Market Overview Russian Pharmaceutical Market

2

Executive Summary (1/2)

The Russian Pharmaceutical market is one of the fastest growing pharmaceutical market* and a potential market for pharmaceutical manufacturers as the country has a large patient population base with an increasing purchasing power

Technological growth, economic and political changes, increasing middle class population, trade liberalization and investments in the healthcare infrastructure are the drivers for Russian pharmaceutical market

The drug registration process for generics and innovator (new) drugs is almost same in Russia except the fact that clinical trials for the new drugs should be done in Russia while that for generics bioequivalence study results can be submitted to the regulatory agency for drug registration

Generics dominate the Russian Pharmaceutical market and contribute over 1/3 of the market. The Russian pharmaceutical market is heavily dependent on import drugs. However, the country is trying to boost its domestic production to 50% by 2020 by upgrading its domestic pharmaceutical manufacturing operations to GMP standards and increasing the level of innovator pharmaceuticals in the Russian market

Around 76% of drugs in terms of money consumed by the population are produced abroad. On the line of top 20 leading players in the Russian pharmaceuticals market , Pharmstandard is the only domestic manufacture

According to the data Strategy of Pharmaceuticals Industry, 27% of pharmaceuticals in the Russian market are domestic products. In order to boost the domestic production Russian Companies produced approximately 65% of pharmaceuticals from the lists of strategically important and the most vital medicines

Sanofi and Novartis are the leading foreign players while among the domestic players, Pharmstandard is the market leader in the Russian Pharmaceutical market

The retail segment was the major contributor to the Russian Pharmaceutical market, contributing 75% of the sales in 2013 followed by the hospital segment

under the Vision 2020 development plan, AIPM proposes the introduction of compulsory drug insurance system, which could reduce the GDP losses associated with healthcare from 11% to 20%

3

Executive Summary (2/2)

The Russian government intends to invest over $4 billion to incentivize companies to increase total domestic medicine sales and production to a level of 50% or greater within the Russian pharmaceutical market.

It is also forecasted that Generic medicines will take up a majority of market volume and increasingly greater market share

Private healthcare expenditure accounts for one third of all healthcare costs of which 88% is met by OOP due to insufficient availability of healthcare services and medicines through the public healthcare system and the informal payments for healthcare services

A recent trend of co-operation between international and domestic pharmaceutical companies was observed in the country for the distribution and marketing of high selling prescription drugs

Although the Russian pharmaceutical market is dominated by the foreign players, it is still assumed that governmental support to the domestic players, the strong knowledge of the local market, easy access to physicians and better understanding of certification processes for new generic drugs gives Russian companies an advantage that should help them to gain market share in the coming years.

Overview: Russian Pharmaceutical Market

5

Russian Pharmaceutical Market

2010 2011 2012 2013F 2014F 2015F 2016F 2017F0

5

10

15

20

25

30

35

40

0%

2%

4%

6%

8%

10%

12%

14%Market SizeGrowth Rate

USD

Bill

ion

Gro

wth

Rat

e (%

)

Russian Pharmaceutical Market (Value)(2011 – 2017F)

The Russian Pharmaceutical Market ranked 7th among the top ten largest pharmaceutical markets across the globe in 2013. The market was estimated to be around $28.5bn* (including VAT) in 2014 and is expected to continue registering double digit growth in coming years.*

Although quite less than the US and most of EU countries, per capita consumption of medicine in Russia was $104 (RUB4,317) in 2010 and increased to ~$130 (RUB 5,400) in 2012. Russia is registering ever increasing per capita income and the healthcare spend is expected to grow simultaneously

The increasing federal spending, increasing prevalence of lifestyle related diseases and enhanced purchasing power of the population are the key drivers of the Russian pharmaceutical market

Source: DSM Group report *Conversion rate 1 RUB = 0.024 USD

Market Size (RUB Bn)

735 824 921 1,041 1,165 1,291 1,415 1,552

Growth Rate (%)

6 12 12 13 12 11 10 10

2010 2011 20120

50000

100000

150000

200000

250000

300000

-

1,000

2,000

3,000

4,000

5,000

6,000

227,496 249,360

274,560

Per C

apita

Inco

me

(RU

B/ Y

ear)

