Pricing Regulation of Pharmaceutical Market – New Prescriptions for Business

Dr. Alina Lavrentieva
Partner, Pharmaceutical Practice Leader

The Russian pharmaceutical market has witnessed significant changes in the past couple of years. The landscape is now set to alter again, as the government implements health care reforms, increases its influence over the prescribing of pharmaceuticals and looks to bring in potentially tighter restrictions on promotional activities.

Among the key drivers are changes to the state regulation of prices for vital and essential pharmaceuticals (hereinafter “pharmaceuticals),” specifically, changes to the registration of maximum prices of pharmaceuticals of Russian and foreign manufacturers and setting maximum wholesale and retail markups for manufacturers’ actual prices.

Although at present the methods of regulating prices outlined above are only just beginning to make themselves felt, taken together they are creating new challenges for pharmaceutical market players. Moreover, the practical impact of the state’s new approaches in regulating prices varies for each player along the pharmaceutical supply chain.

Thus, determining the maximum price for pharmaceuticals produced by Russian manufacturers is carried out based on the principles of reimbursing the manufacturer for economically justified expenses related to the production and sale of pharmaceuticals, accounting for the profit required by the manufacturer to obtain the money it needs to service any debt, developing production and financing other justified expenses, all the while accounting in the pricing structure for all taxes and other mandatory payments.

The state registration of prices in relation to foreign manufacturers’ pharmaceuticals is carried out based on their minimum price in both the country of production and other countries where the pharmaceuticals are registered, taking into account the respective transportation costs.

In essence, based on the above regulatory mechanisms, it is assumed that pharmaceutical manufacturers, both Russian and foreign, will be able to set prices for pharmaceuticals in such a way that they correspond to manufacturers’ functions and the risks they bear.

As for distributors and pharmacies, they need to think about how to finance their expenses and ensure their businesses’ future growth in conditions where statutory maximum markups apply.

In our view, distributors that are the Russian subsidiaries of foreign manufacturers find themselves in the most difficult position, as a consequence of both the statutory maximum wholesale markups and the variety of functions that they are called upon to perform. Thus, the majority of such companies not only carry out the functions of purchasing, storing and delivering pharmaceuticals fr om manufacturers to pharmacies and hospitals, which are functions performed also by independent distributors, but also actively participate in promoting medicines and organizing marketing campaigns and events that help boost sales.

In conditions wh ere statutory maximum wholesale markups apply, distributors represented by foreign producers’ subsidiaries will inevitably be faced with a choice of whether to carry out a wide range of loss-making activities or gradually reject such a model and concentrate on functions directly associated with the distribution of pharmaceuticals, increasing the effectiveness of performing such functions and ensuring the growth of the business. In our view, the majority of distributors will choose the second option. As a consequence, manufacturers themselves will have to take on the marketing and promotion of their own pharmaceuticals.

In practice, this will mean that they either have to carry out marketing and promotions activities themselves, or, given that distributors already have the relevant experience and qualified staff, they may hire the distributors to provide, for a fee, services related to the marketing and promotion of pharmaceuticals. Foreign pharmaceutical manufacturers can also use other ways to perform the respective functions, in particular, through their Russian representative offices.

Another countermeasure that may be used by distributors to address the changing market conditions is to amend the legal nature of contractual relations with pharmaceutical manufacturers, that is, refusing to enter into buy-sell agreements and instead switching to agency relations. In the circumstances under consideration, switching to agency relations will mean the exclusion of distributors from the pharmaceutical supply chain. As a consequence, the statutory maximum wholesale markups will not apply to them.

Overall, changes in the state regulation of pharmaceutical prices will most likely lead to changes in the business model of pharmaceutical market players, especially when it comes to distributors and manufacturers. These changes, in our view, will raise a number of issues that need to be carefully evaluated by both distributors and manufacturers. We believe that any decision should be made based on a comprehensive analysis of all the relevant issues. Although such an approach requires time and resources, it will ultimately enable market players to avoid mistakes and minimize their risks.