To Russia with drugs

NEW YORK (CNNMoney.com) -- Russia has one of the fastest-growing pharmaceutical markets in the world, but for foreign companies it's frustrating and filled with risks.

American drugmakers like Pfizer (PFE, Fortune 500) and European companies like Sanofi-Aventis (SNY), Roche and Novartis (NVS) are finding a hot market where rich Muscovites and their private insurers pay some of the highest drug prices in Europe.

Datamonitor analyst Tijana Ignjatovic said this results from the "virtually free drug pricing" in Russia, which allows drugmakers to charge more for their products and reap better profits. He said drug companies are also attracted to the rapid expansion of the Russian market, which makes the rest of Europe and the U.S. seem glacial in comparison.

Pharma sales in Russian surged 30% in 2006 to $12.3 billion, according to the Moscow office of the Dutch research firm DSM, far outpacing single-digit increases in the U.S. and Western Europe.

But Big Pharma is also butting heads with Russia's cash-strapped healthcare program and its ever-changing regulatory system.

"You don't even know what the regulations are, because they are changing so often," said Ignjatovic, who tracks the Russian market. "And there's lots of corruption. In some ways, it's even more extreme than the Chinese market."

But Ignjatovic added: "It's also the land of opportunity, for people who know how to grab that."

While pharma sales in Russia surged by nearly one-third in 2006, growth slowed to a still-impressive 16% increase in 2007, according to DSM estimates, totaling $14.3 billion.

DSM said the slow-down is largely because of the Russian Federation's drug reimbursement program, known as the Dopolnitel'- noe Lekarstvennoe Obespechenie (DLO), which translates into the Provision of Supplemental Medicines. The DLO is supposed to provide free drugs to retirees and war veterans. But the DLO ran out of money shortly after its 2005 launch, and in 2007 some of its high-level members were arrested on charges of bribery and corruption.

"By mid-2006, the $1 billion [DLO] budget was exhausted and the distribution companies contracted to supply the program were forced to provide financing out of their pockets," said a 2007 report from IMS Health, a Connecticut-based research firm. "This has caused pharmaceutical manufacturers to question the program's sustainability, and their own market share."

The IMS report said that "serious risks remain" to government reimbursement, but "despite uncertainties, we believe the populist DLO program will continue to receive both political support and continued funding."

DSM includes the government reimbursement program in future projections. It projects that the Russian drug market will surge 20% in 2008 to $17 billion in sales, and another 13% in 2009 to $19.4 billion. As part of the estimate, the analysts include $2.5 billion in drug sales from the DLO in 2008, and $2.8 billion in 2009.

"The demand for drugs will definitely increase," said Ignjatovic of Datamonitor. "Branded pharma will still have opportunities to capture there."

Part of this comes from the DLO, but most of it comes from the commercial sector. Drugmakers are heavily dependant on affluent Russians who can pay cash for some of the more popular drugs from the West, such as Pfizer's sexual dysfunction drug Viagra, Roche's antiviral Tamiflu, Sanofi's anti-clotting drug Plavix, and Novartis' leukemia treatment Gleevec.

The demand is driven by the unhealthy lifestyle of many Russian men, who have an average life span of 59, according to ISM, with heavy drinking and smoking partly to blame. The French company Sanofi said that its OTC liver toxicity drug Essentiale is "very popular" in Russia, but the company wouldn't break out sales.

In addition to issues with the DLO, drug companies face the frustrations of dealing with the Russian regulators who approve the drugs for safety.

In his 2007 report on international trade barriers, James Class of the Pharmaceutical Research and Manufacturers of America complained that Russia's drug approval process is hampered by "arbitrary" fees and "unnecessary" requirements for re-registering products every five years, as well as demands for "duplicate" drug tests.

"Rules regarding state control of medicines are excessive, administered arbitrarily and not harmonized with international practice," wrote Class in the report. He said that regulatory decisions are carried out "not by the responsible state body but by various opaque third parties" who impose fees "unilaterally." In addition, he said that trademarks are ignored and their laws are not enforced.

Even though the Russian market is expected to keep expanding, Class said its government needs to bring its regulatory system more in-line with European standards, and to improve its DLO to serve "the vast majority of people in Russia [who] live on very restricted income."

"We would like to be optimistic about Russia and we would like the Russian government to help us with that," Class told CNNMoney.com.