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31.01.08
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Combating A Chronic Illness
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By Gerhard Symons
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Pharmaceutical Companies Face both Problems and Opportunities in Russia
Russia is sick. Each year 1.3 million Russians die from cardiovascular disease, costing Russia billions of dollars in lost economic output, aside from the inherent human tragedy. At 59 years, the average life expectancy for a Russian man is almost 20 years shorter than that of his Western European counterparts, who are expected to live to be 76. The comparative difference for Russian women and their Western European peers is ten years (72 years compared with 82). Combine these numbers with a sub-replacement fertility rate and it is unsurprising that the population has been in freefall since the end of the Soviet Union, falling from 149 million in 1992 to 141 million in 2007.
Acknowledging the gravity of the situation, President Vladimir Putin announced health care as one of the four National Projects alongside agriculture, education, and housing, in his 2006 address to the nation. The state of Russia’s public health remains the starkest reminder that the impressive economic gains of recent years, such as year-on-year GDP growth – 7.2 per cent in 2007 alone, a four-fold increase in average wages from 2001 to 2007, a decrease in unemployment from 9 percent in 2001 to 7.3 percent in 2006 and significant reductions in poverty have not translated into health benefits.
Chronic under-investment in the health care system is the most likely explanation: current public health care expenditure in Russia is 3.7 per cent of GDP compared to an EU average of 7.1 per cent of GDP. Acknowledging the disparity in health care spending, the Russian government hoped to increase health care spending to 4 to 5 percent of GDP as part of the national project on health.
Government data shows that $971 million from the federal budget was spent in 2006 on a range of improvements, including salary increases for healthcare professionals, a flu vaccination program and treatments for 14,000 HIV patients. In a 2007 update on the health care initiative, the Russian government decreed that cardiovascular disease and diabetes should be treated free of charge by regional health authorities. However, this policy does not address the desperate need for modernizing Russia’s aging hospitals so that they can cope with modern surgical interventions for heart attacks and unstable angina.
In addition, the government continues to fund the controversial, federally-administered medicine reimbursement program – Dopolnitelnoe Lekarstvennoe Obespechenie (DLO), which covers medicine costs for between 12 and 14 million pensioners, war veterans and low-income families in a bid to improve their level of healthcare.
The program allows pharmaceutical companies to supply innovative and premium-priced medicines, such as those for cancer and anemia, to pharmacies through selected distributors. The government promises to reimburse pharmaceutical companies for these medicines by calculating the sum owed from pharmacy receipts. In the gold rush of uncapped pricing, Western pharmaceutical firms were swift to capitalize on the reimbursement scheme. According to Russian data provider RMBC, the top 10 foreign firms, which are members of the Association of International Pharmaceutical Manufacturers (AIPM), captured 66 percent of the total value of the program in 2005. With guaranteed state purchasing, the average pack prices for innovative drugs in the DLO scheme have risen five-fold since 2005.
Despite a number of measures taken in 2006 to reduce the scale of the problem, such as reducing the total DLO reimbursement to $1.15 billion, the government grossly underestimated demand, and the predictable escalation of pack costs. By the middle of 2006, the DLO scheme was already bankrupt and the government was $1.5 billion in debt to pharmaceutical companies. After a public outcry at the shortage of medicines, the government capped prices, decreased prices of the 165 most expensive medicines by 10 to 35 percent, decreased a further 670 foreign-produced medicines by 5.5 percent, increased terms of payment for supplied medicines to 180 days and removed over 600 medicines from the reimbursed list. Despite these measures, foreign manufacturers increased their share of the DLO value in 2006 to 89 percent.
In 2007, the government increased the DLO back up to $1.3 billion and pledged to repay $640 million of debt from 2006 to pharmaceutical companies, although the details of this agreement are unclear, and this sum does not cover the total debt, or the interest on waiting up to a year for payment. This situation has had a palpable impact on pharmaceutical companies, such as Hungary’s Egis, which reduced its 2007 sales forecast by ten percentage points to 15 percent growth, partly on account of lengthy payment delays for drugs supplied under the DLO program. Commenting on DLO, Michael Crow, the general manager of GlaxoSmithKline Russia, said: “The frequent changes in the DLO create instability for all parties, not least the patients. The 2007 DLO program was certainly more stable than in 2006, however, given the number of reports from regions that are claiming shortages of DLO medicines, the program looks to be managed purely from a budget position rather than based on actual patients’ needs.”
