Russian Pharmaceutical Forum 2009: the strongest survives the crisis
On May 19-21, 2009, the 15th anniversary conference of the Adam Smith Institute "Russian Pharmaceutical Forum" was held at the Corinthia Nevsky Palace Hotel, St. Petersburg. Hundreds of participants came not only from different parts of Russia, but also from all over the world to try to figure out for themselves how Russian pharma will develop in the era of the global economic crisis. For guests from Ukraine, this event is also very interesting — being at it, one gets the impression that he has fallen into a kind of parallel reality, where events are developing painfully familiar, but at the same time so unlike. The key issues that concern the players of the Russian pharma are the same as for the operators of our country: the impact of the crisis and the prospects for overcoming it, state regulation and control of pricing, the working conditions of distributors and retail during a difficult period, the search for mechanisms to improve work efficiency. And the differences that exist between the realities of the markets of our countries allow us to look at hot issues from a different angle, because much of what is already happening in Russia, our country has to go through. At the same time, our realities largely anticipate what was just discussed on the sidelines of the Russian forum and at discussions in the format of the event.
When the wind of change blows, most build walls, and only a few build mills. Russian pharma withstood the first gusts of the crisis wind. Many survived, some even managed to strengthen their positions. However, it is obvious that almost no one has managed to use the situation to their advantage. It was in search of an answer to the question of how this can be done, or at least small hints on how to direct the energy of change into the movement of the flywheels of business, that the forum participants gathered this year.
The first session of the forum was an annual analytical panel discussion called "Development of the pharmaceutical sector in difficult times", where reports of leading analysts of Russian pharma were presented.
Nikola Milevcic, CEO of IMS Health in Russia and the CIS, noted that over the past six months there has been a decrease in the market. In rubles, the market continued to grow, but if in the last few years structural changes were the main driver of the pharmaceutical market development, then during this period the growth was determined by the inflationary component. In dollar terms, the market showed a 9% drop compared to the fourth quarter of last year.
In the OTC segment, there is an increase in the price of medicines (drugs) due to the shifting of risks to the end user. In the hospital sector, the transition to cheaper drugs has been noted.
N. Milevcic announced the forecast of IMS Health for the global pharmaceutical market, according to which in 2009 it will grow by 2-3%. At the same time, there will be a redistribution of the influence of various local markets. Thus, many mature markets, including the United States, will decrease, while growth will continue in the markets of China, Brazil, Mexico and some other emerging markets.
According to Nikolay Demidov, CEO of the Russian company Pharmexpert, the crisis shook the country's pharmaceutical market, but did not destroy it. Sales volumes in rubles increased more than it was in the first quarter of 2008. The increase in prices led to a decrease in consumption in physical terms and a slow decrease in sales volumes in dollars. In his report, N. Demidov noted that today the pharmaceutical market of Russia has returned to the level of the IV quarter of 2007 in terms of its indicators.
Some of the effects of the crisis have been offset. Thus, the decrease in advertising expenses of companies was partially offset by a drop in advertising prices — as a result, there are still a lot of pharmaceutical advertising.
Among the impact of the crisis processes, it can be noted that companies are now reviewing their activities, since inefficient models of behavior in the market lead to significant decreases in sales volumes, unlike in 2008, when consumer loyalty was significantly higher and sales increased even of those goods that were not distinguished by a competent pricing or advertising promotion policy. The negotiation processes between all parts of the pharmaceutical market have tightened, including contractual relations between distributors and retail have become much stricter. Timely payments are becoming one of the most important moments of interaction between market participants.
The main influence on the market is provided by macroeconomic indicators, probably, they will determine its condition in the future. The price of oil is the most important indicator for currency exchange rates and for the economic situation in Russia, which determines all spheres of economic activity today. The purchasing power of consumers and the implementation of social programs in Russia, and hence the state of the pharmaceutical market, equally depend on the price of oil and the situation with the export of this mineral.
N. Demidov provided 2 prognostic scenarios for 2009-2010. According to the conservative, the market will decrease by 6-7% in the currency. The positive scenario assumes 5-7% growth. Regardless of how events unfold, it is very important that the market remains attractive to foreign companies and investors, which will be the driver of its growth in the future.
The report "Pharmaceutical Eclipse: 7 minutes of fear" was presented by Alexander Kuzin, CEO of DSM Group. It was named after a total solar eclipse, which causes darkness in the world for 7 minutes and not so long ago caused fear in the hearts of people, because they did not know the nature and essence of this phenomenon. At that time, it was customary to carry out a number of actions in order to avoid the negative consequences of the eclipse — to create a lot of noise, shoot into the sky, make sacrifices. A distinctive feature of all these actions was invariably that they brought a "result" — the eclipse ended and the sun shone brightly again!
