Pharmaceuticals Russia 2007 report

RussiaPharma reportMay 2007

RUSSIE REPORT1 12/04/07 22:40 Page 1

hen the Russian Federation emerged from the formerUSSR in 1991, the social net that had provided forRussians' healthcare needs - including centralized

distribution of medication - was just a memory. No drug reg-istry existed during the first few years of independence, andforeign pharmaceutical companies were able to sell just aboutanything they had in stock into the new private distributionstructure.

As the production of consumer goods, including pharmaceuti-cals, had previously taken place in other socialist countries inCentral and Eastern Europe, regional players were able toleverage name-brand recognition and existing productionassets to dominate the Russian market. Multinationals enteredthe fray, but many retreated when the economy was crushed in1998 by the ruble meltdown that reduced the currency's valueagainst the U.S. dollar by 300% to 400% almost overnight.

However, the Russian economy quickly rebounded from thecrisis, thanks to its immense natural resources, and is now abona fide petro-economy with net creditor status. PresidentVladimir Putin's dominant United Russia party has been able toachieve budget surpluses large enough to put billions of dollarsaway for the future while funding tremendous works in fournational programs, the largest of which is healthcare.

Declining Population

World Health Organization (WHO) statistics speak volumesabout the negative effects of more than a decade without anyreal national healthcare coverage. The health of Russia's

S2 FOCUS REPORTS MAY 2007

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The Fall (and Rise) of Healthcare

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population has dipped to a ranking of 127th out of 192 WHOmember states, and the public health system is ranked even lowerat 130th. Communicable diseases represent a substantially highershare of the disease burden than in Europe, and Russia has post-ed the world's highest increase in HIV incidence rates. Russianmen have suffered the most severe health deterioration and nowdie at an average age of 59.

This is principally due to heart disease and external causes (suchas accidents, poisoning and injuries) and is largely attributed tounstable economic conditions, unhealthy lifestyles and a wide-spread lack of attention to risk factors. Additionally, more thantwo-thirds of the population lives in areas affected by air pollu-tion and 63% of males smoke, so the prevalence of respiratorydisease is high and cardiovascular disease causes 56% of allRussian deaths. The two major killers, ischemic heart disease andcerebrovascular disease, each cause at least 400% more deathsper 100,000 people per year than in the European Union (EU).

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first of all, needs to gain a full understanding of epidemiology.Secondly, the Ministry of Health must continue its work to estab-lish uniform treatment guidelines for common diseases so physi-cians know which drug or group of drugs to give first. Only then

will it become relatively easy to define the budget required tomeet the needs of the population. The current gap in the Ministryof Health budget for 2006 is simply a consequence of inadequatecalculation of the needs of the sick in Russia,” he says. “Nobodyknew what to expect from the DLO because there was no histo-ry on which to base funding decisions. Somebody needs to makethese calculations and make the necessary allocations to theregional and federal funding mechanism.”

Once this happens, Petrovic believes the potential of Russia canbe unlocked. “This is the key, as the cost of the reimbursementof medicines is not such big money for the number-three coun-try in the world in foreign currency reserves - higher than thewhole EU. The issue is now whether the Russian Federation real-ly wants to bring its healthcare system to the European level.”

Petrovic believes that “if one can assess the success of a productlaunch in three to six months in an average European country,


Coupled with this general decline in health, the increased annu-al federal healthcare budget - worth $3.9 billion for drugs and atotal of $5.7 billion in 2006 - has suddenly made Russia a hotbedof pharmaceutical industry activity. The first large-scale federalsocial program since the creation of the Russian Federation, theDLO, was launched in the beginning of 2005 to bring greateraccess to modern pharmaceuticals to a population of 8 millionpensioners and low-income families. The program's inaugural$1.8 billion budget, which has settled at $1.2 billion in 2006 and2007, was the major catalyst behind the Russian pharmaceuticalmarket's rise to a global ranking of 12th in 2005 before it becamethe world's 10th largest commercial drug market in 2006.Through world-leading 28% growth, Russia is now an $8.4 bil-lion ready-to-use-drug market.

The DLO was a driving force behind the state-financed sector's82% growth and increased its contribution to the overall Russianmarket to 39%, a level which approaches that of the US.However, many industry insiders are concerned about the hastyimplementation, as well as corruption in the unsophisticated pro-gram, which has recently led to budget overruns, more than $1billion in outstanding bills, and consequently, greatly reduced orhalted drug deliveries in many cases.

The result has been an ongoing scandal that in November 2006led to the dismissal of the leadership of the Federal MandatoryMedical Insurance Fund (FMMIF), the Ministry of Health andSocial Development (Minzdrav) entity responsible for process-ing DLO payments, and the March 2007 dismissal of the head ofthe Federal Service for Health and Social DevelopmentSupervision (Roszdravnadzor) which was created in 2004 tosupervise the overall regulation of medicines and to run theDLO. All this might mean that while the DLO has essentiallymade the market, it could soon be dismantled. Nonetheless, thecommercial market alone should be enough to attain 10% to 20%annual market growth in the next several years.

More Work Ahead

As a specialty drug provider, it isno surprise that about 60% ofRoche's sales in Russia come fromthe DLO program, but MilosPetrovic, the Serbian head ofRussian representation for Roche -the number-two player in the over-all Russian (ethical) prescriptionsegment as well as the DLO reim-bursement segment (according topreliminary 2006 data fromPharmexpert) - sees today's DLOas far from sufficient.Nonetheless, he says. “We need togive healthcare policymakers achance to work with all stakehold-ers to improve the system.”Petrovic suggests that “Russia,


SPONSORED SUPPLEMENTRussia Report

The first large-scale federal social program since the creationof the Russian Federation waslaunched in the beginning of 2005to bring greater access to modern pharmaceuticals to a population of 8 million pensioners and lowincome families

Real growth of drug commercial segment outpaced GDP growth rate

1998 2004 2005 2006 2007 F

GDP, $ billion 306 589 762 980 1183

GDP growth rate,% -5,3 7,2 6,4 6,7 5,8

Inflation, % 84,4 11,7 10,9 9,0 8,0

Credit rating S&P CCC- BB+ BBB BBB+ ???

