects tobe supported by the Russian state8Deputy Minister of Industry and Trade Denis Manturov says there are currently 170 projects in thepipeline. The procedure, as it has been explained to us in MIT, is quite straightforward: the compa-ny applies to the MIT; MIT’s Scientific and Technical Committee reviews the applications once amonth and submits applications for inclusion into the list of strategic projects in the pharmaceuticalindustry to be discussed and approved by the Presidential Commission for Modernisation (the dis-cussion and final review is done by the respective working group in the Presidential Commissionheaded by Minister of Industry and Trade Viktor Khristenko and Deputy Minister of Health and So-cial Development Veronika Skvortsova.Foreign investmentAttraction of foreign investment is not made conspicuous – if at all mentioned - in the Strategy.There are no transparent criteria set for localization of production in Russia, but this is not neces-sarily a disadvantage under the circumstances, notes a governmental representative, pointing to apossibility of making products qualify as local according to general Customs requirements (whichare quite lax compared with special requirements for localization of pharmaceutical production inother countries, e.g. China). The governmental expert also notes that:- New special requirements for pharmaceutical products will be much stricter;- What these criteria will be no one in the Russian government can knowledgably explain, sincethe pharmaceutical industry is very complex and diverse [vs. automobile industry where suchcriteria were introduced several years ago];7An orphan drug is a pharmaceutical agent that has been developed specifically to treat a rare medical con-dition, the condition itself being referred to as an orphan disease. The assignment of orphan status to a dis-ease and to any drugs developed to treat it is a matter of public policy in many countries, and has resulted inmedical breakthroughs that may not have otherwise been achieved due to the economics of drug researchand development (source: Wikipedia).8
  10. 10. Grayling — 10- Due to complexity of the matter localization criteria for the pharmaceutical industry will not bedeveloped and approved in the foreseeable future – at least in 2010-2011. Introduction of loca-lization criteria for medical devices, by contrast, is simpler to develop: these criteria are to beintroduced much sooner.Russian experts do not appear to be overly against creating favorable conditions for foreign play-ers, as our research demonstrates. Quite unexpectedly, they point out to the fact that the overallenvironment for foreign investors shapes up to be rather unfavorable in Russia compared with oth-er countries:- Enforcement practice for the Fourth Part of the Civil Code (devoted to intellectual property) islacking and companies are unable to sell their drugs in other countries.- Production in Russia is costly and simply may soon cease to be profitable. “Russia loses tomany countries in terms of high energy and salary costs, and if we factor in cold weather,costs become even higher”, notes one of the top managers of a Russian pharmaceutical com-pany. Russian experts, therefore, understand why foreign investors are hesitant to invest inRussia and if they do so, they do it mostly for Russia-specific market access reasons.- Newly adopted law “On medical drugs turnover”9comes into force on September 1, 2010, butgovernment still hasn’t cleared out the rules for clinical trials. Foreign companies may beforced to postpone or cancel trials altogether.- Investors cannot secure any preferences or some kind of guarantees from the government,which makes their benefits vague and their future in Russia uncertain.What all representatives of Russian pharmaceutical companies underline is that there is “alwaysplenty of possibilities for joint projects with foreign investors” and “Russia is generally open” to that.ChemRar’s partnership with Roche is perceived as such a recent example.Russian experts also point to the new Foreign Affairs Doctrine10being developed by the Ministry ofForeign Affairs which envisages a more constructive but very practical dialogue with foreign coun-tries providing concrete bilateral recommendations. There is quite a deal of politics in the develop-ment of the pharmaceutical industry, and Russian experts advise to attach foreign investmentprojects to respective bilateral negotiations proactively choosing the right time and place. Our con-tacts in the Ministry of Foreign Affairs confirm to us that the Foreign Affairs Doctrine is a real doc-ument set to be finalized and enacted by next year.Focus on supporting big playersIt cannot go unnoticed that the strategy centers on several big projects, leaving out nurturing smalland medium innovative businesses. It might be logical since by the year 2014 according to the newlaw “On medical drugs turnover” all the manufacturers should comply with the good manufacturing9Adopted in March by State Duma the law “On medical drugs turnover” introduces new rules for the Russianpharma market which has substantially changed since the previous law had been adopted more than 10years ago. It introduces new definitions and procedures for trials and registration, a new list of essentialdrugs and transparent system of pricing for them.10The document is a conceptual blueprint for a new foreign policy doctrine that seeks to improve Russia’srelations with the West, particularly with the EU and the United States, in order to secure technology trans-fers, attract Western investors and create favorable conditions for Russia’s moderniza-tion.
