Bayer explores Russian options in the context of Pharma 2020 strategy

Bayer HealthCare, one of the business units of German drug major Bayer (BAYN: DE), is exploring all options for meeting Russia's 2020 regulations for foreign pharma players, country division head Viktor Geisler said. 

These options could include entering into strategic partnerships or joint ventures (JVs) with local players, seeking buys or building its own manufacturing plant, the executive told BiopharmInsight intelligence at an investment forum in Russia. The review is to comply with the Russian Pharma 2020 strategy, which among other things, stipulates a 2020 deadline for full localization of so-called "life essential drugs" used in treating serious diseases. Bayer wants to continue supplying such drugs to the Russian market after 2020 and is evaluating its investment plans on how best to localize its operations.

Potential deals

In terms of acquisitions or JV partnerships, feasible potential candidates could include Veropharm, Valenta, Ozon and other similarly robust peers, according to a sector investment banker and sector analyst. These firms are attractive as potential targets because of their broad assortments of products, including OTC medicines, they added.  Veropharm is reportedly being pursued by US health care company Abbott Laboratories (NYSE: ABT), a speculation that pushed the local firm's stock price by 15% in April to 1,130 roubles on MCX and its market cap to a record 11.15 billion roubles, the banker noted. The deal, which targets about 81% of Veropharm, is expected to be worth about $500 million, as previously reported. 

Veropharm, which posted a sales volume of about $140 million in 2013, and one of the largest local players, could potentially still be available to other potential bidders in case the ongoing negotiations fall through. Not least because this type of transactions is, by law, conditional on the Russian antitrust agency's approval, the banker said. 

The requirements for all the local players to be GMP-compliant by 2014 could force some of the local peers to seek investments and consequently, be more ‘pliable’ to offers, the analyst said. Besides, one of the production platforms of Valenta needs capital-intensive modernization, and hence, the company could listen to attractive offers, the analyst noted. Ozon is a specialist in tabulated forms of generic drugs, the analyst added. Valenta generated gross sales revenue of about $180 million in 2013, while Ozon generated about $120 million last year. Representatives of Veropharm and Abbott, as well as Valenta and Ozon could not be reached for comment by BiopharmInsight.

Available localization options

Localization options available to foreign pharma players also include contract manufacturing agreements with local firms, as short- and mid-term strategies. However, this may entail upgrading the partner's plants to comply with GMP standards, the sector analyst said. As an example, the analyst cited US pharma giant Pfizer (NYSE: PFE), which recently launched local production of its vaccine Prevenar-13 at one of Russian Petrovax's plants. Full localization is a more rational approach from the point of view of logistics, seeking approvals and certifications for imported drugs, customs clearance and import duties, the analyst said. 

Drug localization 

The Pharma 2020 strategy will also impact a select group of drugs, whose retail prices are significantly subsidized or fully bankrolled by the government, Mr Geisler, the banker and the analyst explained. These include drugs for cardiovascular disorders, oncology and other critical states, Mr Geisler noted, but declined to specify them, citing local laws that prohibit naming prescription-based drugs in the media. The state's list contains about 570 names of such ‘life essential’ drugs, which are annually reviewed, the analyst said. According to sector-focused researchers IMS and DSM Group, Russia produces only about 20.8% and 22.6%, respectively, of these prescription drugs and life essential drugs, with the balance of almost 80% being imported, the analyst said. 

The Union of Pharma and Biomedical Clusters' data even put the volume of imports of such drugs at almost 90% of the local market's total need, thus underscoring Russia's lopsided dependence on imports. The largest exporters of such essential drugs to Russia include Germany, the US, France, Switzerland, Great Britain and India, which collectively account for about 40%-50% of Russian imports, aside from 60 other importing countries, the analyst said. 

by Christopher Kenneth in Moscow for BiopharmInsight