|                                                                                                                                                                                     |  | Financial Crisis Affects Pharmaceutical Market in Russia                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsCustomsCornerPublicationsSourcesof FinanceFinanceLinkLeadsand EventsExchangeRatesState ExportsOtherSources** |  | December 1998by Ludmila MaksimovaAs a result of the financial crisis in Russia, federal and local governments have drastically cut
funds allocated for the purchases of pharmaceuticals.  The regional medical insurance funds,
which were required to invest in government securities, lost all their money overnight due to
government default on treasury bills.  Funds for medical purchases in many regions have dried
up.  With the banking system in chaos and money difficult to transfer abroad, many distributors
of pharmaceuticals have stopped shipping goods to Russia.Pharmaceuticals
According to Russian Health Minister Vladimir Starodubov, pharmaceutical imports have
dropped by 80 percent, and prices have risen two to three times since August.  The majority of
local governments have reduced the number of subsidized drugs.  Local governments have also
fallen behind on payments to pharmacies.  The Russian Government has declared the restoration
of the pharmaceutical supply as a major goal.  Minister Starodubov said, "We have personnel and
medical equipment for at least half a year, but without medicines we will be unable to provide
treatment to patients."In 1997, the Russian pharmaceutical market was estimated at US$3.1 billion, US$1.9 billion of
which were imports.  Before the crisis, 12,000 different drugs produced by 370 domestic and 880
foreign enterprises were distributed in Russia.  In 1997, the government provided substantial
support to domestic drug manufacturers to help them increase production (by 20 percent) and
reverse several years of declining production.  Domestic producers supplied 40 percent of the
market while imported drugs met the remaining 60 percent.  Because of the recent drastic drop in
pharmaceutical imports, the ratio changed in September 1998 to 60 percent domestic drugs, 40
percent imported.The crisis led to an overall 30 percent reduction of domestic pharmaceutical output in September
1998.  In addition, the Russian Government has been steadily diminishing its role in the total
purchases of drugs.  In September 1998, 80 percent of all drugs consumed in Russia were paid
out of individual patients' pockets, while the  federal   and local budgets and the obligatory
insurance funds covered 20 percent of medicine purchases.   Increased demand was not enough
to boost local production because of the poor financial condition of the majority of domestic drug
manufacturers.The current crisis has significantly  affected the distribution of pharmaceuticals.  In 1993-1994,
the pharmaceutical wholesale business became one of the most lucrative businesses in Russia,
reaching a profitability of 30-40 percent of sales.  Consumer demand for pharmaceuticals has
been growing for years.  The number of wholesale firms rose from 100 in the late 1980s to 4,000
in 1997.  The rapid initial expansion of the wholesale pharmaceutical business was the reverse
side of the weakness of Russian pharmaceutical manufacturers    lack of experience in product
marketing.  Russian producers have been  pushed out of the market due to strong competition
from imports.  Leading positions in the wholesale business were occupied by 20 large firms that
controlled about half of the market. It is likely that the number of small and medium-sized
distributors will decrease.The total losses of distributors and pharmacies caused by the crisis are estimated at US$500
million. The outstanding debt of Russian distributors to Western drug manufacturers is estimated
at US$360 million.  Unlike Russian drug manufacturers, which work with distributors on a
prepayment basis or use 30-  to 45-day credit terms, Western companies, including U.S.
companies, give six months of credit.  Western companies are financing half of the industry
through credit provided to distributors.Steps Taken
The crisis has spurred activity by major players in the pharmaceutical market.  The leading
international pharmaceutical association, the Association of International Pharmaceutical
Manufacturers (AIPM), and three Russian pharmaceutical associations have sent a letter to the
State Duma requesting elimination of import duties on pharmaceuticals and simplification of
licensing procedures.  The American Chamber of Commerce sent a position paper to the
Ministry of Health in which it outlined the major problems of the Russian pharmaceutical market
and suggestions to solve these problems.The Russian Government has taken a number of measures to offset the effects of the crisis on the
pharmaceutical industry.  In September, it issued a decree exempting medicines containing
insulin from the additional 3 percent import duty.  In addition, as of October 22, 1998, the
government removed an additional 3 percent import duty on the majority of pharmaceuticals and
several medical devices.  The Ministry of Health postponed the introduction of new and more
complicated licensing procedures for imported drugs until December 1, 1998.  Unfortunately, the
government has not come up with a clear-cut policy for the health care and medical industry of
Russia.Although industry experts expect the Russian pharmaceutical market will shrink by 35-40
percent in 1999, the majority of Western pharmaceutical  companies have stated that they are
committed to the Russian market.  Russia might be a hard place for newcomers to do business,
but those who are already in Russia understand that, if they leave, others will immediately
occupy their niches.  Western pharmaceutical companies plan to continue to work with Russian
distributors, with whom they are negotiating ways of restructuring outstanding debts.For more information on the medical industry in Russia, visit BISNIS OnLine at
www.mac.doc.gov/bisnis/isa/isa.htm#Fisa.Ludmila Maksimova covers the medical sector for FCS-Moscow.This report is provided courtesy of the Business Information Service for the
Newly Independent States (BISNIS)