Russian pharma market volume, $ billion 4,8 6,7 9,0 12,3 14,1

Sources : MERT, Goskomstat, DSM Group Sources : DSM Group “Monthly retail audit of the Russian pharmaceutical market”QMS meets 9001:2000 requirements

2005

GDP growth ratePharma real growth rate

2006

9,5%

6,7%

2,4%

6,4%


Hodgkin's lymphoma with MabThera as doctors do inGermany or the U.S.A., they then had to overcome thelack of budget allowances in hospitals for infusionpumps needed for the drug to be administered,” hesays.

Educating the Stakeholders

Education is also at the heart of Novo Nordisk's strate-gy. “We have very good relationships because we con-

sider education, effective data management, and clarity on rolesand responsibility as equally important elements,” says SergeiSmirnov, who is responsible for the 13 Commonwealth ofIndependent States and became Novo Nordisk’s youngest vicepresident worldwide. He adds, “our stakeholders know that weare very reliable in terms of superior quality in everything wedo: high-quality products, security of deliveries and supportingservice activities. Our aim is to encourage a more collaborativeapproach as part of the solution for better health outcomes.”

Diabetes is the number-two category in the Russian DLO pro-gram after cytostatics and accounts for more than the globalaverage of 10% of overall healthcare expenditure. Since 70% to80% of people with diabetes have the “disabled” status they need

Milos Petrovichere we need to talk about one to two years. Two factors areresponsible: the size of the country and a conservative attitudeamong many Russian physicians. But when the product is well-accepted, its life cycle is longer than in Western Europe.”

Nonetheless, Roche's leading products in Russia - MabThera,NeoRecormon and Herceptin - are the same as in most otherEuropean countries, and three big launches were recently con-ducted in three months: Bonviva, MabThera for rheumatoidarthritis and Tarceva.

Petrovic points out that the massive educational efforts directedtoward physicians and nurses were left to pharmaceutical com-panies. “Once they discovered that they could treat non-

"We need to give healthcare policymakers a chance to work with all stakeholdersto improve the system"


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to be eligible for the DLO program, it is no wonder that morethan 85% of Novo Nordisk's sales (the highest percentage of allthe top players) come from the program.

Novo Nordisk has been working for years now to diagnose latecomplications of diabetes and to screen for diabetes in differentregions with the help of specialists from the EndocrinologicalScientific Center of the Russian Academy of Medical Scienceswho work in the Novo Nordisk Mobile Diabetes Center. Thecompany placed its Mobile Diabetes Center next to the Inter-Parliamentary Assembly of CIS Countries in St. Petersburg whenparliament deputies were to discuss the model law on diabetes.

“After they had been tested and educated about diabetes, theyadopted this because they already knew what it was all about,”says Smirnov. “Closing the gap between the treatment currentlyoffered and what could be offered based on available guidelinesand scientific knowledge saves both money and lives and is partof the sustainable development of healthcare systems.”

Smirnov is confident that Novo Nordisk's advocacy of a moreseamless system of care, in which medical treatment is just oneelement, will serve to defend his stable 50% market share againstthree new Russian insulin manufacturing ventures that plan tocome online with enough capacity to meet the overall demand of

the Russian market.

While many multinationals are still marketing old-generationproducts like 17-year-old antibiotics and ACE inhibitors that nolonger exist in the West, the DLO has improved access to moremodern and efficient insulins, like the short-acting insulin aspart(NovoRapid), thus improving predictability and control.

The clear advantage, according to Smirnov, “is that the majorityof people do not know exactly how much or what they are goingto eat. Our dosage, however, is based on exactly what they eat.


Russia Report

Smirnov became the

youngest vice president for

Novo Nordiskworldwide

Sergei Smirnov

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Increasing Access to Innovation

In 2006, Lilly took a leading role in the process of updating theCode of Marketing Practices of the Association of InternationalPharmaceutical Manufacturers (AIPM), the main industry voiceof the international pharmaceutical community. “We want everycompany in the Russian market to play by the same rules, in fullcompliance with all applicable laws and regulations,” saysJentzsch.

Despite its frustrations with the DLO, Lilly is committed to theprogram. “Access to innovative, often life-saving medicines isstill limited in this country,” asserts Jentzsch. While Lilly hashistorically focused on diabetic care in Russia - and these treat-ments still account for 50% of Russian sales - diabetes takes aback seat to the Russian unit's leading role in Lilly's global multi-layer philanthropic initiative on multidrug-resistant tuberculosis(MDR-TB) in partnership with the WHO.

The initiative supports essential activities in the world's MDR-TB hot spots - China, India, Latin America, South Africa andRussia, where the WHO states that 86 new cases of tuberculosisare recorded per 100,000 people per year, more than six-and-a-half times the EU average.

Jentzsch explains the Russian role: “We started by funding train-ing activities in a specialized treatment center in Tomsk whichhave greatly decreased mortality. This now forms the basis oftraining conducted in specialized research centers throughoutRussia. We also transferred drug manufacturing technology fortwo MDR-TB antibiotics - capreomycin and cycloserine - to SIAInternational, one of Russia's top-two diversified distributors andpharmaceutical holdings. Their personnel will be provided withthe specific training required to best utilize this technology inaccordance with good manufacturing practices and to helpensure the quality and sustainability of drug manufacturing.”


OUT OF AN ESTIMATED 8 MILLION PEOPLE WITH DIABETES, ONLY 2.3 MILLIONHAVE BEEN DIAGNOSED AND THE AVERAGE CONSUMPTION OF INSULIN PER CAPITA IN RUSSIA IS 57 INTERNATIONALUNITS, COMPARED TO350 UNITS IN GERMANY.

Giving treatment that's adequate to a person's diet has helpedus to reduce HbA1c significantly.”

Despite the common view that diabetes may be the only dis-ease given special priority by the Russian authorities, only 2.3million of the estimated 8 million people with diabetes havebeen diagnosed, and the average consumption of insulin percapita in Russia is 57 international units, compared with 350units in Germany.

Need for Transition

Stefan Jentzsch, head of representation for Russia and the CISregion at Eli Lilly Vostok, came from the fairly structuredSaudi Arabian market in 2003 to find quite a different situationin Russia.

