Crisis and pharmaceutical production: slowing down underperformance
The first steps to overcome the crisis. Rating of Russian pharmaceutical manufacturers, 1st half of 2009Irina Katasonova, Manager of the Market Infrastructure Research Department of CMI "Pharmexpert"
Read the full text of the rating in "Farmvestnik" No. 26 (558) dated 25.08.2009.
Over the past year, the topic of the global financial crisis and its impact on various industries and spheres of life has been actively discussed. The pharmaceutical industry is no exception and is also feeling the impact of the global financial system crisis. In particular, in Russia, following the results of the 1st half of 2009, there is a decrease in pharmaceutical production volumes in value terms by 20% compared to the same period of the previous year (the volume of production for the 1st half of this year amounted to 1,177 million US dollars). At the same time, according to retail sales monitoring, the volume of sales of local drugs is declining at a slower pace: in value terms – by 12%, in kind – by 0.35%.
Pharmaceutical manufacturers, despite the crisis difficulties, are aimed at maintaining and strengthening market positions; as a result of their efforts, the rate of decline in production volumes observed since September 2008 has slowed down. A positive trend in domestic pharmaceutical production has been traced since March this year. Thus, the first steps to stabilize the pharmaceutical market have already been taken.
The totality of problemsOne of the main reasons for the decline in drug production at the beginning of the year was the change in exchange rates, which led to an increase in the cost of imported raw materials for the production of finished dosage forms.
The crisis situation in the market has also complicated the sale of products, especially in the regions, because in the conditions of a sharp rise in prices and rising unemployment, many consumers tend to reduce costs and more often prefer inexpensive drugs, which negatively affects sales volumes and the effectiveness of manufacturers.
Currently, about half of the drugs in pharmacies are imported, they account for three quarters of the drugs sold; more than 80% of domestic medicines are made from imported raw materials. Due to the high level of import dependence, the pharmaceutical industry acutely felt the consequences of the devaluation of the ruble in 2008. The state, for its part, took measures to increase the presence of local producers on the Russian market, but such large-scale changes are long-term and by the beginning of the crisis, most of them were not implemented. This state of affairs indicates that the crisis has overtaken the domestic pharmaceutical industry not at the simplest time. However, the change in consumer preferences (consumers began to buy less expensive domestic products in greater volume) and the active position of Russian manufacturers (for example, the companies "Pharmacor", "Sotex" and "Veropharm", which showed high growth rates of production volumes in relation to the 1st half of 2008: 389, 56 and 39%, respectively) allowed us to increase the share of locally produced drugs, which has tended to decrease over the past few years, and by the end of the 1st half of 2009 showed an increase.
In the current conditions, local producers have received another chance to strengthen their positions and expand their influence on the country's market due to inexpensive products that are becoming increasingly popular among consumers. This is confirmed by the launch of production stopped in January this year at Krasfarm, the basis of the assortment of which are inexpensive antibiotics, infusion solutions, blood substitutes (such as sodium chloride, glucose, etc.). The reason for the resumption of one of the conveyors was the state order for inexpensive and relevant products for modern consumers, the increase in interest in which is explained by the change in consumer preferences. The proof that consumers have become more active in purchasing local medicines is also the fact that when considering the monthly dynamics since February 2009, there has been a decrease in the difference between the volumes of local production of the current and previous years.
Despite the obvious positive changes, the situation of Russian pharmaceutical manufacturing companies is burdened by the fact that the lack of facilities equipped in accordance with GMP standards, an outdated assortment portfolio, and a low-efficiency promotion and sales system remain relevant. The crisis has further aggravated the state of the industry and exacerbated the need for changes not only in the activities of companies, but also in general in the work of the pharmaceutical industry, in particular various associations and government agencies.
The updated draft Strategy for the Development of the Pharmaceutical Industry in Russia until 2020, recently published by the Ministry of Industry and Trade, proposes a number of measures aimed at stimulating domestic companies. One of them is an increase in import duties on foreign generics, if local manufacturers are able to meet the needs of the market with domestic analogues.
In the short term, the state takes measures to control prices, curb their unjustified growth, as well as manage the assortment (keeping cheap drugs on pharmacy shelves). The order of the Ministry of Health and Social Development of Russia "On the organization and implementation of monitoring of prices and assortment of medicines in stationary medical and preventive and pharmacy institutions (organizations) of the Russian Federation" in the event of an increase in prices for medicines obliges the subject of the Russian Federation to argue it. There is a possibility that by making life easier for customers (protecting them from unpredictable price increases), the state will shift the burden of problems to distributors. The increase in overhead costs, in particular transport costs, will be more difficult to compensate by increasing selling prices. This may trigger the withdrawal of a number of distribution companies from the market. On the other hand, price monitoring aimed at their stabilization can initiate the process of optimizing relationships with pharmaceutical suppliers; this may reduce the number of links in the supply chain and establish direct contacts with manufacturers, which is especially important for large pharmacy chains. In turn, manufacturers are also interested in lowering product prices and optimizing relations with the retail chain, including through changing the distribution system.
