Finance, business

Import substitution vs. competition: Rostec’s drugs and no alternative

6 Aug '15
Oleg Kouzbit, Online News Managing Editor

Word came earlier this summer that Russia’s government procurement market for a number of vital medical segments is likely to be monopolized for a few years to come. President Vladimir Putin of Russia is reported to have granted one of the subsidiaries of Rostec, a powerful Russian state-owned technology corporation, the rights to become the sole supplier of drugs the government purchases from federal coffers to fight HIV, tuberculosis and hepatitis. On the one hand, to help lessen this country’s dependence on medical imports is a good intention. On the other hand, care should be taken to make sure this good intention is not one of those which the road to a well-known ugly place is paved with…

RBC, a Russian business daily, reported in June that Mr. Putin had not only received and considered but also approved the proposal of Rostec CEO Sergei Chemezov to make Rostec’s 100% subsidiary, National Immunobiology Co. (Natsimbio), the de facto monopoly in the market for government purchases of key drugs. The timeframe for its special status is five to ten years.

It was not at all a request to the national leader for direct preferences to a single market player, Mr. Chemezov explained. By asking the president he cared for “the Russian Federation’s sovereignty in the manufacture of medical solutions, and for import substitution in the national pharmaceutical sector.”

So, Natsimbio is most likely to become the only supplier of drugs for tuberculosis, HIV infection and viral hepatitis under government procurement programs. Officially, the preferences will be in effect at least through 2020. In Russia’s hematology solutions segment, however, the Rostec asset is expected to keep its monopoly position through 2025.

In such a no-alternative environment Natsimbio stands a good chance of covering 90% of domestic demand for the above drug categories. Whether it’s good or not so is still up in the air…

A winning strategy?

The decision fits in well with Russia’s sweeping import substitution drive. That a country should do its utmost to start actively producing most important drugs at home rather than paying a fortune for imports sounds logical indeed. According to Rostec, Russian-made drugs account for 25% of the national market for the mentioned categories at most; some of the key drugs have never been manufactured in Russia. In the HIV and viral hepatitis solutions segment, Russian products accounted for a marginal 11% last year.

The decision also looks like a very timely move in the lingering standoff between Russia and the West. One who has everything in his own backyard couldn’t care less for any economic sanctions. Well… sounds like a Russified version of North Korea’s juche (or self-reliance as the official political ideology of communists there)? Perhaps, and it may even be justified in Russia under the circumstances. The jury is still out, though, as to who benefits from this sort of self-reliance, and who gets sidelined to wait in the wings.

Some feel that it’s the huge community of innovation driven universities in Russia’s regions that may stand to lose, because university innovators might be barred from freely commercializing their brilliant solutions in the domestic market. With increasingly complicated procedures of going global, what options may they all face? Either sell Rostec exclusive rights for their know-how, thus giving up hope for international recognition, or just scrap research in these particular areas.

Some gain, some lose

Option one is what Russian experts polled by RBC appear to deem most likely. For example, Nikolai Bespalov, director for development for RNC Pharma analysts, emphasized in an exchange with RBC that current Rostec assets can only manufacture a very limited range of drugs for HIV infection, tuberculosis and hepatitis. In its monopoly position, Natsimbio would in fact “act like a distributor purchasing drugs from other manufacturers,” he thinks. David Melik-Guseinov who runs the Center for Social Economics agrees; he mused in an interview that in addition to its go-between’s role the subsidiary of the government corporation would most likely have strings to pull in the entire procurement chain by having the authority to pick and choose subcontractors.

However, option two, when university researchers just stop doing anything in this direction as there is no free market for them, is also more than possible.

One way or the other, the developments are still casting doubt on the prospects—at least in the monopolized area—of “5/100,” a very important and useful federal program aimed at helping leading Russian universities boost their international competitiveness.

“Choice,” a word not to forget…

I do hope Rostec will choose a strategy that will incentivize university innovation. After all, working as a subcontractor for the state corporation is also an incentive; it will bring investment into university start-ups and will hopefully keep the best and brightest from emigrating.

Nevertheless, with all the pros and cons which universities may see in this new status quo, there still remains a question which has to be answered: who will guarantee that in a purged, zero competition playfield Natsimbio is ready to provide Russian patients with products of decent quality, a kind of quality which around the world is a result of relentless competition between the top researching brains?

The newborn monopolist has yet to answer this essential question.
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