December 1998

by Ludmila Maksimova

As a result of the financial crisis in Russia, federal and local governments have drastically cut funds allocated for the purchases of pharmaceuticals. The regional medical insurance funds, which were required to invest in government securities, lost all their money overnight due to government default on treasury bills. Funds for medical purchases in many regions have dried up. With the banking system in chaos and money difficult to transfer abroad, many distributors of pharmaceuticals have stopped shipping goods to Russia.

Pharmaceuticals
According to Russian Health Minister Vladimir Starodubov, pharmaceutical imports have dropped by 80 percent, and prices have risen two to three times since August. The majority of local governments have reduced the number of subsidized drugs. Local governments have also fallen behind on payments to pharmacies. The Russian Government has declared the restoration of the pharmaceutical supply as a major goal. Minister Starodubov said, "We have personnel and medical equipment for at least half a year, but without medicines we will be unable to provide treatment to patients."

In 1997, the Russian pharmaceutical market was estimated at US$3.1 billion, US$1.9 billion of which were imports. Before the crisis, 12,000 different drugs produced by 370 domestic and 880 foreign enterprises were distributed in Russia. In 1997, the government provided substantial support to domestic drug manufacturers to help them increase production (by 20 percent) and reverse several years of declining production. Domestic producers supplied 40 percent of the market while imported drugs met the remaining 60 percent. Because of the recent drastic drop in pharmaceutical imports, the ratio changed in September 1998 to 60 percent domestic drugs, 40 percent imported.

The crisis led to an overall 30 percent reduction of domestic pharmaceutical output in September 1998. In addition, the Russian Government has been steadily diminishing its role in the total purchases of drugs. In September 1998, 80 percent of all drugs consumed in Russia were paid out of individual patients' pockets, while the federal and local budgets and the obligatory insurance funds covered 20 percent of medicine purchases. Increased demand was not enough to boost local production because of the poor financial condition of the majority of domestic drug manufacturers.

The current crisis has significantly affected the distribution of pharmaceuticals. In 1993-1994, the pharmaceutical wholesale business became one of the most lucrative businesses in Russia, reaching a profitability of 30-40 percent of sales. Consumer demand for pharmaceuticals has been growing for years. The number of wholesale firms rose from 100 in the late 1980s to 4,000 in 1997. The rapid initial expansion of the wholesale pharmaceutical business was the reverse side of the weakness of Russian pharmaceutical manufacturers lack of experience in product marketing. Russian producers have been pushed out of the market due to strong competition from imports. Leading positions in the wholesale business were occupied by 20 large firms that controlled about half of the market. It is likely that the number of small and medium-sized distributors will decrease.

The total losses of distributors and pharmacies caused by the crisis are estimated at US$500 million. The outstanding debt of Russian distributors to Western drug manufacturers is estimated at US$360 million. Unlike Russian drug manufacturers, which work with distributors on a prepayment basis or use 30- to 45-day credit terms, Western companies, including U.S. companies, give six months of credit. Western companies are financing half of the industry through credit provided to distributors.

Steps Taken
The crisis has spurred activity by major players in the pharmaceutical market. The leading international pharmaceutical association, the Association of International Pharmaceutical Manufacturers (AIPM), and three Russian pharmaceutical associations have sent a letter to the State Duma requesting elimination of import duties on pharmaceuticals and simplification of licensing procedures. The American Chamber of Commerce sent a position paper to the Ministry of Health in which it outlined the major problems of the Russian pharmaceutical market and suggestions to solve these problems.

The Russian Government has taken a number of measures to offset the effects of the crisis on the pharmaceutical industry. In September, it issued a decree exempting medicines containing insulin from the additional 3 percent import duty. In addition, as of October 22, 1998, the government removed an additional 3 percent import duty on the majority of pharmaceuticals and several medical devices. The Ministry of Health postponed the introduction of new and more complicated licensing procedures for imported drugs until December 1, 1998. Unfortunately, the government has not come up with a clear-cut policy for the health care and medical industry of Russia.

Although industry experts expect the Russian pharmaceutical market will shrink by 35-40 percent in 1999, the majority of Western pharmaceutical companies have stated that they are committed to the Russian market. Russia might be a hard place for newcomers to do business, but those who are already in Russia understand that, if they leave, others will immediately occupy their niches. Western pharmaceutical companies plan to continue to work with Russian distributors, with whom they are negotiating ways of restructuring outstanding debts.

For more information on the medical industry in Russia, visit BISNIS OnLine at www.mac.doc.gov/bisnis/isa/isa.htm#Fisa.

Ludmila Maksimova covers the medical sector for FCS-Moscow.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)