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Last year, 2022, proved to be a pivotal year for the pharmaceutical market. Pandemic-related problems have been exacerbated: complicated logistics, inventory shortage, and component supply disruptions. The interaction network “manufacturer – distributor – pharmacy chain”, which has been fine-tuned for years, should be set up anew.
How are big pharmaceutical companies responding to these changes? Have the players been able to adapt to the new reality? What business models and operating formats have proven to be most effective in a tough environment? These and other questions will be discussed by participants in the Top Managers' strategic discussion on the sidelines of the 14th Eurasian Pharmaceutical Forum in Almaty. Arminas Macevicius, Vice President Eurasia, Stada, and speaker at Eurasian Pharmaceutical Forum 2023, shared his experience in an exclusive interview with Adam Smith Conferences.
Last year, 2022, proved to be a pivotal year for the pharmaceutical market. Pandemic-related problems have been exacerbated: complicated logistics, inventory shortage, and component supply disruptions. The interaction network “manufacturer – distributor – pharmacy chain”, which has been fine-tuned for years, should be set up anew.
How are big pharmaceutical companies responding to these changes? Have the players been able to adapt to the new reality? What business models and operating formats have proven to be most effective in a tough environment? These and other questions will be discussed by participants in the Top Managers' strategic discussion on the sidelines of the 14th Eurasian Pharmaceutical Forum in Almaty. Arminas Macevicius, Vice President Eurasia, Stada, and speaker at Eurasian Pharmaceutical Forum 2023, shared his experience in an exclusive interview with Adam Smith Conferences.
– Arminas, the past year may have been one of the most dif ficult for the Eurasian countries, even when compared to the difficulties of the pandemic period. What circumstances have most strongly influenced your work?
Obviously, the events that have occurred and are occurring in the region, including the unrest in Kazakhstan in January 2022, the ongoing hostilities in Ukraine, and the unstable situation in the Caucasus, all have an impact, first and foremost, on the safety of our employees, whether they are in the office or in the field.
The second factor is the rearrangement of well-established supply chains. Routes had to be redesigned, not to mention the fact that shipping costs went up 30 to 50% as a result.
The third factor is, of course, the emergence of notable financial turbulence in the region. The system of settlements between financial institutions was disrupted, Russian banks were subject to sanctions, and accordingly, on the one hand, it became more difficult to finance the work of representative offices, and on the other hand, the distributors' payments were affected. And last but not least, departure of Russian banks has, certainly, affected the financing options of other market participants. Sberbank, for example, was among the top lenders in Kazakhstan.
– What dynamics exist in the Eurasian market at the end of this year?
In terms of sales volume, the pharmaceutical markets of most Eurasian countries – Kazakhstan, Belarus, Azerbaijan, Armenia, Georgia – are stagnating. Consumption is not increasing.
If you look at the dynamics in monetary terms, the situation is very uneven from market to market, but the growth (if any) is mainly due to inflation. An important point: this inflation does not quite reflect the inflation that manufacturers have faced. The inflation of production costs last year was huge, but manufacturers cannot raise prices in proportion to it, as in most countries prices for a number of drugs are restrained by the government. On the one hand, our consumers benefit from this, but on the other hand, businesses have become much more vulnerable.
Uzbekistan is one of the few Eurasian countries that is currently showing positive dynamics in terms of pharmaceutical market growth in volume and monetary terms. This is a consequence of the generally faster development of the republic's economy in the last few years, which, of course, is also reflected in the pharmaceutical industry.
– You mentioned new logistics routes. Did you have to find new countries to transport the substances?
We do not manufacture drugs directly in the Eurasian countries, we have a large number of production facilities around the world. Accordingly, we did not have to search for new substances, which would inevitably have been an additional major risk.
The biggest challenge for us was to find new logistics routes, as the route from Europe directly through Russia, Ukraine and Belarus has either become more complicated or has been cut off altogether. We tried the southern route – via Turkey – but it turned out to be twice as long and more expensive, besides, the company faced the problem of low cargo turnover capacity via the Caspian Sea, which has now turned into a “bottle neck” due to the concentration of too much global logistic volume.
– What solutions have been used to restore logistics?
We have our own logistics hub in Vilnius, Lithuania. And we transport most of our products for the Eurasian countries through this route. We are fortunate that the company was farsighted enough and that we were able to rearrange flows to continue shipping the drugs. Today, this is one of our important competitive advantages.
– How has the consumption pattern changed over the last year? The real incomes of the population are not growing, perhaps, in any of the Eurasian countries.
If we look at Kazakhstan, I observed that in the two quarters of last year consumption in the more expensive categories was growing situationally. People are not switching to cheaper drugs.
So far, post-covid consumption is still a serious trend – patients are paying more and more attention to prevention, immunity, physical and psychological health. We see more demand for vitamins and bioactive food supplements. For Stada, it is, of course, multivitamin complexes, vitamins C and D, drugs to support the cardiovascular system. I think in light of covid, patients have understood how important it is to invest time in preventing chronic diseases.
– Have your popular drugs gone up in price in the last year?
