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. Last Updated: 07/27/2016

Drug Industry Begins Slow Recovery

Depressed by a dearth of development funding and licensing rules from the Iron Curtain era that ignore intellectual property rights, the drug industry is struggling for survival with generic medicine.

The pharmaceutical market, hit badly by the 1998 economic crisis, is recovering, but few see a market for expensive Western brands. Factories produce what consumers can afford.

"The market is definitely getting better," said Sergei Davydov, marketing director at Searle Pharma.

"We are getting healthier, meaning now it is not as bad as it was last year. And last year it was so bad that many companies thought of leaving the market."

The August 1998 ruble devaluation seriously dented consumer purchasing power. The government forecasts it will be years before incomes return to pre-crisis dollar values, which will be needed to take proper care of their health. Mikhail Grigoryev, chief executive officer at Moskhimfarmpreparat, one of the country's leading pharmaceuticals producers, estimates the average consumer spent 200 to 250 rubles ($7.25 to $8), on pharmaceuticals last year, compared with an average of $15 before the crisis. Americans spend about $220 and Hungarians $50 annually.

Data from the Association of International Pharmaceuticals Manufacturers shows that Russian sales in 1999 hit $1.8 billion in producer prices, which spokeswoman Irina Stafeyeva said was 75 percent of 1998 levels.

Foreign companies, which usually sell their medicine to local distributors without advance payment, are still smarting from the ruble's fall against hard currency.

The association said only 45 percent to 50 percent of the debts have been repaid so far. The market share of more-pricy foreign medicine slid to 55 percent from 60 percent to 65 percent in 1998.

But Stafeyeva was optimistic that sales this year would be even or slightly higher than in 1999, even in the sector of more expensive foreign drugs.

"The situation with foreign medicine has improved significantly since the start of 1999. A trend for stabilization has appeared," she said.

Ruble devaluation played into the hands of many Russian producers, who won market share from imports, but it was not of much use to pharmaceuticals makers whose main consumers, the elderly, had barely a kopek remaining.

They focused on buying food. Most Russians cannot afford medical insurance, which would pay for drugs, and the government has difficulty paying regular wages on time.

As a result, local companies lack funds to launch their own new medicine, while foreign producers do not see a wide enough market to start major operations on new products. This leaves most Russians with old, cheap drugs.

"For some time ahead, we are doomed to generic pharmaceuticals because we do not have the money to produce original drugs," Moskhimfarmpreparat's Grigoryev said.

It would cost between $100,000 and $300,000 to produce a new medicine, he said.

Russian licensing dates from Soviet days, when trademarks were owned by the state and shared among companies.

Now many companies produce the same medicine under dozens of different names that are often unknown to doctors and drugstore managers.

Foreign companies are reluctant to introduce their new products for fear they will not be properly legally protected.

Russia also produces and consumes many pharmaceuticals that are prohibited elsewhere because of side effects, executives said. So Russian manufacturers looking abroad face trademark problems and questions about the safety of their products, Grigoryev said.

"Competition is very high and one of the reasons is that when the market narrows, price competition becomes much harder," Davydov said.

However, some foreign investors are optimistic enough to invest in building or buying factories in Russia.

Searle, which last year opened a factory in the Moscow region, plans to raise its output of generic drugs to 30 kinds from the current 10. Slovenian Krka is building a $20 million factory to produce vitamins and heart drugs in the Moscow region. California-based ICN has controlling stakes in five Russian drug makers.