FUTURE OF RUSSIAN HEALTHBIO INDUSTRY

FUTURE OF RUSSIANHEALTHBIO INDUSTRYOlga Makeeva, Finpro ry29.04.2013

04-2013Project Backgroung• As it has been noticed lately, Pharma and Biotech are becoming hottopics in Russia - like in all other world. Biomedical technologies are inthe list of top-5 priority areas in innovation development for Russiangovernment. Technological growth coupled with economic and politicalchanges, increasing middle class, trade liberalization and largeinvestments promise dramatic improvements in healthcare andwellbeing, pharma & nutrition production, industrial biotechnologies etc. –all that gives a reason to believe that there may be interestingopportunities for Finnish HealthBio businesses in Russia in the nearest3-5 years.• In the beginning of 2012 it was been decided to initiate an OpportunityCheck study “Future of HealthBio industries in Russia”, in order toanalyse previous experience, benchmark the latest projects and activitiesand evaluate future development trends in the Russian market.Identification of future cooperation opportunities together with industrydevelopment forecasting through analysis of current trends, weredetermined as the main objectives for the project.

04-2013Pharmaceuticals market estimated growth 2010 – 2015, %Source:http://www.astrazenecaannualreports.com/2011• The global drug market, well-being and healthcaregoods and services are constantly growing.• By 2020 the drug market could reach 1.6 trilliondollars.

04-2013More opportunities, more challengesPharma & HealthBio market trends in the world• Healthcare and drug spending is growingworldwide:• world population growth• population ageing• changing lifestyle• growing middle class• Access of wider populations to HealthBioproducts• Consumers demand better clinical profile forthe same price and better proof of theclaimed results• Restrains on providers and manufacturers:both developed and developing countriesdemand same things from the providers ofgoods and services1816141210864209,654,110,110,95,4 5,444,812,713,95,7 5,95,3 5,815,51995 2000 2005 2010 2015E 2020E6,26,1High income Middle income Low incomeHealthcare consuming a larger share ofGDP in rich and poor countries alike:health expenditure as % of GDP

04-2013More opportunities, more challengesPharma & HealthBio market trends in the world• Generic booming• Development of remote healthcare anddiagnostic technologies• Personalized healthcare has become asignificant driver of the industry• Transition from curing to precaution andinvesting in healthy lifestyle:• functional nutrition• preventive care• health monitoring

04-2013INTERNATIONAL TRENDS IN RUSSIAN MIRRORRussian biotech market experiences the same development trends asthe European and global markets do• Growing demand for pharmaceutical and biomedicalproducts.• Higher consumer expectations: higher benefit for thesame price in both private and public sectors.• Increasing market volume & Generic booming.• Public sector’s ambition to decrease public fundingthrough remote healthcare and diagnostic technologyand preferring local products to imported goods.• Bigger role of individual healthcare, tendency to solvemedical problems with HealthBio products(medications, dietary supplements, medicalequipment).• Growing demand for personalized medicine.• Well-off population and young consumers determinedto invest in medical treatment and prevention.

04-2013Health and Bio in the SpotlightStrategy for development of pharmaceutical industry of the RussianFederation until 2020 (adopted by the order by Russia's Ministry ofIndustry and Trade on 23.10.2009)Stage I2008 - 2012Developing high-tech pharma manufacturing in RFStage II2012 - 2017Generic manufacturing to replace import drugsBuying licensesEnsuring national drug independenceStage III2017 - 2020Developing analogue biomedical drugs for import substitutionDeveloping unique and innovative medicines

Some target indicators of Biotech 2020 ProgrammeYearsIndicatorMeasurement unit2010 2015 2020Consumption of biotech products bln RUR 120 400 1000Consumption of biotech products bln RUR 24 200 800Share of imported products in consumption % 80 60 40Share of export in production % > 1 20 25BiopharmaceuticsRegistered original biopharmaceuticals pcs (collectively) - 10* 50Biopharmaceuticals - equivalents of drugs that are notproduced within the Russian Federation, not protectedby patents, included in the list of vital and essentialdrugs.% import substitution 13 20* 50Biomedical technologiesDiagnosticums % import substitution 25 40 50Biocompatible materials % import substitution 0.5 5 10Developments using cell technologies (bioengineered % import substitution 0.5 5 20fabric structures)Veterinary biotechnologyGrowth of use of veterinary bioproducts % to 2010 14 70Vaccines, diagnostic sets, medications % import substitution 70 80 100Food biotechnologiesFerments % import substitution 5 10 20Food protein % import substitution 10 30 70Share of biotechnologically reprocessed food % 1 10 2004-2013

