On January 11, 2022, the Russian government published a new plan for the pharmaceutical industry development titled Pharma 2030, setting the target to double the domestic production of drugs and pharmaceutical substances during the next nine years.

The new program is an ancestor of Pharma 2020, a similar development plan embarked on in 2014, which envisaged that 9 out of 10 vital drugs should have been localized in Russia by 2020. This task has never been accomplished, even despite strong growth in the domestic pharmaceutical industry’s production, the program secured.

The Russian Industry and Trade Ministry estimated that the Russian pharmaceutical market in 2019 totaled Rub1.45 trillion rubles (USD$20 billion) in 2019, jumping by 58.8% compared to 2014. In monetary terms, domestic drugs accounted for 30.8% of sales on the Russian market against 25.1% in 2014. In packages, the share of Russian medicines stood at 61.3%, primarily because Russian companies tend to localize the most affordable medicines in the first place.

The Ministry also estimated that between 2014 and 2020, the Russian pharmaceutical industry attracted investments close to 200 billion rubles ($3 billion).

On the other hand, the Russian Association of International Pharmaceutical Manufacturers (AIMP) estimated that foreign companies pumped as much as 1 trillion rubles ($17 billion) in various localization projects on Russian ground over the past decade. Between 2010 and 2020, 30 pharmaceutical plants were launched in Russia, including 20 built with some involvement of AIMP members, according to Vladimir Shipkov, executive director of AIMP.

Ticket to state tenders
The Russian government has been encouraging foreign companies to localize production in Russia since 2014, when the first Western sanctions were introduced against the country’s economy following the annexation of Crimea.

In 2014, the Russian lawmakers adopted a set of amendments for the state-run tender regulations, under which non-Russian drugs were banned from competitive bidding if at least two Russian drugs were registered. Since 2019, foreign medicines are not allowed at the tenders even if only one Russian analog is available.

Sergey Shulyak, general director of the Moscow-based think tank DSM Group, explained that localization is not a guarantee for a foreign manufacturer that tender would be won, and it should be considered more as a ticket to the participation.

Currently, foreign companies have two options for localizing their business in Russia. The first is to sign a so-called Special Investment Contract, or SPIC, with the Russian authorities. All SPICs have individually discussed terms and conditions, but they mainly include the company’s obligation to allocate significant investments into production assets on the Russian ground. In return, the Russian government usually offers tax breaks and lowered import duties for a certain period.

The second option is launching contract production with Russian companies. Given the current risks, a growing number of companies opt for this way instead of investing billions into greenfield projects. 

“Outsourcing doesn’t involve large capital costs since you can engage capacities of a Russian partner. This approach proved to be way cheaper,” Shulyak said.

Besides, most companies localizing the production of medicines in Russia also target special state procurement programs. For instance, Roche has localized the full cycle of manufacturing Gaziva (obinutuzumab) at Pharmstandard-Ufa-VITA plant for $20 million, expecting that this step would increase the availability of the drug for patients who would receive it under the 12-nosologies program, under which the Russian government purchases some of the most expensive medicines for hospitals. Russian localization is mandatory for drugs purchased under this program.

A full package
“Contract manufacturing as a phenomenon exists [in Russia] quite successfully,” said Nikolay Bespalov, development director of the Russian analytical agency RNS Pharma, adding that the peak of development in this field, especially in relation to the localization of foreign products, might have already passed since a huge number of foreign players already in some way localized their production in the country.

“On the other hand, there are many examples when companies even having their own capacities [in Russia] localize part of their products at third-party’s facilities. For example, Sanofi localized some parts of the Pentaxim vaccine at Nanolek, while Clexane production was localized at Pharmstandard,” Bespalov said.

Bespalov recalled that Pfizer had plans to build its own plant in Russia but, for a number of reasons, abandoned the project and opted for working with local partners.

“Here, the one need to understand is that frequently local partners not only provide contract manufacturing services but also act as distributors of these products, including representing the interests of foreign companies in the public procurement system. In this regard, this partnership is generally difficult to overestimate since, without localization, many of the products would hardly have any chance to succeed on the Russian market,” Bespalov said.

As explained by Bespalov, in addition to minimizing logistics costs, the rationale behind seeking outsourcing contracts with Russian manufacturing companies is associated with the fact that the cost of production in Russia is now quite competitive compared to other countries.

In recent years, contract manufacturing in the Russian pharmaceutical industry has been used not only by international but also by local companies, and this trend is expected to be gaining traction in the foreseeable future. Bespalov said that the most striking example, in this case, is Sputnik V and Sputnik Light vaccines, the production of which is carried out now at 7 or 8 sites across Russia.

This is not the only outsourcing contract called to battle during the Covid-19 pandemic. In 2020, Gilead Sciences and Pharmstandard signed a preliminary agreement to market, supply, localize and distribute Veklury (remdesivir), a drug product for the treatment of patients with Covid-19, in the territory of Russia. Earlier, Gilead localized drugs for the treatment of hepatitis B and C and HIV at the Pharmstandard’s capacities.

