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. Last Updated: 07/27/2016

Ill Times Bode Well for Local Drugs

After the sudden ruble devaluation in August, Russians besieged aptekas, or drugstores, across the country, hoarding medicine for the winter.

Until recently, foreign-made drugs accounted for 70 percent of Russia's $3 billion pharmaceutical market, but in the time since the ruble devaluation of Aug. 17 imports have dropped to one-third of the pre-crisis volume. The drop in imports and the hoarding have depleted supplies at pharmacies and hospitals. Now the question is how to replenish them. Will Russians have to shell out more for imported medicines, or can domestic producers pick up the slack?

Industry analysts say falling purchasing power in the wake of the devaluation will force the sector to shrink further, though per capita drug consumption in Russia even before the crisis was just 4 percent of the U.S. level. But the shrinkage will most likely occur at importers' expense.

"Yes, our imports, like those of all other foreign firms, have come down roughly by two-thirds," said a spokesman for Hungary's second largest drug manufacturer, Egis. "At the moment we still have stocks in warehouses in Russia but no one can predict what will happen when those run out."

Gedeon Richter, Hungary's leading drug producer, exports roughly 35 percent of its output to the former Soviet Union. It has announced it will cut output in anticipation of reduced demand from Russia. Analysts have predicted the company's sales revenue in Russia could decrease by about 40 percent this year from $96 million in 1997.

According to Health Ministry spokesman Vladimir Vyunitsky, the crisis has ruined half of the country's drug distributors, who owe foreign suppliers more than $300 million in trade loans.

"Those credits must be paid off before supplies are restored," Vyunitsky said. "After that, the focus will be on developing production in Russia so we can avoid such supply fluctuations in future."

The Russian pharmaceutical industry seems to have the potential to help bridge the gap left by flagging imports. The sector is still functioning at about 50 percent capacity, but parts of it were beginning to recover from the industrial collapse that followed the dissolution of the Soviet Union. Last year, drug production increased 15 percent compared to the 1996 level, while Russia's overall industrial output grew just 2 percent.

Many drug factories have lost money to recent bank failures. But industry players and analysts say reduced competition from abroad will help the factories overcome their financial problems.

"We believe Russian manufacturers will benefit from the crisis," said Vladimir Davydov, vice president of Rosmedprom, an association comprising more than 100 local drug producers. "In terms of volume we account for 60 percent of all drugs sold today, though in terms of money, more expensive imports have a bigger market share. But in a couple of years, Russian producers will control 80 percent of the market."

The Russian pharmaceutical sector consists of raw materials producers, drug factories that survive mostly on state orders, and factories that have branched into ready-form medicines. The latter often produce generic versions of off-patent drugs and sell them up to 70 percent cheaper than brand-name imports.

State orders for drugs meant for hospitals and for free distribution to pensioners are shrinking and the government rarely pays on time. But the readyform producers that make medicines for sale in drugstores have been booming recently.

"These companies may do all right because they were competing mostly with Eastern European companies, which are unlikely to be very aggressive now," said Brian Coleman, an analyst with Aton Investment. "So in a way they will benefit."

Companies providing raw materials to drug factories had been losing the market to cheap Chinese imports, but now they could see their position improve as ready-form producers feel the impact of price growth on imports.

Few Western drug companies have production facilities in Russia. One is the California-based ICN Pharmaceuticals, which has bought five factories across Russia for $100 million. The policy now appears to be paying off.

"We too are feeling the consequences of the crisis, but to a lesser degree since we produce locally," said Sergei Gryzunov, vice president of ICN's Russian operations.

ICN has cut its Moscow office staff by 50 percent and the remaining managers have accepted 40 percent pay cuts, Gryzunov said. But the company expects its 1998 sales to be well above the $134 million recorded in 1997.

"You can stop going to the pictures or buying clothes, but you cannot do without medicines if you get sick," Gryzunov said. "People will just move from costly imports to cheaper Russian-produced drugs whenever they can."