Economic gloom triggers drastic drug sector reform

2009-10-01


Regulatory reform, passed and proposed, was the hot topic in Central and Eastern European pharmaceuticals in the second quarter of 2009. Conditions grew bleaker for the research-based drug sector but the generics industry also found itself under mounting pressure.


Against a backdrop of a possible historic sea-change in the administration of the US healthcare sector, Central and Eastern Europe witnessed a swathe of economic crisis-triggered reform in the months leading up to the midpoint of 2009. With contagion from the meltdown of the developed world’s banking system growing and economies and financing systems under severe pressure, the region’s governments were forced into regulatory change.

Romanian government enforces generic prescription
The Romanian government continued to look to regulatory reform to ease a growing financial burden sparked by the depreciation of the lei. Following on from a 10% cut to the average price of imported drugs and new legislation fixing the price of generic medicines at no more than 65% of branded equivalents in the first quarter of the year, in April the health ministry instructed doctors to prescribe generics rather than branded products when distributing drugs under the national reimbursement system.
The continued rollout of stifling reform has obvious consequences for pharmaceutical market growth in Romania. While a 6.6% y-o-y increase in drug sales was reported in Romania for the first quarter, this forward momentum can be attributed chiefly to one-off buying patterns amongst consumers and wholesalers influenced by the economic downturn and the impending round of regulatory amendment. In light of recent developments it is difficult to see this momentum continuing for the second quarter and arguably beyond, with performance unlikely to match the vibrancy of 2008 when, according to Cegedim, the market grew by 17.7% in lei terms (to RON 7.16bn) and 6.6% in euro terms (to €1.94bn). Given the current state of the sector, the drug market could stagnate in euro terms for 2009.

Drug reimbursement rates cut in Hungary
Hungary witnessed similar development during the second quarter of the year. Having implemented two rounds of price cuts in January and April, the government also introduced reimbursement rate cuts aimed at generating savings for its Health Insurance Fund. Amongst the changes was the reduction of the 85% reimbursement rate, which mainly refers to cardiovascular drugs, to 80%. The result of this reform has been to place greater burden on consumer finances, in particular the grey market.
Drug companies in Hungary must now also incorporate into their financial planning the reintroduction of the medical representative fee, at HUF 0.4m (€1,460) per month per representative. A move to grant drug manufacturers that conduct domestic research and development activity in the country a 20% reduction in the payments they must make to help fund healthcare expenses is likely to do little to placate concern over pressure on margins. Second quarter results for local drug major Gedeon Richter underline the growing pressure on companies, with domestic sales down by 7% y-o-y following near stagnation in Q1.
As in Romania, market growth in Hungary will surely be affected, with the cuts to reimbursement rates likely to slow consumption levels, of more expensive drugs at least, instead of encouraging consumers to dig deeper into their pockets in these fiscally restrained times.



Co-payment abolition destabilises health sector in the Czech Republic
Recent pharmaceutical sector reform in the Czech Republic has focused on the proposed abolition of healthcare fees. While political wrangling continues with regards to universal application, co-payments have been scrapped in a number of regions. The immediate impact has been to decimate income levels at pharmacies located in areas where fees still apply, which have reportedly fallen by up to 70% y-o-y, leading to job cuts and a reduction in opening hours. On a larger scale this regulatory change poses a threat to the stability of the country’s healthcare system, undermining the state’s ability to fund an acceptable level of provision.
Healthcare fees have been one of the major sources of income for the Czech healthcare system, saving it over CZK 10bn (€250m) in 2008 according to the health ministry. Prescription fees collected at pharmacies were the largest revenue source, while co-payments also helped to reduce expenditure by cutting unnecessary dispensing of drugs.
This reform is also set to have repercussions for pharmaceutical market growth, in particular as it is the latest is a lengthening line in cost-saving initiatives. As in Romania, doctors in the Czech Republic, whose budgets have come under increasing scrutiny, are now obliged to prescribe generics rather than branded products, with pharmacists dispensing the cheapest version of the medicine. While the market posted 14% y-o-y growth in Q1 according to IMS Health, this rate of expansion seems unlikely to continue as the tide of restrictive legislation continues to grow, with growth likely to be in single figures for the year.

