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. Last Updated: 07/27/2016

$30M Pharmaceutical Plant Opens

IZVARINO, Moscow Region -- Searle Pharma, a 75 percent-owned subsidiary of the U.S. drug manufacturer Searle Pharmaceutical, officially opened its new $30 million production facility outside Moscow on Wednesday, taking a gamble on Russia's shaky pharmaceuticals market.

The new factory, which sits next to a row of half-completed pharmaceutical research facilities owned by its Russian joint-venture partner, RAO Biopreparat, will have a productive capacity of 300 million tablets per year, or about 5 percent of the Russian market.

Searle Pharmaceutical is a subsidiary of U.S.-based life sciences conglomerate Monsanto.

The factory opening comes at a time when the market for expensive Western pharmaceutical products is still reeling from the effects of the 1998 ruble devaluation, which made imported goods more expensive for Russian consumers.

Searle officials said that this market had contracted by up to 60 percent since the ruble devaluation, even as the overall volume of the pharmaceutical market here remained stable at around $4 billion per year, mostly concentrated in retailing, not manufacturing.

Even so, they defended their decision to open the production facility - so far other manufacturers have only opened smaller production lines at existing Russian facilities - saying that it would give them the ability to respond quickly to shifts in demand for their products in Russia.

"We can create the full product portfolio of a normal plant," said Sergei Davydov, the marketing director of Searle Pharma.

"Instead of two or three products, we can offer an entire line," he said. "The flexibility will allow us to be more profitable."

He added that within two years his company hoped to be offering 40 different prescription drugs on the Russian market.

The Searle Pharma project was a centerpiece of the Gore-Chernomyrdin committee's technology transfer initiative, begun in 1994, which aimed to encourage U.S. technology transfers to the Russian production sector.

USAID, the U.S. government's international development agency, gave $6 million as a grant to the Searle Pharma joint venture to push the project forward. By way of comparison, Searle's parent company Monsanto raked up $4.9 billion in worldwide sales for the first half of this year. Even so, Searle officials said the grant was justified because of the risks involved in investing in Russia.

"This was a risky project, and there were a lot of other companies which did not want to get involved," said John Robson, co-manager of Searle Pharma. "The grant was an important part of our decision to invest."

Gennady Gazin, a partner at the McKinsey & Co. business consulting firm, said the investment decision was indeed risky, and that Searle might have refused to make the same decision in today's market conditions.

"They made the investment before the crisis hit," he said. "I'm not sure they would have made the same decision today."

Construction of the plant began in mid-1997, and was already near completion when Russia's financial system crashed in August 1998.

"The factory is a sunk cost, so they need to look at what they can get out of it now," Gazin said.

Company officials acknowledged that the crisis had forced them to adopt a new marketing strategy.

"The plans which we had before the crisis had to be significantly re-evaluated, because the crisis changed not only the size of the market, but the structure as well," Davydov said.

He added that Searle Pharma will now likely concentrate on manufacturing inexpensive generic drugs, instead of a line of drugs based on its own research, which bring in much higher margins.

"It is a market highly oriented toward generic drugs, and the price pressure is very high," he said.

The company is also negotiating with other major Western pharmaceuticals to manufacture their products in Russia as a subcontractor.

Company officials expressed hopes that drugs manufactured at the new plant would become less expensive if and when they found a way to buy raw materials locally.

At present, only packaging materials are produced in Russia.

Gazin, however, warned that import substitution alone would not guarantee lower production costs.

"Even many Russian [ingredient] manufacturers import a significant amount of their raw materials, because of shortages in [domestic] supply, its low quality, or even cost," he said.

However, Gazin added that as a long-term investment - Searle officials say it will take at least 10 years to recover the $24 million they invested - the new factory was probably a good move.

"Searle's investment gives them flexibility to introduce branded generics to the Russian market, which they can use to establish a brand presence," he said. "This image can later translate into sales for their research-based drugs when the market picks up - I'm looking on the bright side, of course."