New objectives
As explained by Bespalov, Pharma 2020 indeed pushed foreign companies to localize production at Russian facilities. However, there is no guarantee that Pharma 2030 will have similar objectives since Russian pharmaceutical companies are now expressing strong interest in having full-cycle production.

“In general, contract manufacturing is not an ultimate goal [for Russian companies]. For a manufacturer, of course, it is more interesting to produce a drug on its own and not be content with relatively small payments for a production service. In the case of product distribution, they are, of course, higher, but still far from what the company can earn on its own,” Bespalov said.

To some extent, it is believed that the Russian government has been putting a lot of effort into the localization of medicines in order not to lose some vital drugs if the conflict with Western countries escalates.

“For the state interests, contract manufacturing does not make much sense at all, it is much more interesting in this case either to develop our own capacities to have full production cycles, or to attract foreign partners under the terms of the full cycle localization, including the production of the pharmaceutical substance,” Bespalov said, adding that this could be either technology transfer or joint ventures.

Jeopardized intellectual property
It is also believed that one of the biggest challenges associated with launching contract production in Russia is the weak protection of intellectual property in the country. According to the American Global Innovation Policy Center, Russia is ranked 29th among 50 countries in terms of the protection of intellectual property rights, with several dozens of cases on the protection of intellectual property rights of pharmaceutical companies pending in Russian courts.

For example, Bayer has frozen a project to localize the production of the anti-cancer drug Nexavar (sorafenib) in Russia. This step was associated with the launch of the Nexavar generic by the Russian company Nativa on the market during the patent protection period.

Bayer signed an agreement to localize the production of Nexavar with St. Petersburg Polisan in 2016. This plant already produces the Bayer antibacterial drug Avelox and works on the localization of some other drugs. Under the original plan, the localization of Nexavar was to be completed in 2019.

Nativa registered Nexavar analog under the brand name Sorafenib-Nativa in 2017. In January 2018, Bayer filed a lawsuit against Nativa, demanding that the Russian company be banned from selling its medicine until the patent expires in 2026. Nativa managed to prove in two court trials that during manufacturing Sorafenib-Nativa, it uses its own proprietary formula.

Bayer estimated that while litigation is ongoing, Nativa has already signed 301 state contracts for its generic drug.

Shulyak claimed that the Russian authorities call foreign companies to localize full-cycle drug production within the country, offering preferences in public procurement in return, but at the same time, the authorities are interested in purchasing cheaper medicines. The price of Sorafenib-Nativa was nearly 20% lower compared to the Bayer drug. In his opinion, the conflict around Nexavar may scare away other foreign investors from the Russian pharmaceutical market.

Nativa, in turn, has repeatedly emphasized that the company operated strictly in accordance with Russian law, as well as in the interests of state import substitution policy.

Nativa is also trying to challenge the cancellation of the patent for its anti-cancer drug sunitinib through the Russian intellectual property court. The patent itself was canceled in June 2021 based on the complaint from Pfizer – Sugen, which owns the rights to the original antitumor drug under the Sutent brand.

The main reason for the numerous litigations between the Russian and foreign pharmaceutical companies lie in the field of peculiarities of the Russian patent system, according to Sergei Uchitel, partner at law firm Pen & Paper. He explained that the Russian patent regulator Rospatent satisfies up to 75% of applications, which often causes lengthy and costly litigations, which may last for years.

Legal battles over contesting patents are typical for the Russian pharmaceutical industry, according to Anastasia Sivitskaya, adviser to Orchards law firm. She recalled that Rospatent initially refused Pfizer to cancel Nativa’s exclusive right to sunitinib. The very fact that a foreign company eventually managed to challenge this decision, Sivitskaya said, is an important precedent for the Russian pharmaceutical industry. In 2020, out of 14 applications filed to the intellectual property rights court to challenge the decisions of Rospatent to refuse to recognize exclusive rights as invalid, only three were satisfied, she added.

However, Bespalov said that there are no high risks associated with intellectual rights protection in the Russian pharmaceutical industry, primarily because most outsourcing contracts are signed for only certain stages of the production cycle. He added that this problem could have been relevant 20 to 30 years ago, but not now.

“The main risks in this regard are concentrated at the stages of production of raw materials, but there are practically no examples of transferring the production of raw materials to our country, so there is no reason to believe the risks are high,” Bespalov said.

“By the way, now there are many examples when Russian courts, on the contrary, take the side of foreign companies, so I would not say that in Russia there are problems of weak protection of intellectual rights,” Bespalov continued. “Moreover, some examples generally contradict all the concepts of common sense. For example, the patent protection for Tujeo Solostar (Sanofi), which is a classic example of an evergreen patent, has not yet been lifted.”