Per C

apita

Con

sum

ption

of M

edic

ines

(RU

B/Ye

ar)

Per Capita Income Vs. Per Capita Consumption of Medicines (2011 – 2012)

6

37%

39%

24%Generic Prescription DrugOTC MedicineInnovator Prescrip-tion Drug

Russian Pharmaceutical Market Generics Market

The Russian pharmaceutical market is dominated by generics. Generics Prescription drugs captured over 1/3 rd of the total

pharmaceutical market with a value of $7.86bn* (excluding VAT) in 2012. At the same time innovator prescription market

was ~one fourth (24%) of the total market with a value of $5.01bn (excluding VAT) *

Commercial segment is the largest segment and constitutes ~80% of total drug sales by value in the country.

The DLO (Dopolnitelnoe Lekarstvennoe Obespechenie) * program (initiated in 2005) facilitated the free access of

medicines to the most vulnerable and weaker sections of the society. This initiative positively impacted the market

penetration of generics and also contributed nearly 15% to the pharmaceutical market

Pharmaceuticals Market –Subsectors(2012)

2011 2012 20130

1000

2000

3000

4000

5000

6000

4,454 4,458 4,429

1,019 1,038 956

97 83 75

Commercial Hospital DLO

Mill

ion

Pack

ages

Russian Pharmaceutical Market (Volume)(2011 – 2013)*

7

Russian Pharmaceutical Market – Segment

7

The drug sales from the retail segment contributed maximum, 73% and 74% to the pharmaceutical sales in the country both 2012 and 2013, respectively. The retail sales included sales of OTC, Rx and expensive medicines. The generics contributed 15% in the retail segment, 27% in the hospital segment and 13.5% in the reimbursement segment in 2012

Drug sales in the hospital segment declined since by 2% in 2013 over 2012, which can be an indication of the fact that the hospitals are not selling expensive drugs as nearly 95% of the hospitals are run by state and face budget constraints

Russia has a weak private health insurance system, which is evident from the fact that the drug sales from reimbursement contributed only 10% to the overall Russian Pharmaceutical market

Russian Pharmaceutical Market (Value) – Segment

2012 20130

5

10

15

20

25

13.54 14.88

3.153.11

1.932.11

Retail Hospital Reimbursement

USD

Bill

ion

2012 20130

1

2

3

4

5

6

4.72 4.56

0.660000000000002 0.630000000000

002

0.1 0.1

Retail Hospital Reimbursement

Billi

on p

acks

Russian Pharmaceutical Market (Volume) – Segment

Conversion rate 1 RUB = 0.024 USD Source: Pharmstandard Annual Report - 2013

8

Local Vs. Import Drugs

Source: DSM 2013

0%

20%

40%

60%

80%

100%

30.1%13.5% 23.9% 24.1%

69.9%86.5% 76.1% 75.9%

Proportion of Drug Sales – Domestic vs. Imported Drugs(2012)

Domestic Drugs Imported Drugs

It is quite evident that the Russian Pharmaceutical Market is heavily dependent on imported drugs. Nearly 75% of the medicine demand of the country is met through the imports. Germany (20%), France (10%), China and India are some of the key exporter of pharmaceuticals to Russia*

Drug reimbursement program has maximum share of imported and expensive drugs as programs such as seven nosologies focus on drugs related to chronic diseases and procure expensive innovative medicines

Most of the demand for imported drugs is met through the foreign manufacturers such as Novartis, Sanofi, Roche, Teva, Bayer etc.

