Evaluation of Russian pharmaceutical market

30 October 2013

Market Access Solutions

The company " Coface ", which is an expert in the field of commercial risks and the global leader in credit insurance , has introduced the first quarterly report on the evaluation of the Russian pharmaceutical market . Estimation of capacity of the pharmaceutical market as a whole and its individual elements may vary depending on the source of the information . This is due to the fact that different media outlets can use divergent ways of grouping types of pharmaceutical activity by sector. The ratio of domestic and imported drugs in the Russian market remained stable in 2011 - 1 half of 2013 , and in value terms, imports cover about 75 % of the market , and in-kind - only 40% ( in 2011 the share of slightly shifted in favor of imported goods ) .

This discrepancy is explained by the fact that the average price of imported drugs several times higher than the prices of medicines produced in Russia ( June 2013 the ratio of average prices was 40.6 rub./185 , 7 rub. Per set ) . It should be noted that government policy is aimed at replacing foreign medicines domestic equivalents . The overwhelming share of the market of dietary supplements in the Russian Federation is owned by Russian producers (84% " in packages " and 67 % in value terms in 2012) .
The main factors determining the dynamics of the Russian pharmaceutical market , are inflationary growth and a shift in sales mix toward more expensive products . At the same time measures of state regulation also significantly reduce the profitability of pharmaceutical market . In the Russian pharmaceutical market can be divided into three main groups of participants : pharmaceutical manufacturers (foreign and domestic ) , distributors ( wholesale ) and retail pharmacies ( pharmacy chains and individual outlets ) .
75% of the market occupied by imported drugs and, therefore , foreign manufacturers . Russian manufacturers are in the best position when working with VEP , as fixed allowance specifically to the manufacturer's price ( although the price producers have to register and re-register in the case of indexing every year) . Operating margin for the results of 2012 (many manufacturers are closely held companies and do not disclose their interim results ) of the largest Russian manufacturers hovers around 10% to 30% profit margin before tax - from 5 % to 20 %. Russian producers have high levels of equity - 30-70 % ( as of the end of 2012) .
Financial leverage is specific to each company. You also need to be wary of the intermediate indicators ( for all market participants, not only in the analysis of the producers ) , as the industry is still subject to strong seasonal fluctuations. Almost all major Russian pharmaceutical manufacturers in 2012 showed revenue growth , but with a significant spread in performance (increase from 2 to 48%). The average increase in sales is placed in the annual rate of price growth (6-7 %).
Pharmaceutical distributors provide access for foreign producers on the Russian market and the distribution of domestic production. Market concentration at the wholesale level is quite high: the top 15 players account for 78 % of the market . Five leaders as in the situation with manufacturers is quite stable. Restricting the price (or more precisely , margins) VED seriously affected the activities of pharmaceutical distributors . Since 2010 , almost all wholesale companies operate with a negative operating income ( loss ), and a positive pre-tax profit .
This is due to the fact that, faced with limited margins, retailers have started to work with buyers and suppliers of the bonus scheme and reflect the bonuses (in fact, operating income and expenses) , accrued income and expense , non-operating in the "other" revenues and expenses. However, even with these additional revenue margin of profit before tax is low ( less than 1 % -3 %). Some distributors are working with a net loss due to the support of its shareholders and owners. The low profitability of distributors is also evident in the low rates of concentration of equity. Average rates rarely exceed 10% , the maximum values ​​as high as 30 %. Debt burden indicators are also unique to each organization.
You also need to consider the fact that some of the loan funds can be obtained from the owners and affiliated organizations, that is in fact a net worth group. Some large retailers are trying to " credited " at the expense of their suppliers , delaying payment for goods. In this case, the large number of claims from contractors do not necessarily indicate the financial distress of the company, although it raises questions about the ethics of such " business methods ." It is worth noting that among the major manufacturers such cases almost never occur.
The bottom rung of pharmaceutical distribution chain are pharmacy retailers . For this level is characterized by low degree of concentration of the market: on the top 10 players account for only 15 % of the market . The retail sector hardest hit by the government price controls on drugs . Almost all of the major pharmacy chains teetering on the point of break-even ( operating and net margins at a level not higher than 1 %) or operate at a loss . A characteristic feature of the pharmaceutical companies is the presence of a significant debt load (from 30 % to 70 % of total liabilities ) .
Moreover, attempts to compare the financial debt with some measure of profits does not make much sense because of the virtual absence of profit at the level of the operating result . However, there also needs to be borne in mind that some of the loan funds may be provided to owners or other members of the group. Drugstore chains are actively looking for ways to optimize performance. In particular, there are special pharmacies "low price " (" discounters ") parapharmaceutic expanding range of goods , the prices of which are not subject to state regulation. However, the glut the market with cheap drugs may lead to a reduction in demand and, consequently, reduce the effectiveness of these measures.
The pharmaceutical market in Russia is in a state of near stagnation. This character of the market situation leads to the intensification of the struggle between the participants , as the substantial expansion is only possible at the expense of the share of competitors. Pronounced trend in the pharmaceutical industry is the formation of a vertically integrated holding companies , but this approach is not always effective . In any case, the analysis of organizations at all levels of the market should take into account the influence of the group as a possible support and redistribution of financial resources for the benefit of other affiliates.
One of the factors that can influence the dynamics of the pharmaceutical market in Russia in 2014 , is the introduction of requirements for mandatory compliance with production standards GMP (good manufactured practice) to 01.01.2014 (Federal Law "On Circulation of Medicines » № 61 -FZ) . Closure of businesses that can not be upgraded , can lead to a reduction in supply and increase in prices of domestic medicines.
Compiled by:
Pavel Nikiforov
Director of Underwriting and Risk " Coface "
Julia Yarysheva
Head of the Department of ratings and financial analysis of " Coface "


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