In February 2007, National Logistics Company (NLK) commissioned a warehouse providing 5,000 pallet places in Odintsovo District of Moscow Region, custom-built for Sanofi-Aventis. The storage is equipped on the premises of a prime warehouse facility Rent-Tsentr (Rent Center) raised by NLK in 1997. The event could not go unnoticed by Sanofi-Aventis’ rivals in Russia and pharmaceutical distributors. Sanofi-Aventis has presence in at least 100 countries, with a workforce of nearly 100,000, NLK has reported. The company said it had spent several hundreds of thousands of dollars on the project but refused to give more precise figures, as agreed with the client.

Manufacturers of pharmaceuticals do not require large storages, measuring more than 50,000 to 100,000sqm. A storage measuring 7,000sqm and providing 5,000 pallet places is considered a large property. Larger facilities are operated by distribution firms who store products for more than just one manufacturer at a time. Russia’s pharmaceuticals sector is not large. NLK puts the number of participants operating on the market at 3,000 to 4,000. Beginning the early 1990s Russia has seen arrival of new brands introduced by international manufacturers, who also brought along a large number of pharmaceutical distributors. Russia’s pharmaceutical sector could have continued to grow independently had it not been for interference on the part of professional logistics services providers, such as NLK.

Logistics companies who raise storages measuring 100,000 to 200,000sqm and over provide services to a large variety of businesses. Professional logistics services providers build universal distribution centers, or warehouse terminals, where storage units are often let to grocery retailers, home appliances manufacturers and pharmaceutical companies in one and the same location.

But until recently it was more common for pharmaceutical manufacturers to deal directly with distributors. Medications and healthcare products were supplied from abroad to the storages of Russian distribution companies whose task was to sell them to retailers. By the early 2000s almost all foreign brands had established their presence in Russia, according to market experts. But that was solely owing to distributors’ efforts. None of the international manufacturers had their own offices or production facilities in this country. Incidentally, domestic manufacturers have proved to be quite self-sufficient in these terms. Russian firms have long operated their manufacturing facilities and warehouses, which they built themselves. But since the early 2000s foreign manufacturers have been increasingly active in launching their production units in Russia. Similar plans were announced by companies International Medical Products and Intendis last year. To that end international companies needed storage space or distribution centers. At that point universal logistics providers offered their assistance to them. Such is one of the theories proposed by market participants.

Specialists at the distribution company Protek believe that NLK’s managers had discerned that new trend at the right time. In near future foreign companies will be launching their branches or subsidiaries across the country.

“It took us five years to persuade the conservative French firm Sanofi-Aventis to rent our storage," says Oleg Dorozhinsky, head of NLK's pharmaceutical project. “In previous years international manufacturers supplied medications directly to distributors. These days, things are changing.”

As to manufacturers' strategies, some of them enlist services of distributors as early as at the stage of customs clearance. Others – mostly major western firms – ship their products to Russia themselves. Those companies need storage facilities, but for the time being they – understandably – opt for leasing them rather than building own warehouses, as development projects are fraught with higher costs, a spokesperson for Protek has explained. ”.

Special Treatment Storages

Requirements set by major manufacturers such as Pfizer or Sanofi-Aventis for storage facilities are very strict. Besides, pharmaceutical products require special storage conditions, Protek’s representative explain.

From the standpoint of a pharmacist a storage facility is not a classic warehouse as defined by universal developers and logistics operators. On the face of it, NLK's project for Sanofi-Aventis is no different from any other built-to-suit development. But a pharmaceutical warehouse is more than just walls and pallet places – it must meet a variety of technical requirements and industry standards as set out in the order No. 80 of March 4, 2003 on the rules of sale of drugs and pharmaceuticals by pharmaceutical organizations. Besides, to be eligible to rent storage units in Russia a pharmaceutical company must obtain a license. Ironically, in order to obtain the license the company must first sign a tenancy agreement for a specialized storage property. Dorozhinsky says that foreign manufacturers are not experienced in obtaining such licenses, so warehouse developers often assume the burden of those matters in the interest of their clients.

According to logistics providers, the Health Ministry sets very strict requirements for pharmaceutical storages, and a failure to maintain the specified temperature regime for example may result in suspension of a license. International standards of equipping pharmaceutical storages are not applicable in Russia.

Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global, says that against the backdrop of general shortage of warehouse facilities manufacturers and retailers of pharmaceuticals face the double challenge as their storages must meet special requirements. Projects for development of pharmaceutical storages are costly. For example, the 7,000sqm facility raised by NLK for Sanofi-Aventis is estimated at $200 million while a conventional storage of similar size costs a developer only $10 million. A pharmaceutical warehouse must be equipped with air-handling units, closed metal cabinets and safes for certain medications, special shelves and trays, refrigerator units, etc. Maintenance costs are also quite high.

