Sergey Beloborodov: Produce locally, think globally

“The production strategies based only on import substitutule won’t last for long,” noted Sergey Beloborodov, the Ecexutive Director of NovaMedica at the round-table discussion “Attracting investments to pharmaceutical industry” held during the InvestRus International Conference in Moscow March 11, 2015.

“Let’s talk about investmentins in the pharmaceutical industry. What trends have been notice for the last five years? We see some international players who already have their manufacturing facilities in the world and are thinking about local manufacturing in Russia. We also see certain local companies that are thinking about modernization of their old facilities or building new ones. In fact, their primary strategy is targeted on import substitution. The first ones recognize the necessity to protect their business against import substitution. The others see the import substitution strategy as an opportunity for development. The questions is who will be faster in this race. It may result in creation of many ineffective production facilities.

Let’s remember that the tenders and state purchase contracts, which is the primary target of the import substitution strategy, represent only 30-40% of the market depending on whether it is counted in money or in product packs. Half of this volume lies within the segment of patent protected products/ the remaining part comprises 15-20% of the market. So, what do we have in result? The result is that all these production facilities targeted on import substitution will only cover a small part of the Russian market! Therefore, is it possible for the production development strategies targeted on import substitution to be long-term strategies?

Investments in production are the projects lasting no less than 20-30 years with a certain amortization perios, which strategy should include fundamental products or production advantages that would guarantee the company decades of presence on the market. In case of the import substitution target, the project might be relatively successful only for 2-3 years because the competitors would be able to localize generic production within 2-3 years. Due to erosion process, the price for expensive products might “shink” to the cost of production and even lower in order not to let the facility to stay out of work.

We have learned many good lessons from our colleagues’ experience and did it our way. NovaMedica is a company which strategy is targeted at localization of innovative drugs, products and technologies that are strongly differentiated (specialized) or have a long-term patent protection. We are creating a product portfolio in three major directions: venture investments in drug development at later stages with obligatory acquisition of IP rights for Russia and CIS, exclusive in-licensing agreements for commercialization of drug products and our own innovative developments. In one-year prospective, NovaMedica is opening its own R&D center which will allow the company to develop its own new drug forms.

Production investments should not be an end goal. Otherwise, it will be extremely difficults to ensure return on investments in manufacturing facilities buildt without portfolio consideration. We see a lot of examples of such facilities. Unfortunately, this is a common mistake made by strategic manufacturers. Building is one thing, but what should come next?

NovaMedica chose a different approach. We went to the construction site only in the end of 2014 clearly understanding what we were going to produce and who would be the consumers. Besides, our production facility will be compliant with GMP and FDA requirements, which is unique for Russia. Therefore, we have the potential for a long-term development not only in Russia, which is still only 1% of the global market, but also for the remaining 99% of the global market.

Let’s look at the Asian countries. The production strategies of their successful pharmaceutical companies are targeted at the global export and compliance with international quality standards. Why do we need to reinvent the wheel? Speaking about production, we should stich to a proven and successful strategy which is prospectives of the global export. That is why I repeat once again that differentiation and patent protection of the product portfolio as well as production facility compliance with the international standards is what will give us an opportunity to go to the global market and ensure a long-term and successful return on investments.”