The contribution of the domestic drugs has increased over the years due to new and improvised drug policies such as ‘Pharma 2020’

24%

76%

Domestic Vs Imported Drugs – Value(2013)

Domestic Imported

40%

60%

Domestic Vs Imported Drugs – Volume(2013)

Domestic Imported

9

1129

615

98 36

Number of API Manufacturers in Russia & CEE compared to rest of BRIC countries (2013)

China India

Russia & CEE Brazil

There are less than 50 Russian-owned companies with the capability

to produce API and only a fraction of finished-dose companies when

compared to India and China

Russia heavily relies and is likely to continue to rely on companies in EU

markets, India and China to aid in the materials and imports needed to

produce many of its drugs. However the imports may start to decrease as

major drug companies build capable plants in Russia. The Russian

government launched a highly aspirational programme 'Pharma 2020' in

2010 and targets to locally manufacture at least half of all drugs, and 90%

of all 'vital medicines'

API Manufacturing – Russia

Key highlights – Program for development of Russian pharma market Federal Program for Development of Russian Pharmaceutical and Medical Industry until 2020 and Further Periods targets to

increase: Share of Russian-made medicines in monetary value - 50% Share of Russian-made medicines in the vitally essential medicines list - 90% Share of Russian-made medical equipment and devices in monetary value - 40%

Governmental purchases: imported medications may not be accepted to tenders with two or more similar medications

produced in Russia or Belarus, or price discrimination: Draft regulations: packaging and labeling will be treated as Russian-made medications until 1 January 2014. And after this,

full-cycle production (including from imported substances) will be needed to qualify as Russian-made A 15% discount for foreign manufacturers (does not contradict Russia’s agreements with WTO

10

Generics Vs. Innovator DrugsMarket Overview & Key Trends

Russia is an ideal market for branded generics as the

consumers are willing to pay higher costs for quality drugs.

Also, it is worth noting that almost 80% of the prescribed drugs

are dispensed without a prescription hence resulting in higher

demand

Generics dominated the market across commercial, hospital

and DLO segment

The market share of innovator drugs was highest in the DLO

segment. Innovator drugs for therapy areas CVS, cancer and

diabetes dominated the DLO segment

The main objective behind the inclusion of innovator drugs in

DLO segment was to encourage the up-take of expensive

drugs at affordable prices

The DLO program has strengthened the market for foreign

manufactures as Russia is majorly dependent on imports

Commercial Market

Hospital DLO0%

20%

40%

60%

80%

100%

8% 17%

40%

92% 83%

60%

Generics vs. Innovator Drugs – Market Share (Volume)

(2006)

Innovator Drug Generics

Source: Krivoshapkina, 2007

Data availability about recent generic vs. innovator

across market segment is limited. The data

presented here is of 2006. Although generics lead

the market share by volume share, actual

percentage may vary as the government has rolled

out its Pharma2020 plan focusing on domestic

production of drugs

Russia is predominantly a “Generic” market

Russia's market has been dominated by locally produced generics but there is a growing demand for more branded

generics from multinational companies. Foreign players such as Sanofi, Novartis, Bayer and so on are selling branded

generics in the Russian market since the direct consumer’s decision is influenced by advertisements and marketing*

Russia is ranked second in Generic uptake only after India showing that Generic uptake after launch was ~80%

India Russia China US Brazil Germany UK Canada France Spain Italy Australia Japan0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Generics Market Volume Uptake

Ge

ne

ric

s V

olu

me

Up

tak

e(%

)

Source: Deloiotte 11

Competitive Landscape

12

13

Leading 10 diseases Sales structure of RTU drugs on Russian retail commercial market by ATC groups

First level ATC groups Sales value,(mn rubles)

Group share insales value, %

Sales Volume (mn units)

Group shareSales, volume, %

A: Alimentary tract and metabolism 88,981 19.3% 789.6 17.8%

R: Respiratory system drugs 58,512 12.7% 632.4 14.3%

C: Cardiovascular system drugs 56,724 12.3% 457.4 10.3%

N: Nervous system drugs 54,711 11.8% 817.9 18.5%

J: Antibacterials for systemic use 35,709 7.7% 285.8 6.5%

M: Musculoskeletal system drugs 35,641 7.7% 297.0 6.7%

G: Genitourinary system drugs and sex hormones

34,176 7.4% 81.9 1.9%

D: Dermatologicals 28,359 6.1% 460.9 10.4%

L: Antineoplastic and immuno-modulating agents

19,445 4.2% 79.9 1.8%

B: Agents affecting blood andblood forming organs

15,662 3.4% 128.5 2.9%

Alimentary tract and metabolism related medicines contributed to around 19% of commercial retail sales value and ~18% of sales volume in 2013. Oncology with 1.8% of volume share captured 4.2% value share which shows that most of the oncology drugs are expensive and imported in the country

