Russia Report: Build and Create: The Reinvention of a Screwdriver Assembly Industry

Gennady Shirshov, executive director of the Society of Professional Pharmaceutical Organizations (SPFO), was recently a guest on a national television program. "You might know," he starts, "that many such programs are strictly controlled by the government."

Artwork by Vladimir Chaika provided by Boehringer Ingelheim.

Shirshov continues: "All of a sudden, in the middle of the session—and it was live!—they started asking these ugly questions about integrity; about why a government official would promote a specific drug, and things of that nature. I could not believe it. And the fact that it was being spoken about, live, on a government-controlled program, is a great sign of where we are heading."

Russia is a country of insistent vicissitudes—in fits and starts, through monetary crises, oil surpluses, shifts in geopolitical trade policies, corruption scandals, seasons of animated economic development, and over and again. When asked how much has changed since 2007—when Focus Reports produced its first overview of the Russian pharmaceutical market—managers, coy, simper widely. Where, really, to begin?

For investors, the central indicator should perhaps be attitudinal. The general manager of Pierre Fabre in Russia, Pavel Chistyakov, offers simple words: "Do not be afraid of the Russian market." It is an invitation, a reassurance, a solicitation, and—even this—a warning. No aspirational multinational, nor hitherto self-effacing domestic player, can afford to be bearish about Russia. Not anymore.

And is there anyone now afraid of the Russian market? International industries are veritably jostling for position here. Russians themselves are upending their image problem; the country is "on the verge of breaking away from its past and entering the global economy with full sail," maintains the president of the American Chamber of Commerce in Russia, Andrew Somers.

Andrew Somers, AmCham President & CEO

There are caveats; Somers goes on: "Russia is the largest market not yet in the WTO, which can intensify certain trends towards 'over-nationalism' and isolation. And moving forward, the country needs to diversify its economy and one of the priorities needs to be the pharmaceutical and healthcare sector."

Pharmaceuticals and healthcare, indeed, are starting to enjoy the very highest of priority. Both President Medvedev and Prime Minister Putin are regularly seen, across all forums and media, speaking with impassioned gravel about improving the state of the healthcare system, and boosting the productivity of the domestic pharmaceutical industry.

Gennady Shirshov, SPFO Executive Director

As Frank Schauff, CEO of the Association of European Businesses (AEB), notes, there is no other choice. "This industry is a political priority here, and rightly so. When you consider the demographic situation in Russia, the statistics with regard to healthcare, and the pharmaceutical environment, the circumstances are quite disconcerting. In a country where life expectancy is very low in comparison to European neighbors, and where we are still battling communicable disease on a wide scale, things have to be done."

According to the Russian Federal State Statistics Service (Rosstat), the population of 141.9 million has been in decline since 1994 (apart from a rather negligible increase last year), and early mortality rates, especially for males, are troubling at the least: average male life expectancy is 62.8 years. Not to speak of Russia's famous lifestyle problems, such demographic blight is in large part attributable to treatable disease. Milos Petrovic, managing director of Roche in Russia, estimates that an astounding 80% to 90% of Russian patients, especially those with severe therapeutic needs, do not receive adequate treatment.

GSK Russia's area director Michael Crowe provides an illustration. "We estimate today," he says, "that out of 1.5 million registered asthma sufferers, only approximately 300,000 receive a modern combination product." In chronic obstructive pulmonary disease (COPD), there are "anything from 2.5 to 10 million sufferers, but less than 100,000 patients receiving an optimal treatment." Patient inaccessibility to effective medicines, most acute outside of the nation's major cosmopolitan centers, is fast eating away at the Russian citizenry.

One of the greatest causes is lack of public funding: as a proportion of GDP, the World Bank estimates that state expenditure on healthcare approaches 4%, relative to 7% to 10% in many Western economies. Most people still pay for medicine out of pocket and, by calculation of pharmaceutical research group IMS Health, drugs sold through retail constitute 70.1% of sales. Furthermore, 'prevention,' a notion well worn in the West, is only now coming to popularity in Russia.

Nycomed President Jostein Davidsen presents Russia's Prime Minister Vladimir Putin Nycomed's future plant in Russia.

Therein lies the woe; therein lies the good. Nycomed Russia's president Jostein Davidsen points out, "There is a long way to go. But by looking at all of this, you can see that as a healthcare company, these are all upsides. These are all growth opportunities." It's rather a matter of making lemonade. Every year, companies can well expect to reach more patients, bring new products to the market, and broaden participation as state reimbursement becomes better funded. Celgene's country manager Victor Ferkovich, to wit: "Russia is one of the best places in the world for the pharmaceutical industry to help patients."

Failing healthcare is not only a social problem, but an economic problem, as well. So too is an undiversified economy. Finance Minister Alexei Kudrin declared in a 2010 Moscow news conference that oil and gas accounts for 25% of the Federation's GDP, and that the number must fall to 14% within 10 years. In the pharmaceutical sector, this means giving up a decades-old reliance on imports, which in 2010 approached 75% of drugs sold, according to domestic market research group Pharmexpert. As Viktor Geisler, country division head of Bayer Healthcare in Russia, maintains, it is perfectly reasonable that Russia should want to conceive a true domestic pharmaceutical industry: "You may call it strategic interest, or, more simply, you may say that a developed country with over 140 million inhabitants deserves its own pharma industry." In response, the authorities are taking sweeping, ambitious action.

