Russia's prescription for prosperity

A man reaches for a medicine bottle as he takes his prescription pills in Miami, Fla.

I used to do a lot of driving around post-industrial towns in upstate New York, reporting on the economy. And, at first, my tour of Yaroslavl, Russia, feels rather familiar: the shuttered factories, the fields of grazing cows.

I've taken a four hour train ride from Moscow to get here. I'm touring the city with Eugene Solovjev, who formerly oversaw public relations for the region. He hands me a presentation booklet he assembled. It represents the city he envisions: Yaroslavl, The Capital of Advanced Pharmaceutics. This glossy bilingual brochure is based on some promotional material that Solovjev picked up at a conference in Buffalo, NY some years ago.

"Like Buffalo," Solovjev says, "Yaroslavl used to have a big industry, in Soviet time." And like Buffalo, Yaroslavl is pinning its economic future on the health care industry.

Apparently, it's working. Solovjev drives me through two metal gates and we come to a stop in a field of bulldozers, steel girders and hard hats. It's a factory being built by Nycomed, the European drug maker, for a hundred million dollars. When it's finished, the factory will create hundreds of jobs and tax income for the city. The winding road we took here will be a four lane highway.

What's less clear is how this factory benefits Nycomed. It's expensive to build a factory in Russia, for lots of reasons: The winters are brutal, utility hookups a challenge, infrastructure non-existent, land is expensive, and labor costly. So why is Nycomed choosing to establish a factory here? And why are pharmaceutical giants like Pfizer, Novartis, Astra Zeneca, GlaxoSmithKline and Sanofi-Aventis all expanding their manufacturing operations in Russian cities like this one? Big drug companies have been doing business in Russia for two decades without setting up shop here.

To answer this question I met with Yuriy Krestinsky, the founder of "Pharmexpert", still one of the most widely read trade publications about the Russian drug industry. Krestinsky told me what pharmaceutical companies doing business in Russia have now learned. "If you construct your factory in Russia," he says, "you will have better conditions for your business activity in this country."

Better conditions. Let's unpack that a bit, okay? And just consider this anecdote for what it's worth: About a year ago the pharmaceutical company Novo Nordisk got a visit at its Moscow office, from the Federal Antimonopoly Service, or FAS. The FAS charged Novo Nordisk with refusing to sell drugs through Russian distributors. An anti-trust violation punishable by millions of dollars in fines.

Novo Nordisk had what it thought was a good defense, told to me by Gennady Shirshov, the head of a coalition of drug manufacturers in Moscow. It's something called the "cold chain issue." Basically, to get a drug distribution license in Russia a company does not have to guarantee that it will keep the drugs refrigerated during transport. Novo Nordisk didn't deal with those distributors because it didn't want its insulin to be compromised.

"Because safety comes first!" Shirshov says.

"But not according to the FAS," I say.

"That's their opinion!"

"But their opinion is pretty important right?"

"Yes, but..." Shirshov pauses. "We are a real democracy by the way!" Shirshov starts to laugh, but quickly collects himself. "No no this is a serious business a serious business..."

And it's a big business, too. The Russian drug market is projected to grow at 20 percent a year. And where there's profit, there's compromise. Novo Nordisk announced it would build a factory in Russia. No one can say for sure whether the timing of that announcement was tied to the ongoing investigation of the company. The Moscow office of Novo Nordisk declined to be interviewed. But Shirshov says that many companies are bowing to government pressure to invest here.

"If you want to highlight what I'm saying in one word," Shirshov says, "It's about product. You want your product to be here at whatever cost. So sooner or later they will make peace with the government initiative in some way." There are ways besides building a factory, he says. "Like establishing a lab. Or helping to establish a R&D branch of a university and this will be viewed as a localization thing."

The Federal Antimonopoly Service declined my request for an interview. In fact the only official that would talk on the record was one who stands to gain a lot from this factory building boom: the deputy governor of Yaroslavl, Viktor Kostin. He's figured out a way to tap the mutual self-interest of both pharmaceutical businesses and Russia's government, to benefit his region.

I caught up with the deputy governor at Sheremetyevo Airport in Moscow. He spends a lot of time on the road, courting investors. From his carry on bag he pulled a glossy brochure (the same 'Capital of Advanced Pharmaceutics' brochure I was given in Yaroslavl on my factory tour). "In my opinion the Federal Antimonopoly Service was not exactly right in their claims," he said. "In any case, the Russian pharmaceutical market is growing rapidly and the market is very attractive to foreign companies. These 'confusions' that happened in the past will be resolved in the nearest future. And the solution will be positive for pharmaceutical business."

With that, the deputy governor tucked the brochure back in his suitcase and rose to catch his flight. There was a drug company in Israel awaiting his visit.

TEXT OF STORY

Kai Ryssdal: We're about to tell you a story about the pharmaceutical industry. If it were set here in the United States, you'd know how it'd go. It'd be a story about the approval process for new drugs or whether doctors can take money from drugmakers.

But we're going to Russia, where the government's promising to spend billions of dollars on health care. Since the Soviet Union collapsed, Russia's one of the few countries where life expectancy significantly declined and health problems increased, even as the economy grew.