According to the expert, the Russian pharmaceutical market has passed the test of strength. According to the data provided by DSM Group, the financial crisis, which gained momentum in the fourth quarter of 2008, affected the size of the market in foreign currencies. If during the I–III quarter the market growth in rubles was 10% lower than in dollars, then in the last quarter of 2008 the dollar exchange rate increased by 16%, which smoothed out the difference between the growth indicators. As a result, the market increased by only 28% in dollars.
The state segment showed growth in 2008. To a greater extent, this is due to the program of additional drug provision (DLO) — expensive drugs for seven nosologies were put into a separate program, as a result, their consumption increased almost 3 times. The hospital procurement segment increased by 17% compared to 2007.
It was due to public procurement, and not due to the growth of consumer spending, that the market grew by 25% in 2008 to the greatest extent, compared with 10% in 2007.
Russian medicines in the fall of 2008 were becoming more expensive than foreign ones, perhaps one of the main reasons for this was serious difficulties with loans, which manufacturers partially shifted to the shoulders of buyers. First of all, cheap drugs have become more expensive.
Are pharmacy chains to blame for the rise in the price of medicines in Russia? If we compare the margin on drugs in retail for March 2008 and March 2009, it turns out that the difference will be 1% (the average margin is 31 and 32%, respectively). This means that the retail contribution to the increase in drug prices was insignificant.
A very important issue in 2009 will be state regulations, including drug prices. With their implementation, which does not have a proper pharmacoeconomical justification, retail will suffer first of all, but the entire market will feel this influence. Among the advantages of price regulation, A. Kuzin attributed the absence of hype jumps in the cost of drugs and price variance between regions. However, he expressed the position that price regulation is justified when the market is financed by the state or by various insurance financing systems, but the free market should regulate itself.
In the crisis period, according to A. Kuzin, the most important task for companies is to stay in the market. The weaker ones will clear the market for the more viable ones, which will be successful after the economy comes out of the crisis during its growth.
The forecast from the company "DSM Group" is as follows:
- the share of the pharmaceutical market in the country's GDP will decrease to 1.5%, which is at the level of 2001-2002.;
- in rubles: +24 – +12%;
- in packages: -5 – 0%;
- in dollars: -7%.
The aborigines of Australia associated a solar eclipse with a positive process — a romantic meeting of a man of the sun and a woman of the moon. One way or another, both the eclipse of the sun and the eclipse in the economy just need to wait out without panicking.
The experts could not answer the question from the audience, addressed to all analysts, whether the Russian pharma has internal mechanisms and potential for growth that is not tied to an increase in oil prices or macroeconomic indicators. Obviously, as long as there is hope for the sale of minerals, lending, Western investments, etc., the market will cling to such opportunities without making much effort to optimize its structure and search for new drivers of development.
The key to success both in love and in business is the same: the ability to manage your expectations — Daniel Tornili, Senior Vice President, Head of CEEMEA, Economist of the Group, began his report with these words. His speech was made within the framework of a new format for the forum — "Presentation of a special guest".
The first part of his report was a full-expression attempt to convey the complexity and uncertainty of the situation that has developed in the last six months in the global economy. The world has literally gone crazy, and the development of the crisis is largely due to the fact that the world-wide economic system has not been tested for strength. The absurdity of the situation is perfectly reflected in the expression of Albert Einstein — "There are two infinite things — the universe and human stupidity. However, I'm not sure about the universe." How else can we explain all the absurdities that led to the beginning of the crisis and accompany it?
The panic in the global economy began in the fall of 2008 with the bankruptcy of the investment bank Lehman Brothers — this was the first signal that people on a global scale are mismanaging their expectations. In fact, the activity of banks has become one of the key moments that led to the stagnation of the global economy. At the same time, huge amounts of bonuses were paid to bankers worldwide for their work in 2008. And this is because they had a hand in the collapse of the world economy?
For the first time in a hundred years, the Big Seven countries, according to analysts, will have negative GDP growth indicators. Certain industries, even in a difficult period, remain afloat: some consumer goods, telecommunications, energy. At the same time, construction, metallurgy, the IT sector, and the production of many goods have already suffered significantly. First of all, those areas that are dependent on loans suffer.