Again, again, therein lies the good! Russia's GDP growth—4% in 2010 (World Bank)—is nothing to sound the trumpets about—at least not today. But its pharmaceutical market, currently valued at 14.8Bn USD, easily outpaces world growth rates. (Globally, IMS Health expects a 5-8% compound annual growth rate through 2014.) This year is looking up: to quantify, Pharmexpert forecasts 15-21% growth in 2011. While some are less optimistic, barring disaster, a minimum growth rate of 11% is all but guaranteed—the charming 'BRIC' double digits.

Ivan Blanarik, managing director of Boehringer Ingelheim in Russia, speaks to what the entire industry believes. "I think the one logical headline, for emerging markets, and Russia, is, simply, 'Growth,'" he says.

Reckitt Benckiser Russia general manager Bruno de Labarre is a bit more blithe: "In a Western European country, you might oscillate between -2% and +2% growth, and perhaps you are a hero if you grow the business by 2.5 percent. What is the fun in that?"

THE MAIN VIOLIN

Marina Veldanova, general manager of Ipsen Russia, describes an unfamiliar scenario. "This is the first time, in the last 20-year history of the Russian pharmaceutical market, that a new player has appeared: government. This is a very big new player! Of course, the government played some role before—regulatory functions, customs, certification, etc. But now they took the main violin in this orchestra," she says.

Olessia Akimtseva, CMS Senior Associate

It is widely acknowledged that in the vacuity created by the fall of the Soviet Union, healthcare was ancillary. However, since 2005's oil-bought budgetary surpluses brought about the introduction of the National Priority Healthcare Project (Russia has long prospered when the barrel has), the authorities have executed, with dizzying purpose, reform after reform. First, the development of the drug reimbursement system (DLO) for Russia's neediest—and, after spectacular and public failure, the program's reimagining and restructuring. Subsequently, the Vital & Essential Medicines list delineated the strategic medicines of the territory, controlling their market prices.

Then, of course, we come upon today's twin whales-in-the-room: The Strategy of the Development of the Pharmaceutical Industry in the Russian Federation Until 2020, a cumbersome name précised to Pharma 2020; and the Law on Circulation of Medicines. The former is a striking design to turn a generic market with questionable domestic production standards and little globally marketable innovation, into a player. The latter takes a classically semi-regulated market and brings it under strict supervision.

These are colossal steps, but not all is well in a progressive Russia. For one, change is neither predictable nor incremental. Olessia Akimtseva, senior associate at the Russian affiliate of CMS Legal, illustrates the legislative quandary: "After the Law on Circulation of Medicines passed, changes were adopted several times, almost monthly. This is a specific situation to Russia; you will not see this in every country." Akimtseva continues, "There are few certainties upon which we can totally rely. We have new rules, new methodologies, approved every year. That is life."

Unequivocally, volatility hinders the operational mechanisms of a traditionally long-cycle business. AstraZeneca Russia president Nenand Pavletic explains the industry perspective: "If we as pharmaceutical players want to ensure the quality of our products, the quality of our regulatory filings, the quality of our production standards in line with GMP, and the quality of our clinical activities, we need to have a predictable environment. In Russia, the environment is not fully predictable, and this makes it quite difficult for us to ensure the highest quality for our patients. Non-planned and unpredictable changes create significant barriers for our activities."

Many of these changes, moreover, convolute the process of selling products on the market, wrapping additional red tape.

Are the authorities taking note? To what degree has government, relatively inexperienced in the pharmaceutical sphere, and suffused in an overpowering heritage of long-defunct Soviet law and consuming bureaucracy, consulted the industry?

Vladimir Shipkov, former head of the pharmaceutical inspectorate of the Russian Ministry of Health and executive director of the Association of International Pharmaceutical Manufacturers (AIPM), whose 52 members produce 55% of the medicines sold on this market in value terms, is displeased. "Unfortunately," he says, "the key specificity of the Russian pharmaceutical market—indeed, not only the pharmaceutical market, but the Russian market at large—is a lack of transparency, and a lack of communication with the business community—especially with the foreign faction of that community."

Shipkov emphasizes the necessity of an international contribution in building this market. He may be right: the authorities are nigh on starting from scratch, and this moment is exhilarating, and vulnerable. As Merck KGaA's Russia managing director Rita Bobro puts it, "When many of our politicians discuss the restoration of our pharma industry, I am quite surprised. I do not believe that we have something to restore. Instead, we need to build."

