Russia Pharmaceuticals and Healthcare Report Q3 2012

BMI View: The Russian pharmaceutical market retains vast growth potential and the short- term environment is very positive for both domestic and foreign drugmakers. WTO accession will be an important stimulus for enforcing intellectual property (IP) rights. The economy remains resilient, despite the problems in the nearby eurozone, although weaker-than-expected oil prices remain a concern. The government appears set to retain continuity in fiscal and economic policy, and the country’s health minister looks promising on paper. Nonetheless, major questions linger, including whether the government will be able to overcome widespread disenchantment among the middle classes, and if the strong state-role in industry – including wide swathes of the pharmaceutical sector – can deliver results.

The ability of the sector to deliver more than a 10% compound annual growth rate (CAGR) between 2011 and 2016 will depend primarily on currency stability and continued consumer demand. Exogenous factors, primarily the oil price and credit liquidity, will be crucial.

Headline Expenditure Projections:

Pharmaceuticals: RUB607.4bn (US$20.65bn) in 2011 to RUB664.68bn (US$21.94bn) in 2012; + 9.4% in local currency terms and + 6.2% in US dollars. Forecast upgraded from Q212.

Healthcare: RUB2,507bn (US$85.24bn) in 2011 to RUB2,746 (US$90.62bn) in 2012; + 9.5% in local currency terms and + 6.3% in US dollar terms. Forecast upgraded from Q212.

Medical devices: RUB187.97bn (US$6.39bn) to RUB208.64bn (US$6.89bn) in 2011; + 11.0% in local currency terms and + 7.7% in US dollar terms. Forecast upgraded substantially from Q212.

Risk/Reward Ratings: Russia’s Risk/Reward Rating (RRR) remains unchanged from Q212, at 58.7, with the country ranking fourth out of the 20 Central and Eastern European (CEE) markets in our matrix. The country continues to rank among the top five due to the country’s large population, economic growth potential (as well as linked consumer demand) and continued expansion of state healthcare coverage.

Russia should lead the CEE due to sheer market size alone; however, the country is held back by outsized economic and political risk factors, including volatility in commodity prices, potential for deeper political and social unrest and long-term structural issues, including the need to invest in infrastructure.

Key Trends And Developments:

Russia saw a new government appointed in May 2012; changes included the appointment of a new health minister and industry minister, both of which are key developments for the pharmaceutical industry. Veronika Skvortsova, the Minister of Healthcare, she cuts a very different image from the politically well-connected outgoing minister Tatiana Golikova. Initial indicators suggest, however, that she will maintain broad policy continuity. In an extensive interview in early June 2012, Skvortsova identified her priorities as the rollout of mandatory health insurance, prevention as well treatment, better regulation of medical provision and advanced medicines, and the eventual adoption of the Medicines Insurance System, which will shift the funding of outpatient drug provision from out-of-pocket to a state-backed insurance system.

Top of the agenda for Russia’s new industry minister will be the failure of seemingly robust investment and state backing for domestic production to stimulate exports and address the country’s yawning trade gap. Russia's domestic drugmakers failed to boost exports in 2011, according to data. Full-year trade data show pharmaceutical imports reached RUB374.4bn (US$12.7bn) in 2011, up by 27.6% year-on-year in US dollar terms, equal to a 23.5% increase in local currency terms. Accounting for the majority of this figure, imports of finished pharmaceutical products were up by 27.6% in US dollar terms to RUB374.4bn (US$12.73bn) and 23.5% in local currency terms. Pharmaceutical exports for the year contracted by 5.3% in US dollar terms, which equated to RUB8,750mn (US$297.6mn) - down by 8.3% in local currency terms. The lack of progress last year is a strong signal that the industry will not meet these goals and supports BMI's long-held conviction that Russia's Pharma 2020 domestic production targets are overly ambitious and that the country's pharmaceutical trade deficit will continue to grow.

At the end of March 2012, Canadian drugmaker Valeant announced that it has signed an agreement to acquire Russian firm Natur Produkt International, a speciality pharmaceutical company in Russia. It has a significant presence in the OTC drugs segment in several categories marketed under an umbrella brand, Natur Produkt. Key brands include AntiGrippin, a leading cough and cold remedy, Anti Angin, Sage and Eucaplyptus MA, which are leading sore throat remedies. The acquisition puts the company head-to-head with North American OTC rival Johnson & Johnson, which previously acquired popular Russian OTC brands Rinza and Doktor

Mom from India’s JB Chemicals & Pharmaceuticals. BMI Economic View: The Russian economy continues to face enormous challenges of weakening external demand and continued uncertainty over the policy environment, which affects business sentiment. However, we continue to believe that the government will pursue a more business-friendly approach and seek to attract financing for major infrastructure projects, which should help to sustain a solid longer-term growth outlook for Russia's economy.

BMI Political View: The May 2012 announcement of ministerial appointments to Russia's cabinet is generally supportive of our view that, while President Vladimir Putin will seek to reassert his control over the government and Kremlin, a more reformist economic policy agenda is on the cards. There has been a high retention rate of key ministerial posts, which generally suggests that Putin maintains a firm grip on political power in Russia and raises key questions over the ability of the new government under Prime Minister Dmitry Medvedev to achieve any meaningful reforms over the six-year term. However, there equally have been several key appointments, some of the more surprising than others, which suggest that Russia's more liberal economic modernisation drive remains alive and well.