March to ultra protectionist drug regulatory system continues in Russia
As recent developments in Romania, Hungary and the Czech Republic suggest, a wave of economic crisis-triggered cost saving-led drug reform is sweeping Central and Eastern Europe. Russia was forced to set out on this course before most and nowhere does the impact of economic downturn on pharmaceutical industry development seem so severe. Developments in the second quarter of the year underlined the seismic changes occurring in the Russian drug sector.
The momentum behind protectionist reform grew in the three months from April to June. The Ministry of Public and Social Development drew up reform, due for introduction in July, which will allow it control over the prices of essential drugs, while the Federal Antimonopoly service will reportedly monitor the prices of the 100 bestselling drugs and act on those whose shares are above 35%. That it has already begun to target the standings of leading foreign drug producers, led by Roche, Novartis and Schering AG, is a clear signal of intent. Both measures are mechanisms for reducing drug prices, in particular of imported drugs, outside of the current regulation and will be greeted with trepidation by drug manufacturers.
At the same time, the Russian President has declared that the country must reduce its dependence on imported drugs, targeting a decline in its exposure from 70% to 50%. This goal is to be achieved by the revival of the indigenous pharmaceutical industry, which according to the government is currently represented by no more than ten modern facilities. As well as giving preference to Russian producers, the government is also reportedly planning to offer incentives to foreign manufacturers that focus on the production of generic drugs. As a part of this programme, these producers would be offered exclusive retail rights for any of their drugs that come off-patent in Russia, with other generic equivalents kept off the market through an embargo.

Russian drug industry continues to reel
Whether such reform would be passed remains to be seen but it is likely to draw strong criticism, somewhat unusually, from both the generic and innovative drug sectors. Competitive activity would be severely restricted in both arenas. Switching to company developments in Russia, instability continues in the local industry sector. The value of local production fell by 29% y-o-y to $170.6m (€120m) in May 2009 according to the AIPM, following on from a 43% y-o-y drop in April. Pharmastandart, the country’s leading drug producer, began what could be a fire sale of its assets as it looks to raise capital, divesting its share in Mir-pharm and reducing its involvement in Afopharm. Valenta, another major local player, is reportedly in the process of selling its Novosibkhimpharm subsidiary as it too seeks cash.


In the foreign drug manufacturing sector, Poland’s troubled insulin maker Bioton announced its intention to exit the market, with its 38% stake in Russia subsidiary Bioton Wostok up for sale, while the partnership between UK firm Alliance Boots and local drug company 36,6 came to an end as the sharp economic downturn hit demand for the former player’s more expensive products. Elsewhere, Pfizer’s pledge to accelerate development in the country was notable for its isolated positivity, while the likelihood of a mooted $1bn (€0.7bn) foreign pharmaceutical company investment package in the Russian drug sector being realised appears remote, not at least as regulatory reform beneficial to foreign manufacturers is a condition. Such a proposal seems unlikely to find many supporters.

US drug report underlines generics’ rising star
Whatever the pros and cons for the manufacturing sector, what this recent deluge of regulatory reform underlines is the growing role of generics not just in the Central and Eastern European pharmaceutical market, but on a global scale. Whether governments pursue generics over branded drugs or cheaper versions of existing generics, all roads seemingly lead in one general direction. Recent activity in the US looks set to only strengthen this focus.
Hot on the heels of the report from German generics association Pro Generika, which trumpeted record savings made by the German statutory health insurance system (GKV) in 2008 through the use of generics, the US generics association GPhA has published its findings on generics use in its domestic market, stating that generic drugs saved the American healthcare system more than $734bn (€525bn) between 1999 and 2008, including $121bn (€85bn) in 2008 alone, an increase of 20% over the previous year.


These findings will certainly turn some heads, both in the US and further afield. Calls for greater use of FDA-approved generics in publicly funded prescription benefits plans, such as Medicaid and Medicare, will certainly have grabbed the attention of the Obama administration, which is currently attempting a radical overhaul of the US healthcare system. As opposition to reform is strongly based on the projected cost of such change, the GPhA claim that just a 1% increase in generic use in the Medicaid system could save as much as $490m (€350m) annually will certainly resonate.
Whether President Obama succeeds where so many of his predecessors failed remains to be seen but what is clearer is that generic drugs will play an ever greater part in the US healthcare system, in particular at time of recession and rising unemployment. What does the push for universal healthcare provision in the US mean for the global pharmaceutical industry? What does it mean for the Central and Eastern Europe pharmaceutical industry? If nothing else, it means that the US research-based giants will be increasingly keen to secure themselves a slice of the generics pie. Such development will only quicken the march towards an era of global generics behemoths and a new pharmaceutical sector landscape in Central Eastern Europe.

Generics industry feel research-based sector pain as pressure grows on margins
This is a forecast of which the research-based drug sector are clearly not fond, but while the latest round of reform, in particular the financially driven changes in Central and Eastern Europe, is another blow to this group, market conditions are also emerging that are putting increasing pressure on generics manufacturers. As governments continue to find ways to squeeze as much cost savings from reform as possible, so generics players are facing up to the prospect of reduced prices, reduced reimbursement rates and rising competition. All of which means reduced margins. Near region-wide decline posted by Ranbaxy and Gedeon Richter in the second quarter illustrate the point. The irony will surely not be lost on the research-based drug sector.


John Morgan
Pharmaceutical Market Analyst
johnnylmorgan@btopenworld.com