The multinational industry appreciates the nature of its position. Boehringer Ingelheim's Blanarik stresses, "Our role is not to question this or that; our role is to understand, to make a contribution." Indeed, multinationals are self-admittedly guests on the market—yet it was arguably these very companies that brought advanced medicine to the territory as the authorities turned away in the 1990s. Blanarik believes that "together with Russian government, different associations working on the market, and our colleagues," Russia can "shape healthcare into something that will be the most suitable solution for the Federation." There is a chance, in Russia, to combine the best practices from around the world, and create something paradigmatic.

Besides, the matter at hand is not just about sensible industry regulation, but about working to continue to modernize this country's therapeutic frameworks, which today loiter well behind those of the West. This is a shared goal, public and private. "We can help overcome one of the key barriers in healthcare, which is the scarcity of physicians who know how to utilize new technologies; who know how to provide advanced and novel treatment," says Arman Voskertchyan, managing director of Johnson & Johnson in Russia. As the authorities intensify their scrutiny of the industry and their involvement in the system, working in concert with business is paramount.

But perhaps not all is so cheerless. Although none would wax idealistic about this country, many believe that the trend, nonetheless, is towards increased transparency and exchange. To be sure, with profits abounding, why not take a positive outlook? Shipkov notes, "Although at the beginning, the Ministry of Health was one of the most 'closed' ministries in the Russian government, it is gradually opening up." Health Minister Golikova is taking meetings—selectively.

Celgene is optimistic. "Looking at the drive toward increased regulation at the Ministry of Health—the registration system in Russia became much more transparent and predictable as compared to previous years. This effort is very much appreciated, at least by Celgene. Certainly, there will always be difficulties involved in a transition period, but once this period is over, then things will become more 'user-friendly,'" says Victor Ferkovich. For many managers, a relativist perspective is heartening.

Vladimir Shipkov, AIPM Executive Director

As Ferkovich explains, "Our Ministry of Health and our government has been making much effort, since 2005, to supply patients in need with the products that will help them."

Ultimately, even if particular government decisions prove discomposing, managers would do well to make note of the broader tendencies. Take Pharma 2020's drive for the localization of the industry. CMS's Akimtsova says, "Localization is a trend that is not going away. In spite of some pieces of legislation that appear rather controversial, overall legislative development is still going in a direction that is quite clear. " She emphasizes that "businesses, as well as lawyers, need to be very active, and very reactive."

"If we understand the trend," Akimtsova concludes, "we are well positioned."

EXPATRIATE'S GUIDE TO RUSSIAN INVESTMENT

Four years ago, when Vladimir Shipkov came to head the AIPM, the former Minister of Health of the Russian Federation asked him, 'Why are your member companies not building manufacturing facilities in Russia?' Shipkov recalls: "My answer was that such a question should not be addressed to the industry—it should be addressed to the government. The Minister and his superiors should themselves address the question."

In Pharma 2020, their answer is categorical. With the strategy, authorities are developing a system of preferences, aid projects, investment arms, and importation barriers. Intentions are unambiguous. The initiative falls under the Ministry of Industry and Trade, and Viktor Khristenko, minister, said the following in a speech at the ChemRar Innovation Center in Moscow: "The challenge for the federal program is the transition of the Russian pharmaceutical and medical industry to an innovative development model. In other words, we are talking about going from screwdriver assembly to a full-cycle industry that spans from development to production and meets compulsory integration into the global markets."

As Marina Veldanova of Ipsen—who is head of the AIPM taskforce for government and public communication—notes, by 2020, 50% of total-market medicines (by value) should be locally produced, under European GMP standards; within the reimbursement segment, 90%; and 60% of medicines should be innovative. Khristenko is not bashful: "As you can see, we have set quite ambitious goals."

STEP 1: MANUFACTURING

Admitedly, the Pharma 2020 strategy is just that—a strategy. Many of the details have not yet come to power—or to the foreground. The meaning of 'local producer status,' for example, is a bit of a melancholic lark among the industry. Veldanova explains, "There is no official explanation of what 'local status' will legally imply. Does it mean just packaging? Or formulations? Which stage of production must be completed in Russia so that a product may be called 'locally produced'?"

Nycomed's Davidsen worries that the current discussion is perhaps leaning toward full-cycle production—including APIs. If this is true, Davidsen believes that it "will be very difficult to fulfill, to attract foreign companies to produce their APIs in Russia. It is quite unlikely that they will do that here."

Jérôme Gavet, Servier Head of the Representative Office

No one yet knows what is to come, and whether late-stage production will be enough to garner state-endorsed local status is to be seen. With elections coming up, the situation is delicate—as everything else—and may fall to either side. Yet, Dejan Jovanovic, general manager of Astellas in Russia, is perhaps quite right: "With a market that could likely become one of the top 10 in the world, take it or leave it. If you do not want to participate in the race, you participate somewhere else."

Moreover, as CMS' Akimtseva described, the broader trends are unmistakable—none seem to doubt the authorities' sincerity when they say they aim to saturate at least 50% of the market with locally manufactured drugs. An ambitious multinational operating in Russia perhaps must, sooner or later, think of local production, whether alone or by contract. In response, several companies have taken the greenfield leap, and are preparing the ground to bring manufacturing here in stages. AIPM member organizations have pledged in excess of $1 billion to plant construction.