Jentzsch believes that Russia needs “to transition to a better-funded, insurance-based system, while strengthening outpa-tient care (which accounts for only 35% of public healthresources versus 60% in the EU) and developing treatmentstandards as the main basis for reimbursement decisions inorder to ensure better access to innovative medicines.”

Jentzsch's localunit lags farbehind Eli Lillyas a whole, whichreceived a num-ber-10 globalranking fromPharmaceuticalExecutive in2005, yet heexplains thatunwavering glob-al compliancestandards and adisconnectbetween charita-ble acts and prod-uct inclusion inthe DLO programare to blame.

While up to 80%of prescriptiondrugs are soldwithout prescrip-tion in Russia,

Jentzsch claims: “We are complying with the highest ethicalstandards in Russia. We are not encouraging patients to buy aprescription drug in a pharmacy without having received a pre-scription from a physician.”

“Access to innovative,often life-savingmedecines is still limited in this country”

Stefan Jentzsch


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Jostein Davidsensees Russiaas a Top Five European pharmamarket in fiveyears and as thebiggest in Europein ten years

The Russian Psychehe most successful foreign managersin Russia agree on some basic prin-ciples - beyond the preference for a

Russian bride. A Russian proverb illus-trates the Russian reality: “People knoweach other when they have eaten one pud(35 lbs) of salt together. It would take a lotof time for the two of us to eat a pud of salttogether.” Close relationships are not easyto cultivate with the Russian people; ittakes time, but if a Russian trusts you, hewill trust you until the end.

Accordingly, 5 to 10 years is the bestlength of stay in Russia. This is the view ofJostein Davidsen, managing director,Russia-CIS for Denmark's Nycomed, whohas probably worked longer than any otherforeigner in the Russian pharmaceuticalindustry - since 1988.

Davidsen, the leader of the consistent top-10 market player, believes thatwhile Russia is still an emerging market with a system that is not complete-ly transparent or in compliance, things have changed since the early andmid-1990s. “No longer is it a jungle where you need to build your home foryourself,” says Davidsen.The companies that historically have been the most successful in Russia -Sanofi-Aventis, Gedeon Richter, Berlin-Chemie Menarini and Nycomed -have had mixed portfolios that are adapted to the market, including manyproducts not sold in the West. Nycomed, which has the largest field force inRussia (with a headcount of 800), still benefits from the strength of someSoviet-era products while also building on innovative, high-tech hospitalproducts, branded generic beta blockers, type 2 diabetes and pain generics,and a large over-the-counter (OTC) portfolio. Before the acquisition of the much larger Altana, which gave Nycomedresearch and development capabilities, Nycomed derived 26% of its €750million ($975 million) in group revenues from the Russia-CIS region, itsbiggest market. Even following the acquisition, Davidsen is confident thathis region will still be the second-biggest market after Germany. “While thenew Nycomed will be less dependent on the Russia-CIS market,” saysDavidsen, “I'm very doubtful that the focus will be less.”

The question now is whether or not Davidsen will set up a Greenfield facto-ry in Russia. “From both a capacity and cost perspective, it's probably easi-er and cheaper to import products into Russia at the moment,” reflectsDavidsen. “Greater participation in reimbursement programs will never bethe sole criterion in a decision to produce locally; however, given a strategicfive- or 10-year plan, when I believe that Nycomed and all the top-10 or top-15 companies probably plan to exceed the $1 billion annual revenue mark inRussia, it might become quite beneficial from a logistics point of view.”

Despite current excitement about who the next presi-dent will be and recent reports that the value of bribesto officials nearly matches the state's total official rev-enue of $250 billion, Davidsen remains optimistic.“Conservatively speaking, I see Russia as a top-fiveEuropean pharmaceutical market in five years and asthe biggest in Europe in 10 years' time.”

“Healthcare expenditure per capita in Russia, evenwhen including the DLO, is still only around $60 to$70, compared to levels as high as $300 in otherEastern European markets. By taking into accountthese extremely important figures, we can understandthe enormous potential for growth,” he concludes.

Given such expectations, it is no wonder that forDavidsen, “the number-one challenge today is to man-age high corporate expectations of sustainable per-centage growth that has been in the 50% to 100%range in the last couple of amazing years.” He believesthe 'easy years' of 2001 to 2004 are now gone. “Wewill eventually follow the Central and EasternEuropean path of less than 10% current growth.”

Common Misconceptions

Paul Melling, founding partner of Baker & McKenzie- CIS, the first Western law firm to be registered withthe Soviet authorities in 1989 and one of the largestpractices in the region, advises: “There are two com-mon misconceptions about Russia; one is that Russiais the same as everywhere else, and the other is that itis so different that none of the usual rules of prudentbusiness practice apply. Both misconceptions willresult in disappointment.”

One must understand the unique features of theRussian pharmaceutical industry, says Melling.Features such as its heavy dependence on distributors:Two diversified national distributors, SIAInternational and Protek, control nearly 50% of themarket, with turnover of well over $1 billion each. No pharmaceutical network existed in Soviet times. Atthe time of the financial crisis, the business was in thehands of a small number of relatively inexperiencedcompanies that were not financially well-managed ortransparent. As the Russian market started to open up,multinational pharmaceutical companies began offer-ing longer-term credit lines to their distributors. Itworked very well until the ruble crashed and only half

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Russian spe-cialists aree x c e l l e n t l ytrained.” InRussia, spe-cialists are stillrelatively more numerous thanprimary care physicians, so Paulhas been busy offering trainingprograms such as one designedto show radiologists the differ-ence between investigations withand without contrast media.

A focus on education is alsonecessary in the area of oral con-traceptives, since, according toPaul, “the average Russianwoman supposedly has five to sixabortions in her life. Despite ashift in political systems, theacceptance rate of the use of oralcontraceptives has only risen to5.5% in the last 20 years, com-pared to 35% in Europe.”