04-2013Important instrument of the future developmentare technological platformsTechnological platform Medicine ofthe Future, organized in 2011,serves as a tool to stimulate theinteraction of researchorganizations, academia andbusiness.As of today, the platformunites over hundred and fiftyparticipating organizations thatrepresent experts from variousregions of Russia who work indifferent fields of biotechnology.Assistance inproduct globalmarketing: customsregulations, stateprocurement,internationalizationScientific andbusinessforesight inbiotechTechnological platform “Medicineof the future” participants:Universities, research andscientific institutesState institutionsState-owned and privateenterprisesForeign partnersAssisting chosenprojects: state andprivate funding,personnel training,benchmarking, etc.Study of currentinnovativeresearches andproductsdeveloping

04-2013Boosting Private Consumer MarketDemand for medicines is risingrapidly in the growth marketsUS$ billionsPharmaceutical sales in Russia180160140120100806040200Pharmasales(US$bn)Pharmasales percapita(US$bn)2011 2012 2013f 2014f 2015f20,65 20,96 22,40 24,41 27,39145 147 157 171 193Sales in 2011 Projected in 2020• Source: Business MonitorInternational

04-2013Private & public sectors of Finnish / Russianpharmaceutical markets, bln USDRetail salesRetail sales of special price drugs (VEDL on prescribtion)Hospitals and other healthcare institutionsRussiaFinland0 5 10 15Retail sales, pharmaciesRetail sales, supermarketsHospitals and other healthcare institutionsSources: Finland as Russia's Business Partner, Trade Representation of Russian Federation inFinland; Report on the Development of pharma Industry in Russia, Ministry of Economic development

04-2013Structure of the Russian drug market is verydifferent from those of developed countriesShare of innovative products inthe Russian medication market, %Pharmaceutical market bysubsectors (bln USD)48Generic drug sales97885,017,86OTC medicine3InnovativeproductsDomestic products12Brandedgenerics52Non-brandedgenericsImported products8,08Patented drugsalesSource: Report on the Development ofPharmaceutical Industry in Russia, Ministry ofEconomic development , Russia Pharmaceutical &Healthcare report 2013, Business MonitorInternational

04-2013Vitamins and bio-additives take a special placeon the Russian pharmaceutical market• Vitamins and bio-additives take aspecial place on the Russianpharmaceutical market.4500040000Vitamins• Registration of newpharmaceuticals as bio-additivesis now much easier and cheaperfor manufacturers, huge numberof small and medium enterprisesregister their products this way• Russian customers are interestedin vitamins and functional bioadditivesas they pay increasinglycloser attention to preventive careand functional nutrition. Yet only asmall part of the population (nomore that 10%) take vitamins onthe regular basis.350003000025000200001500010000500002008 2009 2010 2011Tonics andbottled nutritivedrinksDietarysupplementsPaediatricvitamins andDietarysupplements

04-2013Telemedicine and Mobile Medical Technologiesget special attention in Russia• Telemedicine and remote medicine areespecially important in Russia because of thegap between leading medical centers and theperiphery caused by the differences in personnelqualification and availability of technologies.• Telemedicine initiatives in Russia are beingincreasingly developed on the federal andregional levels with ever-greater coordinatingrole by the RF Ministry of Health, RussianAcademy of Medical Sciences, Ministry ofCommunications Ministry of Defense andEMERCOM.• Despite the activity of Russian companies, theirefforts are not enough to satisfy all the needsand demands of the market, which provides anopportunity for international companies