However, Jérôme Gavet, general director of Servier Russia—a company that has had a plant in the country since 2007, before the announcement of state strategy—is forceful: Unless you are sure of your market, do not invest. "It is true that the position of the authorities is to encourage investment without providing transparent legislation on the definition of local producers—but for now, the barriers to importation are still acceptable for those who wish to keep production abroad," he says. "The decision must be a business-driven decision. If you have demand that warrants a large volume of production and your aim is to produce for a significant segment of the population, your investment is well founded. To expect fiscal exemption and inclusion in reimbursement lists must not be the reason to invest in local manufacturing. This must be considered as an additional benefit but must not drive the investment."

Gavet's final remark is ominous: "You can expect only one thing with certainty—barriers to importation will increase with time."

Some are yet taking a 'wait and see' approach. Others are partnering locally instead of investing in a manufacturing site—and transferring production technology and expertise. For instance, both Janssen and Roche have established such a partnership with domestic generics giant Pharmstandard. Where needed, this kind of transfer addresses the capabilities of the local industry: national standards by no measure equal international standards.

Gennady Shirshov of the SPFO, representing 36 of the largest companies on the market, is brutally honest: "Let me give you two figures that are self-explanatory. Everyone, including government officials, keeps on stating that about 75% of the market share is dominated by foreign manufacturers. That is true—but these are in monetary terms. In unit terms, it is the domestic companies that dominate the marketplace—they account for about 60% of the market share. But when you analyze what they sell, the picture is totally different. In quite a lot of cases it is not a medicine in the modern sense of this word. So the challenge is to turn the local industry into a quality- and value-based industry."

There are exceptions: local innovators like Materia Medica and Petrovax are up to snuff. Pharmstandard has modernized, line by line. However, within three years, they must be the rule rather than the exception; according to the Law on Circulation of Medicines, Russian producers have until 2014 to harmonize manufacturing standards with European GMP, or risk losing their production licenses—after all, the authorities mean to make the local industry export-ready. Some will not survive the transition. The clock is ticking.

STEP 2: RESEARCH AND INNOVATION

Shirshov shares another anecdote. "There will be many changes in the marketplace," he says. "It is not only about building facilities. I remember a business breakfast with Viktor Khristenko, the minister of industry, in June of last year, when he said, 'When we say localize, we do not mean build. We mean create.' It is more about establishing R&D infrastructure, and supporting it, rather than just constructing buildings."

Milos Petrovic, Roche General Manager

Companies such as AstraZeneca and Nycomed have formally factored R&D into their plans, in addition to localizing production. As Davidsen emphasizes, "It is not enough to simply set up a production facility, plant your flag, and do sales and marketing."

Perhaps especially for those whom building a manufacturing site, is simply, not pragmatic, R&D is the focal route to well position themselves amongst their peers as Pharma 2020 unfurls. Roche, for example, is not in the business of high volumes, and utilizes just a few global production facilities to supply their operations worldwide. Russia does not warrant the critical mass for another—here, Roche products lead the high-cost reimbursement sector, and their portfolio is geared toward a small and gravely ill portion of the population. "Besides," Milos Petrovic, Russia head, says, "while I think manufacturing is quite important for building a viable, thriving pharmaceutical industry, for an innovative company establishing research capability should be the top priority." Petrovic stresses, "For me, research is the key to progress!"

Minister Khristenko praised Roche in a December 2010 address for having transferred several preclinical HIV assets to a local Russian startup, Viriom. Viriom will develop and commercialize the assets in Russia and the neighboring Commonwealth of Independent States (CIS); Roche will retain the right to market the finished products elsewhere in the world. This is precisely the sort of collaboration the Russian government hopes to see—the international industry offering its expertise to domestic enterprises, with the aim of developing globally marketable, innovative medicines in Russia. Petrovic explains the collaboration thus: "The Viriom project was something that was done quite rapidly; we gave them the molecules, the expertise, the scientific board for help. It was a real commitment, and it was beneficial to all concerned parties."

Naira Adamian, Janssen Managing Director

What are the benefits? Petrovic is emphatic. The project "means jobs for new scientists and it means help for universities; in short, it means development of local capabilities. Who knows, 10 or 20 years from now, Viriom could become a big regional or even global player. Not all countries are interested in developing research capabilities; Russia, on the other hand, historically has a rich scientific pedigree. We believe in Russian science, and want to contribute to returning Russian scientific prowess back to levels comparable to the US, Europe, and Japan."

Serdix, production site of "Servier" in Russia

Viriom is a company of the ChemRar Innovation Center, which is in the business of creating innovative spinoffs, and in the habit of collaborating with Big Pharma. ChemRar recently received a collaborative nod from Johnson & Johnson (JnJ) and its biopharmaceuticals division Janssen. Janssen Russia's managing director Naira Adamian reiterates Petrovic's sentiments regarding Russia's scientific capacity: "Russia is very strong in fundamental science, and strong in developing chemical and biological compounds at their initial stages."