At the same time, Paul has aclear response to the concernthat the promotion of oral contra-ceptives conflicts with PresidentPutin's new program to increasethe birthrate. “The opposite istrue,” asserts Paul, “oral contra-ception offers the opportunity tochoose the right moment to havechildren. We do in fact supportthe program of President Putin.”Following the merger of Bayerand Schering Plough, BayerSchering Pharma should emergeas a 190 million ($250 million)turnover top-10 pharmaceuticalcompany in Russia in 2007.

Becoming a Fixture in Multi-Center Clinical Trials

Dr. Manfred Paul

of $350 million in outstanding balanceswas collected. “The pharmaceutical sector,aside from the banking sector, was thehardest hit,” says Melling.

A New Interest in Russian Production

Today, in light of the additional moneyflowing into the healthcare system, it is nosurprise to see the last holdouts - like

Wyeth - and the first global biotech giant,Amgen, enter the market. “Russia is now a a genuine market,” says Melling. “Morecompanies will start packing here and willeventually move into actual manufactur-ing. The trend will develop, and multina-tionals will be more 'Russian.'”

While this trend is clear, imports stillaccount for three-quarters of the Russian

market by value, and an even larger pro-portion of the DLO program. Due primari-ly to bureaucratic obstacles, concernsabout intellectual property rights (such asdata exclusivity), and persistent politicaland economic risks, few companies have adirect manufacturing presence in Russia.

Regional player Gedeon Richter was first,KRKA followed in 2002, and now Servier

ussia has become a popularlocation for clinical trials.

According to ThomsonCenterWatch analysis, the coun-try participates in more globalclinical trials than China and Indiacombined. Its population of 143million people is largely treat-ment-naïve, so patient recruit-ment is up to 10 times faster thanin the United States.

However, some challenges doexist: Intellectual property protec-tion is relatively weak, complicat-ed customs procedures can holdup trial supplies, a higher 18%value-added tax applies, andimprovement in the ethics ofpatient recruitment is not comingfast enough. This does not stopmost of the big companies fromincluding Russia in their multi-center clinical trial programs.

Schering AG started its firstRussian phase III study two yearsago and increased its activity to

R three phase III and six post-mar-keting studies in 2006. Based onthis experience contracting withRussian centers and hospitals, Dr.Manfred Paul, general manager -Moscow representative office forBayer Schering Pharma, says:“They fulfill international standardslike Good Clinical Practice by120%.”

Beyond that, Paul explains:“Russian physicians have verygood knowledge but they have lessopportunity to participate asspeakers in international con-gresses because they formerlywere not able to participate in clin-ical studies.” Paul believes thatonce Russian opinion leaders havethe experience, “they will be able topresent at international congress-es and enhance their image as wellas that of Russia and BayerSchering Pharma.”

When Paul returned to Moscowin 2004 to manage Schering AG's

Russian business afterspending 1985 to 1990 asthe representative of theEast German foreign tradecompany for medicines,GERMED, he noticed:“equipment in someRussian hospitals and spe-cialized centers is noweven better than theEuropean average. Whilemany doctors in hospitalshave an average that doesnot fit with the latest equip-ment or technical news,

Country Attractiveness For Clinical TrialsOverall Country Attractiveness Index

US 6.886.10

5.58

5.55

5.264.56

ChinaIndia

Brazil

South Africa

RUSSIA

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: Pha

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Note : Higher score indicate higher levels of attractiveness

Patient poolCost efficiencyRegulatory conditionsRelevant expertiseInfrastructure and environment




been in place since 1992 andcovers most of the issues itshould. However, there was noenforcement until 2002, whenthe Coalition for IntellectualProperty Rights (CIPR) and theUnion of ProfessionalPharmaceutical Associations(SPFO) sprang up to organize theindustry and win a high-profile

battle to persuade the authorities thatpatents would need to be protected ifRussia was ever to have a research-basedindustry.

To date, no major anti-counterfeit legaloffensive has been launched by a research-based company in Russia, possiblybecause the initial victory has not translat-ed into the sustained political momentumnecessary to pull the production licensesof the major violators rather than issuingnominal administrative fines.

Nonetheless, “the problem is no moreacute than inEurope,” saysGennady Shirshov,who leveraged hisbackground in man-aging tobacco logis-tics to take the posi-tion of executivedirector of theSPFO, a group formed specifically tobring together all six sub-sectors of thepharmaceutical industry - suppliers ofactive ingredients, foreign manufacturers,domestic manufacturers, distributors,pharmacy chains and analytical companies- to face the critical task of combating ille-gal imports and illegal domestic manufac-turing.

Now the SPFO has expanded its scope totake aim at ensuring the quality of theoverall Russian pharmaceutical supplychain through a recent proposal toRoszdravnadzor of a new pilot systemdesigned to quickly identify counterfeitsusing NIR (near infrared) spectrography.If this is implemented successfully,Shirshov will be eager to extend the NIRprogram to active pharmaceutical ingredi-ents, at least 80% of which are imports ofwidely varying quality.


and Egis are in the process of bringingjoint local production online. Nonetheless,an AIPM and PricewaterhouseCoopersjoint study in 2005 showed a clear trendtoward localization: 18% of respondentswere already engaged in some manufac-turing activity, and 50% expressed interestin gaining some kind of production pres-ence in Russia within five years, with apreference for full-cycle production.

Tax and Custom Issues

Tax and customs issues are quickly emerg-ing as even the most conservative compa-nies begin moving beyond representativeoffices to establish Russian subsidiaries asthey seek to avoid formalities whileexpanding.

Melling explains the basic challenge: “Thetemptations to cut corners here are so

Gennady Shirshov

Companies are tempted to cut corners because thechances of gettingcaught are small andresults immediate

Paul Melling

enormous, because companies are less like-ly to get caught and results are almostimmediate. While every pharmaceuticalcompany will tell you that compliance is atthe top of its agenda, even companies with aglobal 'zero-tolerance' policy can be suc-cessful, very profitable and grow theirRussian business.”

IP Legislation Seeking Enforcement

Intellectual property rights legislation has




s a pioneer in ultra-low-dosedrugs, Materia Medica is one of akind. Oleg Epstein, general directorof Materia Medica, explains, “wemanufacture with homeopathictechnology, but homeopathy and theuse of ultra-low-dose antibodies areabsolutely different areas”. He adds,“the actions of our drugs are subtleand safe, but due to their unusualmechanisms, these drugs are highlyefficacious. We make pharmaceuti-cals safer through correct dosagesand delicate regulation of theimmune system.”

