by John Helmer, Moscow
Victor Kharitonin (lead image, left), Alexei Repik, Kirill Syrov, and Vikram Punia aren’t household names in Russia. What they do for a living is. This is because they control the largest pharmaceutical producers in the country. So profitable are their companies that each of them has become a dollar billionaire with whom President Vladimir Putin likes to deal directly and personally.
Last November Putin presided by video link at the opening of the new pharmaceutical raw materials plant in Bratsk of the Pharmasyntez Group owned by Punia . The new plant, said Putin, would increase “the capabilities of the national pharmaceutical industry, to which we have always given serious priority”, multiplying the availability of antiviral medications required for Covid-19 treatment fivefold. “This”, said, Putin, “is of vital significance for the country and the people, especially at this time, as we are all aware. Therefore, first of all I would like to thank all those who were involved in the implementation of this large-scale project”.
Punia replied: “Synthesising raw materials is a much more complicated job than producing finished medications. In our case, it was an immensely difficult job indeed, because the company only produced finished medications before and did not have the synthesis competencies: we did not have the necessary technology or personnel to do this. In fact, we had to create a new culture, the culture of producing high-tech pharmaceutical substances.” He thanked Putin for state subsidies and a low-interest loan. He promised to build a new plant with ten times the production capacity of the Bratsk plant.
“Your company,” said Putin, “is greatly contributing to the replacement of imported medications and increasing their affordability for people.”
A month later, on December 26 , the President again presided (also virtually) at a ceremony for an international agreement on co-production and marketing of the Russian Sputnik V vaccine against Covid-19. “In Russia,” said the chief executive of AstraZeneca, “we have a long-lasting partnership with R-Pharm, and we are good friends with Alexei [Repik] and the R-Pharm team. We decided to transfer the technology to R-Pharm because of the advanced technology core and biopharmaceutical capabilities in Russia. They have developed these capabilities over a number of years, and more recently, importantly, with the support of the Russian Direct Investment Fund. This is another good example of collaboration between organisations and companies. I would like to congratulate the Russian scientists at the Gamaleya Institute and also the Russian Direct Investment Fund for developing the world’s first registered COVID-19 vaccine.”
Putin’s ceremonies with Punia and Repik were intended to make a public show that he understands the combination of price increases for imported and domestic medicines, shortage of supplies, and lack of pharmaceutical quality control are causing a national grievance.
To address the trouble this is causing in the run-up to parliamentary elections in September, the Russian government has accelerated its intervention with price controls to cut the cost of medicines, and with increases in budget spending for procurement of drugs to alleviate shortages.
Deloitte Touche, the international accountant advisor to large corporations, has issued its annual report on the Russian pharmaceutical market by noting that corporate profit margins are going up, but Russian consumption of medicines is going down. This is healthy for investors, not so for people. The trend had started before the corona virus struck last year .
In 2019, Deloitte reports, “the Russian pharmaceutical market increased its growth in rouble terms for the first time in years. This was driven by higher prices for medicines, demand shifting towards more expensive medicines and an increase in the share of the public segment (in ruble terms), which has a higher weighted average cost per package than the commercial segment. However, overall consumption of medicines fell after five years of sustained growth. The ongoing pandemic — the main story of 2020 — amplified trends that had already started emerging in 2019, such as higher prices for medicines and lower sales in unit terms.”
The popular reaction to Covid-19 was to pressure Putin and the federal government to introduce price control. Less obvious was the accompanying protection of the profit margin for Russian pharmaceutical producers, distributors and retailers by increasing the state cashflow for procuring their products for hospitals and clinics to redistribute to patients at subsidised prices, or free.
“One outcome of the COVID-19 pandemic in Russia ,” added Deloitte, “was a heightened government focus on regulating the prices of medicines and medical devices. In 2020, legislators amended Federal Laws No. 61-FZ of 12 April 2010 “On the Circulation of Medicines” and No. 323-FZ of 21 November 2011 “On the Basic Principles of Healthcare in the Russian Federation”. These laws now permit the state to cap price rises for medicines that are not on the Vital and Essential Drug List (VED) and medical devices needed in the event of an emergency and/or the imminent spread of a disease that poses a threat to public health, or if the retail prices for these products rise sharply (by 30+ percent).”
This isn’t quite what Deloitte’s market charts show, at least not in money terms. In 2017, 58% of the rouble value of the Russian pharmaceutical market was accounted for by commercial companies; 28% by state budget spending on institutional purchasing (hospitals, polyclinics, schools, military, prisons). In the first nine months of 2020, the share of the commercial sector had risen to 64%; the state share also grew to 36%
Inflating money prices are not the most effective measure of the market. A second illustration by Deloitte shows that when measured in unit terms – that’s packages of medicines – Russians were spending more money, but they were able to afford fewer imported brand-name drugs, getting fewer prescription drugs on the vital and essential drugs (VED) list, and substituting in their place generic drugs domestically produced.
That’s import substitution, as Putin described it last November, but it was not improved affordability.
Next month new state guidelines will come into force to set maximum wholesale and retail price mark-ups for the VEDs. This is because the price-fixing regulations introduced last September and November allowed price regulators considerable leeway to modify prices, mark-ups and profit margins when suppliers warned that medicines were going short and out of stock, and when Russian price protests became audible politically.
There was also an attempt by state officials to crack down on deceptive advertising by the pharmaceutical companies and bribery of hospital administrators, doctors and other health care professionals. These abuses had led during the first Covid-19 wave in the country to panic buying and hoarding of medicines with dubious value for combating the virus. Deloitte is coy about what happened: “compliance risks related to the promotion of medicines and engagement with healthcare professionals online may be amplified by the pandemic”.
Kompromat publications and social media have reported on medical corruption scams around the country. There are so many of them prosecutors can’t cope. Here’s a sample of the main scams – prescriptions for dead souls; inflated charges; kickbacks on hospital and prison procurements . The largest state purchasers of medicines traditionally remain the federal Ministry of Health and Moscow’s Department of Health. The third is the National Immunobiological Company which is the exclusive supplier of vaccines, blood products and HIV drugs to the Federal Penitentiary Service. Fraud and embezzlement of funds in these channels is rife.
A federal Health Ministry official reveals that one of the most popular scams which state-employed doctors practiced during the pandemic was to identify patients as Covid-19 positive when they were not, in order to claim bonuses for treating them. This has significantly inflated the Russian case numbers by comparison with other countries.
By official measurement, the administrative measure of capping prices and reducing the rate of inflation for medicines appears to be working. According to a study by the Romir research group of Moscow, the rate of price increase for medicines showed down in December, compared to November. The annual increase turned out to be 9.7%, Romir says. On the other hand, compared to December of 2019, the price increase was 26%. Also, according to Romir, Russian consumers had to spend relatively more on medicine out of their household budget to preserve their supply .
The federal Ministry of Economic Development and the Russian state statistics agency Rosstat reported early this month that in January of this year the average price of medicines rose by less than 1% in annual terms . But practically, especially outside Moscow, most Russians believe that shortages of the medicines they require are causing an unofficial increase in the price they must pay to keep their supply.
The national grievance grows. “In Russia, there is no group that would analyze the situation [of drug shortages] and formulate solutions,” Elena Gracheva, an analyst with an anti-cancer foundation, has told the press. “The drug crisis has revealed one simple thing: no one is responsible for ensuring that there are enough medicines in the country. The Ministry of Health cannot influence production and prices. The Ministry of Industry and Trade has no idea how many drugs patients need… The FAS [Federal Antimonopoly Service], having incorrectly calculated profitability, can provoke the termination of unprofitable production lines, and there is no mechanism for appealing its decisions. Unfortunately, so long as the final decisions are not left to the Ministry of Health, and the main task will not be the quality and continuation of people’s lives, nothing will fundamentally change.”
“Failures in the provision of medicines,” Gracheva adds , “are the result of numerous actions of numerous participants in the process, and no one has really started to fix all these processes yet. You need to make changes to dozens of legislative acts and orders of dozens of departments, you will be tormented to list them. But the main problem is goal-setting: so far, we see that decisions are made for political or economic reasons, and not to protect people’s health.”
