Challenges for Pharmaceutical Companies in Russia
Jon Umarov, Associate at The Volkov Law Group, returns as a guest contributor. His profile is available here. Jon can be reached at email@example.com.
The Russian government adopted significant reforms to the country’s pharmaceutical industry starting in 2008. According to a 2012 survey of the Russian pharmaceutical industry conducted by Ernst & Young, both foreign and domestic manufacturers projected significant growth in Russia’s pharmaceutical markets.
The Russian Ministry of Health reported that the government’s expenditure on healthcare in 2011 amounted to 3.56% of GDP. A new government strategy announced in 2012 aims at modernizing the healthcare industry and encourage further development by 2020.
While the Russian pharmaceutical market offers great opportunities to pharmaceutical companies, it is a very complex market. Specifically, the same Ernst & Young survey also found that 77% of the foreign manufacturers saw corruption as one of their greatest challenges in Russia.
Notably, several federal laws are relevant to the Russian pharmaceutical industry. They include the Law “On the Circulation of Medicinal Drugs,” the Law “On the Fundamental Principles of Public Healthcare” and the Law “On the Contract System of Procurement of Goods, Works and Services for State and Municipal Needs,” also known as the Procurement Law.
Foreign companies doing business in Russia have complained that the laws and regulations can be burdensome. Yet such reform programs are aimed at developing the domestic industry and encouraging foreign manufacturers to localize their production resources.
For instance, the Law “On the Circulation of Medicinal Drugs” addresses the registration of medicinal drugs. Navigating the registration process can be challenging. Foreign companies also are concerned regarding state registration of prices for medicinal products included in the Essential and Vital Drug List (EDL), as these rules give preferential treatment to domestic manufacturers.
In 2012, additional challenges arose when the Law “On the Fundamental Principles of Public Healthcare” imposed restrictions on pharmaceutical workers in their interactions with pharmaceutical companies. Under that law, pharmaceutical workers are forbidden to accept gifts from pharmaceutical companies and many interactions between them have become more restrictive.
Companies are advised to review their marketing strategies to accommodate such restrictions as they relate to corruption risks. In addition, this law mandates each region in Russia to define its own EDL list, which will be the basis for the new reimbursement plans, thereby decentralizing the Russian healthcare industry by empowering the regions in their decision-making.
From now on, companies will have to address each region separately in their efforts to include products on the EDL lists. There are over 80 separate regions in Russia and navigating all of these bureaucracies could be a monumental task. As a result, global companies will be forced to rely on agents and distributors rather than assigning their own staff. As a consequence, companies will have to devote more resources to screen and monitor third party relationships.
Third party interactions are already a well-known risk in Russia. Pharmaceutical companies are advised to closely monitor their interactions between the third parties and healthcare providers, because healthcare providers are considered state officials for FCPA purposes.
In addition to the pharmaceutical industry laws described above, pharmaceutical companies must also comply with newly enacted Russian anti-corruption legislation. In January 2013, Russia amended its Federal Law “On Combating Corruption,” by introducing Article 13.3 and setting forth new and stricter anti-corruption standards for all businesses.