  11. 11. Grayling — 11practices (GMP).11Experts say that out of 450 producers operating in Russia, only 50 are capableof accomplishing this, thus, the local market can expect new M&As. One of the experts notes thatin Russia it is easier and cheaper to build a new plant than try to modernize the existing outdatedfactory. This is something to think about for those companies who’d like to enter the market by anacquisition of a local production facility, as it might not be the most cost-effective solution.It is of special note, says our senior expert, that the Ministry of Industry and Trade has asked thegovernment for the budget funding of 75 pharmaceutical producers participating in public purchas-ing and manufacturing drugs from the essential drugs list, and 80 medical equipment enterprises,supplying health care institutions to help them transition to GMP standards.One more reason for the strategy’s imbalance lies in the government officials’ priorities – perfor-mance appraisal matters to them more than long-term results. Big companies are capable of deli-vering much needed results, as it was in case of Generium, which not only backed Pharma 2020,but implemented a project, which was worth presenting to Prime-Minister Vladimir Putin on themeeting in Kursk.In the meantime, according to a General Director of one of the Russian pharma companies, a lot ofnew molecules and substances have been invented in the past years, but are not synthesized.Main challenge for Russian pharma, especially innovative, is the lack of guarantees for the sale ofthe end product. If the government bought more medicines, the issue would be solved and Russiancompanies would start producing these drugs.Customs UnionCreation of the Customs Union of Russia with Belarus and Kazakhstan is a major issue for manybusinesses, including pharmaceutical companies.Experts, who took part in the study, note general risks associated with establishment of the Cus-toms Union:- New rules to come into force on 1 July 2010 provide additional powers for Customs officials onan unprecedented scale. The pace of dismantling the old system is faster than establishingand putting the new one into place- There is no clear plan for the pharmaceutical industry yet, but there are talks on the establish-ment of a unified registration body and harmonization of the regulations- Complicated management structure (there are national and supranational bodies, and it is notclear whom to outreach to solve each particular problem)- Absence of the dialogue of businesses with policy-makers in Russia (as opposed to Ka-zakhstan, where government decision-making process is relatively transparent)- Practice of Russia-Belarus customs zone (corresponding agreement is yet to be denounced)shows that it is extremely difficult to achieve consensus and mutual benefits on many issuesand that it is impossible to avoid certain easily imagined, and all too-frequently mentioned inregard to Russia abuses resulting from legal imperfections11GMP refers to the Good Manufacturing Practice Regulations promulgated by the US Food and Drug Ad-ministration under the authority of the Federal Food, Drug, and Cosmetic Act. GMP regulations address is-sues including recordkeeping, personnel qualifications, sanitation, cleanliness, equipment verification,process validation, and complaint handling. Most GMP requirements are very general and open-ended, al-lowing each manufacturer to decide individually how to best implement the necessary controls. This providesmuch flexibility, but also requires that the manufacturer interpret the requirements in a manner that makessense for each individual business.