Source: DSM Group report

14

Competitive Landscape – Key Pharmaceutical Players in the Russian Pharmaceutical Market

The market is dominated by foreign players such as Novartis, Sanofi and Bayer. Novartis was leading player with 5.5% share by value and had 3.2% volume share

Among the domestic players only Pharmstandard was ranked among leading players with a market value share of 3.7%. While it had a comparatively large volume share (9.6%)

Pharmstandard is ranked 3rd in the commercial segment holding a market share of 4.3%. The company has its presence across most of the significant therapeutic areas in the commercial segment

The domestic manufacturing sector is highly concentrated with a count of 550 domestic pharmaceutical manufacturers

Source: Pharmstandard Annual Report - 2013

5.5%5.3%

3.7%3.4%

65.1%

Novartis/ SandozSanofiPharmstandartBayer HealthcareServierNycomed/ TakedaMenariniTevaAbbottGedeon RichterOthers

3.2%2.1%

9.6%

75.0%

Value Volume

Competitive Landscape – Russian Pharmaceutical Market(2013)

Company Name Revenue in RUB Revenue in USD

PROTEK 139,310,563,328 3,343,453,520

PHARMSTANDARD 55,907,598,336 1,341,782,360

AKRIKHIN 8,111,741,952 194,681,807

VEROPHARM 5,269,000,192 126,456,005

SINTEZ-BRD 3,933,053,952 94,393,295

BIOSINTEZ 2,893,638,912 69,447,334

BIOCHIMIK-BRD 1,425,517,952 34,212,431

KRASFARMA 1,279,539,968 30,708,959

DALKHIMPHARM 1,187,096,960 28,490,327

NOVOSIBKHIMF 1,008,243,968 24,197,855

ORGANICA 770,918,016 18,502,032

FARMAKON 513,159,008 12,315,816

HUMAN STEM CELLS 419,769,984 10,074,480

PHARMSINTEZ 247,038,000 5,928,912

Leading Domestic Pharmaceutical Companies

*Conversion rate 1 RUB = 0.024 USD

Protek group is a conglomerate which is involved in distribution, retail sale as well as manufacturing of

pharmaceuticals in Russia. Akrikhin is a PolPharma group company in Russia. Kindly note that the list is

prepared on the basis of revenue data as available in Bloomberg financial database

15

Revenue, Profit & ROE – Key Russian Pharma Players

16

2011 2012 20130

5

10

15

20

25

30

35

0%

1%

2%

3%

4%

5%

6%

7%

22.0

27.8

31.3

10.812.7 11.4

6.6%

3.0%2.5%

Kraspharma

Revenue Gross Profit ROE

USD

Mill

ion

2011 2012 20130

200400600800

100012001400160018002000

0%

5%

10%

15%

20%

25%

30%

35%

40%

1454.2741637.074

1756.39

542.975 604.734

735.062999999999

36.2%29.1%

31.2%

Pharmastandard

Revenue Gross Profit ROE

USD

Mill

ion

2011 2012 20130

50

100

150

200

250

0%

5%

10%

15%

20%

25%

30%216.4

177.5 165.5147.4

100.5 98.4

26.2%

14.8%

7.0%

Veropharm

Revenue Gross Profit ROE

USD

Mill

ion

Pharmastandard had the highest revenue (among the listed

companies) USD 1,756 million (2013) distantly followed by

Veropharm

Pharmastandard had highest RoE which declined between

2011 to 2012 but again increased and was over 31% in

2013

Source: Bloomberg

17

Company Profile – Pharmstandard

Key Facts Headquarter: 5 'B' Likhachevsky proezd DOLGOPUDNYI, 141700 Russia Number of Employees worldwide: 5,966. Website: http://pharmstd.com/ Phone No: +7-495-9700030 Pharmstandard was formed in 2003, when Abramovich’s Millhouse and Pharmstandard’s Chairman Viktor

Kharitonin bought Russian assets belonging to ICN Pharmaceuticals  for $55 mn

Top Management (Title & Name) CEO: Igor Konstantinovich Krylov Chairman: Viktor Vladimirovich Kharitonin

Financial Figures ( Dec 2013) Revenue: RUB 56000 million Gross Profit: RUB 23400 million

Overview Pharmstandard operates through one branch in Kursk, numerous subsidiaries and one affiliated company,

located on the territory of the Russian Federation, Ukraine and Cyprus. In addition, it owns five pharmaceutical manufacturing facilities as well as a medical equipment factory.

