Despite the recent collapse of Russia’s economy, Nycomed reckons it can capture €900 million ($1.25 billion) in sales from the region by 2013—in part through investing in local manufacturing.
Mid-sized Nycomed’s decision to invest €60 million this year in a green-field manufacturing plant in Russia looks, at first glance, rather odd. After a decade of spectacular economic growth, Russia’s economy has collapsed. GDP has fallen 13% from 2008 levels, the ruble has dropped 35 per cent against the dollar since Q3 2008, and the oil price has plummeted to a third of its July 2008 peak, according to Hans Jochum Horn, a director of Moscow-based Renaissance Capital. That has led to a predicted national budget deficit, and—not for the first time—government-mandated price cuts.
GlaxoSmithKline PLC is among the latest victims. The government wants a 15% discount on the price of its HIV drugs, but GSK argues that this would make its business unviable—and that it already in 2006 slashed the prices of these drugs by over 50%. (See Sidebar: The Reimbursement Program Crisis)
But Swiss-headquartered Nycomed is betting that investing in local manufacturing will help protect it from the brunt of such pricing pressure, given a medium-term Russian government objective to purchase 50% of drugs from local producers. This commitment is part of a broader plan to increase health care spend to 7% of GDP by 2020 (up from 4.2% currently) and to broaden drug coverage among the population beyond the current 5-10% range.
If Russia delivers on its promise to make health care a priority mid-term, the prize for those pharmacos bold enough to foray into the country could be considerable: worth €9.3 billion in 2008, the Russian pharmaceuticals market is predicted to grow at 18% compound annual growth rate between 2007 and 2011, reaching over $20 billion by 2012/13, according to IMS.
Nycomed: Already a Leader in Russia
In its bid to capture some of this expected growth, Nycomed appears unswayed by the volatility of the Russian market—and by unpredictable government intervention. It has seen it all before: the company first set up an office in Russia in 1993, and has remained committed ever since. Jostein Davidsen, Senior Vice President, and General Manager of Nycomed Russia-CIS, has run the business for all of those 16 years. As such, he’s pragmatic: “You have to accept the crisis, and face that profit levels will come down. The key is in market share and in sustaining a leadership position,” he said at a Moscow Press conference in June this year.
Nycomed’s share of the Russian market is already considerable, given its size: sales of €243m in 2008 (almost 10% of total turnover, see Exhibit 1) rank the company slightly ahead of Big Pharma such as GlaxoSmithKline, which in 2008 sold £198 million (€223 million) in Russia—up 36% on the previous year, but still less than 1% of its total sales.
This success is in part down to Nycomed’s having specifically developed a market-focused portfolio of a dozen products to fit the clinical needs - and pockets - of physicians, consumers, and payers in the Russian health care system. This broad portfolio comprises a mix of prescription and over-the-counter (OTC) products in tissue management, pain, osteoporosis, respiratory disease, and gastroenterology, across primary and secondary care (see Exhibit 2).
To sustain this leadership position, Nycomed Russia-CIS has set ambitious five-year targets: to deliver sales approaching €900 million and to contribute 38 per cent to group growth in 2013. Building a dedicated manufacturing plant is part of this market-focused approach, although it came about as a result of a global manufacturing re-organization which was initiated with the €4.5 billion takeover of Germany’s Altana Pharma in December 2006.
After the acquisition—which almost quadrupled the company’s size, both in terms of sales and headcount--Nycomed found itself with over-capacity, a complex international manufacturing network, and a broad range of smaller regional products. The company has since streamlined its European manufacturing network by closing two plants in Denmark and consolidating production at sites in Poland and Germany, and maintains a focus on efficiency and reducing the cost of goods.
Manufacturing in Russia: Sensible, Perhaps, but Not Easy
The decision to invest in Russia was less about cost-cutting and streamlining than about pursuing a strategy designed to maximise the company’s success in that particular region. “The strategic rationale [behind the investment] is to support the Russia-CIS products and to have them manufactured locally,” emphasizes Barthold Piening, Executive Vice-President of Operations at Nycomed. The first step, he continues, was to identify the top-selling three products in Russia—Actovegin, a deproteinised haemoderivative used for blood flow disturbances, hypertension drug bisoprolol (Concor) and anti-inflammatory lornoxicam (Xefocam)--which are likely to be reimbursed on grounds of cost, and then to start working out required volumes, plant-size, capex planning and site selection.
Setting up in Russia doesn’t happen quickly; screening sites alone took Nycomed two years. “It takes time to set up a green field in Russia,” outlines Davidsen. “It is not like in Ireland, where there are techno-parks and infrastructure. In Russia you need to ensure your plot has roads, electricity, good ground, water drainage, and overcome legal, administrative, and compliance issues.”
Russia may not have dedicated techno-parks, but free economic zones do exist, for example in the Kazan and the Kaliningrad enclaves, situated some 500 miles east, and 700 miles west of Moscow, respectively. International companies tend to favor the Moscow region, in the “European” part of Russia—the part that Piening refers to as the “centre of gravity” in terms of logistics, the availability of well-educated staff, and local administrative support. Nycomed will announce its chosen site in the third quarter of this year and expects it to come on-line by 2013/14—a timeframe that includes two years for the build and two years for registering the products.
Russia: Towards Reference Pricing
By then, Nycomed Russia-CIS hopes that the Russian government’s health care prioritization plan will have come into effect. And as the Russian pharmaceutical market makes the slow transition from a largely out-of-pocket market closer to the Western model of centralised reimbursement, the government will play a more active role in regulating market access, particularly for high-cost medicines. “The government is extremely focused on price, and they are now demanding reference prices from international industry,” comments Davidsen.
In Russia’s retail market—worth 74 per cent of the total—there’s currently free pricing. Changes to marketing authorisation rules in 2008, however, mean companies now have to submit sales data from their country of origin and from other markets in which the product is registered. And if they want their product included on federal reimbursement lists, foreign manufacturers have to justify their maximum price claim, providing for instance the breakdown of ex-factory price and distribution mark-ups. (There is currently no cost-effectiveness agency in Russia akin to the UK’s National Institute of Clinical Excellence.)
By having local manufacturing capacity and thereby demonstrating its continued commitment to the region, and by choosing to manufacture cheaper, market-appropriate products such as Actovegin and Concor that are likely to be reimbursed in the first place, Nycomed hopes it will be better placed to negotiate the evolving role of the Russian government.
Indeed, the company’s strong position in this top-five emerging market—coupled with other, larger pharmaceutical firms’ growing interest in such regions—may be behind rumors which emerged in March 2009 that Nycomed’s private equity owners, Sweden’s Nordic Capital and Credit Suisse DLJ Merchant Banking Partners, were considering selling the group. The WSJ reported that they had hired Goldman Sachs, although no parties confirmed this.
Sidebar: The Reimbursement Program Crisis
In 2005 the Russian Government allocated $1.35 billion to a programme reimbursing the prescriptions costs for all recipients of social security – approximately 12-14 million people, or about 10 per cent of the total population.
Thus a significant pharmaceutical market was created, almost overnight, and foreign manufacturers were quick to capture a share.
In 2006, after a five-fold increase in pack prices, the program’s budget was cut to $1.15 billion. Unprecedented demand, widespread shortages and general chaos resulted in late, or non-payment to pharmaceutical manufacturers. What’s more, the Russian government capped prices and decreased the price of the 165 most expensive medicines between 10 and 35 per cent, in an unsuccessful attempt to limit spiralling costs.
- Gerhard Symons (g.symons07@imperial.ac.uk)
Gerhard Symons is a doctoral researcher at the Centre for Health Management, Imperial College Business School, London.
