Russian healthcare programme will create opportunities for foreign investment, says Frost & Sullivan

The Russian Healthcare Development Programme is likely to cause major structural changes in the Russian pharmaceutical market and create new opportunities for foreign investors, according to Frost & Sullivan.

The main aim of the government programme is to ameliorate the quality and availability of healthcare, thereby improving overall social wellbeing.

The Russian government plans to introduce mandatory health insurance, supply out-patient hospitals with modern medical equipment and qualified personnel, create an electronic health records system, and discourage self-treatment by tightening control over prescription drug sales.

The initiative includes the Russian Health Ministry's plan to enhance the domestic production of "strategically important" pharmaceuticals. A draft list of 55 drugs was announced on 11 December, 2009. It includes drugs to treat heart disease, cancer, infectious diseases, and diseases of the respiratory and digestive systems. Currently produced by major international companies including Novartis, KRKA, Sanofi-aventis, Shering-Plough and Roche, most of these pharmaceuticals will remain under patent protection for the next 2-3 years.

F&S's healthcare industry analyst Dominika Grzywinska says this decision is a step towards import substitution and reaching a 50:50 split of imported and domestically produced drugs by 2020.

"The Russian pharmaceutical market, worth US$16.2bn, is the largest and fastest growing in the CEE region. However, 80% of drugs sold are imported because domestic companies tend to be small and undercapitalised. It is still too early to predict how the government plans will restructure the market, but there are several possible scenarios," said Grzywinska.

Both Sanofi-Aventis and Nycomed have announced plans to establish production plants in Russia. In so doing, they hope to capitalise on the privileges bestowed upon domestic producers, whose products can be priced up to 15% higher than imported drugs.

However, a faster and less complicated route would be to enter the market through acquisitions or partnerships. F&S says this option is viable because Russian pharmaceutical manufacturers often have outdated production facilities, which generates a need for significant capital investments.

Another possible option could be for local manufacturers to buy the licences for producing certain drugs from foreign generic companies once the patents expire. However, funding issues must first be resolved as domestic producers in Russia often face serious financial difficulties. An easier access to capital would be needed therefore, such as favourable loans or subsidies.