Market Insight - Pharmaceutical and Life Science Industry - The Implications of the war in Ukraine

Introduction - The Implications of the war in Ukraine

With multiple of the content in every corner of social, hard, and digital media most of us are following the news on War in Ukraine. How does this translate into the backstage of the Pharmaceutical and Life Science industry World Wide and in particular in the EU and CEE who are the closest geographically and infrastructure wise to the borders with Ukraine and Russia/CIS?

What is happening at the backstage and in the meeting rooms of the HQs

in Switzerland, Denmark, Germany, UK, France, Austria, Czech and many other EMEA headquarters of the Life Science, Medical Device and Medical Disposable companies?

What are the scenarios and short term, midterm and long term implications of the decisions which are made today?

We tried to filter some of the elements of the possible answers to the above-mentioned questions through the realm of the Interim Management algorithms and methodologies with Mr. Anton Leschenko, Senior Advisor EIM Executive Interim Management CEE.

Leave Russia - Help Ukraine

Without making any judgment let’s have a look at companies from Big and Middle Pharma who have made announcements related to their operations in Russia for the past 4 weeks since the start of the war:

• Big pharmaceutical companies have massive operations in Russia, from manufacturing to running clinical trials and selling drugs
• Several hundreds of global companies have pulled out of Russia but for the pharmaceutical industry, the leaving has been noticeably slower
• According to some sources, companies have pulled some nonlifesaving products, like Cialis and Botox
• A key player in the pharmaceutical industry confirmed, it is refocusing its operations on helping people with cancer and diabetes
• Some of the companies, that manufacture in Russia said they’re donating profits from Russia to humanitarian efforts
• A global player has suspended marketing in Russia but is continuing to manufacture at a facility in St. Petersburg

 Some critics say the industry should pull out of Russia entirely. Some practical CEOs, explain a balanced position:

We have decided to make our own investigation to better understand the situation and use these data to foresee key geopolitical scenarios in the Regions of CEE, Ukraine and CIS/Russia as separate markets

For that, we have used our global network of the top 20 Big and Middle pharma Board level managers in all the Regions on a vertical scale and went deeper to understand what is happening at the meeting rooms and senior level of the same companies in the headquarters on the horizontal scale, again using the network and our Community who work there, to better understand through the eyes of the Interim Management the immediate implications to the existing infrastructures in those geographies in terms of:

• Human Resources
• Sales Channels and Demand
• Supply Chain and Logistics
• Business Models and Risk Mitigation

Human Resources

There are >10 mln Ukrainians outside of the country at the moment. Mostly they are ~2 mln who have being working outside of Ukraine before war and are not able to return and made a decision to stay and support. The rest are mostly women, children and elderly people above 60+.

Among the millions of people who flee Ukraine after war are highly educated professional from different spheres. Not all of them speak English or any other European language but a lot do. Poland, Hungary, Romania, Czech Republic, Slovakia, Georgia, Moldova and Baltics have the highest distribution of the war refugees from Ukraine.

Among the most popular professionals who were welcomed by their companies are IT specialists as they are most universal in terms of the immediate value addition due to the specifics of work. Other popular professionals from Pharma are manufacturing specialists, Medical Liaisons, QA and Marketing. It is more challenging for the country specific roles without knowledge of the local environment and local healthcare systems to park themselves within the industry.

As for Russia and CIS, the situation is controversial. >1.5 mln Russians spontaneously left the country based on the unofficial numbers. The trend will continue with the multiplication factor if the war will have a more prolonged scenario OR the iron fence will shut with not that far familiar sound and boarders will be completely closed. As of now most popular destinations for the Russians who are leaving: Kazakhstan, Kyrgyzstan, Georgia, Armenia, Baltics, Turkey, Serbia, other CIS countries in Central Asia, Mongolia.

CEE professionals are less visibly impacted now but it is a matter of leaving through the Q2 2022 when Q3 can start to be impacted. We do not know a single Pharma company who did not have to review their forecast foe 2022 already to flag the risks. If 2021 was hit and mitigated by the extra burden of the COVID-19 accumulated impact in both direct labor execution limitations as well as the budgets scrutiny and issues with the reimbursement, the 2022 war that started in East of Europe with the direct Boarders with EU and millions of Refugees ending up in CEE has a direct impact on the budgets as most of the refugee population will require access to medicines and healthcare as those are most vulnerable members of the society (children, women, elderly) but also labor market will be more crowded. There are not so many open discussions on this topic – but those are already the realities. Several regional CEOs, and HR professionals are already engaging interim HR Managers to support them in coping with this

Regional CEOs, and HR professionals are already engaging Interim HR Managers to support their organizations in coping with the onboarding and the integration of this huge workforce. The return to offices after Covid was alone a transitional challenge that required much effort and attention to cope with. The ongoing integration of 2+ mln people from Ukraine all over Europe, but mainly in the CEE region represents additional challenges, that can not be simply overcome with the capacity and know-how that many companies have available. Experienced Interim HR Managers know exactly how to build and integrate cross cultural teams.

Sales Channels and Demand

For some companies and countries with less limited financial resources, the above-mentioned factors might bring short term gain, but for the majority of the economies, forecasting the key direct impact on food and energy commodities, as well as the domino effect on the financial ratios (increased cost of capital, inflation etc.) the picture does not look optimistic.

