Russian Pharma and Biotech Market - Regulatory, Distribution and Risk Mitigation Trends 2020+
Olga Carroll, Ph.D.
Global clinical regulatory strategy and intelligence- serving the US and global early, mid and late stage clients in TAs of high unmet medical need
Regulatory Body
The Russian Ministry of Health (Minzdrav) is the federal executive body responsible for drafting and implementing government policy and legal regulation in the area of healthcare, mandatory health insurance, the production and distribution of pharmaceuticals for medical use, including disease prevention measures (such as AIDS and other infections), medical treatment, rehabilitation and appraisals (excluding medical-social and military medical appraisals), pharmaceuticals activities such as ensuring the quality, efficacy and safety of pharmaceuticals for medical use, the production and distribution of medical products, sanitary and epidemiologic welfare of the population, medical and sanitary support for people employed in industries with dangerous working conditions, the medical-biological assessment of the health hazards associated with hazardous physical or chemical factors, the resort and recreation industry, as well as the management of state property and provision of state services related to healthcare, such as medical services, the introduction of modern medical technology, new disease prevention methods, diagnostics, treatment and rehabilitation methods, forensic tests and psychiatric appraisals, organization of associate, university level, postgraduate and additional medical and pharmaceutical education, and resort and rehabilitation services.
The Ministry of Health coordinates and oversees the operation of its subordinated services and agencies, including: the Federal Supervision Service for Healthcare, the Federal Medical-Biological Agency, federal state institutions and unitary enterprises; and coordinates the work of the Federal Mandatory Health Insurance Fund.
Pharma Market Overview
The Russian pharmaceutical market has tremendous promise and warrants consideration by U.S. exporters. In 2018, per capita spending on medicines was $140 per person, placing Russia 17th out of 32 central and eastern European (CEE) economies. $20.1 billion of pharmaceuticals were sold in Russia in 2018, equal to 1.2 % of GDP and 22.1% of the nation’s health spending.
The Russian pharmaceutical market can be divided into prescription drugs and over the counter (OTC) medicines. Prescription drug sales have traditionally dominated the market, and this trend continued in 2018: prescription medications represented 62.3% of sales. Of this amount, sales of generics constituted 67.6% of Russian prescription sales in 2018. Pharmaceutical sales (prescription and OTC combined) grew 25% in dollar terms from 2016-2017, and forecasts projected 9% growth for 2018.
For many years, the Russian government accounted for approximately half of health care expenditures. However, industry anticipates a significant shift towards private healthcare spending.
The Russian healthcare system is funded by the federal government, social spending, and the Federal Mandatory Insurance Fund (FOMS). The FOMS’s budget consists of two revenue streams: companies paying for their employees and the federal government paying for the unemployed. The FOMS operated at a deficit in both in 2017 ($516 million) and 2018 ($1.25 billion), but experts project a 2019 surplus ($801 million) due to the scheduled increase in the payroll deduction for FOMS from 5.1% to 5.9%.
Drug manufacturers prefer not to work with retail pharmacy chains or pharmacies directly, relying instead on distributors to promote their products to retail outlets. Distributors operate vast networks of contacts and work to direct retail distribution channels. Protek, Katren, Pulse, Pharmkomplekt, R-Pharm, Grand Capital, BCC, Profit-Med and CIA International are some of the major distributors in the Russian market. The number of pharmacy chains is growing and currently exceeds 50,000. Major sales are coming from the following chains: Asna, Rigla, Erkapharm, Apteka 36.6.
U.S. pharmaceutical exporters face a complex regulatory landscape in Russia. Russia’s new Good Manufacturing Practices regime can lead to delays in foreign pharmaceutical products’ receiving market access, and there is relatively weak protection of intellectual property rights for patented drugs. IPR issues include erosions in regulatory data protection and patent rights, and the risk of compulsory licensing.
Leading Sub-Sectors
Cardiovascular diseases, cancer and HIV are the most prevalent diseases in Russia and are driving demand for associated pharmaceutical products. High rates of smoking and alcohol consumption also contribute significantly to illnesses. Per a 2015 WHO report, 39.1% of the Russian population smokes compared to a rate of 22.7% globally and 27.3% in Europe. In addition, per capita alcohol consumption of 15.1 liters of pure alcohol per year between 2008 and 2010 far exceeded the global average of 6.04 liters.
