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Five Reasons Why You Should Be Watching Ukrainian Pharma

In recent years Pharma has delivered a stunning 18% average annual growth. But the sector's best days are still ahead of it.
Times have been good for the global pharma industry. New technologies, an ageing population, increased interest in quality healthcare — all of these factors make pharma stand out in today's world economy.
Ukraine is a full-fledged participant of this boom, with pharmaceuticals comfortably placed as one of the country's top performers. While many sectors of the Ukrainian economy have struggled to recover from economic crises in 2009-2010 and 2014-15, pharma has seen impressive growth. In 2018, it reached 89 billion hryvnias, up from 23.5 billion in 2010 - an impressive average growth of over 18 percent per year.

Nor is this growth simply based on a weak local currency, argues Dmytro Shymkiv, Darnitsa Group chairman, pointing to a growth in the hard currency value of sales, particularly over the past two years.

Capital investments in pharmaceutical manufacturing have tripled in the last 8 years and now constitute around 1.85 bln hryvnias. Similarly, investments people and productivity have been able to better manage the challenges of recruiting and retaining talent compared to other industries. While still relatively low compared to Western peers, average salaries of over 15,400 hryvnias ($610) make pharma the best paid industry in Ukraine barring air transport.

But while global players with massive research budgets are expected to struggle under growing price pressure, experts say that strong run is far from over for lower cost emerging market players, with several factors poised to keep growth upbeat in coming years. Dmytro Aleshko, partner and head of pharmaceutical regulation at law firm LegalAlliance, says Ukraine in 2019 is on track to match or even exceed the exceptional performance of recent years."The dynamics of the past three years give reasons for optimism. Sales for this year so far indicate that growth for 2019 will also be in the 20 to 25 percent range," Aleshko noted.

What are the factors that will continue to drive the sector's performance in the coming years? Here are five reasons why you should be watching Ukrainian pharma.


1. Consumer spending catching up to regional peers
Ukrainian drug consumption remains one of the lowest in Europe ($73 per person compared to $625 in Canada or $258 in Estonia) — mainly because of the low purchasing power of people and the absence of state health insurance programs. As this situation is slowly changing for the better, improving prospects for the pharma industry.

"Although a little behind schedule, Ukraine duplicates the success of its European neighbors. That is why 'insurance medicine' and private-state partnership in the pharmaceutical business – are the challenges of the near future. Our company has been already leading negotiations with regulatory organs about such a partnership," Shymkiv said.

After some difficult years, Ukraine has finally turned the corner on economic reforms, which have helped deliver rising wages. In 2018, Ukrainians real disposable income grew by almost 10 percent compared to the previous year, with Kyiv-based investment bank Concorde Capital projecting another 9-9.5% increase for 2019.
Despite the impressive double-digit annual growth, a look at Ukraine's neighbours suggests there is still a lot of room for growth and the industry's potential should still be considered as untapped.
The dynamics of the past three years give reasons for optimism. Sales for this year so far indicate that growth for 2019 will also be in the 20 to 25 percent range.
Dmytro Aleshko, LegalAlliance
2. Import substitution
This period saw a temporary phase-out of imports, with the sharp devaluation of the hryvnia being a key factor.

Higher prices on imported medicines helped Ukrainian manufactures to be noticed in the eyes of Ukrainian consumers. As a result, the market has experienced huge import substitution — a crucial factor for pharma growth in recent years.

"Foreign companies were using an aggressive advertising strategy on the Ukrainian market. They were persuading consumers that only their productis are of high quality. In reality most foreign medical substances have Ukrainian analogues that are just as effective. Along with that their price is 4-5 times lower, and sometimes Ukrainian medicines are even 16 times cheaper," Shymkiv said.

Ukrainian companies are now leading the poles. Darnitsa, Farmak, Arterium, and Zdorovye Group are among the top domestic players.
Before 2014 Ukrainian pharma was dominated by foreign companies. Back then only 3 out 10 biggest Ukrainian pharmaceutical companies were from Ukraine.
Our goal is to provide modern effective and high-quality drugs for an affordable price. Generics are the best way to achieve this goal. We are already on our way: 61 medicinal products are at the development stage at Darnitsa
Dmytro Shymkiv, Darnitsa Group chairman
3. Public sector
This has led to significant self-medication and overall lower medication consumption.