04-2013Personalization of Healthcare and Developmentof Bioinformatics• In developed countries, complete shift topersonalized medicine may occuralready in 2015-2025, when genomesequencingtechnologies becomegenerally available. Implementation ofpersonalized treatment methods inRussian practice seems unlikely in thenext 5-10 years. Yet some expertssuggest that Russia will develop remotegenetic diagnostics methods, similarly toe-commerce. Better-off part ofpopulation will probably use the servicesof international personalized medicine.• Bioinformatics is however welldeveloped and according to Russianexperts, Russian bioinformatics holds avery significant position internationallyTreatmentmonitoringEarlydiagnosticsRisk evaluationPreventive careGeneticscreeningClinical trialsPersonalized medicineMoleculardiagnosticsToxicologicalpredictionsDrug developmentGenomics andbioinformaticsIdentification ofgenes andproteins relatedto a certainillnessGeneticsTherapyresistanceidentification

04-2013Russian Protectionism Results in LocalProduction BoomingPharmaceutical production development in Russia 2001-2011, MRUR / %133%124%128%129%130%180116%112%122%160118%114%108%140140%120%100%12010080604020089%80%60%40%20%0%Source: RF Ministry of Economic Development

04-2013Regions of Russia developing biotechindustriesSource: Program for Development of Biotechnology in the RussianFederation through 2020Today regional biotechdevelopment programmesare adopted in theRepublics of Chuvash andBashkortostan and arebeing developed inBelgorod, Kirov, Moscowand Nizhny NovgorodOblast', and in the future –in the Altai, Primorsk,Kransodar andKransoyarsk, Voronezh,Kaluga, Novosibirsk,Tyumen and Tomskregions, as well as in theKomi Republic and SaintPetersburg. Prominentpharmaceutical clustershave been established inMoscow, Kaluga andNovosibirsk.

04-2013Spending on science and innovation in Russiaincreased sharply in the last five years.• Russia is nowadays one ofworld’s Top10 spenders oninnovation and science and 4 thbiggest spender on start-upsin Europe.• The most well-known projectof today’s Russia aimed at thedevelopment of innovativeindustries is Skolkovo• Biotechnology andbiomedicine are alsosupported by the RussianFoundation of theFundamental Studies, RAS,RAMS, FASIE, RUSNANOand RVCSkolkovo - progress to dateISK Foundation185 grands approved300 mln USD in grant fundingInnovation city:First building / hypercubewith 20 companies / residentsCorporate and VC partners28 key partners51 venture funds agreed to650 mln of investmentTechnopark3 centers for collective use143 applications forregistration of IP rightsParticipants:over 850 start/upsCombined revenue 40 mlnUSDSkolTechadmitted first class of 20students500 applications received3 research centers

Implementation of the pharma and medical industry cluster projects in SPBEstablishment of OOO Novartis Neva:Production of innovative proprietary pharmaceuticals and modern highqualitygeneric drugsEstablishment of ZAO Biocad production andresearch complexEstablishment of OOO Geropharm drugproduction companyEstablishment of ZAO Pharm-Holding drugproduction companyEstablishment of OOO Neon, a companyproducing drugs of various pharma groupsEstablishment of OOO Samson Med:Establishment of OOO STFC Polysan:Establishment of ZAO Vertex innovationdrugs production and research centreEstablishment of a production and researchcentre OAO Pharmaceutical Factory of SaintPetersburg (GalenoPharm)Establishment of OAO Pharmsintezproduction companyEstablishment of ZAO Immuno-Gemproduction company:Establishment of ZAO Medelcom productioncompany:Establishment of Alkor Bio productioncompanyDevelopment and production of more than 40 drugs in accordance with GMPstandards; research facility studying oncology/haematology, gynaecology/urology,neurology, viral infections, diabetesProduction of injectable drugs and suppositoriesDevelopment and production of new generation genetically engineered peptidedrugs, modern diagnostic systems and improved generic drugsProduction of high-quality Russian drugs of various pharmaceutical groupsOrganization of a complete process cycle for the production of activepharmaceutical ingredients and a wide range of drugs in accordance with GMPstandards for various therapeutic groupsProduction of quality intravenous fluidsProduction of drug productsProduction of drugs for treating asthma, chronic obstructive pulmonary disease,as well as dietary supplements and cosmeticsProduction of import substituting drugs for cancer treatmentProduction of human plasmaProduction of medical ultrasound diagnostic equipment and sensorsProduction of reagents for hormone and allergy diagnostics04-2013

