Russian market at a crossroads: still emerging and attractive, despite going through hard times Nickolai Demidov General manager IMS Health Russia&CIS 15.9.215
Executive summary Market overview Russian pharmaceuticals market entered into a period of major external and internal challenges from the end of 214 that are causing changes in out of pocket and state sectors. IMS Health outlined a few major factors and drivers that might have relevant impact in the aftermath of this crisis. General trends Drop of disposable income and purchasing power for both private and state sectors Enforcement of the support for local manufacturers Price regulation for EDL drugs Threat of deficit as a trigger for different regulative novellas Out of pocket sector trends& key factors Lessons learnt from the previous crisis on OOP market Regulation of price registration and adjustment in EDL Out of pocket turned to practically only price-driven OOP market growth Managing the price within the supply chain Government sector challenges and trends Budget cuts for healthcare at Federal Regional levels Variations within different programs healthcare reforms and deficit of CMIF Localization trends for state purchases
Russia entered a period of economic turmoil Russian GDP dynamics, trillion rubles in constant prices -3.4%* 39.8 41.5 42.9 43.4 43.7 42.2 21 211 212 213 214 215E Real disposable income dynamics, % change to the previous year -7 pp. 15.9% 1.5% 14.6% 13.2% 99.2% 92.2% 21 211 212 213 214 215E Unemployment rate dynamics, % of economically active population +.6 pp 7.3% 6.5% 5.7% 5.7% 5.4% 6.% Macroeconomic outlook is worsening due to: Sanctions Further drop in oil prices According to government estimates there will be sharp drop in real disposable income of population in 215 that will lead to significant drop in purchasing power Unemployment rate is expected to hit its peak since 211 and reach 6% of economically active population 21 211 212 213 214 215E * as of August the 3 rd, 215 IMF forecast update Source: IMF, Base case forecast as of May 28 th, 215, prepared by Ministry for economic development, IMS analysis 2 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
Healthcare and pharmaceuticals spending in Russia Dynamics of public expenditures on healthcare, % of GDP 3.7% 3.6% 3.8% 4.3% 4.1% 21 211 212 213 214 Additionally planned increase Percentage of GDP Pharmaceuticals market in Russia, billion rubles 468.5 52.7 559.1 49.2 35% 33% 35% 35% 65% 65% 65% 67% +13% 629.4 34% 66% 5.5% 1.4% 4.1% 215E 79.8 36% 64% Healthcare spending level is expected to remain unchanged (4.1% of GDP) Potential increase (1,4% of GDP) planned by the government is under question Spending on pharmaceuticals in Russia is expected to grow by 13% primarily due to price inflation in the Economy 21 211 212 213 214 215E Budget procurement Retail Source: Ministry of Finance, IMS Market Prognosis 215-219, IMS analysis 3 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
Budget spending, trillion rub CPI, index Economic crisis USD/ RUB exchange rate Oil price per barrel, USD General trends Russia entered a period of economic turmoil (3 / 3) Ruble devaluation and oil price Comments Average USD/RUB exchange rate Average spot price on crude oil, USD Russian government has 2 options driven by the crisis caused by external events: 7 14, 15, 14,1 97, 96,3 6 79, 5 61,8 38,6 4 3,3 29,4 31,1 31,8 3 24,8 31,5 2 1 28 29 21 211 212 213 214 CPI and Russia budget expenditures dynamics 61,5 59,3 215E 12 1 8 6 4 2 1. To allow ruble easing and maintain same budget spending 2. To maintain exchange rates, inflation and allow budget cuts Russian government is more inclined to drop exchange rate and maintain budget spending nominated in rubles, as observed historically Devaluation in focus 3 25 2 15 1 5 CPI, index (IMF, IMS estimates) 2, 16, 17,6 14,2 Russia budget expenditures, trillion rub 29,4 27,3 2.5 25,3 23,2 2. 1.5 1. 5 week Ruble makes the localization of production in Russia more attractive then ever; the potential decrease of local demand may be compensated by increased export 28 29 21 211 212 213 214 215E Source: IMF, Ministry for economic development, IMS estimations, IMS experts