The "Affordable Medicines Program," launched in 2017 by the Ministry of Health, is a step in the right direction. The program aimed to reimburse the most essential medicines with a total of 627 million hryvnias in its budget in 2017. The number increased to more than 1 billion hryvnias in 2018 and 2019. As expected, demand for listed drugs increased dramatically in two years.For now the scope of the program is still relatively limited, as the budget of the "Affordable Medicines Program" constitutes just over 1 percent of the overall market. There may be a positive turn around the corner, however, as discussions about boosting spending on healthcare from the 3.7% of GDP in 2018 to 5 percent (closer in line with regional peers) in the near future.

"The [Affordable Medicines Program] should be developed and enlarged," says Aleshko. "If it would be not 1 but 6-10 billion than the government will have completely different market impact," he added, noting that increased spending can also give the government scale to secure better prices and terms.
In most markets governments are the biggest buyers of healthcare products and services. Ukraine, however, has long been set back by ineffective and deeply corrupt healthcare, as a result of which many medicines were bought individually, despite being approved for public or insurance programs.
4. The rise of generics
"This is a global trend and Ukraine is part of it," Shymkiv pointed out. "Generics allow access to treatment for more patients, which is why governments of many countries focus on them while planning state medical programs."

Moreover, generics are not just an emerging market phenomenon. According to a recent report by the United States regulator, the Food and Drug Administration: "Affordable generic drugs accessible to the American people is a win for public health."

Unlike developing an original new medicine, generics don't require a lot of investments. While creating a new drug can cost more than 1 billion dollars developing generics can be closer to the 5 to 10-million-dollar range. Moreover, as markets for patented drugs are already known (and can serve as a benchmark to forecast the market for generics), generics are both a less capital-intensive and less-risky type of investment. Finally, generics are also much quicker to develop: whereas original medical compounds can take more than 10 years to develop, creating generics is usually 3-4 times faster.

"The goal of the World Health Organization is to provide the highest accessible level of health care to everyone around the planet. WHO experts see generics as a chance for millions of patients to get affordable medical treatment – because such drugs are much cheaper than the originals, while maintaining the same quality," Shymkiv said, adding that many governments now focus on generics when considering state procurement.

One company's loss is another's gain. While many Western-based multinationals are set to lose out because of so-called "patent cliffs" (sharp declines in revenues upon patent expiry), pharma firms in emerging markets see this as an opportunity.

"The age of mass patenting was in the end of 1980s – beginning of 1990s. Usually a patent is valid for 20 years, then the company can prolong it for 5 years. If we start the countdown from the 1990s, 25 years means they expire now," Mamunya explained, noting that thanks to generics both patients and producers will win.

"The pharmaceuticals industry – is not only about business, but also social responsibility. And if the generics production makes the treatment of some diseases cheaper, this will give hope to the dozens of thousands of Ukrainians," Mamunya said.
The Ukrainian pharmaceutical industry is heavily tilted toward generics.
Generics allow access to treatment for more patients, which is why governments of many countries focus on them while planning state medical programs.
Dmytro Shymkiv, Darnitsa Group chairman
This was confirmed by a study of the four top emerging markets Brazil, Russia, India and China by global advisory firm PwC, which shows that projected new pharma spending in 2020 will go overwhelmingly toward generics.

"Our goal is to provide modern effective and high-quality drugs for an affordable price. Generics are the best way to achieve this goal. We are already on our way: 61 medicinal products are at the development stage at Darnitsa," Shymkiv said.
5. Export opportunities
For now, Ukraine is primarily a window into the post-Soviet market — its biggest 3 export markets are Uzbekistan, Kazakhstan and Russia, with only two of its top-10 export countries (Brazil and Iraq) falling outside of this region.

Yet there are some reasons to believe this might change in the future. During the last two years, 7 Ukrainian pharma companies received international standard GMP (Good Manufacturing Practice), ensuring proper production quality. This will foster the export of Ukrainian pharmaceutical production to the European Union.
Having taken a hit after the 2014 revolution, Ukraine has been experiencing steady export growth over the past four years. Ukraine is currently exporting its medicine products to 81 countries. Most experts agree the dynamic will continue at pace.
According to Aleshko, Ukrainian legislation is the most aligned with the EU standards compared to other post-Soviet countries. "A lot of points from Directive 2001/83 are represented in our legislation," he argued. This suggests a promising source of growth for Ukrainian drug exports in years to come.

But quality, not quantity, is more important, according to Shymkiv, who believes that in 20 to 25 years we won't recognize the pharmaceuticals industry. "Pharma will go through the same revolution as the IT industry did in the 1990s. We are on the verge of a boom and that is really exciting," he summed it up.
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