A REMEDY FOR IMPORT

The pharmaceutical industry is one of the long-term priorities of the government aimed at developing import-substituting industries. Given the annual domestic consumption of pharmaceuticals (about ₼1 billion), the industry could be quite profitable. The local production would significantly increase the market share of low-cost but high-quality products, which the population needs even more after a rise in price of imported products. One of the first projects for the development of national pharmaceutical production would be the creation of joint pharmaceutical plants with Russia and Iran at the Pirallahy Industrial Park. 

“The pharmaceutical industry in Azerbaijan is in a poor state. This segment of the national economy has not received a due attention from both the private and government sectors. As a result, we are 100% dependent on imports”, said President Ilham Aliyev at the government session on the results of socioeconomic development in the first half of 2016.

In the late 90s, there were some attempts in Azerbaijan to overcome the dependence on pharmaceutical imports. In particular, the government has negotiated with specialist companies in Pakistan, Iran, Turkey, India, etc. trying to establish the production in the country. However, at that time the financial state of Azerbaijan was very limited. It was not possible to upgrade outdated technology inherited from the Soviet pharmaceutical companies. Despite privatization, domestic plants had to suspend production, as they have been cut off from the source of raw materials. The Azerbaijani market was flooded with imported drugs, which have quickly replaced less quality local products.

The annual domestic consumption of medical products in 90s was limited to some $60-70 million, and the small market size reduced Azerbaijan's attractiveness for foreign investors.

Therefore, it was able to implement only one project on pharmaceutical production at that time. In 1999, the holding Farmsintez was established in Baku and consisted of two companies. One of them, Azersintez, was manufacturing intravenous fluids, while the other one, Azerfarm, was producing a wide range of pharmaceutical products. The co-founders of the holding were a Turkish company Sintez-Ilac, an Iranian pharmaceutical company Darou Pakhsh, a few local investors and the Azerbaijani Ministry of Health.

Later, the development of national pharmaceuticals industry has declined. This was indirectly influenced by a long period of strengthening the position of the national currency, contributing to the cheapening of imports and the reduced interest of entrepreneurs in local production.

Today, however, amidst the devaluation of the national currency and the rising import prices, localization projects in Azerbaijan regain economic viability. This is especially relevant now, as the capacity of domestic pharmaceutical market is growing rapidly. Currently it reaches more than ₼1 billion. Understanding the significance of the situation, the national government aims at attracting investments and technology for the development of local pharmaceutical industry.

“The government has been duly instructed to expand import substitution activities for the production of medicines. We are negotiating with several foreign companies to achieve this. The investors are interested in developing this industry, as the Azerbaijani market is quite big for a population of approximately 10 million people. We have a positive dynamics”, noted President Aliyev.

According to the President, the ministries of economy and health have been on top of this issue for more than a year. The government is drafting a serious program to ensure domestic production of pharmaceuticals. The country must have a full-fledged industrial cluster. In particular, a number of projects for the construction of pharmaceutical plants were launched in 2016.

So, a groundbreaking ceremony of a joint Russian-Azerbaijani pharmaceutical plant, Hayat Pharm, was held in early November at the Pirallahy Industrial Park. Under the agreement, Azerbaijan Investment Company (AIC) owns a 10% share in this joint venture. The rest of shareholders, Vita-A LLC and AR-Pharm LLC (a subsidiary of the Russian company R-Pharm), will have 45% of shares. The plant will be constructed in stages. Total investments are estimated at $74 million.

“The joint Azerbaijani-Russian pharmaceutical plant will reach full production capacity in 2020. The infrastructure construction will start by the end of this year. The construction of production sites will be launched next year. This project is very important, as it will help to reduce dependence on imports, and to diversify non-oil economy of the country”, said the Azerbaijani Minister of Economy, Shahin Mustafayev, at the groundbreaking ceremony.

In particular, the largest logistics center covering an area of ​​5,000 sq. m. will be constructed at the first stage (2016-2018). A production complex, consisting of two plants for packaging and manufacturing the pharmaceuticals (tablets, capsules and substances) will be commissioned in 2017-2020. It is also planned to build a laboratory for quality control of pharmaceuticals.

