The Trials Of A Russian Drug Czar
It's three weeks before the New Year in Moscow and 54-year-old Vladimir A. Bryntsalov, vodka distiller, pharmaceuticals tycoon, and member of parliament to boot, is hosting a small dinner party in the opulent lounge at his business headquarters. There's Bernadotte porcelain from Bohemia on the table, and the Persian rug cost $2,500 per square meter, Bryntsalov remarks, even though no one has asked the price. Over by the bar is a white marble sculpture of a man and a woman locked in an embrace. A gold plate identifies the work as The Kiss by Auguste Rodin. Bryntsalov says he purchased it at the knock-down price of $200,000 from a government sanatorium in the Moscow region. It fell into Russian hands as a "trophy" captured from the Germans in World War II, he explains.
A waiter sets down a tray holding a baby roast suckling pig, head attached. Bypassing the cutlery, Bryntsalov grabs a hunk and tears the flesh from its bones. His hands glistening with oil, he returns to an ever-present conversational theme: his raging feud with Danish insulin maker Novo Nordisk. The companies formed a marketing partnership in late 1995 but parted bitterly three years later. Novo Nordisk accuses Bryntsalov of making insulin with substandard raw materials obtained from other suppliers. Ever since, Bryntsalov has been impugning the quality of Novo Nordisk's own product--and at the dinner, he finds an opportunity to spit out another insult. "Do you know, this pig was alive in the morning," he declares, attesting to its freshness. "Better to have this than the crap chemicals from Novo Nordisk."
A rough man--but Russia is still a rough-and-tumble market. The big Western drugmakers need local partners to navigate it and other emerging markets. But sometimes the partners they find pose more problems than solutions. Partners such as Bryntsalov give Russia a bad rap. He's a textbook type of which there remain all too many in a country still afflicted by rogue capitalism: A politically connected tycoon who operates on the edge, whose strivings threaten to crowd out normal operators and who has joined hands in business with the very regulators in charge of keeping watch on his industry. And to date, the administration of President Vladimir V. Putin has failed to rein him in.
The flamboyant Bryntsalov is a self-made man, Russian-style. By his own account, he grew up in a shack in a province of south Russia, without an indoor toilet, even though he bears a proud pedigree as grandson of a Cossack general. He amassed a fortune--which he puts at more than $1 billion--from vodka making and other businesses in the early days of post-Soviet Russia, then poured much of the profits into the drugmaking business. In the presidential campaign of 1996, Bryntsalov came in last, although his outrageous antics--he carried a pistol at his side, and his young wife reported being paid $18,000 a month for housekeeping--made him a household name.
He sustained a staggering blow in Russia's 1998 financial crisis, when the ruble lost two-thirds of its value. Now he's on his feet again, in an improved national economic climate. Managers at his drug factory, which he gained control of in a 1992 privatization, say monthly sales of $16 million in November were triple the level of sales a year earlier. Bryntsalov himself says he expects to double sales this year. He owns virtually all shares of the drug firm, ZAO Bryntsalov, whose worth, along with the land on which it sits on the outskirts of south Moscow, he estimates at $1.6 billion. His goal: to become the top pharmaceutical maker in Russia, a market where demand for quality drugs is growing by 20% a year. "I'm on the right path," he says.
Not everyone thinks so. Lately Bryntsalov's company has found itself on the losing end of rulings from government bodies examining his business practices. In a judgment last January, the Moscow Arbitration Court found in favor of a Russian Ministry of Health claim that Bryntsalov sold the government animal insulin instead of more expensive human gene-engineered insulin, as called for in the contract. Bryntsalov says much of the criticism is generated by foreign rivals, but he doesn't, in fact, entirely absolve himself of blame. For example, he maintains that his company and Novo Nordisk joined hands to trick the Russian government into buying animal insulin instead of human gene-engineered insulin. "We are both criminals," he declared. Novo Nordisk says the Arbitration court finding against Bryntsalov alone speaks for itself.
