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Reference ID Created Released Classification Origin
07MOSCOW4043 2007-08-17 11:14 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

DE RUEHMO #4043/01 2291114
R 171114Z AUG 07

E.O. 12958: N/A 
REF: A. Moscow 976 
      B. 06 Moscow 12814 
MOSCOW 00004043  001.2 OF 003 
1. (SBU) SUMMARY:  Russia's pharmaceuticals market has grown by 
leaps and bounds in the last three years, and experts predict 
continued robust growth in the short term in almost all major market 
segments.  Foreign firms continue to dominate the market and account 
for an estimated 75-80 percent of all sales.  The GOR wants to 
reorganize the domestic industry to compete more effectively, 
because it views the dependence on foreign firms as a long-term 
national security risk and as one factor that has led to the 
development of a large counterfeit drugs market.  International 
firms argue that there is no link between foreign market dominance 
and the counterfeit drugs market, noting that the bulk of 
counterfeits are domestically produced.  Even so, some foreign firms 
are beginning to realize that an investment in domestic production 
would not only be profitable, but also help ensure a continuing 
long-term market share in Russia.  However, it is likely that 
European drug makers will be more interested than U.S. firms in 
investing in existing Russian plants or in building production 
facilities from scratch.  END SUMMARY. 
Pharmaceuticals Market Growing Astronomically 
2. (SBU) Russia's pharmaceutical market has seen some of the fastest 
growth in the world over the last three years and is expected to 
continue humming along in coming years.  In 2006, the pharmaceutical 
market was worth $10.7 billion, according to market analysts, up 
27.4 percent from 2005, when sales grew by 35 percent compared to 
2004.  Over the counter (OTC) drug sales accounted for 53 percent of 
total sales in 2006.  The head of Russian operations at one U.S. 
pharmaceutical company told us he expects sales growth of 25-30 
percent in 2007 in the OTC segment and growth of 20-25 percent in 
prescription drug sales.  The Russian Government is the largest 
single buyer, accounting for 47 percent of total sales through drug 
tenders, subsidies to hospitals, and the federal drug benefits 
3. (SBU) Despite the impressive growth prospects in almost all 
segments of the market, the government's drugs benefit program for 
social welfare beneficiaries has been a drag on growth in 2007.  The 
program, which is known as the Additional Drug Supply or "DLO," was 
plagued by deficit spending and distribution problems in late 2006 
and early 2007 (reftels).  Some foreign firms tell us they are still 
waiting to be fully paid for drugs they supplied under the program 
in 2006. Market analysts estimate the DLO accounted for at least 10 
percent of total sales in 2006. 
4. (SBU) Sales of imported drugs have actually declined 17 percent 
during the first five months of 2007 compared to the same period in 
2006, according to the market analysis firm DSM Group.  Most 
observers believe the decline reflects continuing problems with the 
DLO, which will act as a drag on sales growth throughout 2007.  Full 
year sales in 2007 are expected to increase by only 10-12 percent 
over 2006.  French drug-maker Servier's sales reportedly declined by 
27 percent during the first five months of 2007, while British firm 
GlaxoSmithKline's sales dropped by 33 percent, probably because a 
greater portion of their sales were made through the DLO. 
5. (SBU) Many industry contacts expect the DLO will continue to have 
problems in 2008, because of the potential for chaos when the 
federal government transfers procurement authority for part of the 
program from the federal to the regional level in the fall of 2007. 
Despite the program's difficulties, the DLO could account for as 
much as 20-25 percent of total drug sales in 2008 as the government 
expands the program to provide benefits both for chronic patients 
who need expensive drugs or long term medication (primarily 
hemophiliacs, leukemia patients, and diabetics), and for pensioners, 
veterans, and the needy. 
--------------------------------------------- - 
Foreign Market Domination Worries the Russians 
--------------------------------------------- - 
6. (SBU) Foreign firms maintain a firm grip on the Russian market 
and account for 75-80 percent of total sales, according to industry 
contacts and market watchers.  (NOTE: While President Putin stated 
at a March Cabinet meeting his displeasure that foreign firms 
MOSCOW 00004043  002.2 OF 003 
control nearly "90 percent" of the Russian drugs market, Deputy 
Health and Social Development Minister Starodubov has since stated 
foreign producers actually control slightly less than 80 
percent of the market.  END NOTE.)  The current dominance of foreign 
producers represents a gradual decline in the fortunes of domestic 
producers, who controlled 60 percent of the market in 1991 as the 
Soviet Union and Warsaw Pact began to disintegrate. 
7. (SBU) With such a large percentage of sales going to foreign 
firms, the Russian government is attempting to reform the portion of 
the domestic market controlled by the state.  The Kremlin sees 
Russia's dependence on foreign drug suppliers as a long-term 
national security threat and would like to establish a strong, 
integrated domestic pharmaceutical production system.  By the end of 
2007, the Russian Agency for Industry (Rosprom) reportedly hopes to 
establish a pharmaceuticals holding company, which would control 
five state-owned production facilities and nine research institutes. 
 The government has been short on the specifics of how this 
reorganization would work.  However, up to half of the shares in the 
new holding company could reportedly be sold to foreign drug 
companies, probably to take advantage of their technical expertise 
in good manufacturing practices. 
8. (SBU) By increasing the competitiveness and capacity of domestic 
drug companies, the GOR believes that Russia will achieve a more 
stable and secure supply base, increase drug safety, and achieve 
cheaper prices for consumers.  Moscow Mayor Luzhkov has also long 
wanted to promote the city of Moscow and the surrounding region as a 
prime location for large-scale drug production.  The most difficult 