With regard to the list of VED drugs, the state is also taking measures to regulate prices. On August 8, 2009, Decree No. 654 was signed, according to which prices should be fixed (in rubles) based on the manufacturer's selling price. At the same time, unstable exchange rates of major currencies and dependence on imported substances can lead to a change in the cost price and an increase in selling prices of local pharmaceutical manufacturers. Pharmaceutical companies, seeking to protect themselves from such obvious risks, may initially fix somewhat inflated prices, which will cause an artificial price increase. A decrease in trade surcharges may lead to a reduction in the share of cheap products and its subsequent "washing out" from the pharmacy assortment. This may lead to the emergence of new types of market participants (distributors and pharmacy chains), for example, social discounters or public-private partnerships. In order to stimulate work with the list of VED, it would be useful to encourage the enterprises and companies involved in working with them, for example, by providing them with tax benefits or providing assistance in lending.
Individuality of solutionsIn the current situation, pharmaceutical manufacturers have several options for action.
One of these is the development of own production not only of finished dosage forms, but also of raw materials, however, for the implementation of these areas it is necessary to finance scientific research, research, and significant investments in the modernization of production equipment. In such a development scenario, the manufacturer reduces its dependence on imported substances, which is an indisputable plus, given the risk of an autumn devaluation of the Russian ruble; at the same time, it faces the need to purchase equipment (including maintenance costs) and create additional jobs. There is also a need to organize production in such a way that the substance produced is competitive, to study a new competitive environment, to develop a marketing strategy for the sale of substances and medicines produced from them, to finance advertising costs for bringing new products to market. In addition, there is another problem for new Russian substances: the manufacturer can produce drugs only from the substance specified during registration. Therefore, it is possible to switch to a new substance only after making appropriate changes to the registration documents, which is not easy.
Nevertheless, in order to reduce the cost of purchasing foreign substances for some types of drugs, the Biocad company received two new licenses for the production of medicinal substances at the end of June this year. Of course, in a crisis, such an event becomes even more significant for the manufacturer, especially given the fact that not every Russian company can invest in its own development. Here, manufacturing companies could also be interested in cooperation with the state – public-private partnership (PPP), which has proven itself in many countries.
PPP involves equity financing; thus, producers could receive financial support from the state for the development and implementation of investment projects and programs; this is especially relevant in the current conditions, when obtaining borrowed funds is significantly difficult. For the smooth operation of such a system, a clear organization of all components of the activity is required, as well as the refinement of the legislative framework, which currently does not meet the modern requirements of scientific, industrial and innovative organizations. Cooperation of this kind is most likely to be expected with the largest companies that have a scientific division, research centers and production lines in their structure.
The interaction of companies with the aim of concluding M&A transactions does not lose its relevance. Currently, it is planned to merge the companies "Moskhimpharmparaty named after N.A. Semashko" and "Binnopharm". If the transaction takes place, production will be transferred to the production facilities of Binnopharm. Thanks to such a deal, a large company can increase its presence in the market by expanding its area of influence.
Another possible option for solving the production problems of companies in modern conditions may be contract production. Often, Russian production facilities are not loaded at full capacity, which increases costs. The production of drugs under contract can help overcome this problem. In addition, placing orders for contract production is beneficial for both domestic and foreign companies. Foreign customer companies, also forced to reduce costs during the crisis, will thus have the opportunity to further develop their sales in the pharmaceutical market of Russia and at the same time (unlike the import of finished drugs) will be able to save on transport and customs costs, while maintaining a competitive price level.
In Russia, more than 80 Russian manufacturing companies currently provide orders for the production of drugs on contractual terms for domestic and foreign companies. Among the manufacturers fulfilling the orders of foreign companies are the companies "Vector", "Sotex", "BIOTECH", "Akrikhin", "Kanonfarma", etc. Production under orders of domestic companies is carried out by "Lecco", "Ellara MC", "Mir-Pharm", etc. Drugs produced by Russian companies under contract, in value terms, occupy a tenth of the market of local drugs (in 2008 – 9%); at the same time, the total sales of drugs produced by Russian companies "under contract" and sold in 2008 amounted to 233 million US dollars, or 65 million packages, of which 78 and 75% of the products, respectively, were produced by order of domestic companies.
In contract manufacturing, the positive for local manufacturers is that the company placing the order will be able to concentrate efforts on the main activity (for example, on the development of new active compounds, pharmaceutical substances or promotion strategies), which is important, because for many companies it is problematic to find funds to organize a full cycle of drug creation – from development and research to release and introduction to the market.
In addition, a Russian manufacturer working on a contract basis is relieved of the need to search for markets for products, since in most cases this role is assumed by the customer company.
Each company can find the most acceptable way out of a difficult situation for itself by objectively assessing its own capabilities and making the necessary efforts to develop the strengths of its activities in a timely manner. Summing up, it is worth noting that the state and the pharmaceutical industry participants are aware of the importance and social significance of this area. The first is actively discussing legislative aspects and finalizing projects for the development of industry entities to ensure more productive activities of enterprises. On the part of the pharmaceutical market participants, there is a desire to use the current situation in order to optimize activities and lay a solid foundation for the future.
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