  12. 12. Grayling — 12- The question of WTO membership has not been settled; Russia is on the fence: whether toenter the WTO alone or as the Union (Belarus and Kazakhstan are clearly not ready for thelatter). The latter opportunity may be impossible to realize although being actively discussed(WTO is to be entered only on country by country basis).Other perceived major challenges for implementing the Strategy- Effective implementation of the strategy depends on corresponding changes in the regulation.However, the administrative activities in this sphere prove to be too slow. The governmentalCouncil on the development of pharma market was conceptualized June 19, 2008, establishedin September 2009 and has had few meetings since then.- Another issue is weak legal framework for exporting the drugs, thenew law “On Medical Drugs Turnover” attempts to resolve the is-sue of banning export for the majority of producers which indirectlyresulted from specific registration requirements. I.e.the primaryand secondary packaging both being part of the portfolio submit-ted to Roszdravnadzor12for registration along with the instructionfor the drug can now be provided in several languages thus givingRussian drugs an opportunity to be exported. The Russian phar-macopoeia13is not synchronized with the European one (pharma-copoeia sets particular requirements for each drug) thus resultingin being a barrier for export and development of the pharma indus-try. Ideally it has to facilitate the development of the industry andeffective trade exchange. In some cases synchronization is im-possible and sometimes it is not economically viable. Ukraine andBelarus have already dealt with this problem, but not Russia- Russian investors have to spend at least 3-5 years to launch a pharma production. This periodincludes signing agreements, approving construction documents, construction itself and align-ing with GMP standards and it can be even extended depending on different factors.- It is very expensive to market the drug; experts argue that cost of research and developmentof the drug is so high because of the cost of entry to European and American markets. Buteven in Russia a third part of the total volume of retail prices (around $20 billion) goes to pro-motion, marketing, market access facilitation, distributor incentives and medical representa-tives. The bulk of these expenses is carried by foreign companiesTrade associationsGrayling has asked experts to weigh in on the position of associations (including the Association ofRussian Pharmaceutical Producers) and their roles for supporting Russian producers. The mostcommon response to this was that individual efforts of the companies prevail and matter more thantheir concerted activities in the associations (especially given the “lowest common denominator12Roszdravnadzor (Federal Service for Oversight of Healthcare and Social Development) is an executivebody which issues an official document given out on medical equipment, drugs and materials on basis ofresults of corresponding tests and estimations confirming quality, efficiency and safety of products. By Sep-tember, 2010 it’ll merge with Rospotrebnadzor (Federal Service for Oversight of Consumer Rights Protectionand Human Wellbeing) in an attempt by Russian government to get rid of excessive administrative hurdles13Pharmacopoeia in its modern technical sense is a book containing directions for the identification of sam-ples and the preparation of compound medicines, and published by the authority of a government or a medi-cal or pharmaceutical society. In a broader sense it is a reference work for pharmaceutical drug specifica-tions (source: Wikipedia).Only top ten big com-panies can afford bigcosts, vague pros-pects and inability toexport.Top manager of aRussian pharma-ceutical company
  13. 13. Grayling — 13factor”). “Both Russian and international associations are yet to earn the respect of the government.Their administrative leverage is weak”, note Russian producers.Several experts suggest that several independent associations currently active on the marketshould merge to represent the entire industry.What to doOur interviewed experts offered several ideas as to where the industry and its players should bemoving in the future:- One senior expert suggests that the government should elaborate a federal target program toback the strategy and it seems reasonable since Pharma 2020 is strong on favouring domes-tic producers and designing strategies for them, but light on the realistic development of theRussian pharmaceutical market on the whole. Apparently, this suggestion has recently beenheard by the Ministry of Industry and Trade who in May announced it was in talks with othergovernmental bodies to draft a federal target program for the modernization of the Russianpharmaceutical industry which stipulates funding for manufacturers transitioning to GMPstandards.- A common view is that “the government needs to fund research and development centerstoday so that in seven to ten years they could auction off their achievements to business”.Other group of respondents echoed this opinion by saying that situation on the market shouldnot be expected to change in the next decade; only then government’s strategy will yieldtangible results if today the state and the business jointly invest in R&D.- There is a need for innovative start-ups, but the government should provide financing bridg-ing. Start-ups struggle with the lack of connections and clear rules for projects. According toone of the experts, clusters are a good idea, but the government has to provide more thanjust sites for building factories from scratch.- It is clear that legal framework should be amended to favor innovations in the industry, oth-erwise, no matter how much money is allocated by the government, investors and venturefunds will reluctantly invest theirs.
