Pharma at war: Reorientation from anti-COVID drugs to hemostatics, destroyed warehouses and migration of pharmacists
How market players survive, interact with one another and overcome difficulties in the new situation
The large-scale phase of the war halted the growth of Ukraine's pharmaceutical market, which had been rising by 10-12% annually. Instead of the usual growth, total sales in hryvnia terms for the first eight months of 2022 decreased by 5%, according to Proxima Research.
In the retail segment, as early as in January and February, medicine consumption grew in money terms by 31% and 45%, respectively, and in March it decreased by 11%. Due to inflation, as of early October, this indicator's rate of decline slowed to 9% compared to last year. Instead, in physical terms, volumes of sales decreased by 30%.
However, Ukrainian pharma continues to develop and does not stop new projects.
Mind examined how the pharmaceutical market has changed, how its key players are overcoming difficulties and recovering, and what has been happening in the industry for eight months since the beginning of the full-scale invasion.
A shift in demand for medicines
In the first days of the war, the demand for medicines more than doubled: in the conditions of uncertainty people stockpiled medicines (patients with chronic diseases, in particular), and volunteers bought medicines on requests. Since the beginning of March, sales volumes began to fall and became negative in the middle of the month.
Speaking by categories of medicines, the demand increased for painkillers and neurological drugs, cardioprotectors, anti-inflammatory and anti-rheumatic remedies. The consumption of medicines for the treatment of chronic diseases remains stable.
The demand for dietary supplements, vitamins, prophylactics, anti-covid drugs has significantly decreased, which caused pharmacies to have an overstock. Ukrainians began to buy only the most necessary things to save money.
After 24 February, there was a shift towards the consumption of domestic drugs, because their price is lower than that of imported equivalents. According to Proxima Research, today 65% of the market in packs is occupied by Ukrainian companies which produce 61% of drugs from the National List of Medicines. In monetary terms, foreign manufacturers are leading with 64%, because their products are represented in the more expensive segment.
How did manufacturers survive and keep working?
Currently, there are more than 100 factories producing medicines in Ukraine. Despite the war, pharmaceutical manufacturers not only survived, but also increased their pre-war volumes and help the army, hospitals and volunteers. Thus, Farmak and Darnytsia, with their plants located in Kyiv, have resumed 100% operation of their workshops.
Farmak suspended its operations on 24 February, but because the occupants destroyed the central warehouse in Kyiv Oblast, where all finished products and packaging worth UAH 1.5 billion were stored, the Company needed to restore their assortment. Therefore, on 8-9 March, the company started working. "We have manufactured as many products during the war as last year, when there was no war," said Volodymyr Kostiuk, Executive Director of Farmak.
Darnytsia's production did not stop even in the first days of the war (the company prepared a stock of raw materials back in January-February). In March, the company managed to produce medicinal products at 60% of the pre-war level, and in April – at 100%, said Vasyl Gubarets, Corporate Communications Director of Darnytsia Pharmaceutical Company.
In that the company continued to work when the enemy was on the outskirts of Kyiv, the processes of automation and digitalisation launched by Darnytsia long before the war played the decisive role. Owing to this, office employees were quickly switched to remote work, as a significant number of projects work automatically and digitally. Medicinal product dossiers are stored in the cloud, the SMART HCM personnel management system with artificial intelligence is used, a modern accounts visualisation system and an electronic document management system have been introduced, and the warehouse has been fully robotised since 2007.
Arterium manufactures its products at the facilities of Kyivmedpreparat and Galychpharm plants. The plant in Kyiv suspended its operations until mid-March for the sake of safety of employees, but workshops in Lviv continued to function.
At the end of March, Arterium evacuated part of its products produced until 24 February from the warehouse not far from Kyiv to the western part of the country, where it found a warehouse.
The international company Teva does not have production facilities in Ukraine, but imports more than 200 types of drugs from the EU and Israel. According to the Ukrainian branch of the company, Teva Ukraine, due to the war, the mode of operation of their warehouse in Kyiv Oblast was slightly adjusted until 15 March, an alternative warehouse in the west was used and logistics routes were changed in the first weeks . As for the volume of imports to Ukraine, the company plans to fulfil the annual plan that was approved before the war.
Reorientation to military needs, teams and logistics
Farmak said that, in the first place, they began to manufacture medicinal products that were necessary for the people and the army: painkillers, haemostatics, anaesthetics, drugs used for emergency hospitalisation, and medicines for the treatment of chronic diseases.
In its turn, Darnytsia, in cooperation with the Ministry of Health and the National Security and Defense Council, registered in April a drug for protecting the population from radiation – Potassium Iodide-125-Darnitsa. The company donated 5.25 million doses from the first manufactured batch of this preparation (worth 66 million UAH) to the Ministry of Health for free. In total, the company has produced more than 12 million doses of potassium iodide.
One of the main challenges remains the establishment of logistics, the problems with which began during the coronavirus pandemic back in 2020, and after the suspension of air and sea traffic from 2022 February came to the fore. To guarantee uninterrupted supply in the first months of the invasion, Darnytsia helped distributors to find lorry drivers and vehicles that met the technical requirements for the shipment of medicines. This was especially critical in the field of export.
After 24 February, suppliers revised the terms of work with Ukrainian companies, because international insurers refused to work under contracts for the supply to Ukraine, referring to force majeure. In order to avoid the risk, foreign partners continued to cooperate with domestic business only on a prepayment basis.
Despite the difficulties, almost all manufacturing companies did their best to keep their teams and not to lay off employees, and some of them even increased the number of employees: Farmak had and still has about 3000 employees; Darnytsia had 1086 workers, and now – close to 1200; Arterium had 2603 employees, and now – 2511; Teva Ukraine had and has more than 350 employees.