As you know, in 2022, the authorities of Kazakhstan approved a list of anti-covid drugs, which, for example, included our Cardiomagnyl, and its prices were unilaterally reduced by almost 40%.
If we look at the other drugs, there was a pricing order at the end of the year, and after a long hiatus, prices returned to the figures of the end of 2020. So no, there has been no increase in price in that regard.
– Why did international pharmaceutical companies become more active in Kazakhstan last year? Is it influenced by the recent political decisions of the government?
I would not say that the politics have changed. There have always been opportunities to communicate and receive information on different platforms, including Association for the Support and Development of Pharmaceutical Activities of the Republic of Kazakhstan and Association of International Pharmaceutical Manufacturers in the Republic of Kazakhstan, EUROBAK, as well as other organizations.
I think that last year was just a conjunction: first of all, the active desire of Kazakhstan itself to attract investments, which, of course, draws the attention of international manufacturers. The second is the desire of the manufacturers themselves to diversify risks. If earlier all processes were aimed at localization in Russia with the idea of further servicing neighboring markets, for example, Central Asia or the Caucasus, now parallel processes have started. The companies are thinking about how to provide access to their innovative drugs directly to consumer countries.
The companies' desire to localize innovative production is, naturally, very much welcomed by the state, however, it implies huge costs. I personally will be very happy to see the first results of localization of production of innovative drugs in Kazakhstan.
– What are the company's main plans for the coming year? Do you plan to introduce new drugs for consumers in the Eurasian market?
Yes, we are absolutely planning on it. We will expand our current portfolio, our presence in the cardiology, endocrinology, men's and women's healthcare categories.
We signed an agreement with Sanofi and become a full partner in all Eurasian countries for the company's OTC product portfolio. It is both a great honor and a new opportunity for us to prove that we have earned this right.
At the same time, we are assessing opportunities for our presence in other segments of the pharmaceutical market. We are very interested in the government procurement market, which is constantly growing in Kazakhstan and already occupies almost 50%. However, we are not stopping in other countries either, we are developing, increasing the number of registrations, which is especially important now. Instead of representative offices, we are registering fully-fledged commercial companies (subsidiaries of STADA AG) in most countries in the region, which will be a good new impetus for our development in Eurasia. I consider it a great accomplishment. I do not know of any other company that has done this already.
– Arminas, at the upcoming Eurasian Forum you will participate in a discussion with top managers of the largest international players in the region. In your opinion, what strategy will help pharmaceutical companies in Eurasia overcome the market challenges that have escalated in 2022?
I think governments should regulate less and be more open.
In my opinion, the best development strategy will be the strategy of promoting a dialogue between manufacturers and governments, discussing preferential terms and special approaches to financing market participants, developing a more liberal approach to regulatory requirements, for example, registration and labeling of drugs according to the EAEU rules. In light of geopolitical instability, for instance, the last point has already become complicated as it is.
And I have a feeling that it's the manufacturers – not other participants in the supply chain – who are now getting the first blow of any new regulatory burden. After all, we prepare, we install equipment in factories, we hire people, project teams who sometimes have to put new labeling codes on packages by hand. At one of our factories we have recently produced a package with medical labeling for Uzbekistan. This kind of packaging is generally one of the first on the market right now. We have been pursuing this milestone for almost two years, it is a gigantic amount of work, effort and time, and it is very important that our endeavor has succeeded. These challenges remain with us, and it is essential and necessary for us to cooperate with state regulators on them.
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Obviously, the events that have occurred and are occurring in the region, including the unrest in Kazakhstan in January 2022, the ongoing hostilities in Ukraine, and the unstable situation in the Caucasus, all have an impact, first and foremost, on the safety of our employees, whether they are in the office or in the field.
The second factor is the rearrangement of well-established supply chains. Routes had to be redesigned, not to mention the fact that shipping costs went up 30 to 50% as a result.
The third factor is, of course, the emergence of notable financial turbulence in the region. The system of settlements between financial institutions was disrupted, Russian banks were subject to sanctions, and accordingly, on the one hand, it became more difficult to finance the work of representative offices, and on the other hand, the distributors' payments were affected. And last but not least, departure of Russian banks has, certainly, affected the financing options of other market participants. Sberbank, for example, was among the top lenders in Kazakhstan.
– What dynamics exist in the Eurasian market at the end of this year?
In terms of sales volume, the pharmaceutical markets of most Eurasian countries – Kazakhstan, Belarus, Azerbaijan, Armenia, Georgia – are stagnating. Consumption is not increasing.
If you look at the dynamics in monetary terms, the situation is very uneven from market to market, but the growth (if any) is mainly due to inflation. An important point: this inflation does not quite reflect the inflation that manufacturers have faced. The inflation of production costs last year was huge, but manufacturers cannot raise prices in proportion to it, as in most countries prices for a number of drugs are restrained by the government. On the one hand, our consumers benefit from this, but on the other hand, businesses have become much more vulnerable.
Uzbekistan is one of the few Eurasian countries that is currently showing positive dynamics in terms of pharmaceutical market growth in volume and monetary terms. This is a consequence of the generally faster development of the republic's economy in the last few years, which, of course, is also reflected in the pharmaceutical industry.
