German pharmaceuticals company Stada has signed a preliminary contract to purchase an almost full stake in Nizhpharm, one of the leaders on the Russian pharmaceuticals market.

Anastasia Matveeva

The deal to buy 97% of Nizhpharm shares should take place by the end of January 2005. If everything goes according to plan, Stada will be the new owner of the fifth largest producer of drugs in Russia. Nizhpharm, as part of the German company, will get more resources to grow on. The deal sent a signal to the market that the Russian pharmaceuticals industry has promise. The purchase will cost Stada 80-85 million euros, though Nizhpharm’s turnover for 2003 was only 40.8 million euros. And the market has already picked up on this signal. Immediately after the deal was made public, the United Financial Group announced that it would review the market value of 36.6 Pharmacies (which includes another well-known Russian pharmaceuticals firm, Veropharm) and likely increase it, perhaps by as much as 28%.

A brand for Nizhpharm

Nizhpharm is one of the few Russian drug companies that have managed to keep up with world trends in pharmaceuticals. By the year 2000, only a few dozen of the 2,000 Soviet drugs manufacturers had managed to stay afloat. The top ten, including Nizhpharm, produce about half of all Russian drugs. Nizhpharm had a 3.4% share in the Russian market for generics in 2003.

The company from Nizhny Novogorod was able to become an industry leader thanks to the fact that in 1994 as Nizhpharm privatized, one of the companies involved brought to the new corporation an energetic young management team led by Andrei Mladentsev, the current general director of Nizhpharm. The new managers immediately began looking for an investor for the company, which was in pitiful shape at the time. They wanted more than just money; they wanted the experience an investor might be able to contribute to Nizhpharm’s development. Negotiations with big foreign pharmaceuticals companies began. However, the Russian managers soon realized how weak they were. The company had nothing in terms of business potential to offer a potential strategic partner. As a result, they could not even succeed in getting a decent sum for a controlling stake in the company.

The search for investment then turned to financial institutions. It came to an end in 1999, when the European Bank for Reconstruction and Development (EBRD) became one of Nizhpharm’s shareholders. For $10 million, the bank gained a 25% stake in the company. Naturally, Nizhpharm’s management did more than just look for money. The company’s affairs were gradually starting to look up. Financial management stabilized, the information system at the company was automated, and marketing improved. The company became transparent and began conducting the financial, environmental, and legal audits necessary for attracting foreign investment. By the time the EBRD arrived, Nizhpharm was already performing well and turnover had grown from $7 million in 1995 to $21 million in 1998.

Initially, the young management team thought less about strategy and more about closing the gaps in day-to-day management. When they discovered that in order to get a loan from the EBRD the company would have to present its development strategies, they began to work on them in earnest. The centerpiece of company strategy was its focus on branded generics. The fact is that Russian drug companies have one way to grow, to find a niche in certain kinds of well-known drugs with expired patents, otherwise known as generics. Primarily, this strategy succeeds for companies capable of creating a brand name for their drugs, or in other words companies able to invest significant resources in marketing. Nizhpharm did just that, and at present its brand is one of best known on the Russian market.

Ticket to the market

The EBRD is supposed to leave the ranks of Nizhpharm shareholders by January 31, 2005 at the very latest. For this reason, investors began to look for buyers for their Nizhpharm shares some time ago. Among the contenders were several well-known manufacturers, but the German company walked away victorious. “Stada’s proposal,” Mladentsev stated, “was the most attractive.”

Nizhpharm’s strategy played a crucial role in Stada’s decision to acquire this Russian asset. Representatives of Stada told Expert that this strategy resembles their own. Basically, the German company heard the magic words, “generic” and “brand”. Stada does not conduct large amounts of scientific research and does not have any innovative patented products. The German company ranks respectably among producers of high-quality branded generics. This is just the type of manufacturer that is interested in Russia today. For innovator companies, developed countries are far more attractive, as they have patients able to pay high prices for drugs that cover the cost of million-dollar research, prices far higher than in Russia. For generics producers offering drugs at substantially lower prices, the Russian market is very attractive. Its turnover is approaching $4 billion and is growing by 10-12% a year.

Until recently, only Eastern European producers showed any interest in Russian drug enterprises, as Russia and the NIS have been their traditional stomping grounds since the Soviet era. Now, companies based in developed countries have appeared on the scene. This is logical, as generics from Asia and Eastern Europe have presenting them with tough price competition. They need to look for new ways to diversify. Specialists at UFG believe that the Nizhpharm deal’s high price is actually a premium for entry onto the Russian market, especially as Nizhpharm has a well-developed system of product promotion. It has representative offices in several NIS countries, as well as broad network of drug reps.

The size of the stake up for sale also played a role in setting the price for the deal. Consolidating the stake also worked in the EBRD’s favor, as it would have never gotten such a high price for its quarter stake under other conditions. The remaining owners apparently agreed very quickly to consolidate, as none of them had more than a 15% stake in the company.

Carte blanche

Stada is also pleased that its future asset meets international Good Manufacturing Practice standards and has dynamic growth and high profitability. The company’s strong performance encouraged the new owner to leave the current management at the helm and give its new unit autonomy. There has been no discussion so far of producing Stada products at Nizhpharm facilities in the near future. For the time being, the company is considering which Nizhpharm products would fare well on the European market, as their prices could compete with those of producers from developed countries at the very least.

For Nizhpharm, the new market prospects are not the only advantage the company will gain from the change in ownership. According to Svetlana Grudacheva, an analyst at the Pharmexpert Marketing Agency, emphasizing brands means significant expense and bringing production up to international standards. Thus, Nizhpharm would inevitably have to face the problem of finding new sources of investment for the constant cost of advertising, for expanding product lines to increase market presence, and for converting all production to GMP standards. The size of Nizhpharm’s business and the large number of small shareholders limits its possibilities for attracting funds, and it is possible that the company would not be able to maintain its achieved growth rates. Thus, the appearance of a strategic investor could play a deciding role in the further development of the Russian manufacturer.

Practically everyone in the Russian pharmaceuticals community is pleased with the upcoming deal. Nastasya Ivanova, General Director of the National Distributor Company, expressed the general sentiment in the industry: “We are now seeing that big world drug makers are beginning to fully appreciate the potential of both Russian companies and the pharmaceuticals market as a whole.”

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