In 2009, the Russian Government launched its ‘Development of the Pharmaceutical and Medical Industry of the Russian Federation until 2020’ (Pharma 2020) initiative. The aim of the initiative was to increase the local production of drugs to at least 50 percent and modernise the country’s poor healthcare system.
Russia currently imports more than 80 percent of its pharmaceuticals, with European companies supplying 71.8 percent, Indian companies 6.1 percent, and United States–based companies 4.7 percent.
The Pharma 2020 initiative included funding of RUB177.6 billion (which, at the time, equated to US$5.55 billion) spread over a number of years. The Russian Government additionally supported the initiative by providing tax benefits and gradually tweaking legislation to stimulate local manufacturers.
Major global pharmaceutical players reacted by localising their production in Russia or creating joint ventures with Russian pharmaceutical companies. Japan’s Takeda Pharmaceutical Company built a US$97 million factory in Yaroslavl in 2013, while Abbott Laboratories paid US$305 million to acquire Russian pharmaceutical company Veropharm in December 2014. Israeli generic pharmaceutical company Teva opened a factory in Yaroslavl in October 2014 after investing US$65 million over an 18-month period, and Swiss company Novartis made a commitment to invest US$500 million in Russia over five years.
With such heavy international investment in its pharmaceutical sector in recent years, Russia is gradually becoming less reliant on pharmaceutical imports.
Points to note
Foreign pharmaceutical businesses are really stepping into the local Russian market, building factories and acquiring Russian pharmaceutical companies that provide employment for tens of thousands of people. Their compliance needs therefore have to be adjusted accordingly. The following are some recommendations for compliance officers of companies operating in the Russian pharma market:
- The tens of thousands of people now working directly for foreign pharmaceutical companies in Russia need to receive compliance training that is adjusted for the specific risks of the country. For example, employees of Russian company Veropharm in Voronezh were obliged to sign new contracts following the company’s acquisition by Abbott Laboratories in December 2014. Although they complained about the new contracts, particularly sections that mandated them to comply with sanctions against Russian and Ukrainian entities, Abbott Laboratories communicated to their new employees that this directive related only to business connections and would not affect them on a personal level.
- The Russian Government plans to start checking that all local manufacturers and foreign importers comply with the Good Manufacturing Practices standards, though it is not expected that this will come into effect until 2018. Russia has sought to tighten its struggle against fake pharmaceuticals. In December 2014, the Russian Parliament adopted new legislation aimed at the criminalisation of pharmaceutical counterfeiting and the distribution of counterfeit and falsified medicines and medical devices. The abovementioned law will be followed by random checks of manufacturers and distributors through 2015. All third-party manufacturers and distributors will be checked to ensure they possess the necessary certificates, and investigators will also search for failed checks and withdrawn licenses.
- Companies that plan to step into the Russian pharmaceutical space need to remember the high risk of corruption in the country. Rigorous enhanced due diligence must be conducted before any merger or acquisition or joint venture process takes place. This also holds true for opening research and development centres and localising clinical trials.
- Many Russian officials are alleged to be the beneficiaries of pharmaceutical companies (directly or through third parties), or connected in some other way. When working with a local company, reverse-ownership checks should be conducted in order to rule out the possibility of breaching sanctions that may have been imposed on Russian officials and their affiliates.
In 2014, Russia was able to reduce its dependency on imported medicine. Last year was also notable for the heavy sanctions that were imposed on the country, the Russian rouble falling by more than 40 percent, and oil prices plummeting. Despite all this, the price of medicine soared by 12.7 percent, and this surge is expected to continue in 2015 – particularly on imported substances and equipment.
By increasing their involvement in the sector, international companies have exposed themselves to various new compliance challenges that have to be taken into consideration. Laws benefitting local manufacturers will continue to proliferate, restricting importers. And the United States and Europe will continue to look to punish those that violate their sanctions regimes.
With the Russian pharmaceutical sector looking more vulnerable than ever, it is imperative that international pharmaceutical companies already working in Russia, or intending to work in the country, maintain a functional and up-to-date compliance programme.