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Romanian pharmaceutical market, report by Roland Berger Strategy Consultants

The local pharmaceutical market is one of the few economic sectors least affected by the economic crisis, with 2009 marking the only decrease in recent years

Between 2002 and 2007, the market was shaped by the general economic growth period, which resulted in a double-digit compound annual growth rate (24.5%).


2007 marked the beginning of a slow-down trend, which was further impacted by the 2008 economic downturn and by the introduction and repeated modifications of the claw-back tax starting with 2009. The 6.7% sales growth (in EUR value) of the pharmaceutical market in 2008 as compared to 2007 came as an anticipation of the inflection point reached in 2009, when a market contraction of approximately 2% (in EUR value) corroborated with a strong depreciation of the national currency affected the industry.


The growth of pharmaceutical market value in 2010 (19.6% in EUR value) was accompanied by an actual decrease in volumes sold (-2.0%), resulted mainly from the diminished public support for the acquisition of prescription drugs and negative margins that encouraged parallel exports.


In 2011 total pharmacy sales reached EUR 2.55 bn, showing a growth of 11.7% in EUR compared to 2010, supported by a strong 28.2% advance in Q4 2011.


In local currency, sales increased in 2011 by 12.4% compared to 2010, reaching RON 10.8 bn. Growth rates are however still limited as compared to previous periods, with significant expansion due to parallel exports, which become more sophisticated and are estimated at 20-25% of sales (market analysts estimated parallel exports at EUR 500 m in 2011, from EUR 400 m in 2010, with projections of EUR 700 m in 2012).


In 2012 prospects are positive, with a forecasted growth of 8-9% in EUR value. Data available for the first two quarters display steady growth in Q1 2012 as compared to same period in 2011 (18% in EUR), followed by a decrease of 2.5% in EUR in Q2 2012 as compared to same period in 2011. The inflection point in the second quarter seems to mark the tendency to focus on profitability rather than on sales on behalf of all players, in the light of recent legislative modifications. Nonetheless, the impact in 2012 of regulatory issues such as the claw-back tax and the new Health Law on the market evolution is still hard to assess, due to the low predictability of further legislative changes.


According to the National Statistics Institute, the pharmaceutical imports in Romania in 2011 amounted to EUR 2.3 bn. Germany, France and The Netherlands represent Romania's main trading partners in the sector. Exports account for only EUR 0.7 bn, with main destination markets being Germany, UK and Denmark. Notable is the 25% increase in EUR of exports compared to 2010, which reflects the increasing trend of parallel exports.


Given the import-intensive nature of the local pharmaceutical market, exposure to variations in exchange rates is very high and considering the significant recent depreciation trend of the RON (up to 4.6 RON/EUR) in 2012, a negative impact on the market and players' profitability is expected. In previous periods, the depreciation of the local currency as of summer 2007 severely affected importers and distributors, further leading to an erosion of profit margins for retailers, ultimately resulting in temporary suspension of drug deliveries by distributors.

Market Structure


The two distribution channels in the pharmaceutical market, hospital and retail, account for disproportionate fractions of the market. The retail channel covered 87% of the market in terms of value in 2011. While having a significantly lower market share, hospitals nonetheless witnessed a significant growth rate in 2011 – 39% in EUR compared to 2010, mainly driven by authorities' decisions to transfer back several subsidized drugs from pharmacies to hospitals. Available data for the first half of 2012 indicate further growth compared to the same period of 2011 of both retail (4%) and hospital segments (8%).


Over the last years, retail was the main driver for the overall market growth, with 2011 value growth of 8.4% as compared to 2010, whereas the similar rate for 2010 growth compared to previous year was situated at the higher value of 21.7%. Repeated price augmentations in the prescription drug segment, as well as the reduced governmental support for drug acquisition were among factors that lead to this development. In 2010, retail sales also benefited from the complete or partial transfer of drugs pertaining to several National Health Programs from hospital pharmacies to retail pharmacies, as was the case for oral anti-diabetics and insulin, oncology, post-transplant or HIV/AIDS drugs.


On the other hand, hospital pharmacies have been until 2011 severely affected by deficient management and financial blockages in the system, as reflected by the massive 14.1% decrease in volume and by the slight 4.3% increase in value in 2010. In 2011, hospital sales accounted for around 13.1% of the total market value.


Rx drugs currently hold a market share of around 84.1% of retail sales in value terms, corresponding to EUR 1.86 bn in 2011. Analysis of previous evolution indicates a continuous increase of Rx drugs share in retail sales occurred (from 79% in 2005). Rx drugs are comprised of both patented drugs and generics, and the growth is mainly driven by generics, that for most medical conditions compete with the more expensive original drugs. The introduction of electronic prescriptions in H2 2012 (with a maximum of 7 drugs per recipe) is aimed at increasing the transparency degree of the medical system (affected in recent years by numerous fraud accusations) and on providing patients with better healthcare assistance on the midterm. On the other hand, OTC drugs maintained a share of approximately 14% of the total sales in 2010 and reached a retail level of EUR 0.35 bn in 2011, 8.6% higher as compared to 2010.

 


Original drugs (drugs protected by a patent) represented in 2011 about 72% of the market in terms of value, and approximately 38% in terms of volume, with good prospects for future growth. However, the introduction of co-payments for drugs in Romania's healthcare system is expected to favor generic drugs, which are sold at a generally significantly lower price. In the first 9 months of 2011, the ranking of original drugs brands suffered modifications compared to recent years, as GSK's Seretide treatment for asthma ranked first with sales of EUR 31.3 m at wholesale prices, matching a 19.5% sale increase YoY (in 2009 the drug was not placed in top 5). The top three was completed by Merck's Mabthera (inactivated poliomyelitis vaccine) with sales of EUR 27.4 m and Roche's Pegasys (hepatitis) matching sales of EUR 27.3 m affected by a 18.5% sale decrease compared to the previous period.