A license alone costs $30,000, Dorozhinsky says. The price of installation of refrigerator equipment is 1,500 euros per 1sqm. Equipping a pharmaceutical storage at another terminal built by NLK in Khimki and now rented by F.Hoffmann-La Roche has cost nearly $1 million.

But then, revenues from those properties are quite high. That is why the company willingly undertakes development of storages for pharmacists, Dorozhinsky explains. Pharmaceutical storages bring higher revenues than facilities for other goods. Space is let at $1 per 1 pallet place, excluding VAT, per day, or approximately $360 per year. Grocery retailers are charged half that rate. Medications fall into the category of valuable products.

As Russia’s market of pharmaceuticals grows the sector of properties occupied by developers, manufacturers and distributors of pharmaceuticals increases approximately by 20% each year.

Foreign manufacturers view acquisition or development of properties for own use as costly and fraught with risk in a volatile Russia, Dorozhinsky explained. Those firms opt for renting warehouses, even if on a secondary market. They attach more importance to the class of storage and logistics services offered on the premises. Distributors, on their part, undertake development projects themselves raising warehouses where storage units are rented by their clients.

Class A terminals are rented by world’s leading pharmaceutical giants. Smaller companies occupy storages rated as class B or older developments redesigned to modern standards. Experts at Protek believe that some of Russia's drug factories with a history of several decades have only just embarked on the path of modernization of its manufacturing and storage facilities.

“The demand for properties generated by pharmaceutical companies is always high,” says Gennady Shirshov, director of the Union of Professional Pharmaceutical Organizations. “Over the past three years the market of pharmaceuticals has grown considerably. That is why companies who plan their further growth examine market forecasts for warehouse real estate."

Executive director of the marketing research agency Farmekspert Nikolai Demidov says that there were times when Protek's storages were considered the best in this country as by the time the company opened its first storage nobody had ever built anything like that before. Nowadays, many companies have acquired equipment for pharmaceutical storage centers.

Warehouse facilities are growing rapidly, formats are changing and the share of prime storage space is growing stably, Protek's experts believe. However, even class B properties are able to meet the strict requirements set for storage and transportation of pharmaceuticals.

Market Participants

Today, there are some 900 distributors and over 1,000 manufacturers of pharmaceuticals operating in Russia, Protek has reported. International manufacturers account for 80% of the market in money terms. If valued from the standpoint of quantity of packages supplied the situation is reverse. Over 60% of medications supplied in kind are produced by domestic manufacturers. In 2005, Russia ranked 12th in the world by the volume of sales of pharmaceuticals. Remarkably, the average price of one package of medication in Russia stands at $1.9, which is by ten times lower than in the U.S. or Europe. In terms of regulatory and legal framework Russia has reached a stage of development where the industry is regulated quite well. But in view of Russia’s joining the WTO some of the legal provisions will need to be changed.

The country’s leading distributors of pharmaceuticals are Protek, SIA International, Biotek, Rosta, Katren and Alliance Unichem. The company Katren, established in 1993 in Novosibirsk, supplies medications to 11,500 drugstores and hospitals in 65 Russian regions; the range of goods supplied includes over 10,500 names, according to Katren's own data. Katren runs 25 branches across the country, which either own or rent storages. In 2006, the company's sales stood at about $600 million. Katren ranked 5th in Farmekspert's rating of distributors in December 2006. Alliance Unichem serves over 80,000 pharmacies in 12 European countries and owns a chain of 1,200 stores in UK, The Netherlands and Italy. In 2004, the company’s turnover was 8.8 billion pounds ($17.14 billion). A year ago Alliance Unichem announced acquisition of 96% in the Russian distribution company Apteka Kholding. The company said it had paid 18 million pounds ($31.2 million) for the stake. Protek accounts for 25% of direct supplies to Russian pharmacies. In 2004, the company's sales stood at $1.2 billion. Protek runs Rigla, one of the country's largest chains of drugstores. The company also owns a packaging production facility Soteks in Pavlov-Posad District near Moscow, that provides packaging for medications and healthcare products by Schering AG, Sanofi-Aventis, Lek, KRKA and other manufacturers. Protek, SIA International and Rosta held the leading positions in Russia's pharmaceuticals industry, as of December 2006.

Some of the distributors – such as Farmakor or Protek – combine functions of manufacturers and owners of chains of drugstores. Launched in 1990, Farmakor runs a manufacturing facility Farmakor Production and a chain of the same name operating 200 stores, 180 of which are in St. Petersburg. In 2005, the company’s sales stood at $105 million; in 2006 - $150 million.