04-2013Made in Russia - ideology• We can see that the Russianprotectionism due to the desireof the Russian government toreduce the state's dependenceon imports of medical andpharmaceutical products and,ultimately, to reduce publicspending on health care, hasalready led to the rapid growth ofpharmaceutical production.• Closing the market to foreignplayers, the Russian governmentnow supports the development ofdomestic players, from universitystart-ups to major pharmaceuticalplants. Projects of foreigncompanies entering the Russianmarket or starting joint productionalso can receive support.Facilitatinglocalization offoreignproducersSupportingdomesticproducersReducingdependence onimportTransition fromresource-basedto innovativeeconomy

04-2013FundingDecreasing Public Costs through PPPPPP is considered to be one of the most effective forms of increasingthe effectiveness of innovation processes – but in Russia such form ofcooperation as a synchronization mechanism of innovativedevelopment of the national economy is still not working.Today the following factors impede thedevelopment of PPPs in Russia:• Underdeveloped legislation• investors' limited resources and difficulty to attractforeign investments;• relative underdevelopment and instability of thefinancial markets and banking resources;• designing large-scale concession projects withouttaking into account the real situation;• lack of transparency and access to informationabout investment projects;• strict requirements along with low commercialviability of PPP projects;• lack of active involvement on the part of the state(municipal authorities)ManagementcompanyManagementcontractPrimecontractorGovernment bodyPPPcontractConsortium(specialmanagementcompany)ConstructioncontractConsultants ofthe governmentbodyConsultants,lawyersCreditorsInvestor(s)Shareholders

04-2013Unhealthy Living Stimulates Healthy EatingRussians’ interest to healthy issues is ambivalent• 85.0% of Russian respondents rategood health as the most important• 64.1% - say they did not keep to adiet• 76.4% - do not do morningexercises• 33.7% - smoke regularly, of which48% smoke from 11 to 20 or morecigarettes a day• 84.7% - drink alcohol, from whichone in four drinks vodka, brandyand other strong spirits regularly• Functional food is treated asmedicine60005000400030002000100002008 2009 2010 2011 2012 2013Better-for-You food Russian market sizedevelopment, MRURSource: Euromonitor international

04-2013Identified marketopportunitiesPositive development factorsChallengesEducational & consultingservicesAttracting Russiancompanies to FinlandThere is a strong need for educationalservices (personnel for newly constructedpharma plants, research& developingpersonnel, HealthBio sector managers etc.)and Finland is well known for the high levelof both professional and universityeducation. We think it would be quite easy tooffer these services to local companies – butonly in case they will be adopted for the localneeds and translated (that is why themarketability score is not the highestpossible).We may suppose that in the future more andmore Russian companies would like to enterthe European countries and thus considerproduction outside Russia. Finland has verygood R&D and manufacturing infrastructure,and there can hardly be any obstacles toattracting Russians to Finland.Market size is however not very high, becausethere are many obstacles for its development(growing local competition, foreign playerssending their personnel for training at their plantsworldwide, not enough resources of smallplayers). Practically all the same can be saidabout professional consultancy – there is a needand it will obviously grow in the future, and themarketability is high, but the demand for theseservices from Finnish companies would hardlybe too high.Our macroeconomic score is not quite high ,because impetuous development of Russianpharma and bio industries are mainly based onstate support and the products are designed andmanufactured for the local market and inaccordance with local standards. We expect thatdespite certain interest, finally only a small groupof Russian companies with niche products willcome to Finland.Traditional export ofhealthcare products,including medicines,laboratory and medicalequipment etc.As it is stated in the report, there are stillopportunities for traditional export and import,especially when products are unique and basedon high tech solutions. However,Marketability score is not very high, as it is veryexpensive to enter the Russian market, there aremany bureaucratic barriers and delivery costs aregrowing from year to year. Market potential also notvery high because of the Russian protectionalisticpolicy.