The company’s portfolio includes over 200 products used in the treatment of diabetes, growth hormone deficiency, cardiovascular diseases, gastroenterological and neurological disorders, infectious diseases, cancer, etc.

In February 2014, OTCPharm acquired iSingapore-based Bever Pharmaceutical On May 21, 2014 OJSC Pharmstandard and Millhouse LLC announced plans to acquire stakes

(individually) in Biocad Holding Ltd., the main shareholder in Russian biotechnological company CJSC Biocad (“Biocad”). Biocad specializes in the development, production and promotion of original and generic drugs in the following therapeutic categories: urology, gynecology, dermatovenerology, oncology, hematology, autoimmune and infectious diseases.

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iew

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Source: Company Website

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Company Profile – PHARM SINTEZ

Key Facts Headquarter: 8 Vtoroy Roschinskiy blvd., Moscow, Russia, 115419 Number of Employees worldwide: Website: http://www.pharm-sintez.com/ Phone No: (495) 796-94-33  PHARM SINTEZ was founded in the year 1997 and is involved in the active molecule synthesis and

production of complete drug forms in the areas of oncology, urology, gastroenterology, gynecology, endocrinology, resuscitation and radioisotope diagnosis.

Top Management (Title & Name) CEO: Dmitriy Dmitrievich Genkin CAO: A B Barkanova

Financial Figures ( Dec 2013) Revenue: RUB 451 million Gross Profit: RUB 155.8 million

Overview PHARM SINTEZ is involved in development and production of highly demanded original products ,

branded generics and generics, using the latest scientific research and heavy investments in these fields. PHARM SINTEZ’s strategy is to use the scientific research and collaboration with the leading medical and

scientific research centers, to be in the avant-garde of the pharmaceutical industry and to produce highly efficient medical agents, lowering the dependency of Russian patients on the import drugs.

Source: Company Website

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Company Profile – Veropharm

Key Facts Headquarter: 18-9, 2nd Yuzhnoportovy proezd, Moscow, 115088, Russia Number of Employees worldwide: more than 2,000 employees. Website: http://www.veropharm.ru/eng/ Phone No: +7 495 792-53-30 Veropharm was founded in the year 1997 and is one of the largest Russian manufacturers of

generic drugs, oncological medications, and medical adhesive bandages

Top Management (Title & Name) CEO: Marina Penkova

Financial Figures ( Dec 2013) Revenue: RUB 5,269 million Gross Profit: RUB 3112 million

Overview Veropharm has production facilities in Belgorod, Voronezh, and Pokrov. Representative office in Belarus,

subsidiaries in Ukraine and Kazakhstan Veropharm is specialized mostly in prescription drugs and is a leading player in the oncology market. It is a

market leader in production of adhesive bandages in Russia In the first half of 2014 Veropharm initiated production and sales of new forms and dosages of Anfibra,

Bixikam, Gistamel, Maverex, Taut ax, Anti-bacterial napkins, Absorbing napkins and Nitric Diet

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Healthcare and Reimbursement

Healthcare System – Russia

In Russia, due to its Soviet legacy, the burden of healthcare provision for the masses falls largely on the public sector,

which operates on three levels: Federal, Regional and Municipal. The budget for different parts of the healthcare system

is controlled at each level.

The MoHSD holds responsibility for strategic planning for the healthcare system in the country.

Overall, healthcare policy and the national healthcare budget are controlled at the federal level. Funding for the ‘seven-

nosologies’ program, which started in 2008 and provides free treatment to about 77,000 patients with extremely high cost

chronic diseases, including haemophilia and multiple sclerosis, is at this level. 

