Foreign investment continues to flow into CEE pharma

2010-06-02


Healthcare funding remained a major issue in Central and Eastern Europe in the first quarter of 2010, but there was more evidence to suggest that these financial problems were doing little to deter foreign investment in regional pharmaceutical markets, as research-based and generics majors continued to spend.


Healthcare funding problems persist in Bulgaria
The new year witnessed the introduction of a new healthcare act in Bulgaria, but the legislation did little to cure the instability that continues to plague the healthcare sector. The first quarter was marked by delays in payments by the national health insurance fund NHIF, doctor strikes, pharmacy closures and allegations of corruption against pharmaceutical distributors.
It remains to be seen if a change of personnel at the health ministry will improves matters, but the government’s position is a difficult one, as the climbdown over health insurance contributions illustrates. Just weeks after announcing plans to increase contributions from 8% to 10% of income from April 1, the government changed its mind. The exposure given to the rising number of people losing their health insurance rights is likely to have played a part.
The increase was due to help cover the rise in NHIF spending in 2010, providing €153m in funding. According to the government, the money will now be sourced through the abolition of preferential rules of healthcare contribution payments for public sector employees, who had been exempt from paying 40% of their contributions.
Whether shifting the onus on payment from one section of the population to another is a viable strategy is highly debatable and it would appear that unrest in the Bulgarian healthcare sector will continue. With the NHIF still overspending by €2-3.6m per month on drug reimbursement between January and March, it is clear that further reform is needed.
Despite the structural instability and economic crisis, the Bulgarian drug market grew by 8% to €878m in 2009 according to IMS Health. Generics represented 53% of this total in value terms and 85% by volume. Unsurprisingly, some have been quick to play up the positives of this performance, which is notable given the economic climate during the year. However, the contribution of a one-off purchase of swine flu vaccines should temper the optimism. The increase is a short-term positive, but at present there is little guarantee of long-term growth.




New pharma law passed in Russia
The first quarter of the year witnessed further development in the overhaul of the Russian pharmaceutical regulatory environment. The new “On Circulation of Medicines” law, which covers all the main issues surrounding the output and quality of the local manufacturing sector and the provision of affordable essential medicines, was approved on its third reading in the national parliament.
New wholesale and retail mark-up standards for essential drugs were also introduced during the three-month period, while the government announced that retail mark-ups for non-essential drugs would be set centrally, and not left up to regional authorities, as was previously the case.
While reform and efforts to bring domestic practices further in line with international norms is a positive move, the foreign manufacturing sector remains far from happy with conditions in Russia. The passage of the new law through the Russian parliament brought fresh complaints from foreign companies. A perceived bias in the tender process was raised, with local companies profiting from a beneficial position over pricing, and the US research-based pharmaceutical companies association PhRMA also raised concerns over the reform process. The decision to delay the introduction of GMP compliance for local drug manufacturers until 2014 will do little to placate the foreign industry sector.

Novartis tops Russian pharmacy drug market in 2009
Shifting focus on to the performance of the market, despite a very challenging 2009, with the pharmacy drug market falling by 6% at retail prices to $10.4bn according to the AIPM/RMBC, the tone of market development has been fairly optimistic. The drug market is expected to return to growth in 2010, buoyed in part by growing consumer confidence.
The composition of the Russian pharmacy drug market remained relatively unchanged in 2009, with Novartis keeping hold its top spot. This relative stability in the face of torrid financial conditions should be reassuring for the foreign companies, whose domination of the leading rankings (the top 10 controlled over 40% of the market in 2009, compared to just under in 2008) has played a key role in keeping the sector on an even keel. Continued investment helped foreign manufacturers maintain their positions, in particular Teva, for whom spending on local expansion helped them into the top 10.
Pharmstandard is the only local drug company in the pharmacy market top 10. It rose from third to second in 2009, increasing its share to 5.8%. The manufacturer has benefited from downshifting among consumers as well as the thinning out of the local drug producer marketplace. Its favourable status with regards to public sector drug procurement has also no doubt been a benefit.





Czech government pushes ahead with drug cost-containment policy
In the Czech Republic, as promised, the government continued to focus on public sector healthcare finances, in particular health insurance system funding, during the first quarter. Both consumers and manufacturers felt the brunt of its cost-containment push. It increased the level of VAT on a number of goods and services, including medicines, from 9% to 10% in January as part of its efforts to raise money, and reduced the maximum manufacturer’s drug prices and reimbursement levels by 7% for medicines whose prices were not reviewed in 2008, when the country introduced a new reimbursement system.

