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Pharmaceutical Gold Rish is On

The latest announcement has come from the German pharmaceutical company Stada Arz-neimittel; in August it acquired the Russian drug group Makiz for Eur 135 million, at a multiple of 18 times profits and 2.4 times 2005 sales. This followed announcements by Frances second largest pharmaceutical company Servier, that its Eur 40 million pharmaceutical plant north of Mos­cow would begin operations by the end of the year, and by giant Pfizer that it was planning to construct its own plant.

Just a month earlier, the Pharmstandart IPO in London brought Roman Abramovich's Millhouse Capital and his co-investors a windfall of USD 880 million when it sold a 28% stake at a company valu­ation of 2.2 billion. It was only four years ago that Millhouse and friends acquired the Pharmstandart base, then called ICN, a collection of 100 or so pharmacies, five pharmaceutical plants, a building and other miscellaneous assets for a bid of about USD 54 million. The pharmacies were quickly turned over for a reported USD 150 million or so. Pharmstandart sold one one of the original plants, closed another and acquired one additional plant.

Annual per capita consumption of pharmaceu­ticals in Russia is only 10% - 15% of the consump­tion of Western Europe and the United States, and a fraction of that of other countries of Eastern and Central Europe. Russians each spend only an average $37 on medications annually. It is expected that the Russian market will grow rapidly to catch up with other economies making it one of Europe's fastest growing pharmaceuticals markets. Analysts project average annual market growth at 10% - 12% over the next 5 years. The government has also recently increased its reimbursements for pharmaceuticals as part of its increased health care programs.

The growth of Russia's pharmaceutical market is primarily dependent upon increased real disposable income of Russia's population, which has been rapidly growing. Another factor is that the Russian government is increasing spending on public health; it now allocates some $2 billion to meet the medication needs of the least advantaged of the population groups.

There has been a relatively large number of reports of foreign pharmaceutical companies expressing interest in acquisitions in Russia, and some of the larger Russian companies can also be considered potential acquirers. A 2006 report by Meridian Capital identified twelve global pharmaceutical companies that had expressed an interest in a Russian acquisition or green/ brown-field facility.

During the past twelve years, Russia has become dependent upon the import of pharmaceu­ticals and over-the-counter medicines. The market share of Russian-made pharmaceutical is approximately 30% in monetary terms and 70% in terms of quantity. As a result, the Russian government is also expected to put pressure on global companies to produce domestically. Charles Rowlands, Director of RM Consulting, a company that has extensive experience in the pharma industry in Russia and Eastern Europe, commented that this was voiced as a high priority in recent meetings with health industry regulators.

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