The Moscow Arbitration Court decision is not the only one that has gone against him. Last February, the Russian Antimonopoly Commission ruled against Bryntsalov in a trademark-infringement claim brought by Novo Nordisk. The commission instructed Bryntsalov to stop selling the disputed product. But Novo Nordisk believes Bryntsalov is continuing to sell his insulin under the Novo Nordisk name and is readying further action against him in the International Court of Arbitration in Geneva. The Danish company also is seeking a judgment against Bryntsalov in the same court on a $6.5 million debt. Meanwhile, Diosynth, a Dutch producer of insulin crystals, last year terminated supplies to Bryntsalov over concerns he was using the crystals in formulas not yet approved by health regulators. "His name and his company were involved in activities that we did not consider appropriate," says Peter van Straelen, Diosynth marketing and sales manager.
Most troubling are the questions raised about the quality of his insulin--a medicine on which 500,000 diabetics in Russia depend for their lives. Hospitalized last spring after injections of Bryntsalov-made insulin failed to help him absorb blood sugar, junior army officer Anatoly Lukoshkin, 46, from the Moscow-area town of Domodedovo, now says he would like to ask the tycoon: "Why are you producing insulin that is causing suffering to people?" The apparent problem: "It's not concentrated enough," says Irina Zamotina, a medical consultant for the Mordovia region, who conducted a two-month test of the product last year after patients there said it wasn't working. There have been similar patient complaints in Volgograd, too.
Nor is insulin the only Bryntsalov product about which questions are being raised. At a meeting of Western drug company representatives last November in Moscow, an investigator for French pharmaceutical firm Aventis said the manufacturer suspected Bryntsalov was counterfeiting a batch of Aventis' Claforan, the leading antibiotic sold in Russia. Aventis pulled the entire legitimate batch--several hundred thousand vials of the medicine--from the Russian market because it was difficult for hospitals to tell the difference between real and faked product. Russia's Interior Ministry police are probing the case.
Although some Russian regulators have clearly clashed with Bryntsalov, the tycoon has deep ties to other branches of the government. His drug company, ZAO Bryntsalov, has a partnership to produce insulin with a research arm of the Russian Health Ministry--the State Institute of Blood & Pharmaceuticals--that advises the Ministry's State Quality Control Dept. on insulin-quality issues.
The institute gave Bryntsalov a $5 million insulin production line in 1998: The line was purchased initially for the state with foreign credits guaranteed by U.S. taxpayers' money through Eximbank. A probe of the government's diabetes program conducted by Russia's budgetary watchdog, the Audit Chamber, concluded that the move violated federal laws. Then, last Dec. 9, Bryntsalov's company sent a letter to endocrinologists across Russia citing the institute's "experts' conclusion" in support of the letter's claim that Novo Nordisk is not producing human gene-engineered insulin, as it says it does, but a synthetic. Novo Nordisk is preparing a suit against Bryntsalov's company for defamation.
Meanwhile, Bryntsalov's partner, institute director Georgi Khylabich, is helping the State Quality Control Dept. evaluate the quality of imported insulin, including products made by Novo Nordisk. Together, the institute and the quality control regulators would decide whether to restrict imports of insulin on quality grounds, Khylabich told BusinessWeek. He said that at this point he had not formed a firm conclusion on Bryntsalov's claim against Novo Nordisk. Yet the department last September awarded ZAO Bryntsalov a prized "GMP" certificate stating that it met international standards of good manufacturing practice. Responding in writing to questions posed by BusinessWeek, Ramil U. Khabriev, the quality control boss, said ZAO Bryntsalov makes "duly registered" insulin.
Bryntsalov's political connections seem to work wonders in Russia's regions, too. In Mordovia, Bryntsalov insulin is still being supplied to patients even though endocrinologist Zamotina, based on her tests, recommended a switch back to insulin made by producers in Germany, Denmark, and the U.S. Few patients have that alternative, since the insulin is paid for by the government, and they lack the funds to buy another brand on their own. Officials declined to comment, but Zamotina suspects she is being overruled because of political ties between the local government and Bryntsalov. When asked about his use of his political contacts to win government drug tenders, Bryntsalov counters that political influence is no less important in U.S. business.
Bryntsalov, a member of Russia's State Duma, the lower house of parliament, is also championing a bill that would jack up tariffs on drug imports. But he faces an uphill battle. "It's aimed at limiting competition," says Duma Deputy Alexander M. Afanasiev, chairman of the Duma's subcommittee on the pharmaceutical industry. Putin's Kremlin, which is attempting to bring in more foreign investment, is also opposing the bill. Ever hopeful, Bryntsalov has enthusiastically joined Putin's Unity party. Bryntsalov did achieve one victory last year--passage of a bill shifting the tax burden from vodka producers to distributors--and is planning to restart vodka production at his Moscow plant.