Since 1929, the lowest level of lending in the world has been noted. It is precisely the difficulties with lending that can become one of the most difficult problems for all spheres of production and economy in the world — the availability of funds for development will become much lower.
At the same time, consumption is also seriously decreasing, which is associated with a decrease in people's incomes. Since 1945, the United States has already recorded the highest unemployment rate. Consumption of almost all groups of goods is decreasing. Of course, there are exceptions — for example, during all the recent crises, it was noted that sales of lipstick and cheap alcohol are steadily increasing. Apparently, the most affordable women's cosmetics and the most affordable "antidepressant" will be in demand in this crisis. However, D. Tornili expressed his fear that all the efforts of women who are aimed at improving their situation in difficult times by investing money in beauty may not be justified if men prefer cheap alcohol. Here, too, it is very important to manage expectations correctly.
What can we expect for Russia in the foreseeable future? The next 3-9 months will be very difficult all over the world, including for this country. A distinctive feature of this crisis is its global nature. If in 98-99 of the XX century, when Russia, along with Asian countries, experienced a very severe crisis, some people could count on the fact that they could leave in search of a better life, today there is nowhere to run — the crisis affected every country in the world.
What will be the key criteria for success in 2010? The main thing, according to the expert, will be the company's market share. It is the position on the market in comparison with competitors that will be crucial: what brands, personnel, prices the company has. Absolute figures will not be decisive.
For example, an increase in prices for the sake of profit (that is, for the sake of absolute indicators) can lead to a loss of market share, which is short-sighted. The company "P&G" claims that the loss of 1-2% of the market share today can have a very bad effect on the fate of the company in the region in the foreseeable future.
Expert advice: never raise prices so much that you will lose leadership in the market!
Today, many behave like fools when they say that in order to invest, develop companies or sell, they need stability. Unfortunately, such statements do not correspond in any way to the realities of 2009. It is time to recognize that stability in the coming years is a big dream that will not come true, and it is necessary to learn how to act in new realities.
Given the fact that analytics is significantly difficult in a dynamically changing world, today there are often recommendations to carry out only short-term planning. In a rapidly changing situation, this sounds reasonable and rational, but it doesn't work enough.
Expert advice: it is much more efficient to plan scenarios.
This means that each company should have several scenario plans for the most likely scenarios for the development of the situation and budget each of them. Only with this approach there are chances to stay on the market in any event.
Another element that you need to learn how to properly implement during a crisis is saving. Come to the office, turn off the lights, close the window, turn off computers and phones, sit on your hands and do nothing — this is an example of passive economy. It is obvious what the effectiveness of such actions is. However, in practice, many companies did this in the fall of 2008, which aggravated the economic difficulties.
In Russia, companies began to save sharply in November–December 2008: many reduced their expenses by 30-50%, reducing advertising budgets, salary funds, etc. The reason for this is the regional nature of Russian companies, not very strong brands, less access to capital and credit resources and less flexibility to switch them between several regions where the company is represented. International companies have a number of advantages in these matters, which allowed them to cut budgets less sharply. However, it should be recognized that many of the Western enterprises began to control their expenses long before the first signs of the crisis.
Expert advice: do not destroy your business by excessive savings — you can kill a chicken that lays golden eggs. Indeed, it is possible to save up to 20-30% on costs by optimizing their use and thereby compensate for the decrease in sales and economic difficulties. However, you should not spoil relations with partners with excessive savings or lose precious personnel.
Frames are the next moment that needs to be paid close attention. Today, many companies are trying to get rid of unnecessary people, but it should be remembered that when the market is growing, a lot of resources are needed.
Expert advice: try not to be left without personnel in case of market growth, otherwise in a favorable period you will have to recruit random people with low work efficiency again. The most important thing is talented people, they are the ones who do business. Today there is an opportunity to find good personnel, especially in the field of marketing and sales, where specialists from parallel markets may appear.
D. Tornili also noted that the bad reputation of Russia, which is imposed in the West, has a bad effect on business development, attracting investors to this country. There is a formed opinion that if you do business in Russia, you will definitely be robbed and killed, and if the Russian mafia does not do this, then your partner will arrange it. This is how Western mass media provide information, this is how Russia is shown in films. Obviously, there are a lot of lies about this country — it's hard to do business in Russia, but in recent years, many companies have had the best results here.
Russia has a huge potential: the government has worked well during the crisis, the country has the third largest stabilization fund in the world, the economy is very weakly dependent on the stock market.
