Pharmacies in Russia go upscale and turn in healthy sales figures

Russian pharmacy chains have come up with a new prescription for the modern world. Departing from the dull-looking, Soviet-era establishments characterized by deficiencies, pharmacies in today’s Russia come in different sizes, shapes and styles. Some, like industry leaders ICN and 36.6 Pharmacy, have gone so upscale that they could be mistaken for beauty salons or elite boutiques.

In fact, a group of tourists strolling in central Moscow recently mistook one shop, with a fresh, stylish facade and brightly written sign, for one of the haute-couture boutiques that spring up regularly in the capital.

"It was a total surprise [to the tourists] to discover that it was a pharmacy," their guide said later. "It’s so different from traditional pharmacies, even by Moscow standards – and it’s certainly several light-years away from some of the existing leftovers of the Soviet-era imitations of drugstores."

Inside one of the pharmacies, a smartly dressed, eager-to-help saleswoman, whose nametag identified her simply as Svetlana, was quick to explain that all of the chain’s other Moscow outlets were built in the similar, upscale manner.

"Why do people still think pharmacies should be dull, like they were in the Soviet era?" she asked rhetorically.

"Selling medicines, like any other merchandise, is an art," she said when told the shop appeared a bit too upscale for a pharmacy. "Anything that can boost sales in the business – from a shop’s location and layout, interior design and the way the drugs are arranged on shelves to the way one approaches clients – now matters a lot."

She added that drugstores are no longer just for people suffering from some sort of ailment. "These days, it’s not only people with health problems who visit drugstores. Apart from traditional curative and prophylactic drugs, modern pharmacies have a wider range of services, including beauty products – some even look like beauty salons or boutiques," she said.

‘Why do people still think pharmacies should be dull, like they were in the Soviet era?’

The pharmaceuticals retail sector has undergone a profound revolution. The results of the fast-tracked transformation have been so impressive that shares of some pharmacy chains are now listed on the domestic stock exchange, while some of the nation’s largest investment groups are lining up to diversify their assets into the industry.

An aggressively growing market

Experts see the sector as a healthy and aggressively growing industry worth several billion dollars in annual sales. It’s a world that shows no resemblance to the pathetic picture in the early 1990s, which was characterized by a lack of essential drugs and/or long lines for the few available medicines.

Experts say the sector’s rosy picture is only the beginning. Retail sales reached $3.7 billion in 2002, and the market is seen growing by at least 10 percent a year until 2005, when it’s expected to hit about $5 billion. Nationwide, the ratio of Russian to foreign drugs at retail sales outlets is about 30 percent to 70 percent – similar to the ratio in the industry as a whole.

According to reports by experts on the sector, there are about 19,500 large pharmacies nationwide, about 10,500 of which belong to privately owned companies. There are also about 45,500 small drugstores and kiosks, of which 23,500 are in the private sector.

Moscow alone has about 800 large pharmacies and 1,700 small drugstores and kiosks, the gross sales turnover of which was estimated at $484 million in 2002.

Some drugs remain hard to get

Several key drugs, however, are still not to be found in the mainstream pharmacies, for instance those used in treating cancer, HIV and viral hepatitis, because of their special characteristics, said Sergei Zhludov, CEO of Rosmedkomplekt. Rosmedkomplekt distributes some of these drugs directly to consumers at wholesale prices.

"Selling at these prices means that the patients don’t have to pay the extra 35 percent profit margin allowed on foreign drugs, and the route taken by these drugs from manufacturers to patients is very short and very, very transparent," he said. "Another advantage is that there is no problem of counterfeit drugs in this specific segment when they are thus sold, a problem often seen when it comes to general retail outlets."

These drugs are mainly produced abroad by specialized companies and distributed in Russia through special distribution networks. Officially, the drugs are available to patients free of charge on a doctor’s prescription in highly regulated outlets.

However, the amount of such drugs is low, with only 20-25 percent of the required amount nationwide due to insufficient government funding. This has led to some patients being forced to buy drugs in private pharmacies, mostly located within clinics, Zhludov noted.

Muscovites have highest per capita spending

In terms of infrastructural development and standard of living, Moscow is traditionally treated as a separate geographical entity from the rest of the country for in any survey, including concerning the pharmaceuticals market.

National per capita drug expenditure hit $20.2 in 2002. However, the figure varied widely from city to city – the highest in Moscow at $55.4 per person, followed by St. Petersburg at $26.4 and Irkutsk at $24. The lowest level was in Rostov Oblast, at $10.2.

The Moscow retail drugs market was estimated at $484 million in sales in 2002, statistics show.

Experts have attributed the high end-user prices to generous profit margins added by middlemen as drugs move from manufacturers to patients. For instance, medicines valued at $541 million wholesale were sold for $688 million to end-users in 2001. In 2002, a wholesale value of $624 million turned into $796 million at the retail end.

About 80 percent of all drugs are sold through pharmacies, while 15 percent are sold through hospitals and 5 percent sold on special orders to the government, RMBC says.