Opportunities
Demographic factors will continue to drive pharmaceutical market growth as the population ages. However, the Russian government’s desire to curb imports may constrain opportunities for U.S. exporters.
The Russian government is focused on creating its own pharmaceutical industry as outlined in its “Pharma 2020 Strategy,” which aims to reduce the reliance of the Russian economy on imported pharmaceuticals. In July 2016, Prime Minister Medvedev said that he expected domestic production to increase from 28.5% to 75% of all medicine sold in Russia by 2020. Despite the challenges that U.S. companies face as the result of this strategy, profitable opportunities persist, including licensing agreements/technology transfers by U.S. manufacturers of pharmaceutical products, as well as U.S. manufacturers supplying pharmaceutical production and packaging equipment. The Ministry of Industry and Trade is developing the “Pharma 2030 Strategy,” which will be a continuation of the existing “Pharma 2020 Strategy.” In the short-to medium-term, the market for generic drugs will continue its growth due to incentives from the Russian government, as well as population’s preference for cheaper drugs.
Russia may be faced with a shortage of drugs in the future, due to the forthcoming transition to a new system of drug labeling that may lead to huge interruption in medicines supplies to the country, according to an official spokesman of the Russian Ministry of Health.
By 2019, all drug importers and producers operating in Russia were supposed to begin labeling drugs using a new technology that requires producers to make certain investments in its introduction, the amount of which is estimated at "several million dollars for a single plant."
In addition, starting July 2020, all producers should be connected to the new information system, which is operated by the Russian Federal Tax Service (FTS.)
At the same time, information about the price should be recorded in the system at every stage of the drug transfer, from the moment of the supply of drugs from the plant to the distributor and then through the chain. The entire data set will be fixed by an identification number that will appear on each drug package in the country. In theory, the market should become more transparent, as at present companies just provide accounting reports, but not the cost of drugs and mark-ups on them.
Drug makers say new system will require accounting changes and result in additional costs
In the meantime, the new state plans have already sparked another wave of criticism from producers. According to them, the introduction of the information system of the Federal Tax Service will require a change in the accounting systems of all drug makers operating in Russia, and will be associated with additional costs for them.
In addition, those drugs which will not transfer information about shipping price to the FTS system will be banned for the sale in Russia. To this end, plants that are not even registered in Russia, but produce drugs in Russian packaging, will have to transfer information to the system about the shipment of each batch of drugs, indicating the cost of each drug. At the same time, at present factories and distributors do not detail the cost of a single package of drug when signing contracts, indicating just total sums under supply contracts.
The new rules mean that manufacturers will have to change their internal management system to meet the new Russian standards, which may require additional expenditures of $2-3 million. Foreign producers that are involved in small drug supplies to Russia will no longer be able to afford them, while their further drug imports to Russia will be unprofitable for them.
Currently producers are preparing a letter to Russia’s Deputy Prime Minister Arkady Dvorkovich, with a request to postpone the introduction of mandatory labeling rules.
Regulatory requirements pertaining to drug serialization in Russia are regularly updated
To make the pharmaceutical supply chain safer and ensure patients get the medicines they need, the Russian Ministry of Health intends to put in place serialization and aggregation requirements for drugs. The” Federal State Information System for Monitoring of Drugs Circulation from a Manufacturer to a Final Consumer with the Use of Labeling (FSIS DCM)” sets out requirements for pharmaceuticals produced for the Russian market. However, despite the fact that a pilot program is running, there are still discussions as to what exactly the FSIS DCM will entail.
Serialization, coding and reporting requirements in Russia
While the law does not explicitly define standards that are to be used for identification and marking or for data reporting, industry associations and manufacturers recommend the use of GS1 standards and 2D data matrix for unique product identification to encode serialization and aggregation data. Serialization shall ultimately allow traceability from the manufacturer all the way through the medical supply chain. Events like drug production, sale, write-off/withdrawal from circulation/disposal, sampling or quality checks will have to be recorded and reported.
Drug manufacturers and their supply chain partners will have to report above mentioned events to Russian authorities via standard protocols and electronic interfaces. The Russian Ministry of Health is therefore developing a rather complex reporting system and database including several functional and infrastructural subsystems. Management of the different FSIS DCM components are intended to be carried out with the use of specialized management automated working stations (AWS).