Forecasts regarding the way out of the crisis for both Russia and the whole world are very diverse. Almost no one today believes that the way out of the crisis will be quick — in the form of the letter V (a sharp drop and an equally sharp exit) on the virtual graph of economic indicators. Most likely, the situation will look like the letter U — it will take a long time to get out of the crisis, it will happen smoothly. However, there are also more difficult scenarios in which the situation will develop like the letter L, when the way out of the crisis will be very long and difficult, similar to the plateau of economic failure.
In any case, the best way to behave today is not to be naive and plan different scenarios, control your expectations.
On the first day of the event, the participants also looked for answers to the questions of concern to the pharmaceutical market players in a number of traditional discussions with top managers of pharmaceutical companies and industry leaders.
The first half of the second day of the forum was devoted to the impact of the regulatory system on the full functioning of the Russian pharmaceutical sector. Both the issues of the existing regulation of pharma and the prospects of this sphere were considered.
Deputy Head of Roszdravnadzor, Doctor of Pharmaceutical Sciences, Professor Elena Telnova, in her report noted that for 2006-2008. considerable work has been done in the field of drug provision.
Thus, the program for providing certain categories of citizens has been modernized, while part of the authority to organize drug provision has been transferred to the subjects of the Russian Federation. 7 high-cost nosologies were allocated from the program of providing the necessary medicines, which significantly improved the quality of life of patients and reduced the number of complications. The financing of drug provision has significantly increased, which allowed the program to be implemented in a stable mode.
At the same time, a number of problems still occur, although their solution is under the constant control of the Ministry of Health and Social Development, the State Duma, Roszdravnadzor and other organizations. These are the availability of medicines for the population of the Russian Federation living in rural areas, the price availability of medicines, issues related to the development of the domestic pharmaceutical industry, issues of the quality of medicines entering pharmacy and medical institutions, etc.
Despite the significant share occupied by Russian manufacturers of drugs in kind, the qualitative composition of the assortment leaves much to be desired. On the part of the state, measures are being taken to influence the drug market, which will ensure the price and assortment availability of basic medicines. The system for detecting counterfeit and low-quality products on the market is quite effective, but in some segments it has reached the limit of detectability and needs to be modernized.
In order to provide the population with high-quality medicines of domestic production, measures are needed to introduce GMP, as well as to strengthen the responsibility of manufacturers for violations of these rules. To ensure the quality of foreign medicines, a legislative mechanism is needed to check foreign sites, primarily the countries of Southeast Asia (direct competitors of Russian manufacturers), and a mechanism for revoking registration out of court.
The main issues that concerned the forum participants during this session were increasing transparency and developing a clear structure of the regulatory sphere for ease of work, as well as issues of pricing regulation and changes in this area that are possible in the near future. For the exchange of experience, an overview of the existing drug supply mechanisms in the European pharmaceutical market and a discussion of which of the models operating in Europe would be most applicable for the Russian pharmaceutical industry were provided.
According to E. Telnova, there is no single mechanism for controlling the pricing system in Russia today. In choosing the optimal model, there is a search for a balance of interests. On the one hand, it is necessary to regulate and control the price level, introduce generics to increase the availability of treatment, ensure the availability of drugs; on the other hand, price formation occurs through market mechanisms, and interference in this process can negatively affect the market as a whole.
A number of important issues were discussed during the session "Prospects for local production of medicines in Russia": who should be considered a domestic manufacturer, local production as the basis of the import substitution program, the attractiveness of local production for foreign companies, the production of products for export as a component of the Russian pharmaceutical industry.
General Director of "Nycomed Russia-CIS" Jostein Davidsen in his report noted that the main reason for investing in local production in Russia today is connected with the prospect of creating Russian roots for global manufacturers in order to be able to participate in re-investment programs in the future. There are practically no economic reasons for such investments today. Production costs are higher than in many other countries. The infrastructure has not been created on local sites in order to easily integrate production, there are practically no developed technology parks with high-quality logistics interchange.
During the eighth session of the forum "Distribution as the locomotive of the pharmaceutical industry. Is the situation really changing?" the problems of distributors during the crisis period were discussed.
David Panikashvili, President of ROSTA Pharmaceutical Group, noted that, in his opinion, the crisis phenomena will develop in two stages. The first stage is exchange rate losses due to the devaluation of the ruble, a decrease in consumption due to a sharp increase in prices, switching consumers to cheap medicines. At the second stage, there will be a decrease in consumption due to rising unemployment, a decrease in profitability due to tighter state control over prices, but at the same time optimization of product portfolios of market participants.
