Pending Changes in the Regulation of Drug Prices

Vitaly Dianov
Senior Attorney
Capital Legal Services

The Russian government has established new regulations to control the price of lifesaving and essential medicines. Manufacturers are required to register or reregister their maximum sale price by April 1, 2010 for each medicine on the official lists of lifesaving and essential medicines.

A list of lifesaving and essential medicines (“the List”) was approved by the government on Dec. 30, 2009 and includes more than 5,000 medicines produced by foreign and Russian manufacturers (for instance, ampicillin, tevanat, tamiflu and trivorin). For the most part, the List is made up of generic medicines produced by both foreign and Russian manufactures, while nongeneric, brand-name medicines constitute the rest. Medicines produced by foreign manufactures constitute about 30% of the List.

The registration procedure is rather time-consuming and may require up to two months from the day that the documents are submitted to the health authorities. Registered prices may be reconsidered once a year.

The methods for determining the maximum prices of lifesaving and essential medicines differ depending on whether the medicines are generic or original, whether they have equivalents on sale in Russia, and whether the price was registered within six months of the medicines being imported into Russia.

The new system for determining maximum prices for medicines produced in foreign countries is based on a comparison of their sale prices with (a) the minimum price of this medicine in its country of origin and other countries where it is registered, or (b) the average actual price under which the medicines were imported into Russia previously. Starting from 2011, foreign manufactures will have to register prices in Russian rubles only.

The purpose of the new system of price control for medicines is to fix the wholesale and retail sale prices as high as possible.

It is hard to predict at the moment whether the new system will be beneficial or harmful to the Russian pharmaceutical market. If the maximum retail margins for “foreign” medicines are set too low, it may lead to a situation where Russian distributors and drugstores will not be able to cover the costs of operating and expanding their businesses. This could lead to a reduction in the volume of medicines purchased from foreign manufactures.

Most foreign medicine manufacturers bring these medicines to the Russian market through Russian subsidiaries. The subsidiaries are responsible for importing medicines, operating warehouses, marketing and promoting the medicines. Further distribution to drug stores and medical facilities is operated by Russian distributors, which places significant pressure on subsidiaries of foreign companies to accept very low markups on import prices, in some cases making their operations unprofitable. The situation is worse for Russian subsidiaries of foreign manufactures because of exchange rate fluctuations, and such risks may be increased in 2011 when the maximum sale price has to be fixed in rubles.

As a result, Russian sales subsidiaries may become unprofitable, causing issues with Russian tax authorities. The subsidiaries may have to subsidize the sale of listed medicines from funds derived from the sale of other medicines.

We can only guess how the new methods of controlling prices of medicines on the List will work in practice, but we hope that the new amendments will not lead to market stagnation and other unfavorable consequences.

Foreign medicine manufacturers may protect their interests by (a) transferring expenses incurred in marketing and promotion of medicines from their Russian sales subsidiary to the foreign manufacturer; (b) starting to manufacture medicines in Russia, either themselves, or through a Russian partner acting on the basis of a license granted by the manufacturer; or (c) ceasing delivery of medicines to certain countries where the medicines from the List are registered for prices lower in comparison with other countries. Eventually these steps would influence the maximum sale price to be registered in Russia.