"However," Adamian continues, "Moving forward in the development process, there is an unmet need in this market to commercialize research into marketable products." In Russia, there has long been a commercialization gap: after the fall of the USSR, academia and industry developed on divergent orbits, with precious little interaction between idea-men and financiers. Of course, the great '90s brain drain was particularly injurious as well.

JnJ Russia's managing director Arman Voskertchyan believes that Russia "must develop routes and infrastructure to commercialize ideas. This is one area where companies can really help." Indeed, JnJ, together with Janssen and ChemRar, as well as Russia's 'Silicon Valley'—the newly built Skolkovo Innovation Center—are considering a number of possibilities, along the lines of Western collaborative models. Among them, Janssen's Adamian mentions seed-fund creation for innovative startups, early-stage asset exchange, and, certainly, competency transfer. Just as Russian industry needs GMP standards for finished forms to be export-ready, it needs GLP standards further upstream in the development stage. Adamian resolutely comments, "If this country is to export medicines, then from the very beginning of development—and this is something we stressed during our negotiations—we need to set up capabilities that exceed current Russian standards, and meet FDA and EMA requirements."

Janssen's director believes that Russia needs to begin to appreciate the value of palatable innovative products—legally, politically, and culturally. Perhaps as the domestic industry begins to itself innovate in earnest, this will come. "Innovation is vital. The pharmaceutical industry is highly knowledge-intensive and innovative by nature. We do more than stamp tablets and sell them in pharmacies," Adamian exclaims.

Her colleague Voskertchyan adds, "Our position is to find out what competencies Russia has that can enable its incorporation into the value creation chain." For Voskertchyan, who oversees a diverse enterprise that prominently includes medical devices, this manner of incorporation is substantively important. Of the significance of localization, he says the following: "I am speaking of localization beyond a manufacturing standpoint. I believe that, if we want to be successful, we need to localize. We need to localize our competencies and try to become a player across each segment of the market. The logistics of developing this kind of capability is a question each company should think about. Each company should figure out how to become a local company."

ONE POOD OF SALT

Focus Reports first met Manfred Paul in 2006, when he was head of Bayer Healthcare in Russia. At the time, Paul mentioned an expositive Russian proverb, which states that two people can only really know one another after they have eaten one 'pood' of salt together—one pood being an antiquated measure approximately equal to 16.8 kilograms. That is, close relationships in this country are realized through sore and protracted cultivation. Since our first conversation, Paul 'retired' from the industry—but, like many, could do little to stay away from Russia. Paul is now an independent consultant for Naari, a women's health startup that is looking to penetrate this market. In his official capacity as Naari's Director for Russia and the CIS, he remembers the proverb well. Expression alight, he says, "This indeed remains a very difficult challenge." Very much so, for a new player.

It is those with history here that are most conspicuously successful. Those that have weathered market fluctuations, even when they were world ending (think, 1998 financial crisis). We see that in Russia, the Top 25 has little resemblance to the global Top 25, and this with good reason.

Baker & McKenzie Russia's founding partner, Paul Melling, took up residence in Moscow in 1989 and specializes in pharmaceutical litigation. He observes, "Companies that have always been very positive about Russia, that have always invested in Russia, and that have expanded in Russia even in trying times, have done very well. I think that is one of the reasons why the listing of top companies in this market, relative to the listing of top companies in Europe or the US, is quite different.

Janssen signs a cooperation agreement with Skolkovo and ChemRar.

"It is a bit of a truism, but it is still true all the same, that Russians tend to remember those who did not falter during adverse economic periods. They also tend to run from those that did. Hence, a company is in a stronger position if it can prove a long-term commitment to this market."

Case in point: Davidsen, conceivably the longest-standing foreign manager in the Russian pharmaceutical industry, set up the Nycomed affiliate here in 1993 and has served as president since. He has done something absolutely unusual: turn Russia into the top market for a Swiss healthcare company. Melling describes Nycomed as exemplary: "Globally, Nycomed is quite a way down the list of the top 50 pharmaceutical companies [according to Pharmaceutical Executive, in 2011, Nycomed ranks 48th]; but here in Russia, the company is very highly positioned [according to IMS in 2010, 8th]. There are numerous reasons for Nycomed's success, but one of the pivotal components is its commitment to the Russian market through bad times and good."

Much of Nycomed's success has been based on a strategy of in-licensing. Davidsen posits, "In the early 2000s—in the early post-crisis after the collapse of the economy in 1998-99—very many companies had no interest in entering this market; they found it corrupt, non-compliant, or just generally unattractive. So we worked extremely hard from the early 2000s until 2005 to get in-licensing partners." Proudly, he declares, "That has been a successful model, and we have been building on success after success." Many companies are now clamoring to establish affiliates in Russia, but they are rather late to the soiree. As for Nycomed, Davidsen expects his business to surpass €1 billion in revenues by 2014—if not sooner.

