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Political tensions halt Fresenius' Russian joint venture

Venture was due to complete by the end of the year

Fresenius 

German healthcare group Fresenius has decided not to set up a joint venture in Russia, blaming "changing political and regulatory circumstances in the region."

In April, the group's Fresenius Kabi unit said it had reached an agreement with local pharma company Sistema JSFC and private equity fund Zenitco Finance Management to setup the joint venture, with the aim of expanding its presence in the local market for intravenous pharmaceuticals, clinical nutrition and infusion products.

The aim was to combine Fresenius Kabi's local subsidiary with Sistema and Zenitco's CJSC Binnopharm, but the German company now says that closing the venture has become "more challenging than anticipated." It had been due to complete by year-end.

The companies gave little indication of the specific reasons for abandoning the deal, but Business Monitor notes that investors have become a little spooked by "the consequences of Moscow's actions in Ukraine, which have resulted in the US and the EU imposing economic sanctions."

More generally, foreign workers and businesses are exposed to a high degree of security risk in Russia, which has seen "relatively frequent and large-scale terrorist attacks since the mid-1990s due to the ongoing Islamist resurgence in the North Caucasus region."

Russia's pharmaceutical market is predicted to contract slightly this year compared to 2013 to reach around $24.4bn, says Business Monitor, thanks to sanctions, protectionist measures by the government and depreciation of the rouble, which is eating into pharma company profits in the country. It predicts however that over the longer term the market will return to growth.

Fresenius Kabi has been active in the Russian market since 1994 and made $73m in sales there last year, and insisted withdrawing from the venture does not signal an intention to reduce its presence in the market. Rather, it said it would continue to explore ways to collaborate with CJSC Binnopharm.

Fresenius reported third-quarter sales up 20% to €6bn while operating profit rose 9% to €820m, although its performance in Russia and Ukraine was pegged back by project delays that reduced organic growth and dragged down European profit margins.

On a conference call with analysts last week, Fresenius chief executive Mark Schneider said there is "a lot of stress in the system right now" in Russia and Ukraine, suggesting the revenue decreases are affecting most of the pharma industry.

Article by
Phil Taylor

10th November 2014

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