International trade

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INTERNATIONAL TRADE AND FINANCE

Final report

Omar EL HAJOUI

Presented to Saqib Aziz

2019

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Table of content

Introduction

I/ Current pharmaceutical market in Russia

1. Market size and growth rate ……………………………………………………………………………….…. 4
2. Socio-cultural situation…………………………………………………………………………….…………….. 4
3. Distribution………………………………………………………………………………………………………….…. 5

II/ Russian pharmaceutical trade

1. Structure…………………………………………………………………………………………………………………. 6
2. Factors and risks……………………………………………………………………………………………………… 6

III/ Regulations and opportunities

1. Government strategy “Pharma 20” …………………………………………………………..……………... 8
2. Opportunities for entering the market ….………………………………………………………………… 10
3. Best strategy to adopt………………………………………………………………………;;…….…………...… 11

Conclusion

Introduction

Our company is a leading German pharmaceutical company who sells high quality drugs for curing cancer and cardiovascular deceases. It is located in Germany and tend to export pharmaceutical products to increase sales, market shares and lower R&D costs. Once we have saturated the market in Germany, exporting products abroad can be a great opportunity for us to increase the sales and profits potential. Moreover, it will help us to reduce our huge R&D investments for our drugs. I decided to select a country where there is a growing pharmaceutical industry. Therefore, emergent countries such as China, Russia, Brazil and India appeared to be ones of the most attractive markets with relevant growth rates.

I finally decided to work on Russian pharmaceutical market: Germany is already an important partner of Russia in term of pharmaceutical trade and encourage exports. In addition, Russian pharmaceutical industry is constantly growing and its attractiveness for foreign companies is increasing but depends mostly on the government (especially its strategy “Pharma 20” that we will develop later in the report). Moreover, increasing mortality rates due to increasing elder people or tabagism and lack of high-quality product in the country motivates us to sell our products.

I/ Current pharmaceutical market in Russia

An emerging market Characterized by a rapidly growing economy, by a constantly rising standard of living, and by a notable influence in international affairs, Russia is today considered as an emerging market coveted by foreign pharmaceutical companies. Russia is part of the BRIC group made up of four countries with a rapidly growing market: Brazil, Russia, India and China, where the investment potential is very high.

Pharmaceutical companies therefore have a long-term interest in investing in this market with high growth rates, large populations and whose health needs are not met. In addition, living standards are higher today and household spending on health is rising, which translates into increased demand for drugs. Russia is currently the fourteenth largest pharmaceutical market in the world and represents one of the most dynamic global markets. In addition, the demand for medicines is increasing, which is due to a fall in the general price level combined with the general recovery of the economy after the crises and anti-Russian sanctions.

Although the Russian pharmaceutical market is one of the most dynamic markets in the world, the consumption of drugs is low and still remains far behind the USA and European countries. Russia is expected to triple its drug consumption per capita over the next ten years to meet the government's goal of reaching the same average level of consumption as in Europe. This growth would be an opportunity

1. Market size and growth rate

Figure 1: Market size forecast and dynamics

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According to the graph, the pharmaceutical market increased by 4% in 2018, but the size of the market remains very sensitive to price fluctuations due to instability and the fall of the ruble.

Thanks to investments from the Russian government and the private sector, and increasing health spending by the population, the market value is expected to reach 1,700-1,800 billion rubles ($ 60 billion) by 2020.

1. Socio-cultural situation

Russia lags considerably behind European countries with low drug quality standards and a very high adult mortality rate. The main public health problems in Russia are alcohol and tobacco. Indeed, Russia comes first on the list of countries that consume the most tobacco and fourth in terms of alcohol consumption per capita. The number one cause of death is cardiovascular disease which is closely linked to smoking. Alcohol consumption has a negative impact on life expectancy, especially among men of working age.

Due to the underdeveloped public health system, the patient is often the main purchaser of pharmaceuticals. The patient is mainly affected by advertising and marketing. Thus, the Russian consumer is ready to pay for the quality of the imported products. Fortunately, In the long term, the aging Russian population (the number of people over 60 will increase from 22 million to 33 million between 2015 and 2030, according to the United Nations) should benefit the pharmaceutical sector, despite a shrinking general population.

1. Distribution

Most (80%) pharmaceutical sales, both to hospitals and the public, depend on distributors. Their dominance is particularly high for imported drugs. Some distributors conduct both wholesaling to independent pharmacy chains and hospitals, and retailing through their own pharmacy networks.

Therefore, most drugs are distributed by wholesalers. There are currently two main distribution channels for patients, hospitals and pharmacies

Figure 2: Manufacturers of medicinal products in Russia:[pic 4]

Their dominance is particularly high for imported drugs…

II/ Russian pharmaceutical trade

1. Structure:

The Russian pharmaceutical market continues to see growth, including an increase in sales seen in ruble terms. With pharmaceutical imports (80%) almost 15 times higher than exports, Russia became a net importator of medicines. To add, the main importers in Russia are France and Germany.

Figure 3: Russian trade structure

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1. Risks and factors

Consequently, the high dependence on imports is linked to the low competitiveness of locally produced medicines. Factors such as the rate of inflation, interest rates on high credits and the fall of the rubble, create conditions of competition for the local producer.

Currency:

Figure 4: Currency evolution (Rubble/Dollar)

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After a period of stability of several years, around 3.5 cents US for 1 rubble, the conversion rate of the rubble experienced a first negative vibration in June 2013 in the aftermath of the first threats made by Vladimir Putin towards Ukraine. The rubble then lost 10%, 5 months later, to 3 cents US, 10 months before the fall in oil prices.

Economic players and the financial markets fear threats, therefore uncertainties, and translate their fears of the future by a risk rate, in this case, a discount on the exchange rate. So it represents an opportunity for our company because a drop in the exchange rate promotes the competitiveness of exporting companies since it lowers the price of the products they want to sell abroad.

Interest rate :

After regularly lowering its interest rates, the Russian Central Bank decided to reverse its policy and raise its rate to 7.5%. The Central Bank is ready to take the necessary decisions to defend its currency but increases the cost of investment, for businesses, and for households. In addition, this further decline in the rubble in 2018 will boost inflation through the rise in prices of imported products. These economic difficulties have led the Russian government to announce only 1.3% of the economy's growth rate for 2019.

Inflation rate:

After the monetary crisis caused at the end of 2014 by the fall in oil prices and the sanctions linked to the Ukrainian crisis, official statistics confirm the rise in prices which, after having reached the rate at 2.2% in 2018 (the lowest since the fall of the USSR), rebounded to 3.1% year-on-year in August. This recovery should continue with an inflation rate of 5% to 5.5% by the end of 2019 according to the central bank to cover the increases in social and military spending. The rise in prices is, for the moment, the direct result of the fall in the ruble which has increased imports. Since July, the Russian currency has lost almost 8% of its value against the euro and the dollar.