The company now produces just aselect group of homeopathic prepa-rations. The rest of Materia Medica'sproducts represent an entirely newclass of medicines: antibodies deliv-ered in ultra-low doses. “We demon-strated that antibodies in ultra-lowdoses did not inhibit activities of cer-tain proteins and polysaccharides,but modified their activities instead,”

is acknowledged asthe leader in treat-ing alcoholism, atremendous issuein Russia. The com-pany manages to launch at least onenovel drug per year through an R&Ddepartment that is certainly the mostexperimental in Russia. “We haveobtained impressive results in thecurrent development of an efficientdrug for the treatment of chronicheart failure and expect to enter pro-duction soon,” says Epstein. “Similarprogress is being made in the treat-ment of diabetes and bird flu. Forthese products, we need some newstrategies as well as strategic part-nerships.”

The company is already a leadingRussian exporter of pharmaceuti-cals, and Epstein aims to expandbeyond Russia and the CIS region toachieve a proportion of 60% to 70%of sales from abroad.

AIntroducing a New Class of Pharmaceuticals

Oleg Epstein

says Epstein. “The principal differ-ence between our preparations andhomeopathic ones is that you don'thave to prescribe ultra-low dosesindividually, because they are effi-cient in any patient. We have intro-duced ultra-low-dosage pharmacol-ogy.” He points out that the design ofa new class of pharmaceuticals is anexceptionally rare event.

As one of the fastest-growing phar-maceutical companies in Russia,Materia Medica's turnover has bal-looned to $70 million, making it atop-20 market player. Each of thecompany's three products has founda place among the 100 top-sellingdrugs in Russian pharmacies.Anaferon, a treatment for the com-mon cold and influenza, has foundits niche as one of the most success-ful drugs in Russia's commercialmarket.

Materia Medica also has treat-ments for rheumatoid arthritis and




ven with well over 800 drug manufacturers represented inRussia today, companies with a regional focus, such as

Germany's Berlin-Chemie Menarini, Hungary's Gedeon Richterand Egis, Slovenia's KRKA and Lek (now part of Sandoz), andFrance's Servier still enjoy outstanding success in Russia whichguides their corporate growth and leaves many global players intheir wake. While pre-financial-crisis market leader ICN optedout, a new group of companies with a Soviet heritage have beenworking its way up the Russian ranks.

Croatian leader PLIVA (which is best known for its collaborationwith Pfizer to develop one of the world's best antibiotics, theblockbuster azithromycin) is a perfect example of this trend, asRussia has become more important than its home market toPLIVA's performance.

Developed World Players Buy In

After the azithromycin breakthrough, PLIVA changed its strategyto focus exclusively on its generics business. Barr Laboratoriessaw tremendous value in the company's long-standing presence inCentral and Eastern Europe and acquired PLIVA in late 2006 tocreate the third-largest generic pharmaceutical company in the


A Unique Heritage of Names and Brands

world, with revenues in excess of $2.5 billion. PLIVA willremain the name of Barr's generic business outside of the UnitedStates, and the company will continue to focus on Europe andRussia.

Alojz Pungarsek, PLIVA's country manager - representativeoffice in Russia, is excited about the situation: “There is minimaloverlap between the two companies, something very difficult tofind in the industry,” he says. “This is a pure synergy - it is oneof the best acquisitions ever made in the history of pharmaceuti-cals.” Pungarsek aims to move from top-25 status in Russia tothe top-10 as a leading market in the combined group within fiveyears, in part through the introduction of a broader range ofvalue-added products from Barr.

Paying a Premium for Trusted Brands

Since the quality of drugs is a concern, Russia is a market wherepeople will pay more for recognized brands and quality. Eventhough generic prescribing by international nonproprietary name(INN) is mandated by law, it is not fully applied. Tavinder JitSingh Vasudeva, country head for Ranbaxy, forecasts: “TheRussian market will stay brand-oriented for a minimum of fiveyears, simply because medical professionals know more aboutbrand names than INNs.”

Pungarsek adds, “the concept of marketing in the branded gener-ics industry is absolutely the same as it is in the innovative indus-try in Russia. From time to time, it happens that branded gener-ic products are even more popular than the originals againstwhich they compete.”

“In Russia,” says Pungarsek, “brand promotion and marketingpolicy are in fact the most important consideration, more eventhan a company's pricing policy. As a result,” he says, “we willcontinue to invest heavily in PR and branding and promotion ofthe PLIVA name and products.” This makes particular sensesince many people believe that the price of branded generics inRussia, one of the few true premium-price markets left in theworld across a wide range of consumables, is among the highestin the world.

E Branded generics are often morepopular than the originals against which they compete

1 SANOFIS-AVENTIS2 NOVARTIS3 F.HOOFFMANN-LA ROCHE LTD4 A.MENARIN’S GROUP LTD5 JANSSEN PHARMACEUTICA N.V6 GEDEON RICHTER7 PFIZER8 SERVIER9 NYCOMED10 SCHERING AG11 KRKA12 LEK D.D13 ASTRAZENECA UK LTD14 PHARMSTANDARD15 GLAXOSMITHKLINE16 SOLVAY PHARMACEUTICALS B.V17 BOEHRINGER INGELHEIM18 ELI LILLY19 NOVO NORDISK20 SCHERING-PLOUGH

Top-20 Manufacturers in 2006

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Manufacturers having or building their own plants in Russiaand having contractual production




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President Vladimir Putin (center) and Jerzy Starak(left), owner of Polpharma, during Putin's visit to Poland in 2002.

local player as a way to gain a foothold in Russia. Most real inter-est has come from generics companies looking to be first to theRussian market with first-generation generics. Oleg Feldman,general manager of COMCON-Pharma, a leader in ad hoc stud-ies, sees buying local manufacturing capacity as the equivalent ofbuying market share.