At the first stage, the plant will produce 89 types of medicines under 58 international-recognized nonproprietary names. The annual capacity of the plant will reach 500 million tablets and capsules. Hayat Pharm is expected to manufacture medicines of various pharmaceutical groups, including oncological, anti-fungal, anti-emetics, anti-viral drugs (such as for the treatment of HIV), medicines for the treatment of diseases of the nervous, cardiovascular, musculoskeletal and respiratory systems, antibiotics, medicines for diabetes as well as radiopaque agents and agents for MRT examinations.

According to preliminary estimates, Hayat Pharm’s share in the pharmaceutical market of Azerbaijan will reach 6% in 2025 with production volume of $70 million. In the long term, Hayat Pharm’s products will be exported to Georgia, Iran, Turkey, Germany, Switzerland, Ukraine and the Central Asian countries.

“In the near future, Azerbaijan can become a very attractive hub for accessing the pharmaceutical markets of neighboring countries, including Iran. Thus, the establishment of a joint pharmaceutical company will not only provide domestic needs of Azerbaijan in pharmaceuticals, but will also contribute to the development of non-oil exports of the country”, said the CEO of R-Pharm, Alexey Repik, at the groundbreaking ceremony.

By the way, Hayat Pharm is not the only enterprise established at the Pirallahy Industrial Park to assist in localizing the national pharmaceutical industry. Yet another joint plant will be established here in the near future. This will be a joint Azerbaijani-Iranian plant operating under the agreement between AIC, Azersun Holding and the Iranian company, Darou Pakhsh. The Iranian side will own about 49% of shares of the joint venture. The rest of the shares will be divided between Azerbaijan Investment Company (25%) and Azersun Holding (26%). After a two-year construction period, the joint venture is expected to produce more than fifty types of medicines, including cardiovascular, analgesic, antibiotics and vitamins. Initially, the manufactured products will be designed for the local market, but can be exported in the long term.

“Currently we are negotiating with Iran, Turkey and a number of European countries regarding joint production of pharmaceuticals. The construction of several pharmaceutical plants will soon begin in Azerbaijan. They will expand the list of medicines produced in the country. Today, we are carrying out various researches, analyzing the market demand to expand the range of products subject to domestic production as much as possible”, said the Minister of Economy, Shahin Mustafayev.

During 2016, the government has discussed the possibility of establishing joint production facilities for pharmaceuticals with entrepreneurs and the government authorities of Croatia, Hungary, Poland, namely the traditionally producers of pharmaceutical products.

Also, a collaboration with Japan seems to be very promising. In particular, during the recent visit to Azerbaijan, the representatives of Japanese companies Nipro Pharma and JGC have discussed localization prospects in Azerbaijan. “Prior to making a decision about the plant construction, we, together with our partners in Azerbaijan, have made some researches to determine the demand for certain types of medicines and the feasibility of localization. The market study will take at least one year. Then, we will draft a business plan for the construction of the plant”, said Vice-President of Nipro Pharma, Satoshi Kawamura.

In case of a positive decision, the Japanese company can set up the production of about 300 types of medicines under Nipro Pharma’s brand names in Azerbaijan. It is also possible to export the products to neighboring markets. However, according to Satoshi Kawamura, this will depend on the compliance with the parameters of high-quality products, as well as the possibility of reducing production costs by supplying cheaper packaging materials, etc.

“We plan to export the manufactured products. Therefore, our priority is the quality of pharmaceuticals. We cannot export them unless we have high-quality products. Of course, we can say that the production in Azerbaijan will be cheaper. However, there are other factors. For example, raw materials, packaging materials will be imported from abroad. Then we will study the delivery of cheaper packaging materials to Azerbaijan. If we achieve our objectives, we can offer our products to the market at lower prices”, said Mr. Kawamura.

In general, according to many experts, the success of the localization program in Azerbaijan depends on several factors.

So, in order to support the localized producers, the government is expected to provide customs privileges on import of pharmaceutical substances, packaging materials and other components. In the future, after the production and packaging of drugs from imported substances, it may be necessary to realize the full production cycle providing for the production of chemical components in the country. In this case, the introduction of a mechanism of subsidies for producers of pharmaceutical substances would be justified. The support of producers through state procurement mechanism would also stimulate the development of local pharmaceutical production. That is the way Russia has chosen for the implementation of the state program for localization of pharmaceutical production.