Top suppliers control one-quarter of the market

The Top 10 suppliers of medicines, mainly from European countries, controlled 27 percent of the market in 2002. The Top Five suppliers as of January 2003 were Aventis, Gedeon Richter, Novo Nordisk, Pliva and KRKA, according to RMBC.

On the retail side, ICN’s pharmacy chain, with more than 100 outlets, was the runaway leader – both in terms of number of outlets and volume of sales – in 2002. The 36.6 Pharmacy chain, a joint-stock company formed from its distributing predecessor in 2002, follows with 55 outlets in Moscow and plans to open two more in early June. It also has outlets in Murmansk

Artyom Bektemirov, CEO and co-owner of 36.6 Pharmacy, said the chain is moving to enhance its presence in Moscow and meet increasing consumer demand. "We plan to build 25 more pharmacies before the end of the year," he said. "Also, we’ll continue the rapid expansion of our branded retail pharmacies in Moscow and Moscow Oblast in the medium term and other Russian regions in the long term."

The chain’s turnover in 2001 was $100.6 million, while its sales for the first six months of 2002 were $53.4 million, said Viktor Sachs, a 36.6 board member in charge of strategy and business development. He added that the company was preparing to release full-year 2002 figures calculated under the International Auditing System.

Other top players on the Moscow market include Rigla, founded in 2001, which has 36 outlets in Moscow and Moscow Oblast, five in Saratov and one in Krasnodar; Famir, with 21 pharmacies; and the Chudo Doktor chain, with about 15 outlet, all in Moscow.

Regional focus

A look at pharmaceuticals retail activities in two locations – St. Petersburg, which is closer to Moscow in terms of urban development, lifestyles and consumer behavior, and Novosibirsk, whose market resembles many other Russian regions – gives a good indication of the regional picture.

St. Petersburg experts told The Russia Journal in May that modernization of the sector, which started in the early 1990s when the government still owned more than 200 drugstores and controlled 90 percent of the city’s pharmaceuticals market, has led to significant changes in the industry.

The government now controls just 30 percent of the Petersburg pharmaceuticals market, which overall is valued at between $270 million and $300 million a year. Privately run pharmacy chains control 60 percent of the market, while 10 percent belongs to owners of small drug kiosks and other similar structures.

Experts say that just a few of the state-run chains, boosted by professional management and good locations, can boast stable operations. The rest survive only through generous official privileges, and few would survive if forced to compete on a truly free market with private enterprises, the experts add.

That’s why not all collections of drugstores can be called pharmacy retail networks in the real sense of the term, said Ilya Milevich, CEO of Pharmakor Pharmacy, one of the biggest chains in St. Petersburg.

"A pharmaceuticals retail network is an entity operating in a unified commodity-monetary sphere with centralized management and providing a unified system of services – from having a specific trademark style to working schedules and approach to clients," he said. "In other words, a pharmaceutical retail network functions like a single organism – not only in terms of concept, but in terms of technology with a unified database on available drugs at its outlets."

Milevich said the Petersburg market differs from Moscow’s in that local companies exclusively control the market. "This is because the market is so saturated that the probability of outsiders from Moscow or from outside the country moving into St. Petersburg is practically zero. Secondly, retail prices are about 10-15 percent lower in St. Petersburg than in Moscow," he said.

Novosibirsk Oblast has 337 pharmacies, with 180 belonging to the private sector. The regional market is estimated at about 450 million rubles (about $15 million) in annual turnover while about 75 percent of drugs sold in the region are Russian-made, according to regional experts.

"But as far as actual ruble figures, imported goods bring in much more money, accounting for 70 percent of the sector’s annual turnover," said Olga Nezamayeva, director of Vashe Zdorove, a pharmacy chain in Novosibirsk, a privately owned business founded in 1997.

Not panic-mongers, industry leaders say

The industry is not without controversy, but both Moscow and regional pharmacy chain operators have rejected accusations that pharmacies incite panic over impending epidemics of infectious and other diseases to help boost sales.

"It’s completely untrue," Nezamayeva said. "It does not reflect the actual practice in the sector." 36.6 Pharmacy’s Sachs added, "We have not come across that at all in our own business."

Sector operators have said that SARS has not significantly boosted sales in Russia.

"It has only increased demand for surgical masks in wholesale companies in the region, while the demand for vitamins and other immunity-enhancing drugs – which are supposed to fortify people’s immune systems against the disease – has not been affected," Nezamayeva said.

Other investors eyeing pharmaceutical business

Seeing the upturn activities soaring, Russian heavy financial-industrial groups and other investment powerhouses affiliated with oligarchs are now aching to enter the sector.

AFK Sistema, Base Element and other investors declared their intentions to enter the sector, possibly by buying into ICN Pharmaceuticals Inc., a California-based company that announced plans to sell off its Russian subsidiary earlier this year.

AFK Sistema Vice President Levan Vasadze has confirmed his company’s interest in the deal, although details have remained slim. Insiders say the deal is likely to be concluded with the eventual buyer made known in June or early July. ICN officials in Moscow could not be reached for comment.

