Pharma alert: CEE healthcare systems face meltdown

2009-12-09

While some Western European countries witnessed some easing of their economic woes, conditions remained very challenging in Central and Eastern Europe in the third quarter of 2009, and pressure remained on the healthcare and pharmaceutical sectors. However, foreign direct investment continued to flow into the region, suggesting that the industry is proving more resilient than most.


Hungary’s national insurance system debt rising
Problems continued for the pharmaceutical sector in Hungary during the three-month period as the country’s national insurance system slipped further into debt and the government stalled over the introduction of amendments to its controversial pharmaceutical tax. Figures were released showing that the Hungarian National Insurance Fund (OEP) posted a deficit of almost HUF 53bn (€183m) for the first half of the year, HUF 49bn (€169bn) over its initial target. Spending on drug reimbursement was reportedly 10% over budget.
Given the pressure on the national insurance system, it comes as no surprise that the government failed to make head way on a change to its drug tax law which concerns the introduction of means by which drug companies could offset some of their expenditure on research and development against the charge.
Nevertheless, the delay will further blacken the mood of the pharmaceutical industry, which has come under acute pressure in recent years, with the slashing of reimbursement rates by up to 50% and the revival of the medical representative fee. Domestic regional major Gedeon Richter is one drug company that has been hit and it continued to report a decline in local revenue in the third quarter, with net sales for the first six months of the year falling by 7% in euro terms.



As the new tax was key for the national insurance fund in terms of revenue generation, it seems unlikely that the government will rush to introduce the research-based amendment. Hence, it now seems that the market will not experience much in the way of growth for the year: near stagnation in sales should not be ruled out and early estimates of 3–5% certainly appear very optimistic. Furthermore, unless the government relents in its approach, there may be precious little recovery to talk about in 2010.

Health insurance payment shortfall in Poland
The national health insurance system in Poland is under similar strain. In July, it was announced that the National Health Fund (NFZ) has raised €140m less than anticipated, a shortfall that may see the deficit for the year reach as much as €390m. There are fears that the gap could widen further in 2010.
While the government has refused to increase national insurance contributions as a means of helping generate revenue in the face of the drop in payments and the weakness of the economy despite strong pressure from the president of the NFZ, Jacek Paszkiewicz, its decision to prop up the 2009 budget with the profits made in 2008 does little to assure long-term stability. As part of the redrafting of the 2009 budget, which has been increased by €281m, or just over 2% of the original figure, expenditure of drug reimbursement will rise by €77.2m.
The delay over the approval for the 2010 NFZ budget, amid disputes over restructuring, only adds to the impression that the forthcoming year will be another of austerity, at least in terms of government spending. The government has so far claimed that there will be no further cuts in the health ministry’s budget but, given the state of NFZ finances and the general financial climate, it could be a promise that it regrets making.

Czech Republic healthcare sector chaos
If the national health insurance systems in Hungary and Poland are lurching towards crisis, then the one in Czech Republic is already there. The new government’s decision to abolish patient co-payments was immediately controversial, and development in the third quarter of the year suggested that the tension surrounding the issue is unlikely to recede in the short term.
The reform has been resisted from the onset, with some local authorities refusing to implement the changes. In August, the Czech interior minister threatened to take legal action against local governors that continue to cover health fees for patients. Despite the warning, resistance to the new law is set to continue, which suggests that the national healthcare system and drug market will suffer as a result.
As co-payments were one of main sources of healthcare income for the state, their cancellation can only put financial pressure on government budgets. This development suggests that the Czech Republic could be drawn into a similar situation as that being witnessed in Hungary and Poland, where national insurance systems are struggling to manage the costs of healthcare provision. Such a development can only have negative ramifications for drug companies and the influx of foreign investment.

Bulgaria’s healthcare system also in trouble
Another pharmaceutical market heading for tough times is Bulgaria’s: it was reported in August that the national healthcare system was facing a deficit of €179m by the end of the year. The hospital sector is allegedly responsible for the majority of the debt and the National Health Insurance Fund (NHIF) the remainder.
The health ministry has placed some of the blame on the demands of the state’s reimbursement list, while also criticising a lack of reform and a national health insurance system that raises insufficient funds, not to mention mismanagement by the previous administration. The plight of the health insurance system is being made worse by the economic crisis, which has inflated unemployment figures and, hence, reduced the number of people paying for healthcare.
The Bulgarian government, which is responsible for paying the deficit, finds itself in a perilous situation. With the leva weakening and the economy floundering, it is a bill that it seemingly cannot afford to pay. As a result, the healthcare sector is arguably spiralling towards bankruptcy.
With the national health insurance system due to shoulder more financial burden in the form of co-payment for expensive hepatitis B and C treatments before the end of the year, the picture looks bleak. So how will the government respond? If it follows in the footsteps of its regional peers, the aforementioned co-payments are likely to the victims of cuts, while the health ministry has insinuated that an expansion of public contributions has to be considered.
Such development, in particular any cuts to reimbursement lists, should be of concern to the pharmaceutical industry as this type of reform inevitably means greater pressure on profit margins. It also poses a threat to foreign investment levels, a drop in which will only compound the government’s problems. However, for the time being, multinational cash remains in place.