  14. 14. Grayling — 14Recommendations for Foreign Investors- Rules of the game for foreign investors are not defined by the Pharma 2020 Strategy alone.Russian authorities may become less uncompromised when an "anchoring" project of a for-eign company in Russia is linked to development of bilateral relations with respective coun-tries-of-origin:- A new Russian foreign affairs doctrine being developed at the moment is very pragmaticand open for reconfiguring bilateral cooperation with selected countries. It may be an ideato work closely with your country’s foreign affairs authority to suggest areas for mutual co-operation and plan around respective state visits to make enquires, probing conversationsand announcements.- The US-Russia relations are a different complex universe. AmCham and the U.S.-RussiaBilateral Presidential Commission are the best venues for being up-to-date on recent de-velopments; strengthening your share of voice there may pay back substantially.- The EU-Russia relations are very diverse and ever-changing and uncertain (especiallywhen it comes to industry cooperation) much relied on bilateral relations (at least as it ispositioned from the Russian side). Although AEB is instrumental in being up-to-speed withgeneral developments and recently teamed up with RSPP14on important health sector is-sues, for European businesses it is equally important to work closely with your individualcountries’ foreign affairs authorities, especially in the coming 6-12 months (when the Rus-sian Foreign Affairs Doctrine will be developed, discussed and enacted)- The Russian Foreign Investment Advisory Council is establishing a health sector committeeand is set to play a stronger role in consultation with the government. Investors in the Russianpharmaceutical industry - not necessarily investing in big volumes but adding value to moder-nization and innovation development of the industry – will imminently unite their efforts inputting major issues on the governmental agenda.- Russian producers and governmental experts quite realistically assess prospects for foreigninvestment in Russia and realize what main hurdles for the foreign investor are. Advanceddomestic producers understand that without meaningful cooperation with foreign investors andsizable foreign investment implementation of the Pharma 2020 Strategy will bring little result.For foreign investors it means that a dialogue with Russian producers is not only possible butalso desirable as this may substantially help being heard by the Russian authorities:- If only some six months earlier the prevailing Russian message for foreign investors was“partner with businesses we will be telling you and transfer your know-how, otherwise youwill be squeezed out of the market” today’s environment is more favourable for the dialo-gue: the Russian producers and experts begin to recognize major challenges of foreign in-vestors on the market and are ready to engage in a meaningful dialogue (not with their di-rect competitors, of course). It is yet too early to hope for joint efforts with Russian produc-ers in lobbying major issues on foreign investors’ agenda but it is just the right time for ex-changing views and working out common ground for understanding.14Russian Union of Industrialists and Entrepreneurs (RSPP) - is an independent non-governmental organiza-tion. The RSPP has in its ranks more than 328 thousand members representing industrial, scientific, financialand commercial organizations (including pharma companies) and individual members in all Russian regions.