The Russian market of drugs and pharmaceuticals is one of the fastest growing markets in Europe. In 2006 through 2010 it was expected to grow at least 10% annually, PricewaterhouseCooopers said in its recent survey of the industry. Sales are fuelled by an increase in individual incomes, budget financing and improving distribution system. In 2006 the federal government poured $3.6 billion into healthcare as compared to $1.9 billion in 2005. Another positive factor was an increase in investments in measures to boost provision of medicine to population in 2005.

Infarma Consulting anticipates a $9.2 to $10.1 billion increase in sales in 2007 and $10.1 to $11.1 billion in 2008. Pharmaceutical distributors step up their activity in view of the toughening competition. In the wake of Alliance Unichem’s merger with Apteka Kholding many wholesalers moved to strengthen their positions on the market.

New strategies of market participants, aimed, in particular, at strengthening their positions in Russia through expanding their chains of stores are a consequence of natural development of the market, according to manufacturers themselves. An increasing interest in the pharmaceutical sector on the part of logistics operators also results from those developments. Oleg Dorozhinsky has reported that Pfizer is set to launch its subsidiary in Russia. Any logistics services provider successfully operating pharmaceutical storages will try to market his distribution centers to those companies. Alla Laoz, public relations manager at FM Logistic, agrees.

Developers of logistics terminals providing pharmaceutical storages are FM Logistic, state-run warehouse Petrovo Dalneye, NLK, Orfe, Items, Santens Service and Tablogix, according to market experts.

Developers on Pharmaceutical Soil

Major warehouse developers who do not provide logistic services – for example, companies MLP or Capital Partners – are not interested in built-to-suit projects for pharmaceutical firms. The cost of construction is higher, while the space required is relatively small. Ruslan Suvorov, head of warehouse and industrial real estate at Praedium, says that the outlook for pharmaceutical storages market is good. But the sector is relatively small. Real estate developers who are not involved in the sector of pharmaceuticals may take interest in such projects in the framework of development of the warehouse market as a whole. Yevgeniya Akimova, head of marketing and market research at Capital Partners, has reported that if the company received an offer to build a specialized terminal for a pharmaceutical firm Capital Partners would be able to equip such a property. But so far the company has no experience in that field.

Logistics operators – developers are set to step up construction of pharmaceutical projects. Dorozhinsky says that the storage raised for Sanofi-Aventis would not be the company’s last project in the sector.

FM Logistic’s complex in Khimki rents out 1,800sqm to Johnson & Johnson, Alla Laoz has reported. But the company is ready to create new specialized storage rooms for drugs and pharmaceuticals.

Items’ list of tenants comprises some 30 manufacturers of pharmaceuticals, who are offered both safekeeping and distribution services by the logistics operator. Santens Service' pharmaceutical warehouse operating on the premises of Petrovo-Dalneye measures 10,000sqm. Orfe serves about 20 manufacturers.

“Logistics operators experienced in equipment of pharmaceutical warehouses and safekeeping of drugs and medicines are few. It has taken us years to accrue experience. After all, professional pharmaceutical logistics operators are distributors whose key objective is to supply products. Not every logistics operator shall succeed in pharmaceuticals," Dorozhinsky says.

Distributors Keep Pace

While developers raise distribution centers distributors supply pharmaceuticals to drugstores. In other words those companies supplement one another. On the other hand, a distributor entering into an exclusive deal with a foreign manufacturer himself takes on a role of a logistics developer for at least six months. Other distributors then purchase pharmaceuticals from him. If at some point all foreign manufacturers move to open their branches in Russia logistics operators will begin to market their storages to them even more aggressively whereas distributors will seek to sign deals with manufacturers directly, offering them both distribution and safekeeping services. Dorozhinsky agrees that competition between logistics operators and distribution firms is quite likely. But Protek’s experts doubt that logistics operators will succeed in vying with distributors in terms of volume of construction.

The number of development projects undertaken by distributors is growing. For example, in late October 2006 Rosta opened a new storage in Podolsk District outside Moscow. By the end of 2007 Katren plans to finalize a terminal in Rostov Region, worth $6-8 million. Farmakor acquired a 7,100sqm warehouse for $5 million in the fall of 2006. Protek has built a $50 million production facility near Sergiyev Posad. A year ago SIA International announced plans to build a $10 million manufacturing facility in Tushino, Moscow. This year Protek plans to launch several complexes featuring office and warehouse space in Moscow Region and other parts of Russia, measuring 4,000 to 20,000 sqm. As of January 1, 2007 the company operated 145,000sqm, of which 80,000sqm were in its ownership.

Money Growing: Logistics Operators Target Pharmaceuticals