CEE pharma funding woes ongoing; M&A activity continues

2010-03-09

Central and Eastern European governments continued to grapple with drug sector budgetary problems in the last quarter of 2009 as economic conditions remained challenging. However, the region witnessed significant foreign direct investment activity as research-based and generics majors sought portfolio diversification.

Romanian government defers drug reimbursement costs
In common with many of its regional peers, the Romanian government has been fighting to control spiralling healthcare sector debts, fuelled by the impact of the economic downturn and the weakening of the local currency. Staring down the barrel of an estimated shortfall of at least RON 2.8bn (€659m) for 2009 and with the prospect of system collapse growing nearer, the state was forced to act in the final quarter of the year. In October, it announced an extension of the drug reimbursement period of generic drugs from 90 days to 180 days, allowing it to defer the costs of drug reimbursement to 2010.
The policy is the latest in a long line of cost-containment pharmaceutical sector reform, following on most recently from a decision to restrict the prices of prescription medicines in April, and, given the general economic climate, comes as no surprise. While the drug producers have had to bear the brunt of previous measures, this time the pharmacy sector is in the firing line. The move could have a long-lasting impact on the sector, whose response to the extended payment schedule has been vociferous protest. The Romanian Association of Pharmacists has predicted the closure of many small pharmacies in 2010 and a possible suspension of sales of reimbursed drugs at its stores.
While there is an argument that the pharmacy sector may be overstating the possible consequences, the prospect of such upheaval cannot be ruled out and it is potentially damaging for the government, not least if it were seen to be harming overall drug market performance. With foreign investment becoming increasingly vital to the health of the drug sector, the state should not view causing such disruption lightly.
Spending on pharmaceuticals in Romania was already in decline in 2009. According to Cegedim in 2009 Romanian pharmaceutical market declined by 1.7% to €1,91bn
Should the market continue to react negatively to the state’s latest cost-containment activity, 2010 could be another year of decline. Cegedim suggests that drug spending could fall by as much as 2-3%, a development that would do little to encourage investor confidence.




Bulgarian government looks to solve funding problems
Another regional government announcing new reforms in an attempt to combat a rising healthcare system deficit in the final quarter of 2009 was the Borisov administration in Bulgaria. Facing a shortfall of almost €180m for the year, the health ministry announced an increase in healthcare contributions, an idea that it had reportedly considered earlier in the year.
However, the rise in payments will not be introduced until 2011. Hence, what will be of most interest both to the users of the Bulgarian healthcare system and to its suppliers, are the measures that the government takes in the meantime to address its budgetary problems. Given the state of the system, whose poor condition has been made chronic by the impact of economic downturn, there is little doubt that considerable reform will be forthcoming. An IMF report, published early in the third quarter, said that such reform was desperately needed.
The Bulgarian government will be watching market developments in Romania closely, as reimbursed drug sector reform is likely to be high up on its own agenda. However, cutting prices is likely to be preferable to a move such as the deferment of costs chosen by its neighbours. Either way, the drug industry is likely to have to bear greater downward pressure on margins in the short term.

Reimbursed drug spending falls in Hungary
Evidence of the impact of Hungarian government’s cost-cutting measures on pharmaceutical expenditure appeared in the last quarter of 2009: spending on reimbursed drugs fell in November on a year-on-year basis.
The prospect of further contraction looms, with the government hinting at further drug price cuts in 2010. The state is under pressure to claw back a widening budget deficit in national health insurance system funding, so such a move would come as no surprise.
Although reports of an increase in healthcare spending of 6% for 2010 is a positive, recent developments, along with continued uncertainty over the future of the drug tax law which could provide drug companies with some relief against falling prices, does little to suggest that overall drug market growth will be anything but at a low, single-digit level at best for 2009 and in 2010.

Czech Republic and Slovak health insurance systems under pressure
Another regional drug market struggling to balance the books in terms of healthcare funding is Slovakia. Figures released at the end of 2009 showed that the income of health insurance companies in the country was €17.3m less than expected. The explanation behind the shortfall is a familiar story, with blame placed firmly at the door of the economic downturn and the resultant unemployment and drop in salary levels.
However, unlike its peers, the Slovak health insurance system still managed to generate an increase in receipts (at 4.62%), although at a much-reduced level in comparison with 2008 (20%). The performance of the health insurance industry has mirrored that of the market on the whole, whose growth has decelerated amid challenging economic conditions. The introduction of a drug price referencing system has helped insurances companies to manage the decline in their income.
The drug industry will no doubt be keen to see what the government does next. Given the continued economic fragility, further cost-containment measures are likely to be introduced as it looks to keep the health insurance system on an even keel. It may well choose to follow the lead of the Czech government, which outlined a strategy of price reduction for 2010. The upshot of such reform in both markets is greater pressure on drug company margins, a development that could threaten some investment.


CEE M&A activity continues apace despite funding gloom
Seemingly unaffected by spiralling healthcare debts across the region, merger and acquisition activity, involving both the research-based sector and the generics industry, continued apace in the last quarter. Against a backdrop of further consolidation at the top of the research-based pharmaceutical industry tree, as Pfizer swallowed Wyeth, so-called Big Pharma players continued to roll out acquisition-led growth strategies in Central and Eastern Europe.
German drug giant Merck KGaA expanded its distribution infrastructure in Bulgaria with the purchase of the distribution arm of local drug wholesaler Aquachim, while Sanofi-Aventis snared a majority stake in Bioton Wostok, strengthening its profile in Russia. In addition, US company Valeant acquired the product rights to several prescription drugs from an unnamed Polish drug company, which consolidates its regional product portfolio.
It seems clear that difficult conditions are not putting off research-based drug companies. Why? One of the main factors is the need for portfolio diversification in light of patent expiries and dwindling pipelines. Investment in Central and Eastern Europe, largely in the generics sector, is about spreading the risk for these drug players, and it is not only this region that is witnessing a rise in such investment. During the quarter, GlaxoSmithKline acquired a stake in South African generics major Aspen, while Eli Lilly and Merck KGaA both targeted assets and expansion in China. While the need remains to offset difficulties in the innovative drug sector, Central and Eastern European pharmaceutical market development can be viewed optimistically.

Regional generics market consolidation key development theme
Merger and acquisition activity among generic majors during the last quarter of 2009 gives further credence to this upbeat forecast. Recordati, Polpharma and Teva all let it be known that they were targeting further acquisitions in the region. Recordati is looking to expand its profile in Poland, Turkey and Russia, with Teva is focusing on Poland in the short term. The Israeli drug producer also increased its investment in the Hungarian drug market, spending €18m on the expansion of its Debrecen plant. Daiichi Sankyo-owned Ranbaxy opened a new facility in Romania as part of a supply chain optimisation initiative.





In other developments, Bulgarian generics major Sopharma acquired Latvia’s Briz as part of a regional expansion strategy, while Romanian drug manufacturer A&D Pharma rolled out a similar growth programme, acquiring the divisions of Arishop Pharma in Bulgaria and Ozone Laboratories in Poland, Slovakia, the Czech Republic and Moldova. A&D’s investment has made it into a leading drug distribution in the region.
As generics become more competitive, fuelled in part by the rise of branded generics, investment in and consolidation of the Central and Eastern European drug market will continue. In this combative environment, it is fast becoming survival of the fittest, as to some degree the perilous state of small pharmacies in Romania illustrates. The divestment of Ratiopharm was restarted during the quarter and this is an asset that is likely to attract the attention of research-based and generics majors alike.


John Morgan
Pharmaceutical Market Analyst