This year, Iceland's Actavis acquired ZiO Zdorovie, andPolpharma -Poland's largest producer of pharmaceutical sub-stances- won the contentious bidding process for Akrihin. Manycompanies clearly believe that Russia's pending World TradeOrganization (WTO) succession talks will not keep authoritiesfrom looking favorably upon domestic producers.

Polpharma established Russian operations only five years agowith the objective of selling cardiovascular, gastroenterologicaland neurological branded generics and OTC products. WhenMarina Veldanova joined Polpharma Russia as managing direc-tor in July 2006, she arrived equipped with experience fromAstraZeneca and OTC leader Berlin-Chemie Menarini.Polpharma owner Jerzy Starak split the CIS and Russia business-es, and Veldanova now reports directly to the new CEO. “Russiamight not be number-one based on current sales - since weaccount for 10% of all Polpharma sales with $20 million in salesin 2006 - but we are number-one based on ambition and marketgrowth potential in a $350 million company,” she claims.

Plus, the expectation that Russia will shift back to a commercial-ly driven market in the next few years, especially as private insur-ance becomes more prevalent, certainly bodes well for concertedmarketing efforts in Russia.

Buying Russian Market Share

Many international companies are intent on picking up a suitable




According to Veldanova, “it is possible to change both patient anddoctor behavior towards a medication just by applying the propermarketing tools, mostly in the branded generic market.” In linewith this thinking, Veldanova has opted to focus on launching“the first-ever OTC campaign in Russia with TV spots.”Her contention is that “direct-to-consumer marketing guaranteessales. This - as well as a focus on less-crowded space like neurol-ogy - is the right strategy to prevail with a fairly small andunknown product portfolio,” says Veldanova.Any doubt of Polpharma's focus on the potential of Russia wasremoved in March, when the company outdid itself (and its 75th-place commercial market position in Russia as determined byDSM Group). They succeeded where other larger companies likeRanbaxy had failed in acquiring a majority stake in Akrihin, atop-five Russian pharmaceutical manufacturer that achieved aturnover of more than $60 million in 2006.

Neither Asian nor European

Constant adjustment of operations and strategies is characteristicof the unpredictable Russian market. The result is Russian man-agers have to be imaginative in shaping their companies' future.

According to Jonas Tryggvasson, Actavis' Russian-speakingexecutive vice president - Central/Eastern Europe and Asia, “therecipe for success in Russia is as unique as the country, a proudnation that is neither Asian nor European and has its own soul. Wehave to put in the time to penetrate the cold façade of this kind-hearted nation.”

Tryggvasson pioneered development in the region for Actavis,and Russia is now the largest, most important and fastest-growinggeographic area for the Icelandic generics powerhouse. Russiansales now exceed $70 million.While its Russian representative office was only established in1999, Actavis cemented its long-term interest in the regionthrough the acquisition of a $60 million, 51% stake in ZiOZdorovie in November 2006. Tryggvasson explains the move:“This is the best company I've seen in Russia. They have built thesite from scratch with Western European design and the mostmodern equipment. This may be the only ISO (InternationalStandards Organization) and European GMP (GoodManufacturing Practice) certified facility in Russia.” After trying out the relationship through a secondary packaging ofselected products for joint promotion starting in May 2006,Tryggvasson was pleased. “It seemed that we were a very good fit-they have a good-quality production site, and we have a good-quality product line and new product pipeline.”

For Actavis, the move has opened doors to preferential salesopportunities with government-funded programs. “We expectmore pressure from the government to produce locally,” saysTryggvasson. “It's not only about basic job creation but also aboutsecurity of supply, consistency and bringing high-tech jobs toRussia. You can find cheaper products in places like China andIndia, but Russia is not about that; it's about consistency, qualityand going forward.”

In a market that has one of the highest low-cost generic drug pen-etration rates in the world (70% by volume), Tryggvasson is tak-ing aim at the more novel, more modern and higher-priced sector,“where price erosion has not caught up yet.” He hopes to tap intorecent global acquisitions that bring in advanced controlled-release products and cutting-edge oncology generics to create aunique market opportunity in Russia. “We want to play witheverything that is advanced, good-quality, makes profits, and canbe first to market or unique in some way.”

“Putting More Legs under the Table”

Tryggvasson's focus is on “cardiology and central nervous systemtherapies while 'putting more legs under the table.' The RussianOTC market accounts for 70% of our sales and offers potential forline extensions as old, established generics are slowly leaving.” The ZiO Zdorovie acquisition should add about $40 million inannual sales immediately, and while Actavis is just breaking intothe top 10 in the generic market, Tryggvasson is more than hope-ful. “We will be number-one one day,” he contends. “The issue forus is to manage ourgrowth, because if youtry to swallow too much'candy' you will havesome digestive prob-lems.”

One might wonder howa company from thenumber-one country inthe world in transparen-cy, Iceland, could havesuch aspirations inRussia, which slipped toa ranking of 121 in the2006 TransparencyI n t e r n a t i o n a lCorruption PerceptionsIndex. Tryggvasson'sanswer is quite simple:“Russia is surely mov-ing in the right direc-tion. It is now becomingmore predictable andeasier to manage sys-tems that are transparentin Russia.”

“The recipe for sucess in Russia isas unique as the country, a proud

nation that is neither Asian norEuropean and has its own soul”


Actavis and ZiO Zdorovie see the sky as the limit




few years ago it was true that tak-ing out a bank loan was not a

viable option, since banks saw pharmaceu-tical R&D as “speculative” and interestrates in Russia were around 25%.Alexandr Itin, general director ofOtechestvennye Lekarstva, says thingshave now changed: “It's not hard for us toattract money from the market today, sincemoney is quite cheap. Projects require'long' money, not just cheap money. Wehave positive experience in placingbonds.”

According to Dmitriy Kushaev, managingdirector and head of investment banking atTroika Dialog, not only is there a consid-erable amount of funding available, butruble interest rates are also in line witheuro bonds. At the same time, there is aclear lack of available pharmaceuticalshares in the local equity market. Thisshould not be ignored, as Moscow ispoised to emerge as the number-two capi-tal city in Europe within the next decade.Kushaev, who set a precedent by placing

the first Russian pharma IPO, PharmacyChain 36.6 (a resounding success - theshare price has increased sixfold), com-ments, “The market wants more and willget more, especially since the fundamen-tals are here.”