To ease the DLO problems, in 2007, Putin sacked Mikhail Zurabov, the unpopular former Minister of Health, and Ramil Khabriev, the former head of the Federal Service for Surveillance in Healthcare and Social Development (RosZdravNadzor). Furthermore, in October 2007, the government decentralized the program, giving responsibility to the regions for holding auctions to allow local wholesalers to bid for the right to supply reimbursed drugs for three or six months. With the opportunity for widespread corruption across the country through opaque auction practices, the future of the DLO in 2008 is in question.
Despite the uncertainties of the DLO, growth in the Russian pharmaceutical market in Russia has been strong, with sales increasing 27 percent in 2006 to $10.7 billion. These figures pushed Russia into the top 10 global pharmaceutical sales markets for the first time, according to Pharmexpert, a Russian data provider. Since 60 to 70 percent of health care spending is out-of-pocket, increases in average wages have translated into three-fold annual increases in per capita health care spending to $75. Foreign manufacturers dominate the pharmaceutical market, with a 77 percent share. There is consternation in certain echelons that domestic manufacturers are not as competitive as their foreign counterparts, and therefore a number of policies have been implemented to support the domestic industry, through preferential state purchasing of pharmaceuticals and by increasing the drug registration burden for imported medicines.
Despite robust growth in this market, there are a number of challenges that firms need to face and overcome, such as protecting intellectual property – the lifeblood of research-based pharmaceutical firms. Another challenge is to overcome the opaque drug approval process illustrated by the example of one major Western firm, which took 18 months to expedite the approval of a generic drug, while a smaller rival generic manufacturer received approval within weeks. Russia does not currently have legislation protecting commercial data from firms seeking marketing authorization and it is conceivable that unscrupulous companies “cut and paste” previously submitted data for their own generic submissions. For a drug to be reimbursed by the government once approved for marketing, it needs to be listed on Russia’s federal formulary, which is updated on a quarterly basis in an opaque process. Firms lobby the Ministry of Health to get medicines onto the list and to negotiate their price, which is often referenced to competitor and historical prices and not always considered on a cost-benefit basis. Generics are often targeted by counterfeiters because generic manufacturers have fewer resources to defend themselves legally against shell or short-lived counterfeiting companies. Unfortunately, Russia has little experience and no mechanisms for combating this practice.
Unsurprisingly, a survey of pharmaceutical manufacturers in Russia identified government corruption, bureaucracy and medicine counterfeiting as three of the biggest business challenges in Russia. However, the majority of Western pharmaceutical firms are signatories to international standards and codes of practice enforced by the Association of International Pharmaceutical Manufacturers (AIPM) in Russia in an attempt to raise ethical standards.
For Russia, the wider economic trends suggest greater growth in the pharmaceutical market due to the growth of an emerging middle class in St. Petersburg and Moscow and concomitant growth in the private market, the continuation of the DLO, and negotiating Russia’s accession to the World Trade Organization. Successful firms will capitalize on demographic trends by providing novel medicines that meet patient needs in a number of critical therapeutic indications and in a number of lifestyle issues that are prevalent in Russia.
The legacy of Soviet planning left a substantial amount of human capital and assets in relatively isolated and inclement regions that have substantial infrastructure costs and accrue few benefits. Made up of 87 regions across 11 time zones, Russia is best seen as a basket of economies with extreme variance in income, mortality, health care expenditure, access to information, and education levels. The logistics of communicating new product information and contacting health care professionals on this scale are staggering, and they make pharmaceutical marketing in Russia particularly challenging. Those firms that have sales and marketing capabilities in the regions of highest growth and understand how innovations are adopted and diffused, will stand to capture the greatest value here.
Gerhard Symons is a doctoral researcher at the Centre for Health Management of the Tanaka Business School, Imperial College London. |
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