Key government initiatives on pharmaceutical market regulation in 214-215 are in line with general import substitution policy N Government initiative Status Impact on pharma 1 Essential drugs list review in 215 Several new products included 2 Support of local manufacturers for loans disbursement Minor, for several domestic companies 3 Import substitution plan approval General guidance and targets 4 5 Parallel imports of certain product categories legalization To come into force from 1 st January 216 Localization: from packaging to full cycle To come into force from 1 st January 216 6 One-time price adjustment for EDL 7 8 9 1 New order of price registration for EDL, To come into force from 1 st January 216 Preferences for domestic in government purchases ( the third is odd rule) To come into force from 1 st January 216 System of monitoring of the product journey from manufacture to patient (labeling) Draft law on mode of production of patented products at Russian plants???? Headache for manufacturers; Potential new market for new whls Reflashing of product delivery to the market models Joker in the deck of the regulator that is wasn t used so far Controversial: tight procedure though indexation of price for all Procedure looks rather complex to be effective; might change the balance in generic including bio Increase of cost vs. increase of market transparency Might change the paradigm of innovative business in Russia Sources: Ministry of Health, Government press releases, government acts, experts interviews
SALES BY VALUE, RUB BLN SALES BY VOLUME, BLN PACKS Pharma market growth in H1 215 Market grew by 11% in value, but it is still shrinking in volume Value Volume 348 +11% 388 2,4-8% 2,3 236 1% 261 Retail Hospital Federal Reimb 2,1-8% 1,9 57 6% 61-6% 54 21% 66,3 1%,3 H1 14 H1 15 H1 14 H1 15 Indicator RUB $ EURO Packs Value H1 215, Bln. 388 6.7 6. 2.3 Growth H1 15/H1 14,% Source: IMS Health. TRD prices 11% -32% -17% -8% 6 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
SALES BY VALUE, RUB BLN Top 1 producers by sales value in H1 215 Outpacing growth is concentrated outside top 1 group 22 2 18 16 14 12 1 8 6 4 2 6% 17,3 1,7 2,2 % 12,8 2,5 8% 11,9,2 4% 7,6,4 3,8 23% 9% 2% 9, 9,3 9,1 1,4,6 TOP-1 market concentration in H1 215: 36% H1 214: 32% 3-33% 1,2 2,3 6,2-26% 4,6 2, 2,8 12% 7,6,5 2 1-1 -2-3 -4 GROWTH,YOY,% Novartis SA Bayer Teva Takeda Servier Stada Roche J&J Gedeon Retail Hospital DLO Source: IMS Health. TRD prices 7 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
SALES BY VALUE, RUB BLN SALES BY VOLUME, BLN PACKS Retail market growth in H1 215 Split by prescription status Value Volume 236 +1% 261 2,1-8% 1,9 118 1% 129 Rx,6-7%,6 OTC 119 11% 132 1,5-9% 1,3 H1 14 H1 15 H1 14 H1 15 Source: IMS Health. TRD prices. Retail sales only 8 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
SALES BY VALUE, RUB BLN SALES BY VOLUME, BLN PACKS Retail Rx market in H1 215 Split by EDL status Value Volume 118 +1% 129,6-7%,6 59 13% 66 Non EDL EDL,2-9%,2 7% 59 63-6%,4,4 H1 14 H1 15 Source: IMS Health. TRD prices. Retail Rx sales only H1 14 H1 15 9 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
Growth structure on retail market in H1 215 X Analysis of the structure of growth in EDL and Non-EDL segments shows similar oiewre trends Prices grew significantly in both sub-segments on wrrrrrrrr EDL 3% retail market. The main difference is in the scale of rrrrrrrrrr inflation process 1% rrrrrrrrrr 1% 8% rrrrrrrrrr Prices for EDL products increased by 6% 1%YoY in H1 15 rrrrrrrrrr rrrrrrrrrr -,1 rrrrrrrrrr rrrrrrrrrr Drop-out products* rrrrrrrrrr rrrrrrrrrr rrwww wwww wwww wwwwt r, Inflation 25% More expensive 2% Volume Non EDL 14% New products 12% Drop-out Inflation More Volume New Total products* expensive products Growth Source: IMS Health. Data at TRD prices, drop-out products are excluded due to low figures 2% Total Growth Price increase for Non-EDL products accounted for 25% IMS monthly analysis shows no price increase since February. It means that inflation probably has already achieved its max effect EDL in Russia >6 preparations >6% of the market in value basis for government purchases and for future reimbursement ex-man prices is to be registered, whls &retail markups are limited 1 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
Key products categories in OOP market in 1H 215 Branded generics dominate at the OOP and keep growing faster then market average, though consumption strongly declined Product categories, MS%, by value 6,1% 33,2% 5,2% 55,5% generics and never protected not covered original protected 2 15 1 5-5 -1-15 -2 Product categories growth, by values/volumes 11,5% 1,2% -8,4% generics and never protected -6,6% -3,7% -15,1% 15,5% -3,2% not covered original protected Gr value, % (RUB) Gr volume, % Generics, MS%, by value Generics growth, by values/volumes 5,9% 3 26% 23% 13,2% BRANDED 2 12% INN UNBRANDED 1 Gr value, % (RUB) 8,9% COMPANY BRANDED -1 BRANDED -7,2% INN -4,4 UNBRANDED COMPANY BRANDED -2,53% Gr volume, % Source: IMS Health. Retail sales; RX/OTC; TRD prices -2 11 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