obstacle for Russian firms to overcome will likely be the poor 
quality standards of domestic firms, few of which currently comply 
with good manufacturing practices or other international norms for 
drug production. 
--------------------------------------------- -------- 
Will Foreign Firms Invest in Russian Drug Production? 
--------------------------------------------- -------- 
9. (SBU) Historically, few international pharmaceutical firms were 
interested in investing in domestic drug production in Russia. 
According to our contacts, this was partly because of a generally 
cautious approach among drug company boards towards investments in 
Russia and the lack of a clear economic advantage to domestic 
production versus importing.  However, there are growing signs this 
conservatism is beginning to change.  One industry representative 
told us that the recent tremendous growth in drug sales and the 
concomitant strong growth in fast moving consumer goods (e.g., 
toiletries, soaps, cosmetics, toothpaste, shaving needs, and 
detergents) are both persuasive signs that Russians in the coming 
years will begin spending lots of money on OTC and prescription 
10. (U) Servier, the second largest French pharmaceutical company, 
became the first big drug company to establish domestic production 
in Russia in early July with a 40 million Euro investment in the 
construction of an 11,500 square meter full cycle pharmaceutical 
plant near Podolsk in Moscow Oblast.  Servier is the largest seller 
of prescription drugs in Russia and the third biggest drug company 
in Russia in terms of overall sales.  Servier's Russian plant will 
produce 20 drugs for the treatment of diabetes, cancer, 
cardio-vascular and nervous system diseases.  Production will start 
by the end of 2007 with an annual capacity of 60 million pills and 
will reach 4.5 billion pills per year by 2011. 
11. (SBU) German drug-maker Stada purchased one Russian 
pharmaceutical firm in 2005 and is now in the process of acquiring a 
second, Makiz-Pharma, for a reported 135 million Euros, which would 
be the largest-ever foreign acquisition of a Russian drug company. 
Pfizer announced in late July it is also considering opening its own 
plant in Russia, or acquiring and revamping an existing facility, 
though the company has not made any final decision yet.  Foreign 
manufactures are likely thinking that a domestic presence will allow 
them to increase both overall sales and sales to the government 
through the DLO and other tenders.  Other foreign firms, such as 
Johnson and Johnson and GlaxoSmithKline, have established joint 
ventures with local firms to manufacture HIV/AIDS drugs and some 
seasonal flu and hepatitis vaccines.  Industry contacts tell us the 
GOR has not offered any concrete incentives like tax breaks for 
establishing domestic production, but locally manufactured drugs do 
enjoy a preference in government tenders. 
12. (U) Some international banks have also been attracted by the 
pharmaceutical market's impressive growth and have been willing to 
MOSCOW 00004043  003.2 OF 003 
back innovative financial mechanisms to support the industry. 
Financing in the pharmaceuticals industry is generally on standard 
commercial terms.  However, 36.6, Russia's largest drug store chain, 
has financed its expansion by selling for $85 million a nearly 25 
percent stake in its pharmaceuticals manufacturing subsidiary, 
Veropharm, to a consortium of international banks led by the South 
African-based Standard Bank.  Separately, 36.6 has been looking for 
a buyer for Veropharm, and GlaxoSmithKline is reportedly the main 
interested suitor.  Whoever ultimately buys Veropharm will pay off 
the international bank syndicate or retain them as a minority 
partner.  Later this year, 36.6 is also expected to become the first 
Russian firm to issue short-term commercial paper (a novelty in 
Russia) to fund its operations. 
Fake Drugs Spark Controversy 
13. (SBU) Experts estimate that sales of counterfeit drugs in Russia 
are at least $200-$300 million per year, with some 70 percent of 
fake drugs being produced domestically.  Foreign pharmaceutical 
companies have argued that more rigorous domestic enforcement and 
stiffer penalties for "pharma-pirates" could help control the 
problem.  Government officials counter that establishing a stronger 
domestic industry and eroding the dominant position of foreign firms 
will allow the government to weed out counterfeit production, 
claiming that the higher prices for imported drugs act as a profit 
incentive for pirates to enter the counterfeit market.  In a 
February 2006 speech to prosecutors, President Putin stated that 
"the trade in counterfeit medicines is a real threat to our nation's 
health, and the distribution of counterfeit products without a doubt 
discredits Russia as a reliable business partner." 
14. (SBU) In a highly publicized counterfeiting case in 2006, a 
Moscow court fined domestic drug company Bryntsalov-A 40,000 rubles 
($1,500) for the improper storage of drugs at its facilities.  This 
was a lesser offense than counterfeiting, with which Brynstalov was 
also charged.  The court found there was insufficient evidence of 
actual counterfeiting by Bryntsalov, and it also stopped short of 
revoking the company's manufacturing lic
ense, as foreign 
pharmaceutical firms had demanded.  The decision was widely regarded 
as a completely inadequate punishment for a company that Western 
drug makers estimated had sold at least $30 million worth of 
counterfeit drugs in the Russian market, including about $1.5 
million in sales of fake bottles of Bayer aspirin.  The company is 
owned by Vladimir Bryntsalov, a former Duma Deputy and former 
presidential candidate, and is still mired in other criminal 
investigations.  Tatyana Brynstalov (Vladimir's sister) and several 
other company managers currently stand accused of illegally selling 
alcoholic beverages as a medicine in order to avoid paying the 
excise tax on spirits. 
15. (SBU) COMMENT: Despite strong market growth in Russia, we 
believe many American drug companies will take a conservative 
approach in the near term and prefer investing in other BRIC 
countries such as India and China.  As the Russian office head of 
one U.S. drug company told us, "The Americans are aggressive in 
China, while the Europeans are aggressive in Russia." 


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