Scope of the law and intended deadlines
Russia aims for a phased implementation by drug groups starting with the seven high-spending disease classes, such as medicines for treatment of hemophilia or multiple sclerosis and drugs administered after organ transplantation for example, to be serialized in Q1 2018. Implemented in four steps depending on sale price, the law is supposed to ultimately apply to all medicines for human use released into circulation from Q4 2018.
While there is still clarification and guidance necessary, the pilot program will hopefully contribute to the development of clear and concise instructions. However, given that there is still some uncertainty, it is questionable whether the majority of pharmaceutical manufacturers will be able to meet the Russian deadlines.
In Russia, serialization, aggregation and event reporting along the supply chain will be mandatory for all medicinal products (RX and OTC) manufactured in Russia or imported into Russia from January 1st, 2020 (Latest update: The Russian government has officially extended the deadline to July 2020). Operator of the Russian Drug Circulation Monitoring System is the public-private organization CRPT.
One of the main differentiators of the Russian track & trace system is the crypto verification system, which adds another layer of security to unique product identification.
Unique Product Identification (UPID) in Russia
UPID requirements for medicines supposed to enter the Russian Supply Chain are specified in government decree No 1556. Unlike in many other countries, Unique Product Identification in Russia consists of two parts. A unit of sale is identified through the combination of Global Trade Item Number (GTIN) and Serial Number. Additionally, a so called two-part crypto tail makes the unique identifier more secure.
Crypto verification as an added layer of UPID security
The crypto tail consists of a verification key and an electronic signature. The verification key consists of four numbers, lower- and upper-case letters (Latin alphabet). The application identifier used is 91. The electronic signature or crypto code is a sequence of 88 characters* including numbers, special symbols, lower- and upper-case letters of the Latin alphabet. The application identifier is 92.
Crypto verification allows to unequivocally establish the legality of the applied identification code as the combination GTIN/ Serial Number/Crypto key/Crypto signature is next to impossible to guess and reproduce.
*Part II article 5 of government decree No. 1556 of December 14, 2018 states “electronic signature (…) which consists of 88 symbols” but system provider CRPT has confirmed in May that the crypto signature will be reduced to 44 characters.
How to get the crypto tail?
The verification key and crypto code are not generated by the license holder (MAH) or the drug manufacturer but attributed by the system operator (CRPT). License holders send an application to the CRPT (incl. sGTINs or GTINs & Serial Numbers and other relevant data specified in governmental decree 1556). Through the relevant combination of the GTIN and the serial number, the crypto code issuer uses an asymmetric encryption algorithm to create the verification code for each item.
To facilitate communication, the system operator will provide data exchange devices for production sites in Russia and set up a Cloud system for manufacturers outside Russia to connect via an API (application program interface). More and more manufactures in Russia are requesting remote access to the code generation system as well though.
Serialization requirements in Russia: The way forward
The crypto tail was not part of the industry pilot running since February 2017. Therefore, manufacturers will have to test their print & verify modules as the additional information to be encoded in the data matrix might impact its readability. The pharma industry is pushing for a shorter crypto code but no decision has been made to date. Despite these additional requirements, the ultimate deadline for implementation (January 2020) has not changed, which does not leave much time for testing and, if new material needs to be acquired, qualification.
Future
Russia’s pharmaceutical market is one of the fastest growing in the world and is expected to reach $36.61 billion by 2021, according to GlobalData, a recognized leader in providing business information and analytics.
The company’s latest report: ‘Country Focus: Healthcare, Regulatory and Reimbursement Landscape – Russia’, reveals that the key market drivers are improving regulatory guidelines together with government initiatives to develop the domestic pharmaceutical market. However, limited access to healthcare facilities, price cuts, high Out-Of-Pocket (OOP) payments and low R&D expenditure are likely to restrain market growth.
The Russian pharmaceutical market comprises two business segments: the commercial market and the government procurement market. The commercial market dominates, accounting for 73% of overall value and 85% of volume. However domestic products only accounted for $6.05 billion, or 28%, of the commercial market in 2015.
Sharath Chandra, Healthcare Analyst at GlobalData, commented: ‘The Russian Government’s ‘Pharma Strategy 2020’ is aimed at boosting domestic production of pharmaceutical and medical device products .Consequently several multinational pharma giants such as Novartis, Takeda, Teva, Novo Nordisk and AstraZeneca have established their manufacturing facilities in Russia since 2011, and GlaxoSmithKline, Pfizer and Bayer have signed partnership agreements with domestic manufacturers.’