SALES BY VALUE, RUB BLN SALES BY VOLUME, MLN PACKS DLO market in H1 215 Sales growth is being largely driven by ONLS segment in H1 215 Value Volume +21% +1% 54 66 48,2 2,5 17% 52,9 2,9 35 32 9% 7N ONLS 45,6 1% 5, 22 4% 31 H1 14 Source: IMS Health. Contract prices H1 15 12 15.9.215 Stada Capital Markets Day 215 Saint Petersburg H1 14 H1 15 INN generics/local biological/innovations, limited room for branded generics Tender based market regulator push for lowest price Localization leverage the access, to be more important in future
Pharmacy chains & distributors OOP sector trends Importance of pharmacy chains is growing due to business consolidation and capture of significant market share Context pharmacy chains in Russia accumulated around 61% of total retail sales(in value term) in 215/16 and this trend is expected to continue there is no limitation on chain ownership in Russia but competition legislation limits maximum market share belonging to chain in region chains are privately owned; the biggest are fast developing and expanding with different formats, location and positioning TOP-1 chains occupies 2% of local market; there 3 chains with more then 1 outlets and 6 with 5 pharmacies the biggest chain 36,6 has 3,3% of national market in value terms with 783 while the biggest chain in terms of outlets # - >16 and only 2,1% (due to regional coverage specifics) marketing unions and other type of virtual chains already become a strong tool for negotiation with suppliers and is to get stronger with new types of collaboration Source: IMS Health; SCI; 2 interviews with chains
Wholesaler segment joins the race of consolidating through M&A Context Top-1 Wholesalers in Russia accumulated around 82% of total direct drug sales (in value term) in 1H 215 Wholesalers in Russia are usually providing full range of service (logistics/warehousing/documentary) based on setting margin on ex-manufacturer price Pharmacy chains & distributors OOP sector trends The wholesalers tend to have 2 types of specialty full range wholesaling mainly focused on dealing with pharmacy retail (rather consolidated and stable) and tender players Most of TOP full range wholesalers has expanded into neighboring areas, mainly pharmacy retail, by creating their own chains (also virtual). Some also invested in production aimed for localization services for international pharma Like in retail chains Consolidation process through M&A is also continuing in Distributor segment (Ave Group bought Russian subsidiary of Oriola; R-Pharm is in process of acquiring of SIA Int.) Currently wholesalers in Russia are trying to leverage some short term benefits the exchange rate fluctuations provided along with optimization of the business. In long term they might become under threat of bankruptcy as the models they apply requires constant access to cheap long term funding of trade operation which might be eroded in Russia if the macroeconomic situation will be further worsening Source: IMS Health; SCI; 2 interviews with chains
Scale of crisis sustainability for different types of pharma companies in 215-217 Combination of branded /INN/company branded generics (EDL <4%) New bio generics for gov purchases Rx EDL free portfolio with underestimated price INN generics Low risk Diversified portfolio of non EDL/OTC/innovations (MNCs) High margin innovative Products with low elasticity of demand Local production of branded generics Sustainable High portion (>7%) of EDL products Low margin innovative in gov. purchases Newly launched innovative products Expensive OTCs with low differentiation Products with high elasticity of demand High risk 15.9.215 Stada Capital Markets Day 215 Saint Petersburg
Drivers Political situation added new uncertainties in a long prospect Though the market is to have a deep decline in 215, the most likely scenario for 216-217 is the restore of the average yearly growth close to 1% Total Pharmaceutical market Sales LC$B (ex-mnf), 29-219 8,2 8,8 11% 1,2 11,2 12,1 Source: IMS Health, Market Prognosis March 215 13,7 15,2 Devaluation of Ruble affected the market drastically in 215. Further restore of the market in one of the scenarios might bring back to faster growth -45%- -5% 29 21 211 212 213 214E 215E 216E 217E 218E 219E 8,9 9% 16,2 17,6 19,2 21, Wild cards Duration and scale of sanctions Situation on commodity markets Drivers Price increases along with sustainable purchasing power of population and state budget Market restore in 216-217 (?) Introduction of Drug insurance in a long term range Constraints Weak macroeconomic outlook New preferences for local production Constrains for price growth in EDL 16 15.9.215 Stada Capital Markets Day 215 Saint Petersburg 215 IMS Health Incorporated or its affiliates. All rights reserved