Poland witnessing large-scale pharma sector consolidation
In Poland, consolidation was the main theme of drug sector development at the beginning of 2010, covering both the manufacturing and distribution arenas. The latter consolidation has accelerated significantly of late, not just in Poland but throughout Central and Eastern Europe, as increasingly severe cost-containment policies have been rolled out, putting pressure on smaller, often independent pharmacies. The privatisation of state assets and the introduction of new technology, including e-commerce and the internet, are also contributing to consolidation. Illustrating this trend, it was reported in January that as much as one-sixth of pharmacies in Hungary were facing bankruptcy.
As a result, cross-border pharmacy conglomerates are fast appearing, with power being concentrated in fewer and a fewer hands, a trend that has long been prevalent in the manufacturing sector. In the Polish manufacturing sector, reports appeared concerning a proposed merger between drug majors Polpharma and Bioton. The future of Polpharma has remained a hot topic in Poland since the collapse of the merger with Hungary’s Gedeon Richter. In addition, Adamed completed the takeover of Polfa Pabianice as it took another step in the creation of Grupa Adamed.

Regional drug majors drop sales in Poland in 2009...
The continued consolidation in Poland is set to make the competitive environment increasingly fierce and the challenging nature of market conditions is already in evidence, with both Slovenian drug major Krka and Gedeon Richter both announcing a drop in sales in Poland for 2009. Krka posted an 8.5% drop in revenue in the country, from €122.2m to €112.6m, while Gedeon Richter reported a 15.4% fall in sales. Rising competition and relentless government cost-containment policy were the main contributors.



...but foreign investment shows no sign of slowing
However, despite challenging market conditions, foreign investment continued to flow into Poland and the rest of the Central and Eastern European pharmaceutical market during the first quarter of 2010, underlining the attraction of a marketplace offering relatively low per capita consumption rates and good quality, affordable primary, secondary and tertiary sector resources.
Major European drugs group Berlin-Chemie/Menarini announced plans to build new drug production and packaging facilities in Russia, while AstraZeneca indicated that it may start the production of key drugs in the country. In Poland, Sandoz unveiled plans to increase the output at its Strykow plant, while GlaxoSmithKline announced it would be shifting some of the production of its Avodart product from France to its factory in Poznan, in a project worth €17m. In addition, Sanofi-Aventis announced that it will be investing €10m in its presence in Poland in 2010.
Elsewhere, Teva announced a €65m investment in the expansion of its Godollo plant in Hungary, while Sanofi-Aventis confirmed plans to launch 15 new products in Romania in 2010. Staying in Romania, US generics company Alvogen announced major investment plans for the country as well as for the expansion of its presence in Bulgaria.

Are we witnessing the dawn of the era of the mega manufacturer?
The rise in foreign drug producer investment in Central and Eastern Europe is a longstanding, major trend, the pace of which is unlikely to slow noticeably as long as assets remain up for grabs and the prices of domestic manufacturing resources remains high. However, this type of activity is increasingly falling within a larger sphere of development: the emergence of mega manufacturers, whose profile spans both innovative and generic drugs, and the developed and emerging worlds.
If research-based majors once looked upon generics as a threat to their very existence, today the picture looks very different. Activity in the first quarter of 2010 confirmed the steady growth of this new format of mega manufacturer. Pfizer announced the debut of its generics portfolio in the UK, a launch facilitated by agreements between Indian generics company Aurobindo Pharma and Claris Lifesciences.
Another research-base behemoth exploring this generic partnership route is AstraZeneca, which announced an agreement with another Indian generic drug manufacturer, Torrent Pharma, in March. A first for the Anglo-Swedish drug producer, the move is designed to boost its presence in emerging markets and counter patent expiry-incurred losses on innovative medicines. In other related news, Valeant entered into a partnership with a Brazilian generics company, while Roche announced its intention to target assets and expansion in China, following on from a similar move by Eli Lilly and Merck KGaA in the last quarter of 2009.

Teva trumps Pfizer to acquire Ratiopharm
However, perhaps the biggest news during the first quarter of 2010 concerning the generics industry was Teva’s capture of German generics major Ratiopharm in March in deal worth €3.63bn. The move by the Israel generics giant consolidates its position as the leading generics company in the world, and propels it to the top of the rankings in Europe. That it had to beat off competition from Pfizer underlines the value of not only the German generics company but also the importance of the position on the European generics market it brings. The move helps fill a gap in the German market, where Teva was relatively weak, and also gives it extra muscle to target expansion, not only in Western Europe but also in the east. Teva has invested considerably in Central and Eastern Europe in recent years and will be able to exploit key synergies in terms of exploiting Ratiopharm’s considerable portfolio.



Given the emergence of generics superpowers and the growing interest of research-based manufacturers in emerging markets and generics companies, the mid-term outlook for the Central and Eastern European market is surely one of consolidation and a high level of foreign company control. It is not difficult to envisage a near-term future where a relatively small number of foreign drug producers, which encompass both generics and innovative fields, dominate the regional marketplace, with local companies only existing in the shadows.


Johnny Morgan
Pharmaceutical Market Analyst