– You mentioned new logistics routes. Did you have to find new countries to transport the substances?
We do not manufacture drugs directly in the Eurasian countries, we have a large number of production facilities around the world. Accordingly, we did not have to search for new substances, which would inevitably have been an additional major risk.
The biggest challenge for us was to find new logistics routes, as the route from Europe directly through Russia, Ukraine and Belarus has either become more complicated or has been cut off altogether. We tried the southern route – via Turkey – but it turned out to be twice as long and more expensive, besides, the company faced the problem of low cargo turnover capacity via the Caspian Sea, which has now turned into a “bottle neck” due to the concentration of too much global logistic volume.
– What solutions have been used to restore logistics?
We have our own logistics hub in Vilnius, Lithuania. And we transport most of our products for the Eurasian countries through this route. We are fortunate that the company was farsighted enough and that we were able to rearrange flows to continue shipping the drugs. Today, this is one of our important competitive advantages.
– How has the consumption pattern changed over the last year? The real incomes of the population are not growing, perhaps, in any of the Eurasian countries.
If we look at Kazakhstan, I observed that in the two quarters of last year consumption in the more expensive categories was growing situationally. People are not switching to cheaper drugs.
So far, post-covid consumption is still a serious trend – patients are paying more and more attention to prevention, immunity, physical and psychological health. We see more demand for vitamins and bioactive food supplements. For Stada, it is, of course, multivitamin complexes, vitamins C and D, drugs to support the cardiovascular system. I think in light of covid, patients have understood how important it is to invest time in preventing chronic diseases.
– Have your popular drugs gone up in price in the last year?
As you know, in 2022, the authorities of Kazakhstan approved a list of anti-covid drugs, which, for example, included our Cardiomagnyl, and its prices were unilaterally reduced by almost 40%.
If we look at the other drugs, there was a pricing order at the end of the year, and after a long hiatus, prices returned to the figures of the end of 2020. So no, there has been no increase in price in that regard.
– Why did international pharmaceutical companies become more active in Kazakhstan last year? Is it influenced by the recent political decisions of the government?
I would not say that the politics have changed. There have always been opportunities to communicate and receive information on different platforms, including Association for the Support and Development of Pharmaceutical Activities of the Republic of Kazakhstan and Association of International Pharmaceutical Manufacturers in the Republic of Kazakhstan, EUROBAK, as well as other organizations.
I think that last year was just a conjunction: first of all, the active desire of Kazakhstan itself to attract investments, which, of course, draws the attention of international manufacturers. The second is the desire of the manufacturers themselves to diversify risks. If earlier all processes were aimed at localization in Russia with the idea of further servicing neighboring markets, for example, Central Asia or the Caucasus, now parallel processes have started. The companies are thinking about how to provide access to their innovative drugs directly to consumer countries.
The companies' desire to localize innovative production is, naturally, very much welcomed by the state, however, it implies huge costs. I personally will be very happy to see the first results of localization of production of innovative drugs in Kazakhstan.
– What are the company's main plans for the coming year? Do you plan to introduce new drugs for consumers in the Eurasian market?
Yes, we are absolutely planning on it. We will expand our current portfolio, our presence in the cardiology, endocrinology, men's and women's healthcare categories.
We signed an agreement with Sanofi and become a full partner in all Eurasian countries for the company's OTC product portfolio. It is both a great honor and a new opportunity for us to prove that we have earned this right.
At the same time, we are assessing opportunities for our presence in other segments of the pharmaceutical market. We are very interested in the government procurement market, which is constantly growing in Kazakhstan and already occupies almost 50%. However, we are not stopping in other countries either, we are developing, increasing the number of registrations, which is especially important now. Instead of representative offices, we are registering fully-fledged commercial companies (subsidiaries of STADA AG) in most countries in the region, which will be a good new impetus for our development in Eurasia. I consider it a great accomplishment. I do not know of any other company that has done this already.
– Arminas, at the upcoming Eurasian Forum you will participate in a discussion with top managers of the largest international players in the region. In your opinion, what strategy will help pharmaceutical companies in Eurasia overcome the market challenges that have escalated in 2022?
I think governments should regulate less and be more open.
In my opinion, the best development strategy will be the strategy of promoting a dialogue between manufacturers and governments, discussing preferential terms and special approaches to financing market participants, developing a more liberal approach to regulatory requirements, for example, registration and labeling of drugs according to the EAEU rules. In light of geopolitical instability, for instance, the last point has already become complicated as it is.
And I have a feeling that it's the manufacturers – not other participants in the supply chain – who are now getting the first blow of any new regulatory burden. After all, we prepare, we install equipment in factories, we hire people, project teams who sometimes have to put new labeling codes on packages by hand. At one of our factories we have recently produced a package with medical labeling for Uzbekistan. This kind of packaging is generally one of the first on the market right now. We have been pursuing this milestone for almost two years, it is a gigantic amount of work, effort and time, and it is very important that our endeavor has succeeded. These challenges remain with us, and it is essential and necessary for us to cooperate with state regulators on them.
Connect to stay up to date!