Translated material
Pharmacists will get caught in the net
Experts predict acceleration of pharmaceutical market consolidation
The Russian pharmaceutical market, especially the distribution and retail segment, will face a series of mergers and acquisitions in the near future. According to market participants and experts themselves, consolidation will occur not because the big players have too much available funds, but rather because small regional companies today are working at the limit of their capabilities and will not be able to survive a sharp decline in the profitability of the drug business. Over the past year, company revenues have been falling as a result of the introduction of a number of restrictions on the pharmaceutical market by the state and increased control over the industry as a whole. First, maximum values of trade markups were established for the entire range of drugs, followed by restrictions on manufacturers' selling prices for vital drugs and an update of the mandatory pharmacy range. The first to prepare to absorb unviable colleagues was the distribution link, which at the beginning of the year numbered about two thousand companies across the country (of which several dozen were large). With some delay, after a regrouping of forces, the largest pharmacy chains will follow.“Distributors are always the first to meet all changes in the market and the first to react to them,” says David Melik-Guseinov, director of marketing research at Pharmexpert. According to him, during the crisis, almost all wholesalers were forced to reduce the number of warehouse workers and, in some cases, storage space. Pressure on wholesalers increased after the introduction of new rules for regulating prices for medicines on the list of vitally important drugs (VED). “So, the logistics of, for example, one package of some traditional drugs for our country costs about 7 rubles, and in pharmacies it costs an average of 5 rubles,” noted Mr. Melik-Huseinov in his report at a recent international conference Adam Smith Institute "Russian Pharmaceutical Forum" in St. Petersburg. And therefore, small regional companies, which have also lost the support of local administrations, most likely will not survive.
In fact, the heads of the Ministry of Health and Social Development, who organize government procurement of medicines, have long called for a reduction in the number of intermediaries in the medicine sales chain. But in practice, pharmaceutical wholesalers still remain an indispensable link. Only a professional logistics company can organize the delivery of any significant number of medicines to the region, especially when it comes to drugs that require special storage conditions. Large companies meet these requirements, and new government restrictions have made their position even stronger in comparison with manufacturers and pharmacy chains.
Alexey Repik, Chairman of the Board of the specialized distributor R-Pharm, expects to expand the influence of his company in the regions in the very near future. Today, his company is not only engaged in trade, but also invests in its own production of pharmaceutical and biological substances: “Our immediate plans include the purchase of existing GMP production facilities in Kostroma and the launch, together with Himrar, of the production of active substances in the Yaroslavl pharmaceutical cluster,” - Mr. Repik shares his plans. “We are ready to actively expand into the market,” says Mikhail Stepanov, marketing director of Imperia-Pharma. This northwestern company will soon open about ten ultra-modern pharmaceutical warehouses in the regions of Russia.
“The future of the industry lies in consolidation. The country does not need two thousand distributors,” says Alexey Molchanov, general director of the largest Russian wholesale pharmaceutical company CV Protek. CV Protek was the first among its competitors to become a public company: its IPO, held on April 27, brought in $400 million. “50% of the proceeds will go to support retail (Protek owns the Rigla pharmacy chain), 30% to support its own production, 20% - to complete the modernization of logistics centers,” said Mr. Molchanov, speaking at the conference. By the way, Mr. Molchanov immediately demonstrated how exactly consolidation in the market would take place. In response to the reproach of one of his company’s partners, the director of a small pharmacy chain from the Urals, who complained about the “greed” of distributors who have recently refused to provide discounts depending on the volume of drugs purchased, he suggested that the retail industry “get ready for consolidation.” “According to our forecasts, in two to four years, 90% of the market will be divided between two or three large distribution companies,” Jorman Kayaste, chairman of the board of directors of the ROSTA group, confirmed the competitors’ forecasts.
Unlike the wholesale market, the situation in the retail segment of the pharmaceutical market is not so transparent. “Only two companies have open information that allows one to judge whether the network is profitable or unprofitable—Rigla and 36.6.” Working with others is, in fact, an uninsurable risk,” noted Alexey Molchanov. There are a lot of state pharmacies (about 40%) and individual pharmacies that are not part of a network. According to the Russian Association of Pharmacy Chains (RAAS), there are now more than 5,600 pharmacies operating in the country.
Analysts, however, are confident that after the introduction of new rules for state restrictions on prices for vital drugs, the profitability of the pharmacy segment, which previously operated with a margin of approximately 6%, decreased noticeably - to an average of 4%. This immediately increased the importance of the non-medicinal product range, which already brings pharmacies more than 60% of their income. Accordingly, only those chains that already now not only sell shampoos and cosmetics, but also produce them under their own brands, will do well in the future. So far, only the 36.6 chain can boast of significant success in this area, with a product range of almost 1,000 items of its own cosmetics and hygiene products. “We plan to maintain profitability through our own brand. The average margin on these products is 63%. Over the year, their sales increased by 83%,” says German Inozemtsev, deputy general director of the 36.6 chain.
“The situation for pharmacies is complicated by the fact that in addition to price restrictions, they must have a mandatory assortment established by the state. Distributors do not have such restrictions,” notes David Melik-Huseinov. Only large chains will be able to operate in the new conditions; they are the future, says Andrey Gusev, general director of the Rigla pharmacy chain. According to him, sooner or later the Russian market will differ little from the American market, where the ten largest chains occupy 90% of all pharmacy retail. Now the ten leading Russian networks cover no more than 50% of the market. But already now Rigla and 36.6 are buying assets in the regions. And in the next year or two this process will only gain momentum.
For the consumer, the redivision of the pharmacy market will change little. “Practice shows that in 90% of cases pharmacies reopen in place of closed pharmacies,” notes Mr. Melik-Huseinov. Considering the entry into force of the law “On the Circulation of Medicines” on April 1, which regulates the maximum values of manufacturers’ selling prices, a significant part of the guaranteed assortment of pharmacies is already protected from sharp price increases.