CEE pharma: cost cutting and foreign investment continue apace

During one of the fiercest quarters of cost-containment pharmaceutical sector reform in Western Europe in recent times, governments in Central and Eastern Europe (CEE) continued to pursue their own budget-cutting agendas. However, the flow of foreign investment into the emerging region remained healthy.

 

 

The second quarter of 2010 witnessed the widespread implementation of stringent cost-cutting-focused pharmaceutical sector reform in Western Europe, with swinging price cuts playing a central role in development.

The Spanish, Portuguese, Greek and Italian governments all introduced new legislation aimed at reducing spending on pharmaceuticals, with measures particularly tough in recession-hit Greece, while the German government tabled a fresh set of proposals with the same purpose. In Turkey, research-based drug manufacturers continued to protest at similar reform.

Against this backdrop, governments across Central and Eastern Europe continued with their own cost-containment-led policies, putting more pressure on research-based players, drug producers in the increasingly competitive generics industry, and patients.

 

The beleaguered Bulgarian pharmaceutical sector, which has been beset by funding problems, doctor strikes, pharmacy closures and allegations of corruption against distributors, witnessed a timely positive development in the second quarter of the year in the form of a proposed recovery package.

A multilateral agreement, whose measures could save the heavily indebted health insurance system BGN 2.4m (€1.2m) per month, was signed by the National Health Insurance Fund (NHIF), Bulgarian drug manufacturers, and wholesalers and organisations representing doctors and patients. Proposals included a 5% discount for the NHIF on all drugs manufactured by research-based members of the ARPharM association between June and December 2010 and a fixed wholesale mark-up on all drugs of 6%, instead of variable rates of 6-9%, over the same period. The former measure could save the NHIF BGN 1.5m (€0.7m) per month alone.

In addition, the introduction of a patient prescription charge was proposed, which at BGN 2.4 (€1.2) per prescription, could generate monthly savings of BGN 0.45m (€0.23m).

The meeting and the measures that have come out of it are certainly positive; this package may well be seen as having pulled the Bulgarian pharmaceutical sector back from the edge of collapse. However, the deals are short-term answers to long-term problems. Like using a plaster to staunch a deep wound, the immediate danger may have been addressed, but the patient is by no means in better health. Furthermore, having met such firm resistance in attempting to raise the level of health insurance contributions as recently as the beginning of the year (with the government forced into a climbdown), the successful implementation of the new patient prescription charge is certainly not guaranteed.

Interestingly, figures released by ICAP Bulgaria during the quarter showed yet another increase in private hospital revenue in 2009. Spending rose by 19% to BGN 180.2m (€92m) in 2009, with this figure representing a colossal rise of over 375% in comparison with expenditure in 2006. The number of inpatients treated and beds in these institutions have both doubled since 2006.

While the development of Bulgaria’s general healthcare infrastructure has certainly played a part, as has the expansion of the country’s middle classes, the shortcomings of public-sector services have no doubt also influenced people’s choices. The government may have found a short-term solution to the problems associated with its hospitals, but with little evidence of long-term thinking, it is not difficult to forecast continued growth in the private hospital sector. The revenue of these private institutions is expected to exceed BGN 250m (€128m) by as soon as 2011.

 

 

What such growth means for the performance of the overall pharmaceutical market in Bulgaria in the short term remains to be seen, not at least as the vast majority of people do not have access, or at least, regular access, to private healthcare. Should a patient prescription charge be introduced, there could be an initial dip in spending levels as consumers react warily to the extra expense. However, spending on OTC medicines could rise as a result. Hence, growth may well slide back to a mid-single-digit level in 2010, following a 7-8% increase in 2009.

 

Romania is another Central and Eastern Europe country bedevilled by spiralling healthcare debts. During the second quarter of this year, the government introduced a new drug reimbursement model designed to alleviate some of this pressure. The state was facing a shortfall of at least RON 2.8bn (€659m) for 2009 before it decided to defer reimbursement costs towards the end of last year.

The government’s answer has been to overhaul its system of drug reimbursement, replacing the old model with one that reimburses drugs in accordance with the price of the cheapest generic product in each therapeutic group. In short, patients will be receiving small reimbursements and paying more – up to nine times more according to the Romanian Association of International Medicine Manufacturers (ARPIM), although it must be remembered that as its members’ drug prices are among the highest, they have the most to lose from the reform.

The reaction of the public to such a change is likely to match, in part at least, that of the research-based drug industry, but with its back firmly against the wall, the government can argue that it was left with little other option. Romania has a prescription drug reimbursement level of almost 40%, which is a degree of subsidy that the public sector cannot maintain. The response from the public will be interesting to monitor, but should the model remain, its introduction could mark the beginning of a period of greater patient drug co-payment across the region.