However the majority of healthcare is funded by the regions, which have control over healthcare facilities and – for most

conditions – determine which drugs are reimbursed within their region. As there are vast economic and developmental

differences between Russia’s 83 regions, healthcare provision across the country is hugely variable (and often

inefficient). 

Doctors are unequally distributed across the country, with 40% of specialists supporting less than 20% of the population.

The federal-level healthcare programs are focused towards the delivery of medical services to the weaker sections of the

society and increased funding for the primary care provision in rural areas*

Provider payer mechanism is the major challenge faced during the technical improvisation of Russian health system

Russian Healthcare System

RegionalFederal Municipal

Source: Eye for Pharma, MoHSD 21

22

Price Regulation

The average price per pack of the drug varies across the Russian Federation. For instance, the price of a medication pack

on an average is three times higher in Moscow than that of Kemerov region.

The government has taken initiatives to establish new laws to regulate the mark-ups across the value chain in the

pharmaceutical industry, It is expected that the margins would be more regulated and uniform pricing would be established

across regions

The drug prices in Russia are regulated at both federal and regional levels. Ministry of Health and Social Development

(functions at the federal level) registers manufacturers' products and prices and sets the markup limitations so as to control

pharmaceutical prices at the retail level

As per the new law in 2010, it was proposed that the federal authority should be the only body regulating the drug prices

As per the federal legislation, the maximum markup over the manufacturer's price was 25%, and retail prices could not

exceed wholesale prices by more than 30% for drugs included in the list of essential drugs

23

Healthcare Expenditure – Russia

2009 2010 2011 20125.0%

5.5%

6.0%

6.5%

7.0%

Health expenditure – Russia(2009 – 2012)2

2009 2010 2011 20120

200

400

600

800

1000

525669

803 887

Health expenditure per capita – Russia(2009 – 2012)2

USD

Russian Federation observed almost stable trend for healthcare expenditure since 2009 up till 2012. The country’s

healthcare expenditure was 6.3% of the GDP (2012)

Healthcare expenditure per capita has been increasing since 2009, primarily due to government initiatives such as DLO

and increasing per capita income and was USD 887 in 2012. It is estimated that the healthcare expenditure would

increase by ~40% in 2015*

Source: World Bank

24

Public vs. Private Drug Expenditure

Out-of-pocket (OOP) expenditure (% of private expenditure on health) increased by a CAGR of 2% in 2012 since 2009.

OOP was 88% of the private healthcare expenditure. High OOP indicates weak private health insurance in the

country, as per the study (Kolosnitsyna et al, 2007) only 4% of the population had private health insurance

Drug expenditure per person in Russia was USD 59* in 2006 and rose to USD 123 in 2009, at a CAGR of 20%. The

per person drug expenditure in Russia was highest among the BRIC nations however; almost four times less than

Europe

Public sector has a significant and major role as the drug purchaser as high volume of drugs (medicines) is required to

full fill the goals of nationwide programs (including reimbursement) and public hospital provision

Public expenditure though on a higher end as compared to private expenditure, is still quite low in comparison to other

major pharmaceuticals market, hence the dominant part of the medical treatment was borne by the patients in the

country* . This is an indicative of the fact that the Russian market is largely made of OOP expenditure

2006 2009 20120

20406080

100120140

Drug Expenditure per person – Russia2006 to 2012

USD

2009 2010 2011 201270%

75%

80%

85%

90%

95%

100%

Out of Pocket Expenditure – Russia(2009 – 2012)2

Source: World Bank

25

Recent Trends in Investment by MNCs in Russia

Direct investment in manufacturing facilities in Russia

Partnering with Russian companies for local manufacturing

Company Investment ($) Year Company Partner Year

Takeda $97mn 2012 MSD Akrihin 2013

AstraZeneca $187mn 2011 Bayer Medsintez 2012

Novartis $140mn 2012 AbbVie R-Pharm 2013

Novo Nordisk $100mn 2010 Pfizer/GSK Petrovax 2011

Teva $100mn 2011 Actavis Rosta Group

Cadila Pharma $150mn 2013 ViiV Healthcare  Petrovax 2011

Challenges and Opportunities

Opportunities – Russian Pharmaceutical Market

• To achieve the Pharma 2020 targets, the Russian government is emphasizing on plans to boost the domestic manufacturing