Exports have become more complicated and reduced
"Prior to the war, Farmak sold 25-30% of its products to more than 50 countries. Having lost their storage facility in March, the company assigned almost all its production capacities to the needs of the domestic market till June. Hence, exports were expected to drop: in January-August, compared to the same period last year, they decreased by 11%. Now Farmak sells its commodities to more than 35 countries of the world. Starting from 24 February, the company has ceased shipment of medicines to Belarus and is liquidating its representative office there. The company closed its office in Russia back in 2014.
What about producer prices?
As for prices, manufacturers are reluctant to name the average percentage of their increase for products and underline that this figure is lower than the overall inflation rate in the country. Indeed, according to Proxima Research, in January-August 2022, the overall inflation rate in the pharmaceutical market was 15% against the same period last year, while the consumer inflation index rose to 19.5% during this period.
In the first months, pharma companies kept prices at the pre-war level and began to raise them only in July-August after the National Bank adjusted the exchange rate. Darnytsia noted that despite the increase in the cost of products, the weighted average price for a package of the company's medicines as of August is 85% lower than that of a foreign manufacturer (UAH 36 vs. UAH 240), and 48% lower than that of a domestic manufacturer (UAH 36 vs. UAH 69).
Farmak, instead, said that the company did not revise drug prices until August, as it understood that it was a social product, and then raised them by an average of 13.7%.
Teva Ukraine also held on till the rise of the exchange rate. But the press service of the foreign manufacturer Sanofi assures that they did not raise prices for their drugs, given the difficult economic situation.
How has the work of distributors been reformatted?
Three largest players in the distribution of pharmaceuticals – BaDM, Optima-Pharm and Venta Ltd – share almost 92% of the supply to pharmacies. According to Proxima Research, in July the share of Optima-Pharm was 45.5%, BaDM had 39.3%, and Venta LTD – 6.8%.
The main difficulties for distributors were blocked and lost storage facilities due to the fighting, lack of staff, logistics problems, large receivables and closure or destruction of a significant number of drug outlets (19%).
Thus, at the beginning of the war, the warehouse of BaDM near Kyiv was destroyed by the occupants. Venti Ltd's regional depot in Gostomel was also in the centre of hostilities and therefore looted and partially destroyed. As of 1 September, the company's sales fell by 30% compared to the same period in 2021, the volume of supplies decreased by 35%, and the number of customers decreased by 25%.
Viktoria Dubrovskikh, an analyst at Venti LTD's marketing and advertising department, also said that with the outbreak of the war, due to consumer inflation, prices for medicines increased by 25% on average from February to September. "That is, there was a price increase from 10 to 50%," she explained.
The company calls accounts receivable its major problem. "When the military operations are over, we will conduct an audit and determine the losses in relation to unrecovered receivables and write-offs in accordance with international financial reporting standards," said the distributor's representative.
How did the war affect the pharmacy segment?
Before the full-scale invasion, there were about 21,000 pharmacies in Ukraine. Since 24 February, according to Proxima Research, 19% of them have closed. The main reasons were the destruction of outlets, occupation of the territories where they were located and migration of employees (pharmacists left for safe regions).
Before the invasion, there were about 1100 pharmacies in the ANC chain, of which only 970 are working now, the other 130 were closed. Apteka 9-1-1 chain was seriously damaged, 110 of its outlets were destroyed by shelling, 133 were robbed. According to the website of Bazhayemo Zdorovya pharmacy, about 100 of its locations do not work due to the occupation. Apteka Dobrogo Dnia lost 47 pharmacies on the non-government controlled territory.
Most outlets selling medicines were closed in Lugansk, Donetsk, Kherson, Zaporizhzhia, Mykolaiv, Kharkiv, Sumy, Chernigiv and Kyiv oblasts.
"If only goods from the lost pharmacies are counted, the amount of losses is more than 200 million UAH. This is excluding equipment, furniture, premises, etc. During the seven months of the war, we lost about 20% of our business in terms of turnover," said Vyacheslav Sauts, Marketing Director of ANC. As a reminder, at the end of 2021, the chain was the market leader by turnover, which amounted to more than 16.5 billion UAH.
In addition to the loss of pharmacies, representatives of the retail segment mention destroyed logistics, lack of staff and accounts receivable to distributors, working with them on a prepayment basis, as well as problems with the supply of goods to the frontline territories as the main problems. The chains that possess their own logistics have used their own capacities during the war.
There are also unresolved issues with compensation for lost products and surplus stock of medicines. "Now the biggest problem is compensation for the destroyed goods and redistribution of demand. Most manufacturers refuse to participate in the reimbursement of destroyed goods to retail chains (...). Pharmacy chains found themselves in a situation where they are not compensated for joint losses for the destroyed goods and the issue of overstocks is not settled," said Oksana Kyrychenko, General Director of Apteka Dobrogo Dnia chain speaking to RAU.
According to the chain's representatives, they did not raise prices at the retail level. "Our margin remained at the pre-war level. The rise in price for some drugs is determined by the increase in the cost of logistics and raw materials from manufacturers," assured the Marketing Director of ANC.
The overall picture reveals that the pharmaceutical market has withstood and despite the hardships continues to work in crisis conditions, providing the army and civilians with medicines, establishing new complex logistics and solving a dozen more problems mentioned above. The industry has been able to stay afloat thanks to thorough preparations for a pessimistic scenario in response to foreign intelligence reports, systematically large investments in its own production and logistics (which minimised its dependence on imports), demand for products in wartime and competence of their teams claimed by the manufacturers .