In a series of stories, our health care correspondent Gregory Warner will look at how the new money might reshape the Russian health care economy and what Western companies will do to get their hands on some of it. He starts us off in a small Russian city that's courting big drug makers.


Gregory Warner: I used to do a lot of driving around post-industrial towns in upstate New York, reporting on the economy. And, at first, my tour of Yarolslavl, Russia, feels quite familiar: the shuttered factories, the fields of grazing cows.

I've taken a four-hour train ride from Moscow to get here. I'm touring the city with Eugene Solovjev. a former director of public relations for the Yaroslavl region. He hands me a glossy brochure he assembled.

Eugene Solojev: Presentation book of Yaroslavl region.

It represents the city he envisions. "Yaroslavl," it says, "The Capital of Advanced Pharmaceutics."

Solojev: By Russian and in English!

This bilingual booklet is based on some brochures he picked up at a conference in Buffalo, N.Y., some years ago. Like Buffalo, he says, Yaroslavl is pinning its economic revival on the health care industry.

Solojev: New pharmaceutical and high technology industry.

Apparently, it's working. We come to a stop in a field of bulldozers, hard hats and steel girders. It's a factory being built by Nycomed, the European drugmaker, for $100 million. This factory will create hundreds of jobs when it's built, and tax income for the city. The winding road we took here will be a four-lane highway.

What's less clear is how this factory benefits Nycomed. Jens Salatski is the project manager, a German engineer. He rattles off all the reasons that building a factory in Russia is so expensive.

Jens Salatski: You need other heating, other heat insulation.

The winters are brutal, utility hookups a challenge, infrastructure non-existent, and if you think that labor would be cheaper here because of all the unemployment.

Salatski: That's not correct, unfortunately.

Warner: So how much would this project be in Germany? A similar size?

Salatski: Oh I think cheaper. Cheaper.

So why is Nycomed building a factory here? And why are pharmaceutical giants like Pfizer, Novartis, Astra Zeneca and GlaxoSmithKline all expanding their manufacturing operations in Russian cities like this one? Big drug companies have been doing business in Russia for two decades without setting up shop here.

I put these questions to Yuriy Krestinsky, the founder of Pharmexpert, one of the most widely read trade publications about the Russian drug industry.

Yuriy Krestinsky: What I can explain? If you construct your factory in Russia, you will have better conditions for your business activity in this country!

Better conditions. Let's stop there for a minute, and just consider this anecdote for what it's worth: About a year ago, the pharmaceutical company Novo Nordisk got a visit at its Moscow office, from the Federal Antimonopoly Service. The FAS charged Novo Nordisk with refusing to sell drugs through Russian distributors. An antitrust violation punishable by millions of dollars in fines.

Novo Nordisk had what it thought was a good defense. Those distributors did not have refrigerators.

Gennady Shirshov: It's about the cold chain issue.

Gennady Shirshov heads a coalition of drug manufacturers in Moscow. The details of the cold chain issue get complicated, but basically, to get your drug distribution license in Russia, you don't have to guarantee to keep the drugs refrigerated during transport. Novo Nordisk didn't deal with those distributors because it didn't want its insulin to be corrupted.

Shirshov: Because safety comes first!

Warner: But not according to the FAS.

Shirshov: That's their opinion!

Warner: But their opinion is pretty important though, right?

Shirshov: Yeah, but we are a real democracy, by the way. No no, this is a serious business, this is a serious business.

It's a big business. The Russian drug market is growing at 20 percent a year. And where there's profit there's compromise. Novo Nordisk announced it would build a factory in Russia. No one can say for sure whether the timing of that announcement was tied to the ongoing investigation of the company. The Moscow office of Novo Nordisk declined to comment. But Shirshov says that many companies are bowing to government pressure to invest here.

Shirshov: If you want to, like, highlight what I'm saying in one word, it's about product.

Warner: It's about product.

Shirshov: You want your product to be here, at whatever cost. So sooner or later they will make peace with the government initiative in some way.

There are ways besides building a factory.

Shirshov: Like establishing a lab. Or helping to establish a R&D branch of a university and this will be viewed as a localization thing.

The Federal Antimonopoly Service declined my request for an interview. The only official who would talk to me on the record was one who stands to gain a lot from this factory building boom: the deputy governor of Yaroslavl, Viktor Kostin. He's learned out how to tap the mutual self-interest of both pharmaceutical businesses and Russia's government, to benefit his region.

I caught up with the deputy governor at the Sheremetyevo airport in Moscow. He spends a lot of time on the road courting investors. From his well worn carry on bag he pulled out a pamphlet -- the same one I was shown on my factory tour -- the 'capital of advanced pharmaceutics' brochure.

Victor Kostin: The Russian pharmaceutical market is growing rapidly and the market is very attractive to foreign companies. These 'confusions' that happened in the past will be resolved in the nearest future. And the solution will be positive for pharmaceutical business.

With that, the deputy governor tucked the brochure back in his suitcase and rose to catch his flight. There was a drug company in Israel awaiting his visit.

In Russia, I'm Gregory Warner for Marketplace.

About the author

Gregory Warner is a senior reporter covering the economics and business of healthcare for the entire Marketplace portfolio.

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