  15. 15. Grayling — 15- On 27 May US FDA and Roszdravnadzor signed a protocol of intentions to harmonize Rus-sian and international standards. This is another piece of evidence Russia is trying to makerules of the game more transparent- Introduction of compulsory GMP production in Russia by the year 2014 is a natural themefor discussion (as it is known there are very few truly GMP-compliant productions in theRussian Federation) to be complemented by discussion of potential market access stateguarantees for foreign and domestic investors contributing to the realisation of the innova-tion scenario of the pharmaceutical industry development- AIPM is, of course, a very reputable association. InPharma is a relatively new organizationbut set to be strong in reflecting views of foreign investors in the Russian pharmaceuticalindustry. However, unless Russian producers and experts are involved in these trade bo-dies’ meaningful discussion and formulation of common positions on selected topics, AIPMand InPharma’s voices will be continued to be heard but largely ignored by the Russiangovernment and the Presidential Commission for Modernisation.- Implementation of the Pharma 2020 Strategy is supervised by the Working Group “MedicalDevices and Pharmaceuticals” of the Presidential Commission for Modernisation of the Rus-sian Economy headed by the Minister of Industry and Trade Viktor Khristenko. Despite pre-vious statements that Ministry of Health and Social Development had not been engaged inrealization of MIT’s plans it is getting more obvious that Mr. Khristenko’s deputy of the WorkingGroup Veronika Skvortsova, Deputy Minister of Health and Social Development, plays an everincreasing role in the Group’s decision making process. An existing or potential foreign inves-tor in the Russian pharmaceutical industry should continuously engage both ministries in rela-tion to the FDI project being able to knowledgeably discuss:- Full cycle production requirements for designated strategic drugs (feasibility of producingsubstance in Russia is a separate topic, especially given the existing export limitations out-lined by the experts above);- Similar productions in other countries outside of the country where your company is head-quartered. If the planned / existing facility does not envisage stages completed, for example,in China or the USA you will be expected to explain why;- What about contributing to the R&D in the Russian pharmaceutical industry? Would yourcompany be ready for a partnership in this area? Today this is Question N1 asked at minis-terial meetings;- Training specialists for the industry. Would the company be ready to discuss a joint univer-sity program or developing training centres in one of the designated pharmaceutical clus-ters? Please note that this training should be supported in Russia at a Russian educationalinstitution. The government has become leery of programs to support PhD etc studies atoverseas universities. All too often this accelerates the ‘brain drain’ and the sponsees donot return to Russia.- Your company must be a significant tax payer in one of the Russian regions. Do the regionalauthorities pay back in terms of securing federal endorsement for your plans? If not, would itbe an idea to transfer payment of taxes to another region where the governor will be more en-gaged? Not entirely a crazy idea if you consider what a powerful political leverage a governormay be to you provided you have invested or plan to invest in his/her region. Grayling has adedicated foreign direct investment (FDI) group in Russia and CIS which can assess regions’political potentials and help you engage with regional authorities throughout the investmentcycle. Our reputation in this field is well earned to shy away from stating that our FDI services
  16. 16. Grayling — 16are unique in securing regional leverage and strong in ensuring federal endorsement for yourplans on the Russian market.- It is often the case that foreign pharmaceutical companies oversee CIS operations from Mos-cow. Have you been made aware that Belarus also aspires to have its own Pharma 2020Strategy with a focus on producing generics in order to export them to developing countries?How would establishment of the Customs Union and prospects of Russia’s entering WTO af-fect your business in the CIS? These questions should also be explored to ensure continuedsuccess of your operations on the Russian and CIS promising markets.
  17. 17. Grayling — 17About Grayling- With 900 staff in 70 offices around the world Grayling has a global footprint with offices acrossEurope, the Middle East, USA, and Asia Pacific and will rank in the top two independent PRfirms in the world- Healthcare is one of the key industries Grayling has a deep understanding of, helping pharma-ceutical and medical devices producers establish and strengthen their positions in the marketsaround the world. Additionally, Grayling’s global head of Healthcare & Pharmaceutical practiceis based in Russia.- Grayling has a strong Moscow team of 30 consultants specialising in public affairs and gov-ernment relations (including a special FDI division), PR and social media.- CIS operations are hubbed from Moscow. Grayling is the only international communicationsgroup that has a fully operated representation in Belarus. In Kazakhstan, Ukraine, Azerbaijanand Turkey. Grayling has strong local teams serving our clients for more than four years.ContactsVladimir Melnikov, Head of CIS Strategic Consultancy, Grayling16, Bld. 3, Entrance 8, Ul. Krasnoproletarskaya Ulitsa, 127473, Moscow, RussiaTel: +7 495 788 67 84Mobile: +7 903 790 2822Fax: +7 495 788 67 85E-mail: