The Russian pharmaceutical industry faces rampant uncertainty, as the leading Western companies suspended investments in their production assets in the country, though not pulling out from the market completely. As the government targets technological sovereignty in the domestic pharmaceutical market, the prospects of contract production seem vague.

In 2022, sales in the Russian pharmaceutical market stood at Rub2.57 trillion (USD32 billion), 12% up compared with the previous year, the Russian state statistical service Rosstat estimated.

Under an updated comprehensive industry development program through 2030, this figure is expected to grow to 3.7 trillion rubles ($47 billion), with a share of Russian drugs in monetary terms increasing from 35.3% to 42.6% and a percentage of Russian business in the vital and essential drugs segment growing to 80%.

Under the previous development plans, the Russian government tried to encourage foreign firms to localize production on Russian soil through contract production or special investment contracts, when in exchange for investment into full-cycle production, foreign players could count for soft loans, tax breaks, and various administrative support.

It seems that those times have passed into oblivion, as the updated version of the development program titled Pharma 2030, some details of which are still a subject of discussion between the authorizes and the industry community, focuses primarily on supporting import replacement initiatives of the Russian manufacturers.

In 2022, a total of 179 Russian companies were engaged in contract manufacturing of drugs, a marketing survey conducted by Russian news outlet Pharm Vestnik showed. The leaders of this segment are R-Pharm and Pharmstandard, manufacturing 66 and 72 items of International nonproprietary names, respectively. Both companies have unveiled plans to scale up independent production while remaining silent about the state of their contract business.

For instance, R-Pharm signed offset contracts with the Moscow and St. Petersburg governments last year, rolling out plans to invest some 7 billion rubles ($100 million) in ramping up capacities in both cities. Pharmstandard, in turn, said it planned to invest 1.9 billion rubles ($24 million) into establishing the production of common basic medicines, including paracetamol, validol, citramon, and askofen, and 1.6 billion rubles ($21 million) into the production of a medicine used to treat hemophilia.

Drug sovereignty in sight

In the wake of Western sanctions, the Russian Healthcare Ministry set the task of achieving “drug sovereignty,” meaning mitigating dependence on imports at all stages of medicines production to the maximum possible extent, disclosed Natalya Rabinovitch, CEO of Russian medicines manufacturer Innovative Pharmaceuticals. She added that fulfilling this ambitious plan looks like a tall order, as in 2022 out of 808 items from the Russian government’s list of vital and essential drugs, only 379 were produced on the Russian ground.

Achieving sovereignty in the sector would require investments worth 200 billion rubles ($3.3 billion), the Russian Science Ministry estimated in an industry development concept. This money is planned to be distributed among the key market players to boost the production of not only medicines but also active pharmaceutical substances. The Ministry estimated that local substances are currently used only in 20% of Russian drugs. By 2030, the target is to push this figure to 75%.

On the other hand, the proposed funding is said to be clearly insufficient—to achieve drug sovereignty in the pharmaceutical field, the Russian government would need to allocate around 500 billion rubles ($6.3 billion) into import replacement, estimated Alexander Semenov, president of the Russian pharmaceutical company Active Component. Among the top priority investment incentives the state could apply to, he lists soft long-term investment loans, tax breaks, as well as increased customs duties on the import of foreign components, Semenov added.

The Russian Science Ministry’s concept relies exclusively on Russian companies. There are no plans to attract Western business. The Russian press reported that the officials clearly realize that no company from the list of countries deemed as unfriendly would agree to launch any new projects in the country in the current political reality. Besides the obvious reputational risks, international companies must keep some other challenges in mind.

In previous years, one of the reasons why contract production in Russia enjoyed only moderate popularity was a fear that intellectual property rights are rather poorly protected in the country.

Concerns were voiced that amid rising tensions with Western countries, this problem could further worsen. These fears proved not to be entirely groundless. In November 2022, the Russian government legalized pirated screenings, allowing the distribution of foreign films without the consent of the copyright holder.

The Russian Healthcare Ministry has not supported the idea of breaking patents for vital drugs rolled out last year, Rabinovich said, adding that “if you start infringing patents, then companies will need funding not only for developing drugs but also for international legal protection.” Unlike the movie industry, where all key market players decided to sever ties with Russia, there was no reason to break the intellectual property rights in the pharmaceutical industry since all localized production keeps working and import continues, at least for now.

Nothing new

The Russian Science Ministry realizes there is no chance that the country will completely replace all medicines on the domestic market. The Russian newspaper RBC pointed out that the budget of the Russian import-replacement campaign is not comparable with the investments in R&D the leading Western firms allocate.  

Considering this, there are looming concerns over the future of the Russian pharmaceutical market as leading foreign firms, including Pfizer, Lilly, AbbVie, Sanofi and MSD, suspended trials of new drugs in the country in 2022. This factor promises not only to leave Russians without innovative treatment options but also to increase tensions between the Russian authorities and Western pharmacological behemoths.

For example, Pfizer, which transferred all current clinical trials to alternative sites outside of Russia, was running trials of four oncological drugs in Russia last year, two of which are used in hematology, as follows from the data of the Russian Healthcare Ministry.

Foreign innovative drugs registered in Russia must undergo clinical trials on the country’s territory, explained Ilya Yasny, head of the scientific expertise of the pharmaceutical fund Inbio Ventures.

The only exceptions, he added, are made for drugs against rare diseases and those used during pandemics. If the pause in clinical trials appears to be prolonged, new drugs will emerge on the Russian market with a considerable lag or not emerge at all.

This has already happened before with some medicines used to treat hepatitis C and cystic fibrosis, which became available to Russians only five years after they were registered in other markets. Now, the situation is different, as the time until new Western drugs will appear in the Russian market is stretching indefinitely—until the sanctions against the country are lifted, Yasny admitted.

There is confidence that, in general, it will be more complicated for foreign drugs to appear on the Russian market now, agreed Nikolay Bespalov, development director of the Moscow-based think tank RNC Pharma.

“It is difficult to say whether new foreign medicines will make their way to Russia. Difficulties with their registration are definitely possible,” said Andrey Pylev, chief surgeon-oncologist of the Moscow-based European Clinic of Surgery and Oncology.

Without the trials, new drugs would not pass registration, and without registration, they could not be produced, including under outsourcing contracts in Russia.

On the other hand, pharmaceutical manufacturers have a loophole for bringing their new products to Russia. The country remains a member of the Eurasian Economic Union, a trade block of Belarus, Kazakhstan, Armenia, and Kyrgyzstan, sharing a common customs space. Theoretically, if a medicine, for example, is registered in Belarus, its registration should be recognized in Russia, Pylev said.

In general, the present situation means that new contracts with Russian businesses can be signed only for manufacturing medicines already licensed in the country. Still, almost no new contracts in this field were inked in 2022. As some companies withdrew their medicines from Russia, the list of treatment options for Russian patients has been shrinking since the beginning of the Ukrainian conflict.

“At the moment, key drugs are available. But there are several companies that have completely left the Russian market,” said Pylev. “There are several medicines that do not have Russian generics, and they have been withdrawn from the Russian market. For oncologists, this is quite sensitive. These drugs are certainly important, and they have no Russian analogues. I think that we will look for analogues from some other countries with which we have not yet ruined relations.”

Hopes on Asia

A decline in investment activity of Western market players could pave the way to the Russian market for Asian firms, primarily from China and India, indicated a study conducted by Russian consulting firm DRT, a former Russian branch of Deloitte.

“DRT’s clients among Indian pharmaceutical companies have already shown interest in expanding their presence in Russia. India has long developed not only the production of finished dosage forms but also [pharmacological] substances. In addition, [Indian] generics manufacturers receive licenses from Western companies on better terms than Russian ones, which allows them to sell drugs at lower prices,” said Oleg Berezin, a partner with DRT.

Indian pharmaceutical companies occupied a significant share of the Russian market in the 1990s, but over time they were gradually pushed out by Western companies, as well as local manufacturers, the analysts said. “Now companies from India are in a better position because, due to sanctions, they can supply products to the Russian market through other countries at higher prices. At the same time, the Russian pharmaceutical market continues to follow the path of import substitution,” DRT claimed.

However, Asian companies have not made real moves towards expanding their business in Russia just yet, DRT admitted. Some negotiations are already underway, disclosed Vitaly Mankevich, president of the Russian-Asian Union of Industrialists and Entrepreneurs. He disclosed some Indian firms are considering establishing joint ventures with Russian businesses to localize some medicines production in the country but not provided additional details.

Since the beginning of the Ukrainian conflict, the Russian authorities have put a lot of effort into forging stronger ties with China, India, and other Asian countries, hoping to compensate for losses it suffered due to Western sanctions. This strategy brought mixed results—on the one hand, Chinese companies managed to replace a broad range of consumer goods on the Russian market previously delivered by European and the U.S. companies, but on the other, fearing secondary sanctions, Asian firms refrain from selling some critical technologies, components, and raw materials to Russia.

Eyeing foreign markets

In addition to meeting demand on the domestic market, some Russian pharmaceutical companies are laying out plans to strengthen their international business. For example, R-Pharm intends to supply its drugs to the markets of unfriendly countries through partners, Vasily Ignatiev, CEO of the company, said. Speaking during an industry conference in 2022, he said, “The initial fears about a possible negative reaction of international regulators to the registration of drugs from Russian manufacturers due to the current geopolitical situation have not materialized.”

R-Pharm plans to work in the countries of the European Union and the U.S. attracting local partners, the company reportedly have already found. In the first place, R-Pharm plans to bring on the market its drug Artlegia (olokizumab), designed to treat rheumatoid arthritis and COVID-19.

R-Pharm has conducted three phases of drug trials involving patients from more than ten countries, including the U.S. and European countries, investing 9 billion rubles ($120 million) in this venture. In May 2021, R-Pharm announced plans to organize olokizumab production at factories in France and Germany “to ensure the earliest possible registration of the drug for use in the American and European markets.” The company also announced plans to register the drug in Asia and Latin America.

By 2030, the Russian pharmaceutical companies are expected to bring 50 original medicines to the international market, the Russian Science Ministry estimated, adding that this is one of the key objectives of the technological sovereignty concept. Some of these drugs will be directly exported from Russia, others will be manufactured locally under outsourcing contracts. These plans look ambitious, but in the context of the growing sanction pressure on the Russian economy, it is yet to be seen whether they are realistic.

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Vladislav Vorotnikov is a freelance journalist based in Moscow, Russia. He can be reached at vorotnikov.vlsl@gmail.com.