The profitability of Russia’s Big Pharma has been growing, too. “What is happening,” reported Forbes Russia  last September, “has significantly increased the interest of investors in the industry.” Revenue growth in 2019 was already accelerating by 33% over 2018. The pandemic year accelerated this growth rate even faster.Generic drugs produced by the domestic pharmaceutical companies increased to 63% in rouble value, 84% in package units. Their profit margin was considerable, although the cost of imported pharmaceutical materials and components required to make the generic drugs was also rising. At the start of 2020, only 15% of the materials required for Russian drug production were domestically sourced; the imports required came mostly from China, France and India.
Into this gap Punia’s Pharmasyntez has jumped, with state aid. In the Forbes rating of the largest Russian pharmaceutical production companies by revenue and profitability, the leaders are R-Pharm owned by Alexei Repik; Biocad (formerly known as Pharmstandard) and Generium of Viktor Kharitonin; Punia’s Pharmasyntez; and the Valenta group whose controlling shareholders are less than transparent and certain. These companies are closely held by their owners; they do not report public audited financials; their shares are not presently listed on an international stock exchange.
The top pharmaceutical producers , left to right: R-Pharm – Alexei Repik (estimated Forbes wealth in 2019, $2.1 billion); Biocad (Pharmstandard) ansd Generium – Viktor Kharitonin ($2.4 billion); Pharmasyntez -- Vikram Punia ; Anton Strekalov is chief executive of Valenta but he appears to be the front man for Kirill Syrov (22%), Vladimir Nesteruk (18%), Oleg Kedrovsky (18%), Alexey Romanov (13%), Svyatoslav Petrushko (9%), Zinaida Reichart (7%) and Dmitry Shulzhenko (13%). By this listing of Russian billionaires, Repik and Kharitonin are the only ones producing pharmaceuticals .
The revenues of the production companies dwarf those of the leading Russian pharmaceutical retailers. R-Pharm reported revenues in 2019 of Rb82.4 billion ($1.3 billion); Biocad and Generium together, $565 million; Pharmasynez, $248 million; Valenta, $206 million. But the percentage growth in the revenues and profits last year of the two lines of pharmaceutical business, production and retail, have been accelerating similarly. This year they cannot expect to be so fortunate; the projected growth rate for the pharmaceutical market as a whole in the first nine months and the full year ahead is 5%.
FORECAST OF TURNOVER IN THE RUSSIAN COMMERCIAL PHARMA MARKET COMPARED TO PAST FIVE YEARS
(in billions of roubles)
KEY: Blue=the year; red=nine months.
Source: DSM Group analysis; publication in https://www.finam.ru/ 
The pandemic windfall of cash may be running out, but the government’s new plan for pharmaceutical industry aims at further investment in upstream manufacture and greater Russian self-sufficiency. Into whose pockets the profit will flow is a strategic question without answer for the time being.
The state strategy for the pharmaceutical market, titled Pharma-2020, expired last year; a new 10-year plan, Pharma-2030, has been introduced. According to Denis Remenyako, director of the pharma investment fund Grand Capital  in Moscow, “when the program Pharma-2020 was launched, the market treated it with distrust. At that time, our manufacturers also had little faith that something could be changed for the better in this industry in Russia, and large international companies were skeptical about the ambitious goals of the developing state. But the steps which have been taken in the last ten years have forced absolutely everyone to reconsider their positions.”
“In particular,” adds Remenyako (right) there have been major changes in the requirements forlocalisation of production. We no longer recognise as a process of localised production when all that is done is that medicine brought to Russia from abroad was put in a box created on the territory of our country. Now, only the product that is actually made on the territory of the Russian Federation has become recognised as domestic. This was an important step.”
“The third extra rule was also introduced, which has effectively forced foreign manufacturers to make a decision: either you localise the manufacture of your product on the territory of the Russian Federation, or you leave the Russian market. These and many other measures have become quite a strong impetus to the development of our pharmaceutical industry. The market saw this and believed the state. Today, everyone is very closely following the programs that the Russian government is adopting and going into the new decade with a different mood. Yet not everybody came to the conclusion that what can and should be developed in the country is production of components and substances. But I think they believe it now, and we will see businesses interested in the development of a full cycle for production of drugs.”
“In Pharma-2030 it is required to pay attention, not only to the localisation of the production of medicines and pharmaceutical substances, but also to the production in Russia of chemicals, biological ingredients, catalysts and other substances that are used in the production of pharmaceutical substances. It became clear that without this, full-fledged production of pharmaceutical substances is impossible.”