The government has also implemented a policy of import substitution in more than 20 sectors including pharma. This aims to gradually reduce the importation of foreign-made industrial products and replace them with domestically produced alternatives targeting a 50–100% reduction by 2020.
Prescription drugs dominate the pharmaceutical market, accounting for 59% of sales in 2015, worth $17.80 billion, OTC drugs accounted for 36%, worth $10.64 billion and food supplements 5%, worth $1.38 billion.
In August 2017, the Russian State Corporation (Rostec) and local pharmaceutical manufacturing company Marathon group announced a merger. The new company will focus on building a national pharmaceutical distributorship together with developing and manufacturing innovative new domestic medicinal products. Marathon Group produces around 350 drugs and medical products while Rostec Natsimbio produces vaccines against TB and viral hepatitis.
The medical device market in Russia was valued at $6.7 billion in 2016 and is forecast to reach $8.5 billion in 2021.The key driver of growth is an aging population and consequent demand for healthcare products and services. Major segments likely to experience high growth are ophthalmic devices, wound care management, cardiovascular devices, orthopaedic devices and diagnostic imaging.
The government has also introduced the Comprehensive Program for the Development of Biotechnology in the Russian Federation through to 2020. The program sets targets for the development of the biotechnology market and will require $31.8 billion in financing from 2012 to 2020. The government is planning to construct 10 factories for the manufacturing of bio generics by 2020, with an investment of $265.3m.
Sharath continued: ‘Biotechnology serves as a key driver for growth in the pharmaceutical industry by introducing new and improved products and innovative technologies, adding revenue streams, improving the quality of life of patients and extending patient life.’
With a growing pharmaceutical market, there is a wide opportunity for the development of biosimilars. Since 2014, 20 erythropoietin biosimilars, 53 interferons biosimilars, 42 monoclonal antibodies biosimilars, 61 insulin biosimilars, 11 somatropins biosimilars, 24 granulocyte-colony stimulating factor biosimilars, 55 heparins biosimilars, 31 plasma coagulation factor biosimilars and 9 r-coagulation factor biosimilars have been granted market authorization.
The Ministry of Health is the regulatory body responsible for the reimbursement process in Russia. In 2016 the Federal Compulsory Medical Insurance Fund, estimated that 53 insurance companies covered the entire population.
Sharath added: ‘’The government has initiated several reimbursement programs to provide better healthcare in the country. Public funding for drugs is operated through programs including: Vital and Essential Drugs (VED), Seven rare expensive diseases/ Seven Nosologies Program (VZN) and Essential Drug Reimbursement Program (ONLS).’’
Conclusions
It will be interesting to see how these changes will play out in the long term.
The relationship between the Russian government, regulators, and private manufacturers in the market will likely change over the coming years, and the ability for the Russian market to self-regulate is already looking like a mountainous challenge.
Drug shortages and logistical issues are a common occurrence in Russia, with many patients suddenly finding that the drug they rely on has suddenly vanished from the shelves.
Other issues such as misleading advertisement, rampant price changes, and Low R&D expenditure will surely have to be dealt with before any drastic change can take place.
The pharmaceutical industry is constantly changing, a thriving pharmaceutical industry requires innovation, plenty of financial support, and the right government legislation to tie it all together.
While the Russian government continues to show signs that they are building a modern and competitive pharmaceutical market, teething issues have already become apparent.
How the Federal Antimonopoly Service of the Russian Federation the (FAS) and the Russian government reacts to these challenges are anyone’s guess.
Pharma 2020 didn’t account for the collapse of the Ruble and the wave of sanctions that followed the annexation of Crimea. It will be a while before the Russian economy stabilizes, which is dependent on the Kremlin’s ability to repair relations with the West and improve foreign investment.
Market growth, as strong as it has appeared at times, is never too far from a disaster in Russia.
Without amending foreign affairs, Russia’s ability to support a fully-fledged domestic pharmaceutical industry is tenuous. However, this is an issue for the policy makers, here in which the immediate Russian pharma industry will hang on.
References
https://www.pharmtech-expo.ru/Articles/the-russian-pharmaceutical-market-in-2019-tre
https://www.globaldata.com/russias-pharmaceutical-market-reach-36-61-billion-2021/
https://www.pharma-iq.com/market-access/articles/russias-pharmaceutical-market-a-sedated-bear