Russia witnesses influx of foreign cash: Nycomed big spenders
As in Bulgaria, international spending is integral to the functioning of the Russian pharmaceutical sector and in the third quarter, despite talk of radical protectionist reform, the country attracted considerable investment. Notably, regulatory development discussion about more controversial policies quietened, with only the bolstering of the local generics industry drawing any major comment from the government.
Nycomed led the foreign spending charge in Russia and the region in the third quarter. In September, the Swiss drug manufacturer announced plans to invest between €65m and €75m in a new pharmaceutical plant in Russia. The plant will focus on the production of medicines for local consumption and for neighbouring CIS countries, and is due for completion in 2014.
The expansion in Russia followed a move to buy a portfolio of branded generics in several Central and Eastern European countries from Sanofi-Aventis and Zentiva in August. According to the company, the new products will strengthen its position, particularly in the Czech Republic and Slovakia, but also in Hungary, Estonia, Bulgaria and Romania.



It is clear that these purchases are part of a longer-term strategy and it is the promise of a returning consumer demand and spending power, together with sizeable populations and cost-efficient and high quality resources that is maintaining foreign interest and investment. Aside from Nycomed, Servier-Egis announced plans to build a new research and technology centre in Budapest at a cost of €14m, while Baxter and Adamed both unveiled investments in facilities in Poland.



Romania attracts a slew of foreign investment
Despite drug industry spending in Russia, Poland and Hungary, it was another market that attracted the most activity during the third quarter: Romania. GlaxoSmithKline announced 100 new jobs at its site in Brasov as part of the relocation of its production base for the anti-depressant Seroxat and HIV treatment Retrovir. The multinational has been gradually building its presence in Romania in recent times – having acquired Europharm in 1998 – taking advantage of the cost benefits of relocating some activities to the market.
Indian drugs company JB Chemicals and Pharmaceuticals was another investor in Romania, establishing a wholly-owned subsidiary in the country as part of its pan-regional expansion strategy. The company already generates a significant portion of its revenue in Russia, Ukraine and the CIS countries, and the move to set up a base in Romania underlines the country’s geographic advantages. In other news, Terapia Ranbaxy announced plans to market Daiichi Sankyo drugs in Romania.
The country’s continued ability to attract foreign direct investment despite mounting fiscal problems within the healthcare system is notable. As with many of its neighbours, the economic downturn and the weakening of the local currency has put pressure on healthcare budgets in Romania, which in turn has led to restrictive pharmaceutical sector reform. This trend shows few signs of coming to an end.
So what lies behind the Romanian drug market’s continued attraction? The reasons chiefly lie in factors that have already been discussed above in relation to company investment. The country’s geography is important as its position allows it to act as a gateway from the west to Russia and high growth potential ex-Soviet markets. Its size is another key factor: with almost 21.5 million inhabitants it is one of most populous markets in the region and its comparatively low per capita spend (an estimated €90 for 2008, compared to €181 in Poland) suggests that there is considerable capacity for increased drug consumption.



The country’s low cost base is also crucial, with multinationals already relocating production and research activity to the market as part of cost-containment strategies. The attraction of relatively cheap resources across the spectrum is not being lost on drug companies, including developed market focused research-based majors whose revenue streams are under significant pressure.
The Romanian pharmaceutical market may not witness much growth in euro terms, thanks largely to the weakening of the lei, and in volume terms as cash strapped consumers reduce spending in the face of rises prices, but the long-term growth prospects are clear. However, it is crucial that the government let the finances of its healthcare system slip any further into crisis as it is unlikely that the reform required to repair any serious damage will be conducive to continuing levels of foreign investment. Indeed this is a warning of which governments the region over should take heed.


John Morgan
Pharmaceutical Market Analyst
johnnylmorgan@btopenworld.com