Nycomed is not the only company that can credit its accomplishments to pertinacity. Servier, for example, is 25th globally (Pharm Exec, 2011); in Russia, it is the fourth-largest pharmaceutical enterprise by sales (IMS, 2010). Jérôme Gavet, Russia general director, speaks of an early, unsaturated market. "Unlike many other markets," he says, "where we entered and had to face existing competition, in Russia, we penetrated the market at the same time as many of our competitors—or even earlier." This is the foundation; what of the crisis? Gavet goes on: "One time period that was particularly significant was the crisis of 1998. Many foreign companies decided to leave, but we decided to stay. This was a firm decision from our top management and Dr. Servier himself, and he was recognized at the time as manager of the year in Russia. We stayed, and we kept our employees. Today, we have people with a truly extensive history in the company, and they are the pillars of our activities. I recently looked into the figures, and we have nearly 50 people with more than 15 years in the company."

Top 20 Pharmaceutical Organizations in Russia by Revenue

Bayer Healthcare, just one position behind Servier in the overall domestic rankings—and 14th globally—filled the gaps as more reticent investors fled the market. Geisler comments, "Two years after the Soviet Union collapsed, Bayer, as well as Schering, established their respective representative offices here and invested significantly—not in production, but in people, in education, in promotion, and so on. This worked very well, until the financial crisis of 1998. Many companies left in '98. Yet, during the crisis Bayer decided to stay in Russia. That is why, nowadays, Bayer Healthcare has a strong position. Wherever our competitors left the market, we jumped into the gap. We stayed, invested, and we benefitted from our commitment immediately once the market recovered."

Many of the investors who flew the coop at signs of dissonance were American companies, who have traditionally been guarded in emerging regions—in retrospect, perhaps overmuch. Johnson & Johnson, on the other hand, is an enterprise that has long been confident in the Russian outlook. It is the only American organization in the top 10 in pharmaceuticals; across businesses, it may well be the largest healthcare company in Russia and CIS. Arman Voskertchyan, managing director for the region, beams. According to Voskertchyan, only an interminable history, and resultant understanding of the market, could have facilitated the purchase the organization has earned here. "Johnson & Johnson came to the Soviet Union in 1991. Hence, 2011 is a remarkable milestone: We are celebrating our 20th anniversary! This is a momentous achievement for us, because over 20 years, many things have changed—not least of all the fact that the Soviet Union, as a state, has disappeared from the map. We believe that these 20 years helped us not only to establish our business operations here, but also to build an infrastructure that could help us truly understand this environment and ultimately help our patients gain access to high quality healthcare."

In 2008-2009, business again found itself in the wilderness, as the global financial crisis pummeled the Russian state harder than most. None left; this time, some companies in fact countered the market with a speculative surge. A year removed, most found themselves fittingly recompensed.

SMALL HAPINESSES

There can be no question, notwithstanding all prospects and the words of ideologues, that Russia is a difficult market. Bureaucracy and excessive legislative complexity present barriers to entry, operation, and expansion. Crises and fluctuations are commonplace. Of course, there is also the intangible inexplicability of the Russian mindset and business culture—that elusive and endlessly stereotyped Russian umbra—forcefully unique, and only superficially resembling anything European.

Pierre Fabre's Pavel Chistyakov relates the difficulties of establishing a Russian subsidiary—something he was charged to do in 2008: "We faced two significant challenges. First of all, we had to cope with the complexity of Russian bureaucracy. Administrative barriers are quite heavy here. Secondly, and related to the first issue, is the fact that our French headquarters was not fully aware of the specificities of this market when we entered. I will give you a concrete example: To set up a legal entity in the Russian Federation, we were asked to present a set of 12 or 14 official, notarized documents along with the application form. You must present all of these documents together. If one is missing, you may not submit the application. While in some countries you can submit what you already have, and some time later compensate for missing documents, it does not work like this in Russia. This was difficult for our headquarters to understand."

Pavel Chistyakov, Pierre Fabre General Manager

Pierre Fabre headquarters had planned to commence business within two months; in reality, it took six. Can there be no harmony among multinational and market?

Viktor Geisler, Bayer Country Division Head

Astellas' Dejan Jovanovic offers practical advice; he believes that one must live as the Russians themselves do. To his fellow manager, and fellow émigré, he describes three stages of acceptance:

"Let us imagine that a typical general manager, who does not speak Russian, is parachuted into Moscow. He observes for the first three to six months; he soaks in what is going on and reaches the conclusion that Russians do not know what they are doing and that he will teach them what to do. This is stage one. Most ex-pats who have a two- to four-year contract do not pass the first stage." And if they do? "The second stage is deep depression: What am I doing here? Nothing is possible, nothing works, and I must leave as soon as possible."

Dejan Jovanovic, Astellas General Manager

All is ostensibly lost, until the manager discovers the third stage. Jovanovic says, "The third stage is a stage of small happinesses: When you arrive to Sheremetyevo airport, and you are happy that a jumbo jet from Beijing with 500 passengers did not arrive before you to clog up the customs queue; or that the traffic police do not stop you on the way home; or that no one turned off the hot water in your apartment. When you get to the stage of small happinesses—the stage that Russians themselves are in—you can manage the business very nicely."