The impact on pharmaceutical spending of this new model remains to be seen, but recent trends show value sales accelerating in comparison with much more modest performance in volume terms. According to Cegedim, drug sales at wholesale prices in Romania rose by 17.3% year on year to RON 2.34bn (€569m) for the first quarter of the year (in euro terms sales were up by 22%), while volume growth was just 0.5%. This near stagnation in volume terms follows a 9% decline in 2009.

At the heart of this disjointed performance is a trend for consumption of more expensive prescription drugs promoted by the manufacturers, while volume growth is being affected by a reduction in the level of state funding for medicines. The government’s latest reform seems likely to ensure that this disparity continues.

 

Massive healthcare sector debts are also a problem in the Czech Republic, where the country’s health insurance funds are expected to post a loss of CZK 8bn (€320m) in 2010. While political change has slowed the pace of healthcare reform of late, the emphasis has remained firmly on cost containment. VAT on medicines was increased and prices and reimbursement levels were cut at the beginning of the year.

What lies ahead remains to be seen, but the election of a right-wing government advocating austerity and promising widespread reform suggests that the healthcare sector could witness even more stringent cost-containment measures in the short term.

The new government, which won a vote of confidence in the country’s parliament in August, has indicated that it will overhaul the healthcare sector. The provision of state investment worth CZK 1.5bn (€60m) for the hospital sector looks particularly vulnerable. Hence, the pharmaceutical industry should expect more tax increases and spending cuts over the next year or so.

 

Switching from Prague to Bratislava, further evidence emerged during the second quarter that the Slovak government was fighting rising healthcare debts. Following the disclosure of a shortfall of €350m in health insurance company income in 2009, the state announced the provision of a €130m investment to alleviate mounting hospital debts.

While the Slovak healthcare sector is in generally better shape than most of its peers, regional governments and the drug industry will be watching closely to see how the state manages to plug the widening gaps in funding. These interested parties should expect more cost-cutting measures, including those to stem increases in expenditure on the reimbursement of pharmaceuticals provided under national healthcare systems. If more evidence of such a trend was required, the Slovenian health ministry made such a move in June, unveiling a series of pharmaceutical cost-containment measures.

 

So, public sector funding of pharmaceuticals looks set for a period of unprecedented contraction, but these measures are, as yet, not proving a deterrent to foreign investors. The Central and Eastern European pharmaceutical industry continued to witness an influx of overseas investment during the second quarter of the year.

Major research-based drug manufacturer Sanofi-Aventis acquired Polish pharmaceutical and dermocosmetics producer Nepentes in May in a deal worth an estimated €105m. The purchase sees the French drug company continue to build its consumer healthcare credentials in Central and Eastern Europe. The combination of the portfolios of the two producers and that of Zentiva, of which Sanofi-Aventis took complete control during the quarter, has created a leading player in the Polish consumer healthcare market.

Sanofi-Aventis also continued to invest in Russia during the second quarter, acquiring a local insulin manufacturer in the Orlov region. The French drug producer is reportedly set to invest millions of euros in modernising the facility. Another international drug company investing in the Russian insulin sector is Novo Nordisk, which is set to spend €80-100m on the construction of a new plant in the Kaluga region.

 

 

Another company investing in Poland is US-based biopharmaceutical player Gilead Sciences, which has announced plans to enter the Polish market in 2010. The move represents the company’s first venture into Central and Eastern Europe and could form part of a wider regional expansion strategy. Meanwhile, another US company, PPD Inc. has opened a pharmacovigilance and medical communications centre in Bulgaria. The centre in Sofia is the third of its kind that it has in Europe. In Romania, major Italian drugmaker Recordati acquired local pharmaceutical company ArtMed International, leveraging its entry into the market. The deal was worth an estimated €1.2m.

 

Looking at the investment during the second quarter of the year, it is clear that relatively low per capita drug consumption rates and good-quality resources continue to make the region’s markets an attractive prospect for foreign drug companies.

Widening the focus of this analysis, it is also clear that these factors and this activity is part of a wider shift in the infrastructure of the global pharmaceutical industry. During the second quarter, a Chinese drug company opened an office in the Czech Republic, announcing the move as part of a region-wide expansion strategy. The Indian and Russian governments unveiled plans for reciprocal pharmaceutical investment. In the research-based drug sector, Abbott Laboratories and Sanofi-Aventis both acquired drug sector assets in India, while Pfizer has been increasingly linked to a buyout of German generics major Stada.

This is all further evidence of a move towards a time when the global pharmaceutical industry is dominated by a group of manufacturing superpowers whose portfolios range across the innovative and generic drug fields. Retail profiles, supply links and manufacturing bases in emerging markets, including Central and Eastern Europe, will be a central element of the operational strategies of these behemoths.

 

 

Johnny Morgan

Pharmaceutical Market Analyst