According to D. Panikashvili, it is possible to expect the growth of the pharmaceutical market in today's realities in the case of the introduction of compensation programs. In this case, the chain of increasing market volumes due to compensation programs will be closed and developed, which will lead to an improvement in the quality of life of the population and have a positive impact on GDP growth, and this in turn will increase the financing of compensation programs.
The main problems voiced in the discussions for Russian distributors were called changes (for the worse) in the conditions of lending to the financial cycle and the increasing role of the impact of profits and timely repayment of payments as a source of development of companies.
The functioning of the retail segment was discussed in the next session. The discussion was conducted around such key issues as the analysis of possible scenarios for the development of retail chains, the search for the most effective business models for future development in the retail segment, issues of increasing liquidity and finding ways to exist in conditions of limited credit resources. As a result of the discussions, it became obvious that the key factors affecting the functioning of retail in Russia today are the same as for the pharmaceutical market as a whole: economic components, including macroeconomic indicators, consumer purchasing power and reduced availability of credit resources, regulatory component. It should be noted that at this stage the issues of state regulation of the sector have not had a decisive impact on the retail segment, however, some uncertainty in the near future of this issue causes considerable concern among market operators.
The period of active expansion of the market for most large pharmacy chains has been left behind, survival and an attempt to maintain positions in anticipation of better times has become an urgent problem.
The third day of the event began with the search for rational and productive mechanisms of personnel management. There have also been important changes in this area that require new solutions and approaches. The main difficulties for companies are overcoming the problems of "bloated personnel" in an unstable market and choosing strategies for material and non—material motivation of employees.
In matters of staff motivation, the pharmaceutical market is quite stable today. Business Development Director of PYNES GROUP Yulia Poltaratskaya in the report "Changes in personnel management in the Pharma sector: results of PYNDEX monitoring" noted that 42% of companies in pharma have planned revisions (increases) in salaries of their employees, while in all industries this figure does not exceed 29%. The planned size of the revision also distinguishes the pharmaceutical sector in a more favorable light for employees: companies plan to increase salaries in pharma by an average of 14%, while the average figure in other sectors is 10%. At the same time, there is a reduction in social packages. The most affected are educational and sports programs, internal training. To a lesser extent, the costs of voluntary medical insurance, life insurance, and mobile communications have decreased.
The last part of the event was devoted to the issues of proper distribution of marketing budgets and improving sales efficiency in unstable times. The discussion of these issues and the reports presented raised a number of problems: new conditions for the positioning of goods on the market, the search for low-cost channels for their promotion, changing the role of marketing in new realities, improving the efficiency of sales representatives.
Both classic and non-standard solutions to these issues were provided. Thus, German Inozemtsev, Director of Portfolio Development, Deputy General Director of the Pharmacy Chain 36,6 Management Company, spoke about the company's achievements in introducing its own brand to the market — goods developed by Pharmacy Chain 36,6 and produced by manufacturing partners for sale under the 36,6 brand in retail outlets of Pharmacy Chain 36,6. The strategic goal of such an innovation is to increase the profitability of product categories.
According to G. Inozemtsev, customer satisfaction and loyalty "36.6" due to such activities is determined by a lower price, valuable properties of products for consumers, guaranteed stable quality. Cooperation is also interesting for manufacturers. It provides a stable order and predictable workload, no promotion costs, no sales risks and fluctuations in demand.
Pharmacy Chain 36,6 receives profitability to ensure further development, brand development and loyalty strengthening, differentiation from other retail operators.
In the report of Irina Chubukova, a lawyer at Goltsblat BLP, "What attracts the attention of the Federal Antimonopoly Service in advertising pharmaceutical products and services", certain practical recommendations were given. According to her, it is important to comply with advertising bans due to the fact that false advertising leads to a decrease in the credibility of products among consumers and distrust of the manufacturer, is the basis for the application of liability measures. Inappropriate advertising is an inefficient waste of financial resources. And this is relevant in every country of the world, regardless of the requirements of regulatory authorities.
Naturally, it is not possible to describe in detail all that was said within the framework of the largest Russian pharmaceutical forum. In addition to the official part of the event, it is impossible not to mention the unofficial part — this is a great opportunity to establish business contacts, hear what cannot be heard from high stands, make new partnerships and friendships, which is why participation in such events is the best opportunity to be aware of all events and stay in the spirit of the times.
Oleg Ternovenko, PHARMACY Online
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