ICN Pharmaceuticals Inc., which has more than 52 factories and several pharmacy chains worldwide, plans to sell all of its five factories and 100-plus outlet-pharmacy chain in Russia.

Pharmexpert, a Russian ratings agency, put ICN as the third-largest pharmaceuticals producer in Russia, controlling 10.8 percent of the market with annual retail sales of $130 million in 2002.

Similarly, other investors are bidding for the right to snatch Moscow City Hall’s 25 percent stake in Magnolia Apteka No. 433 and 12 percent stake in Malysh Apteka, according to SGUP, an agency in charge of sale of City Hall’s assets. The agency says it will receive offers until June 16, with the winners to be announced later.

In a related development, Sachs said that 36.6 Pharmacy shares are currently listed on the Moscow Interbank Currency Exchange (MICEX), where it has offered 20 percent of its stock to raise funds to develop the retail network in and out of Moscow, for production projects and for other operating costs.

20 leading producers of medicine in terms of sales volume, 2002 • Aventis
• Gedeon Richter
• KRKA D.D.
• Berlin-Chemie/Menarini Pharma
• Sanofi/Synthelabo
• Icn Russian Plants
• GSK
• Novartis
• Servier
• Pliva
• Nycomed
• Lek D.D.
• Bristol Myers Squibb
• Dr. Reddy’s
• Pfizer
• Egis
• Janssen-Cilag
• Akrikhin
• Balkanpharma
• Boehringer
• Ingelheim

"The offering, in our opinion, has been successful, though trading volumes so far have been relatively low. This is because the majority of institutions that have bought our shares did so with a long-term goal in mind," Sachs noted.

Fake products and codes of conduct

Of all the acute problems facing the sector nationwide, most CEOs singled out drug counterfeiting as the most disturbing, especially against the background of the latest discoveries on the market.

For instance, according to excerpts from official reports compiled between May and December of 2002, law-enforcement agencies discovered 90,000 batches of counterfeit drugs worth several hundred millions of rubles, while the Association of International Pharmaceuticals Manufacturers (AIPM) has put the volume of fake medical drugs at 12 percent of all drugs sold in Russia. Other experts were even more pessimistic, calling these figures "just the tip of the iceberg."

As an example of the worsening situation, Nezamayeva said that cases of drug counterfeiting discovered in 2002 in Novosibirsk Oblast increased by 48 percent compared to 2001. "So far this year, 32 counterfeited series of drugs have been discovered." Similar trends are being reported in other Russian cities.

In a move to tighten measures against the escalating number of counterfeit drugs, the Health Ministry has introduced a new system of mandatory certification for pharmaceutical products.

"The new certification requirement will enable the ministry to control the quality of drugs on the market. And, with the help of 200 experts from Goskomstandart [the State Standards Committee], the government aims to curb this negative phenomenon by subjecting drugs to more stringent scrutiny," said Alexander Toporkov, deputy head of the ministry’s department of medical control. "This certification process will take anything from three to 14 days, depending on the drug in question."

However, key sector players are worried, particularly over the vagueness in this waiting period needed for their drugs to get the green light to enter the market.

However, recognizing the need for a stringent certification procedure, they have called for a well-prepared and quicker procedure, arguing that any unnecessary delay in the authorization process would push prices up for end users – and consequently, hurt their business. CEOs of foreign firms exporting medicines to Russia are equally apprehensive, especially as they would have to pay extra for storing their goods at border warehouses during the authentication process.

Some sector players are taking private initiatives to combat counterfeiting. Grigory Braude, research director at SIA International, who also coordinates Famir’s affairs, said APC members have signed an agreement with 15 pharmaceuticals producers to fight counterfeiting at their chains.

He cited the Barrier Against Fake Drugs program at Famir’s pharmacies and SIA International, which supplies over 90 percent of drugs on the chain’s shelves. "And there is a standing agreement that information on dishonest distributors be shared among APC members, and contracts with them severed instantly," he said.

Sachs, from the 36.6 Pharmacy, said his company has put stringent measures in place to prevent counterfeit medicines from reaching shelves. "This includes checking lot numbers with manufacturers and carefully vetting distributors supplying drugs to the chain," he explained.

At a meeting in Nizhny Novgorod in April, the Association of Russian Pharmaceuticals Product Manufacturers (ARPM), which comprises the six largest Russian companies with a cumulative annual turnover of $350 million, agreed to set up a unified set of standards – a code of conduct that meets the European Union’s requirements – to be compulsory for members, ARPM Director Viktor Dmitriyev told The Russia Journal.

"This means adopting strict requirements not only in terms of product quality and production facilities, but also setting up a high benchmark in management and financial transparency, below which ARPM members would not be allowed to operate, or to serve as entrance requirements for new members aspiring to join the association," he said.

He was upbeat about the future of the agreement. "It’s not a coincidence that our agreement to draft these rules of behavior coincided with official plans to draw up a set of technical regulations to govern the circulation of drugs in the country," he said. "Therefore, we hope our tenets will become the foundation on which these regulations are built."