Pharma 2020 and Import Substitution
- By Vladislav Shayman
- Oct. 08 2014 00:00
$4.8 billion government program aims to boost the local production of drugs to at least 50 per cent of consumption.
Innovation and local production are the key features of the Russian government initiative launched in 2009 on the topic: "development of the pharmaceutical and medical industry of the Russian Federation until 2020". Its aim is to aid the transition of the pharmaceutical industry to an innovative model of development. The program assumes financing to the tune of 177.6 billion rubles ($4.8 billion). One of the primary goals of the program to increase the local production of drugs at least 50 per cent of consumption. Currently this proportion is less than 20 per cent.
The policy document lists the major systemic problems of Russia's pharmaceutical industry. They include an imbalance of regulatory requirements facing Russian as opposed to foreign producers, the lack of economic motivation of domestic producers, and a shortage of highly qualified staff. Other problems affecting the industry are a shortage of financing for drug production, insufficient protection of intellectual property rights and the need to raise quality in line with Good Manufacturing Practices (GMP).
"Pharma-2020" will be implemented in two stages. Stage one (2011-2015) aims to overcome the scientific and technical lag of national pharmaceutical and medical industry and realising import substitution of strategically important pharmaceuticals. Stage two (2016-2020) is meant to finalize the transition of pharmaceutical and medical industry to a model of stable innovative development and the provision of the Russian market with a wide array of accessible and quality products produced locally.
How have foreign pharmaceutical companies responded to this challenge? Almost without exception, they have begun to localize their own production in Russia or to unite with Russian pharmaceutical companies in their production efforts. This activity is taking place first and foremost at the various pharmaceutical clusters throughout the country.
According to Pharma-2020, a pharmaceutical cluster is a group of geographically localized, interconnected innovative drug-development and drug-producing companies. A major attribute of an effective cluster is its ability to create innovative products.
Tax optimization is one of the advantages of joining a cluster, which is supposed to work closely with the relevant universities of the region where it is based.
Russia currently features five major pharmaceutical clusters, or business incubators, where foreign pharmaceutical companies organize their production. These clusters are in Yaroslavl, Kaluga, St. Petersburg, Yekaterinburg and on the outskirts of Moscow.
The Yaroslavl pharmaceutical cluster was the first to be created on the territory of the Russian Federation, in 2009. The Yaroslavl cluster already features a functioning pharmaceutical plant of a foreign drug manufacturer. Takeda Pharmaceuticals became one of the first foreign pharmaceutical companies to begin production at its built from scratch production plant on Russian territory, thus getting a good start over its competitors. The company's investment into the production facilities amounted to 75 million Euros.
The construction process was completed within one year, said Calin Anton, Business Development Director for Russia & CIS at Astron Lindab, which supplied and installed the building. "The construction of the Takeda plant in Yaroslavl is an excellent example of successful localization in Russia."
Andrey Potapov, Takeda Russia General Director and Head of CIS territory General Director, concurs, adding: "From the beginning, the decision to build our own greenfield production facility in Russia was a commitment to the market and a part of the company's long-term growth strategy. The Yaroslavl facility is to enable Takeda to meet demand in Russia for three of our key products and later start exporting to CIS countries."
The Israeli manufacturer TEVA is also building a plant in Yaroslavl, which is due to open in 2015 and launch production in the second quarter of next year. The plant at Novoselki industrial park will have the capacity to make 1 billion oral tablets per year. The company already employs 800 people in Russia and the new plant is expected to create another 200 directly employed positions.
The cluster's organizers hope that it will produce over 13 per cent of all of Russia's drugs by the year 2020.
Berlin Chemie, Novo Nordisk, Astra Zeneca and Stada have begun building production facilities in Kaluga in 2011. The Kaluga cluster seeks to create 6,500 jobs by 2016 and produce 46.6 billion rubles ($1.2 billion) worth of pharmaceutical products. The four companies in conjunction plan to produce 37 innovative drugs at the cluster. The project is worth 70.9 billion rubles ($1.9 billion), including federal, regional and private financing.
At the St. Petersburg cluster, Novartis is developing innovative, patented pharmaceuticals and high-quality modern generics. The St. Petersburg cluster features nine investment projects valued at over 25 billion rubles ($700 million). Novartis alone is investing over 15 billion rubles ($411 million) in its production facilities within the framework of the cluster.
The Ural pharmaceutical cluster near Yekaterinburg is the youngest, announced in 2011. Bayer is one of the leading participants. Another biopharmaceutical cluster near Moscow, is Severny or "Northern". Janssen is one of the companies hosted by the Moscow cluster.
The French, Top-15 pharmaceutical company on the Russian market Servier, on the other hand, has joined ranks with the Russian producer Soteks to localize and manufacture Russian products.
"Almost all the profit our company generates is reinvested into R&D", said Vasily Gruzdev, former government relations and corporate communications director at Servier. "At our plant in Moscow region we produce ten different drugs from packaging to the full cycle. Over 85 per cent of all medicines for the Russian market are localized, and some are exported to Ukraine."
The arguments in favor of localization of pharmaceuticals are numerous and closely related to the government's declared priority to assume an innovative vector of development for the pharmaceutical industry among other sectors. In other words, localization of manufacturing and technology transfer will play a critical role in Russia's effort to create an innovative pharmaceutical industry in the next decade.
Under the Pharma-2020 program, the government plans for 90 per cent of essential drugs to be produced locally by 2020. The government also seeks 60 per cent of local medicines to be innovative; pharmaceutical exports are hoped to grow eight-fold compared to 2008.
President Putin has promised almost $4 billion for this initiative, as well as policy assistance including new regulations on GMP.
The Pharma-2020 program focuses on localization of production and import substitution by aiding Russian pharmaceutical companies in development of alternatives for drugs that have so far been imported.
The government hopes to diminish costs for essential drugs on the Vital Essential Drug list.
Russia's accession to the World Trade Organization will see import tariffs on drugs and medical devices fall gradually from 15 to 6.5 per cent.
Viktor Dmitriev, general director of the Association of Russian Pharmaceutical Manufacturers said that the question of localization is sharply relevant for all the foreign companies active on the Russian market, those who partner up with local players, as well as those, who are building manufacturing plants in Russia. "All of the top-10 foreign companies on the Russian market have already localized in one way or another," said Dmitriev.
Spending on research and development is higher than most industries, at 15.9 per cent of revenues he said. But the switch from packaging foreign constituents to full production will not happen before 2017," said Irina Sheykkha, communications director of AIPM, the association that unites most of the foreign pharmaceutical manufacturers in Russia.
Even the financial logic behind import substitution is not clear cut.
"Building a factory that involves 50 million USD of invested capital for a company that has a turnover of several dozen billion USD will not in any way reflect on the company's share price, and will serve as, first and foremost, a mechanism of hedging country risk," said Ivan Glushkov, deputy general director of Stada-CIS. "For the other smaller companies the risks of localization exceed its presumed advantages."