However, what to do when one finds news of adventitious legislation on their desk on Monday morning? Or the market is in a flux, menacing the profitability of the quarter? The silver lining is small comfort; Russian leaders must keep a level head.

Bruno de Labarre, Reckitt Benckiser Russia, CIS General Manager

Bayer's Geisler counsels, "You must be relaxed, and refrain from nervousness. You must accept that sometimes, there will be problems and setbacks, but you have to believe in the long-term trends. It is simply a fact that Russia does not follow a linear upwards path. There are ups and downs. You must understand the reasons for the downs and be convinced that this is just a temporary effect."

The gut feeling is sovereign. "You must have a certain feeling," Geisler maintains, "and understanding for the Russian environment. When I say environment, I do not mean simply the pharma market—because the pharma market is just one part of the entire Russian environment. It is an integrated part, but if you are not willing to understand Russian particularities holistically then you will never be successful here. I cannot describe it better. You must simply have a sort of visceral feeling for what is needed. Perhaps that is why not everyone is suited to manage in Russia. Different markets require different mentalities."

Reskitt Benckiser manager Bruno de Labarre—one of the well suited—describes his experience, emphasizing the importance of observing first, and doing second. De Labarre had come to the Russian market with the intention of staying for a few years. To date, he has managed his affiliate for nine—not an uncommon position for an expatriate to find himself in, awakening one morning. For one, a sporadic market needs managerial constancy; for another, Russia is a dynamic environment that is notoriously hard to part with. "Come for two months, and do not speak—listen," he says. "Look to the people, look to the market, listen to your customers, and listen to your suppliers. Spend two months just listening! After that, try to put on a piece of paper what you have understood about the market, and then decide what you must do. When we acquired BHI in 2006, I spent two months visiting pharmacies, visiting distributors, suppliers, etc. I always asked them the same question: 'Tell me what you think of my company, what I need to improve, and what I do well that I should maintain.'

"The best advice I can give is that you must understand that you do not know," exclaims de LaBarre.

Pierre Fabre's Chistyakov, a veteran pharmaceutical manager who prior to his current position managed Ipsen in Russia, offers his own lessons: "Be active. And importantly, be flexible. In Russia, you must take decisions, and you must take risks, as well. Russia is a developing market—obviously, there are risks. But to gain, you must sometimes accept risk. Multinationals often overevaluate. Sometimes you must act, even if your decision is wrong, because then you have time to do something else."

NO MORE BEARS IN MOSCOW

Igor Kouznetsov, general director of domestic distributor Euroservice, taunts at an old stereotype. Kouznetsov tells the international community, "Bears do not walk the streets of Moscow anymore!"

Of course, Western media is fond of this country—it has a certain talent for good scandal. However, those living here find that this side of Russia is unequivocally exaggerated. "Don't believe everything you read in Western newspapers," dismisses Baker & McKenzie's Paul Melling. Melling maintains that it is plausible, reasonable, and practical for organizations to conduct ethical business in Russia. As one of the country's most prominent litigators, Melling maintains, "Compliance, ethics, etc., are no longer abstract issues—they are now truly critical."

Alexander Demidov, GFK Managing Director

Pharmstandard, Russia's largest domestic pharmaceutical player, illustrates the new Russian compliance. The company went public in 2007 with an IPO on the London Stock Exchange, and has proven a valuable asset for investors. CEO Igor Krylov speaks of reputation: "We constantly consider our reputation—and not only do we consider it, but we act accordingly. We try to operate in accordance with people's expectations of this company." Krylov continues, "We are open, and transparent. It is not easy to be public, especially on the Russian market—but we try to do our best for our shareholders. We constantly think of the investors. This is why our reputation is very important." Any ethical slip would prove thunderous for the company. Is Russia so familiar, after all?

The economy's maturation is easily visible in the diversification and increasing saturation of markets. It is visible in the commercialization of services and mounting specialization. For example, as more companies sell more products across more sales channels, they have an increasing need for market research service providers to explain consumer attitudes.

Arkadiy Nekrasov, Petrovax General Manager

Alexander Demidov, managing director of GfK RUS, an affiliate of the global research giant, studies consumer choice and consumer experience. Prior to the fall of the USSR, Demidov was a pure scientific researcher. As he explains, "Historically, market research was never a business in this country. In the Soviet Union, for example, it was a purely scientific field. In those times, market research took the form of a sociological survey." It was only with the dawn of the capitalist era, and the internationalization of the territory, that a company like GfK could do business in Russia.

Demidov was himself surprised at the transition. Nonetheless, as the years have gone by, his healthcare research division has reached the fourth position globally for GfK, and continues to expand its offering. The commercial market matures further, services become more dear; GfK will have to expand its offering to include consultation.

Not only is the political and commercial environment transformational, but the public is in many ways modernizing, as well. Look toward the indicators of a country in transition. One aspect of Russia's modernization is practical: the demonstrable rise of a middle class.