04-2013Identified marketopportunitiesPositive development factorsChallengesDistantdiagnostics & caresolutions forpublic sectorDistantdiagnostics & caresolutions forprivate sectorScientificcooperation,includingbioinformaticsPersonalizedhealthcareservicesVery big market with growing potential and highinvestments.Entering the private market is much easier in comparison tothe public market. Continuously growing demand for thesesolutions let us believe that the future of this marketsegment is quite bright and consumers are going to buythem more and more.There are many opportunities for scientific cooperation,despite some obstacles related to import/export ofbiosamples. Moreover, some market experts believe thatthese problems will be solved in the nearest future, as theyare nowadays discussed at the highest level in Russia. Thepotential is also quite high – but only scientific and noteconomic.We believe that a high demand for these services wouldmake the suppliers very welcome in Russia, and if onpractice they will be offered in Finland, without establishinga diagnostic laboratory in Russia, there will be no othermarket entry costs but advertising. When they make itpossible to send biological samples outside Russia, acooperation with local private laboratories may help todevelop this service furthermore.Entering the market would suggestadaptation of existing solution for localneeds or new solution design. It may benecessary to enter the market throughindustrial cooperation with a localmanufacturer or start an own production.However, marketability cannot beevaluated high at the moment becauseof high market entry costs (registration +entering retail chains)As we have found out, strong differencesin R&D legislation and practices make itpractically impossible to commercializethe result of joint studies in both Russiaand Europe. As for the market size, it islow in comparison to many othersegments.The share of population that can affordthese services is still very small

04-2013Identified marketopportunitiesPositive development factorsChallengesJoint biotech venturesand daughter companies,inc. pharma and medtechproductionSubcontracting forinternational and RussianpharmaHuge market volume (sales of localizedproducts all over Russia to both private andpublic sector) is doubled with high macroeconomicpotential of growing pharmaindustry, investments, consumer demandetc.Some niche opportunities should howeverexist, especially in the North West wherecooperation with Finnish companies could belogistically and financially acceptable.Entering the market is not an easy and cheaptask, so we give a moderate score formarketability.According to the research, there are not so mayopportunities of this kind: international pharma &medtech manufacturers are using existing R&Dfacilities and partners abroad, Russians aretrying to integrate all stage of productdevelopment into the same organization and donot rely on subcontracting,Growing logistic and customs costs may bringnew challengesPPPWe see the market potential of public privatepartnership projects as very high and knowthat at least in Saint Petersburg theauthorities would like to involve Finnishcompanies into PPP schemes. In the futurethey may become one of the maininstruments of the healthcare sectordevelopment, and it may be recommendedto track changes in this sector on a regularbasis.However, taken underdeveloped legislation andfinancial risks into attention we think it verychallenging to join the local PPP projects justnow.

Future macro-economic potential04-201365Opportunities for Finnish-Russian Cooperationin HealthBio fieldDistant diagnostics &care solutions for publicsectorPersonalizedhealthcare servicesDistantdiagnostics &care solutionsfor privatesector4Educational &consulting services321PPP (3-5 yearsperspective)Subcontracting forinternational andRussian pharmaJoint biotechventures anddaughtercompanies, inc.pharma andmedtechproductionTraditional export ofmedicines, laboratoryequipment, medicalequipment, healthy nutritionetc.Scientificcooperation,includingbioinformatics00 1 2 3 4 5 6Marketability

04-2013Suggested ActionsFINNISH-RUSSIAN CENTER FORBIOTECH COOPERATIONPARTICIPATION TO BIOTECHEVENTS IN RUSSIAINVESTIGATION OFDEMAND FOR EDUCATIONIMPROVINGBIOTECH IMAGE OFFINLAND INRUSSIAPRACTICAL SERVICES TOFINNISH AND RUSSIAN SMEs :(export groups, market entryguides, assistance in everydayactivities)COOPERATION WITHBIOMED CLUSTERS, studiesof regional potential