At $2.5 billion a year, Russia's pharmaceutical market is small compared with the $100 billion U.S. market. But Russia's double-digit growth is attracting foreigners. "Russia is a totally undeveloped market of 150 million," says Jacques Farge, country manager for Aventis in Moscow. Still, the risks are great. "It is extremely unfortunate that Mr. Bryntsalov and his group of companies have become, to a large extent, the face of the Russian pharmaceutical industry," says attorney Paul J. Melling, counsel for the Association of International Pharmaceutical Manufacturers, a Moscow group representing foreign drugmakers that do business in Russia.
Meanwhile, the trading war with Novo Nordisk is costing Bryntsalov a bundle. To gain ground on the Danish company, whose share of the Russian insulin market tops 50%, Bryntsalov's company--now holding only about 5% of this market--is slashing prices by as much as 40%. ZAO Bryntsalov is selling medicine and related products at an annual rate approaching $200 million, according to managers, but profits are modest. "We are prepared to withstand any losses for the purposes of squeezing Novo Nordisk out of the market," says Viktor Kolomin, a senior manager at the plant, whose insulin section is operating at only 20% to 30% of capacity.
But Bryntsalov says this is only a temporary predicament. "We'll master the production technologies of products made by foreigners," he told BusinessWeek. "We make good medicines and the prices are low." Asked about accusations of counterfeiting, he demanded a definition of the practice and challenged anyone with a claim to take him to court. He added that pirates in the Russian market are selling faked copies of medicines bearing the Bryntsalov company name.
Not everyone has parted ways with Bryntsalov. In some cases, raw-materials suppliers in the global market may not know that his company is the end destination for their product. Diosynth hooked up with Bryntsalov through a trading intermediary he often uses, Trans-Medica Pharma, a Hamburg company that specializes in the pharmaceutical substances market. At first, according to Diosynth, Trans-Medica said that the crystals were bound for Russia. It only disclosed the final destination--Bryntsalov's company--after Diosynth insisted on it as a condition for going ahead with the transaction.
Indeed, Bryntsalov has kept up relations with a key foreign partner--Jack O. Nutter II, an aide to then Senator Bob Dole in the late 1970s who operates a Washington, (D.C.)-based lobbying firm, Nutter & Harris Inc. Nutter is the president of Ferane USA, a Bryntsalov subsidiary that exports drugmaking equipment to ZAO Bryntsalov.
Nutter has assisted Bryntsalov on various projects for eight years, recently arranging for the sale of a seven-bedroom home in Great Falls, Va., bought by Bryntsalov for $1.9 million in 1994. On a trip to Moscow last summer, a failed bid to smooth ties between Bryntsalov and Western pharmaceutical executives, Nutter got an earful about the tycoon. Still, he defends Bryntsalov as "a builder" attacked by foreign competitors because he beats their prices. Some Russians just wish the Health Ministry would crack down on the builder. "I used to trust the government," says Yulia Mokhova, 70, of Domodedovo, a diabetic who developed kidney complications she blames on Bryntsalov's insulin.
Bryntsalov himself, a fitness buff, appears to be in fine health. After the pre-New Year's repast of suckling pig, the tycoon offers a nocturnal tour of his possessions. First stop: his ultramodern home on the factory property, built around an indoor tennis court and containing a swimming pool, Turkish bath, and sauna. In the bedroom shared by his two young children is a plate stacked with $50 dollar bills--earned by the eight-year-old boy's pharmaceutical trading activities, claims Bryntsalov. Then it's over to the garage, where the standout in his collection of 15 automobiles is an armor-plated Mercedes S 600 with bulletproof windows.
And finally, the factory works. The tycoon turns on the lights in the section where insulin is made and points to a gleaming array of machinery--$12 million worth of goods, he says. It's what will bring him his triumph, sure to come, over Novo Nordisk and all of his foreign rivals. "They think we are some god-forsaken farmers, but we drive Mercedes cars and we use advanced equipment," he says. Russia's "wild tribes" will devour the invaders, as they have always done, he vows. "We should roll up our sleeves and fight using all possible means." The putative king of pharmaceuticals is already set to rule.