To illustrate, we can consider Reckitt Benckiser. The Russian affiliate's manager, Bruno de Labarre, is in the fast-moving consumer goods (FMCG) business, in addition to the over-the-counter (OTC) pharmaceuticals business. His operations are quite directly indebted to middle-class consumers—and business is blooming. De Labarre describes, "The middle class is indeed rising at an exponential rate, and this rise is very palpable. Look at our own company; we have 150 people in this office. Two years ago, we had 80 people. Five years ago, we had 50." In fact, when de Labarre joined the affiliate in 2002, the organization numbered 32 people in total. Today, across Russia and CIS, it boasts 2,700.

"So we can see from, shall we say, our 'normal life'," de Labarre goes on, "that the middle class is growing—because it is driving our need to expand operations. We are not simply speaking of economic figures one might read on a piece of paper—it is the reality of business today."

Galderma's newly appointed Russia director, Denis Patrashev, describes a transition from a country largely focused on basic disease to a country that begins to consider a more holistic health approach. Patrashev, whose business is dermatological, tells Focus Reports, "A growing interest in pure dermatology, aesthetic dermatology, skin care, etc., is a sign of the population's well being. Indeed, when a society is poor, it can only think about social diseases like oncology, COPD, etc.—it needs to think about its basic health. However, when you transition toward a healthful population, and you have money to care about something more than just basic disease, you start to think about not only health but also aesthetics. For me, Russia has reached this stage. The economic situation is quite favorable; people have enough money to consider 'supplementary' channels of care."

Galderma experienced an astounding 82% growth in 2010, and Patrashev is categorically optimistic about the business. As ever, the societal development propagates outwards from the great cities; and yet all of Russia modernizes, by steps.

The nation is, in exceptional cases, even innovating for the world market. Petrovax, a local enterprise, has managed an admirable landmark: penetrating the highly regulated European Union market with innovative medicine. Arkadiy Nekrasov, Petrovax General Manager, believes that his is quite likely the first Russian company to do so.

What does innovation mean to this business? Nekrasov maintains, "Our definition of innovation is analogous to the internationally understood definition of the term, used by the large research-based pharmaceutical enterprises." In detail: "Innovation is first of all the creation of novel molecules, which have no analogue in the world. It is the patenting of these molecules, substances, and compounds. It is the development of these molecules, and their formulation into finished medicinal products. These products, patented in Russia and abroad, are then commercialized, and it is up to our sales and marketing staff to derive an economic effect from such innovations." Indeed, we are not speaking of innovation in packaging.

Petrovax is exemplary. As Nekrasov describes, the company is an archetype for government ambitions. "With the government announcement of the Pharma 2020 strategy toward domestic innovation, we find ourselves fully aligned with national goals. However, we have worked for over 30 years in this direction—long before the 2020 initiative. We have also long preempted the government drive toward high technology, high research standards, high manufacturing standards, and international collaboration. This fact is well exemplified by our partnership with Abbott, (formerly Solvay Pharmaceuticals) with whom we have been collaborating for approximately 10 years."

The company recently signed a partnership agreement with Pfizer, and will undertake contract manufacture with the aim of import substitution—including technology transfer. "But we do not want to be just contract manufacturers for our partners," Nekrasov emphasizes. "We want to also engage in licensing deals: for example, wherein a foreign partner licenses a product to us, and we develop the product full-cycle going forward. And ultimately, as an innovative company, we are most interested in joint development projects, using our adjuvant platform technology for vaccines and protein conjugation technology to develop next generation biologics."

"A final portion," Nekrasov concludes, "of the authorities' strategy is to increase the export efforts of Russia's pharmaceutical companies. This is again a direction that we are working in. Our high standards, meeting international requirements, allow us to compete abroad. While Russia is our main focus, we are actively expanding our horizons."

While most other domestic players have a long path ahead to attain Petrovax's success, they are indomitable. Vadim Muzyaev, the president of Protek—arguably the largest pharmaceutical enterprise in Russia, comprising production, distribution, and retail sales—leaves investors with the following image of the Russian market: "Russia is an emerging economy. In GDP per capita, we cannot yet match Western markets. At the same time, any world economist would maintain that Russia has a great future, and is dynamically evolving. Within this frame, the pharmaceutical industry will too grow very quickly. The greatest impetus for this industry, as defined by government, will be Pharma 2020. Soon, the proliferation of domestic medicines on this market will be quite a bit higher than it is today.

"Furthermore, with the growth of the economy, we expect a rise in the purchasing power of Russian citizens. Simultaneously, the price of medicine will grow—not due to inflation, but because quality will improve. The Russian pharmaceutical market will, in our view, grow by more than 10% per year. This will allow companies in our sector to realize their potential. Within the next five years, I suspect that we will see several Russian pharma companies commit to IPOs. This will confirm the attractiveness of the Russian pharma market."

The SPFO's Gennady Shirshov offers, simply, and finally, this: "The question you may be asking yourself is, 'Will Russia succeed or not?' We will see. It is important to take the first step."