*

• The Russian pharmaceutical authorities are trying to bring amendments in the regulatory framework by strictly imposing the

requirement of GMP certification for all pharmaceutical manufacturers across the country. This would solve the quality and

counterfeit drugs issues faced by the manufacturers

• The economic growth and stability has increased the attractiveness of the Russian pharmaceutical market and has

presented the country as a favored destination for clinical trial outsourcing. Significant population size and ever increasing

per capita income coupled with double digit growth in the pharmaceutical industry makes Russia one of the favourite places

for investment in the pharmaceutical industry

• The DLO program favors the consumption of innovator drugs, which has strengthened the foothold of the foreign

manufacturers and is negatively impacting the market share of the domestic pharmaceutical manufacturers

• Consumers are willing to pay higher prices for the quality branded generics, increasing the demand for generics in the

country. Hence, the country can be seen as a potential opportunity for generic manufacturers

• Reimbursement levels are expected to increase since there is an upward trend in the per capita spending on drugs and

government is keen to improve healthcare insurance coverage in the country. Hence, an improvisation in the healthcare and

pharmaceutical expenditure is expected

• It can be assumed that the initiative by the Russian Ministry of Health regarding the optimization of prices for essential and

life-saving medicines may create an opportunity for the local manufacturers (Ref- Business Insights 2014). The price

regulation might increase the sales and market share of the domestic manufacturers when the state and the public would

switch to cheaper drug options27

28

28%

22%17%

11%

10%

7%5%

Flaws in the sector’s legal regulations

Corruption

Lack of state funding for healthcare programs and support for Russian manufacturers

Current economic situation and insufficient solvency of inidviduals

Current geopolitical situation and related econimic risks and expectations

Increase in competiton on the market

High percentage of fake products

2013

2014

36%

25%

24%

8%5%2%

Challenges in Russian Pharmaceutical Market (1/2)2013 Vs. 2014

The flawed legal regulatory system (includes pricing, antimonopoly, administrative and so on) posed the highest challenge to the pharmaceutical manufacturers both in 2013 and 2014 *

Despite the availability of Russian patent protection, enforceability of patent laws is still weak and data exclusivity remains an unresolved issue. Consequently, in numerous cases, generics versions of branded drugs are available in Russia, even when the brand appears to be patent protected

The current political situation in the country emerged as a new challenge to the pharmaceutical manufacturers

The worsening business environment and the depreciating currency were also witnessed challenges for the Russian Pharmaceutical Market*

Appearance of fake drugs in the market increased to 5%, which questions the regulatory and the drug control quality framework of the Russian Pharmaceutical Agency. Counterfeit or spurious drugs occupy nearly 12% - 15% of the Russian Pharmaceutical market*

Most manufactures in Russia manufacture cheap/ low cost medicines under the same trade name, which further intensifies the competition among the domestic pharmaceutical manufacturers.* For instance, Enalapril is manufactured by 13 domestic companies

29

Challenges in Russian Pharmaceutical Market (2/2)

Late payments and overspending are some of the challenges faced by the state-run healthcare programs

The Russian pharmaceutical industry fears on taking big projects since it is stuck between the rules set by Westerns companies for technologies and intellectual property (IP) and the unprecedented pricing pressures from the Southeast Asian companies

Also the gap in financial funding during the initial stages of the drug development process also hinders the research and development in-house (Ref- 2014 Business Insights)

The competition among the foreign and domestic players is also evident at the drugstores and pharmacies, where leading pharmaceutical players with popular brands impact the sales of the domestically produced OTC products. The super marts overshadow the drug stores and pharmacies and influence the purchasers by offering wide range of choices

The tax framework is another major challenge faced by the domestic companies. The local players pay tax ranging from 12% to 14% on their sales values (excluding VAT and income tax on wages), which is on a higher end as compared with the foreign players, who pay nominal custom fees