In April 2006, privately owned Troika wasengaged in the IPO of Veropharm, the firstpharmaceutical producer in Russia to gopublic. The company's shares now trade at13 times the 2006 actual EBITDA and 10times the 2007 expected EBITDA - veryrespectable valuation metrics by any stan-dard and a benchmark for the future. This

is on par with other Eastern Europeanproducers, which are also mainly genericmanufacturers.

“Even at these strong valuations, thecompany is still very attractive whencompared to its regional peers who havealready been acquisition targets for a longtime now. Russia is the natural next stopfor multinationals,” says Kushaev.

The industry is reaching critical mass in

production, retail and distribution, so astrong wave of mergers and acquisitionsshould hit very soon. “Companies inRussia are just trying to be ready for that.In fact, the planned Pharmstandart IPO inLondon and Moscow may not happen ifsomebody makes a good offer,” Kushaevadds. “I would not be surprised if they areon the dual track - IPO or strategic sale -and the only critical factor for both istransparency of governance, finances andbusiness model.”

Kushaev believes that strategic interestswill target production assets as well as

Expecting an M&A StampedeA


“Unlike the resource industry,investments in the pharmaceuticalindustry are welcomed.The time is right for international collaboration to develop the Russianpharmaceutical industry”

Dmitriy Kushaev,managing director

and head of investment banking

at Troika Dialog





specific local skills in product origination,launch and marketing. “While some of thelocal players have the potential to stayindependent and become quite big compa-nies due to the consolidation and generalhigh growth of the market, the process ofdeveloping the industry will require theparticipation of international players. It ispossible to make more money here thananywhere else in Central and EasternEurope. Russia is very interesting as aplayground for production. Unlike theresource industry, investments in the phar-maceutical industry are welcomed. Thetime is right for international collaborationto develop the Russian pharmaceuticalindustry, and Troika can navigate the

process,” he says.

Financing Growth

As the biggest equity broker in Russia,Kushaev says Troika already has the expe-rience with multinationals in differentindustries that have gone through consoli-dation. “Our financial services are nowinternationally competitive, transparent,flexible and competent. We are both alocal player with good knowledge of theRussian situation and a company that hasestablished strong international equity dis-tribution. It's a win-win combination,” hesays. “Our research has been awardedmany times by well-respected international

publications and institutional investors,and we cover 300 companies in the coun-try, more than anybody else; we are awareof names that fail to enter the radar screenof big international banks.” At the same time, Kushaev is aware that“as a Russian financial services company,not being affiliated with other companiesmeans that we have no conflict of interest.We can take a natural lead. All this makesus unique.”Any doubters, says Kushaev, can callTroika's main shareholder, chairman andchief executive officer, Ruben Vardanian -widely recognized as one of Russia'sgreatest business minds - to obtain his per-sonal guarantees.




Amgem team on the beach


Russian Innovation: Fact or Fiction?

would logically follow to enhance exportopportunities. Exports in 2005 were worthless than $200 million and went mostly toRussian-speaking CIS countries with noGMP or ISO requirement.

Leading the Way

As one of the largest Russian companiesrealizing the full chain of productionthrough an active pharmaceutical ingredi-ent (API) production facility that feeds itsdrug plant, Oleg Mikhaylov, general direc-tor, says Pharm Sintez is in the process ofbuilding a full complex with GMP stan-dards. It will be ready in 2008. Moscow-based Pharm Sintez exclusively replicatesand produces drugs that have just come offpatent.In 2006 - within two years of its creation -Pharm Sintez reached the $20 millionsales mark, and now the company is ambi-tiously aiming for the number-one positionamong Russian pharmaceutical manufac-turers and sales of $200 million within thenext two to three years, with the help ofnew exports of its first-generation genericsto Western European markets.

“We were already the first Russian compa-ny in terms of volume, research possibili-ties and export possibilities,” explainsMikhaylov. “We aspire to continue on thatroad through very interesting products inthe last steps of registration.”

hile local contract researchorganizations and other phar-ma-focused service companies

have carved out a meaningful role forthemselves, the same cannot be said forlocal manufacturers. Only two,Pharmstandart and OtechestvennyeLekarstva, consistently rank among thetop-20 market participants in a highlyfragmented local landscape of about 600pharmaceutical companies that are mostlyrelics of the Soviet era and lack even asemblance of internationally acceptedquality control mechanisms or the capaci-ty to innovate. Only about 10 Russian companies engagein production under European GMP stan-dards. These companies constitute themembership of the Association of RussianPharmaceutical Manufacturers (ARFP).The organization was created in 2002under the premise that international GMPstandards must be the foundation of thefuture.

The Big GMP Question

Titova Liliya Viktorovna, general directorof the ARFP states, “Russian factoriesoperate under less comprehensive internalstandards and the document from 1998,which was our country's first attempt tocreate GMP standards on a national level.”However, the Ministry of Health failed inits attempt to hand down a timeline for

W

Titova Liliya Viktorovna

About 600 Russian pharmaceutical companies lack any semblance of internationally accepted quality control mechanisms

mandatory adoption of international GMPstandards due to its unrealistic deadline of2005. Today it's difficult to determinewhether any GMP standards exist inRussia at all.Viktorovna now has high hopes for a doc-ument awaiting Ministry of Healthapproval that would effectively harmonizeRussian GMP with leading EuropeanGMP requirements. Such a breakthroughwould probably be linked to Russia's entryinto the World Trade Organization andwould pave the way for investment - bothforeign and local. A similar harmonization of pharmacopeias




This capacity has its roots in Pharm Sintez's precursor company,a small group of professional chemists who created the drugform of buseriline acetate. After this form was on the market,“Pharm Sintez became one of only five or six companies in theworld to possess depot form technology,” says Mikhaylov. “Ourcompetitive advantage in Russia is our exclusive technology tocreate difficult first-generation generics,” he adds.

“We also think about going beyond Russia's border with originalproducts,” says Mikhaylov. “This is why we conduct clinical tri-als in our research programs. We have two original products inthe last stages of registration, and I think within one or two years,we will make it happen. In less than five years, our research pro-grams will be good enough to allowus to produce original drugs.”