• Donation and full financial support will be needed. If you had Ukraine in your scorecard – whatever sales plans were there I would take them out of the scorecard until at least 2025.
• Whatever costs were planned for Ukraine we would re-distribute to the CEE countries with the highest numbers of the refugees (Poland, Romania, Slovakia, Czech Republic, Hungary).
• CEE – require zoom in but definitely for general Rx medicines it will be a combination of the upside and downside. For special medicines and orphan drugs I would zoom in country by country with regards to the reimbursement and Market Access plans to be reviewed and adjusted. Immunology and COVID – same as above mentioned for the budgets re-allocation.
• CIS/Russia – from some of the discussions we expect to see higher numbers re-located to Kazakhstan and economic union and Russian SoM from EU and USA companies taken over by Chinese and Indian manufacturers.

As a globally operating firm, we already have several interim missions running, where experienced “localized” interim managers are supporting our clients. Some of the examples:

• Business development & market entry Africa, performed by an interim manager from UK who moved to Kenya 10 years ago, after finishing his career as business development director for a global player
• Definition and implementation of a complete sales organization and sales channels after a Carve-out from a global player in Europe
• Market Study and preparation of a suitable Market Entry for a Private Equity considering entering a new market

 Supply Chain and Logistics

From the analysis given above and for the country-specific pack, if the re-forecasting was not yet done, it is high time to do it not only for Ukraine and Russia, but for the CEE countries hosting Ukrainian refugees. Same as the manufacturing plans and demand forecast to be adjusted for Russia/CIS accordingly.

With the layouts in Russia and daily increasing pressure coming from the economic sanctions and companies leaving Russia, in parallel, there is a hidden and less visible trend for the “masking’ the routes through neighboring countries of the Economic and Trade Union between Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. The same as it happened after 2014 when Belarus all of a sudden became the key logistic supplier of all the counter-sanctions goods which were implemented on both sides. With the ban of Belarus, Kazakhstan is taking the leading position following by Kyrgyzstan, and Armenia.

As for the less visible Baltics, Moldova and Georgia, those who have those markets on the P&L will have to review them on the level of contingency even though the numbers are not usually high, for consistency and fairness, it has to be done right away.

This topic will require more regular zoom in, collecting market insights and making the updates, but it is already happening while we speak.

Interim Supply Chain Managers covering all the aspects of

• Strategic purchasing, supplier selection, negotiations with suppliers,
• Relocation of complete supply chains from Asia/ Russia to Europe, or from USA to Mexico,
• Inbound/ Outbound Logistics
• Warehouse Operations
• ERP implementation of SCM models

are currently in the highest demand of all functions. We currently have several projects relocating the supply chain from India, China to the CEE Region Our interim manager from Poland is optimizing the warehouse operations in the USA; Interim Supply Chain Manager from the Czech Republic is redefining the European Supply Chain footprint of an automotive producer, Interim Project Managers are finding new premises (warehouses) to stock additional raw materials, and the list could go on an on….

Business Model and Risk Mitigation

From the conversations which we had, majority of the senior management responsible for the CEE and CIS Region confessed that they were not expecting this invasion and war to be started until the moment first news and pictures from February 24th coming from Ukraine with the Russian tanks, military jets and missiles. Not many at the level of the CEE Affiliates and individual countries had contingency plan, except few based in Ukraine. Some of the Big Pharma started to work on the contingency in January-February 2022 while evacuating their GMs and some other foreign management out of Russia and Ukraine. The rest did not believe in the worst case scenario until the last moment.

It is only now when Executive Committees meet several times a week, review the plans and make projections. So what are the most common trends for the solutions?

Review the risks on the top line and make contingency at the level of cost

Classy P&L. Wait and be ready to cut. Most of the Big Pharma approach. Headcount freeze, look at Q1 and be ready with the next level.

Review your Portfolio

Consider outsourcing. Specialty and Orphan Drugs, slim portfolios mid-size pharma, and recently entered startups are considering this option as well. This creates more opportunities and we expect more deals coming from the front line service companies, as well as in some markets delegating business to Distributors on a pure logistics in a small markets.

Hiring Interim Managers/Consultants instead of own headcounts

Interim managers and consultants do not increase your headcounts, are very variable in terms of costs, and present no long term burden to your P&L.

Review the Structure and Composition of your Regions

Group, regroup, merge countries as part of the optimization. Be ready to emove regional layers, or rework your matrix structure.

Switch to digital tools in both B2B as well as B2C.

The trend boomed with COVID, and now it only becomes a must be.

Re-working logistics and warehousing

Create extra stock, have a backup contingency suppliers, rent new warehouses; have contingency plans for logistics

Rework of market positioning and product portfolio, Overall adjustment of the companies operate and communicate, and Strategic projects in general are the domain of Interim Managers.

Conclusion

Ukraine for sure will require full support for a couple of years without asking anything back. Even with the war being over, reparations from Russia secured, and financial aid provided, it will take several years to get back on track from the infrastructure and economical point of view on the level of the demand generation before the war.

For the rest of the Region and for Pharma/Medical Disposables, in particular, the most Agile structures and companies have a higher chance to adopt and even benefit from the current situation in the short term. The long-term impact is still difficult to calculate and it will depend on the duration of the war.

Key elements of Risk Management which are used relate to the cost analysis and reduction/optimization of the fixed costs mostly related to the headcounts, overheads, logistics, and increase in COGs. There is no control over the inflation and overall plans for 2022 require immediate adjustment.