OREANDA-NEWS. On July 30, 2009 the Russian government decided to tighten control over drug prices, due mainly to the fact that in 1H09 drug prices climbed more than 18%. Limits on sale prices are expected to be registered on a compulsory basis, reported the press-centre of OTKRITIE FC.

In order to increase prices drug producers would be required to provide relevant feasibility studies and price calculations to government authorities. The Health Ministry is currently preparing the draft law on drugs, which will include calculation procedures for maximum allowed producer prices, as well as maximum allowed distributor and retail mark-ups for approximately 600 different drugs. The draft is expected to be ready in late 2009.

View: We view this news as neutral for pharmaceutical companies at the moment, since the law has not yet been passed. While we do not know how the maximum allowed prices will be calculated, we note that the average producer mark-ups in Russia are quite high, at c150-190% to CoGS and government drug price regulation might have some negative effects on pharmaceutical companies. If producer prices are fixed, margins could deteriorate.

Valuation: PHST currently trades at 10.2x and VRPH at 5.4x EV/EBITDA 09E.

Action: At the moment we have no official ratings for both PHST and VRPH, but we advise that caution be exercised when investing in pharma stocks before the final version of the law is passed.