Strong Heritage

While history books of the 19th andearly 20th centuries serve as proof ofthe Russian of discovery, chemistry,and science in general, following thefall of the Soviet Union , multina-tional companies managed to extractalmost all discoveries of worth aswell as the great minds behind them.Little advance research remains.

Today, only a few Russian compa-nies have built on a good sciencebase to emerge as niche producers ofmodern generics and innovativedrugs. Nowadays, successful inno-vation in Russian terms refers to reg-istering first-generation generics.However, there are some instances of world-leading innovation.Microgen, the largest pharmaceutical holding - public or private– in Russia , holds strategic importance under the Ministry ofHealth.”

This federal state scientific-industrial company was establishedin 2003 as an integration of 14 state unitary enterprises thatemploy 7,500 people throughout Russia and produces the wholespectrum of vital immunobiological medicines: vaccines for dan-gerous infectious diseases and flu vaccines. Microgen producesmore than 70% of the total Russian volume in this field and thecompany made global headlines last year with its breakthroughvaccine for avian flu in humans.

One reason for this level of competence may be that under theWarsaw Pact, research related to biotechnology and immunolo-gy was centered in the Soviet Union. Anton Katlinsky, formerdeputy minister of public health and current CEO of Microgen,adds: “Despite the fact that a lot of our specialists moved abroad,

our potential in these fields and the fight against infectiousdisease is still considerable. Russia is one of the top-five coun-tries worldwide for possessing staff potential with the abilityto efficiently promote, research, and develop biotechnologyefforts.” Through an investment of more than $25 million, thecompany has prevented the disappearance of domestic produc-tion of immunobiological medicines. While its focus on serving the national interest is apparent,Microgen is also clearly seeking global success. In November2006, Microgen received a delegation from the WHO that con-firmed the high quality of the results obtained by Russia's vac-cine for avian flu in humans. “The WHO experts recognizedthat this development is one of the leading substances in

Europe, so I expect the drug to be cer-tified this year,” says Katlinsky. “Ourchances are not bad to take the lead-ing position in the production of med-icines of biotechnological profile,especially drugs to combat infectiousdiseases.”

An Egg-Free Technology

Microgen is now out to show that it isnot a “one-hit wonder.” The companyis focused on developing vaccinesagainst standard flu based on a newMicrogen invention: egg-free tech-nology. “It's a tissue-culture flu vac-cine based strictly on mammalian cellproduction technology,” saysKatlinsky. “In a situation when wewould confront a pandemic outbreakof avian flu, that would probably

affect chickens as well. So in the production of vaccinesagainst flu, including bird flu, the use of chicken embryoswould be impossible.”In such a scenario, Katlinsky says, “we would need to findanother technology that doesn't use chicken embryos.International experts recognize that this has to do with cellulartechnology.” The possession of such a technology creates acompetitive edge even in the production of vaccines againsttypical flu, on top of a great potential to export such a vaccineto Southeast Asia, where the risk of avian flu is much higher.

Microgen is also working closely with foreign partners likeOxford University to develop new non-injection drug deliverysystems for vaccines. Katlinsky says, “There are new,advanced technologies that allow us to use in situ drug deliv-ery to reduce dosage, substantially reduce side effects andachieve clearer results.” A third promising opportunity forMicrogen lies in its efforts to develop combined vaccines thatcontain several antigens in one injection.


Anton Katlinsky, CEO, Microgen




Portugal:

sk any senior executive to outline the Portuguesepharmaceutical industry’s current set of rules, andyou'll hear a tale of disorientation, even overwhelming

confusion. The government represents around two-thirds oftotal pharmaceutical sales in the country - to the tune of €2.8billion (US$3.7 billion) - accounting for more than 2% ofPortugal's gross domestic product. And although the pharma-ceutical industry doesn't seem to overlook its role in assistingits biggest client in a critical moment of health budget con-straints, it is certainly not happy about the way things haveturned out. “The situation in Portugal is not unique; it is normalthat governments with budget constraints seek to restructurethe health system. Portugal has been relatively calm for sever-al years, and now the government is trying to do everything ina couple of years,” says J. Miguel Noriega, general manager ofOrganon Portuguesa, a company under the Akzo Nobel organ-ization that is well known for contributing to the initial stepstoward family planning in Portugal 35 years ago.

Emerging from the Dark

Having taken office in 2005, the current Socialist “center left”government is facing a daunting array of issues and spending allof its political capital on promoting the country's long-delayedeconomic reforms. To begin with, by 2005, Portugal was facinga 6.1% budget deficit increase in terms of its GDP, far beyond the3% recommended by the European Union's Stability and GrowthPact. As a result, the Portuguese government has agreed to

S2 FOCUS REPORTS APRIL 2007

This sponsored supplement was produced by Focus Reports.Project Publisher : Jessica SantosProject Editor : Thiago Fontoura Struminski Editorial Contributor : Alexa ArceArt Director : Marie ChevallierFor exclusive interviews and more info please log onwww.focusreports.net or contact us at [email protected]

Riding theWave ofEconomicReform

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embark on an aggressive three-year budget deficit-reduction pro-gram that includes a range of severe measures. As the dramaunfolds, the rising healthcare costs are being identified as a nat-ural target of the state cost-containment initiatives.

The financial recovery, combined with the job of increasing thepopulation's access to medication, is under the strict hand of thePortuguese Minister of Health, Antonio Correia de Campos. “Itis not easy. There is a lot of pressure from pharmaceutical com-panies, pharmacies, diagnostic tests, efforts in hospital manage-ment, extra time for doctors and nurses and so on, but I am veryoptimistic,” says the minister, who is returning to the job fiveyears after his first assignment as Minister of Health. “The 2007budget for the health sector can only be controlled under certainconditions. One of them is the reduction of pharmaceutical pricesby 6%; another one is the reduction of co-payments by thenational health system on different levels, depending on the

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Portugal Reportwww.focusreports.net

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At Novo Nordisk, we’re proud of theinsulin therapies and delivery systemswe’ve developed – and continue to develop – because those innovationsmake life better for millions of peoplearound the world.

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