Conversely, the cheaper generic drugs, covered in 2011 only about 28% of the market in value terms, but around 62% in volume terms. This proportion is projected to increase, as co-payment will most probably lead to higher search for cheaper drugs. Besides Nurofen, other well performing branded generic drugs (generic equivalents with a name given by the particular pharmaceutical company) are Algocalmin, Paracetamol, Parasinus or Aspenter – leaders in terms of volume, however not in the top 10 drug sales in the first three quarters of 2011.


Almost all therapeutic areas, except for anti-infective systemic drugs, registered a double-digit growth during the period March 2011- March 2012. Cardiovascular drugs represent the largest segment of drugs on the Romanian pharmaceutical market, followed by antineoplastics and immunomodulating agents, alimentary tract and metabolism, central nervous system, and anti-infective systemic. Some therapeutic groups with the highest growth rates between March 2011- March 2012 were antineoplastics and immunomodulating agents (+57.2%), respiratory system (+25.5%) and muscular-skeletal (+21.9 %). The weakest evolutions during the same period were registered by the therapeutic areas of anti-infective systemic (-2.2%), central nervous system (+13.6%) and cardiovascular (+16.6%).


The Romanian pharmaceutical market is highly consolidated at the production level, the top 10 players cumulating 55.8% of total sales in 2011 (57.1% at the end of 2010). The top 3 positions, including the market leader, have changed in recent years and are comprised of international players, currently Sanofi Aventis being closely followed by Hoffman la Roche, which in turn is followed by Novartis Sandoz. While the remaining positions (ranks 4-10) have stayed mostly unchanged, several important transactions at the global level reshuffled the ranking in the market.


An important share of the drugs supplied on the Romanian pharmaceutical market is imported, while only a fraction is produced domestically, usually by foreign drug manufacturers that have developed local production facilities.


Representative offices usually act only as an interface between the international parent company and domestic distributors of drugs. Most often, their work is limited to medical promotion and other marketing activities, so imports of drugs do not always go through their balance sheet. This is why their financial statements do not reflect the full size of their business. In 2010 in Romania there were 16 representative offices of foreign drug manufacturers, which generated total sales of EUR 903 m and margins of almost EUR 238 m, employing 2,249 people. Most drug sales in Romania are handled by these representative offices.


In terms of local producers the top 15 account for around 12% of the pharmaceutical market; Terapia Ranbaxy ranks first, with nearly EUR 80m sales, followed by Antibiotice and Labormed. The top 20 producers account for EUR 600 m cumulated sales (sales on the internal market and exports). Local producers have production plants in nine cities, with Bucharest as preferred manufacturing area (eight plants), and followed by Targu Mures (four plants) out of a total of 22 pharmaceutical production plants. Distributors must comply with industry specific regulation regarding storage and transportation facilities adequate for medication. According to the National Drug Agency in 2011, there were about 350 storage units at national level available for distribution of drugs, most of which (95%) were held by only 30 large distributors. Despite financial difficulties faced along the pharmaceutical value chain in the context of the economic crisis, distributors continued to increase their storage capacity, by over 15% between 2008 and 2010.On the local market, wholesalers have a privileged position in terms of cash flow control, passing the burden over in a manner that does not severely impact their margins. Concretely, they are positioned along the value chain between pharmacies that face harsh cash shortages due to large payment delays from CNAS and producers that face both payment delays and the claw-back tax negative impact on their margins.


The pharmaceutical retail market increased rapidly prior to the crisis, but is, since 2009, facing a period of market quasi-stagnation. The positive evolution of retailers was due to transfer of certain National Health Program medicines from hospitals to open circuit pharmaceutical units and to the significant drug prices increases over the years - the average price of a medicine package increased by 130% in the period 2005 - 2011 (total pharmaceutical sales reported to total sold volumes). Regarding the number of pharmacies, 2010 was a very difficult year for in dependent units, with various sources on the market indicating between 600 and 1,000 retail units closed due to financial difficulties. Retail chains on the other hand invested resources for expanding their network, either by acquiring independent units or smaller chains.

 

 

Regulatory framework and impact on the market


Recent updates in pricing and reimbursement methodology


MoH ensures the correct functioning of the pharmaceutical market by partially setting the prices of medicines for human use, authorizing pharmaceutical units and enforcing good distribution practices as well as creating a proper framework for local producers and importers.


The pricing methodology is regulated by MoH's Norms no. 74-75 issued on 30.01.2009 and their consequent consolidations (Order no. 220 / 2010 and Order no. 1236 / 2010). Generic pricing is established and changed freely, however a relative cap price is set at 65% of the replicated patented drug. Pricing regulations and caps for patented drugs are however, placed on each value chain element:


- Producer prices must be set at most as the equal of the minimum price among 12 reference European countries (Czech Republic, Bulgaria, Hungary, Poland, Slovakia, Austria, Belgium, Italy, Lithuania, Spain, Greece and Germany)
- Distribution mark-up: 10% - 14% of the producer price (maximum RON 30/ EUR 7)
- Pharmacy commercial mark-up: 12.0% - 24% of the wholesale price (maximum RON 35/ EUR 8)
- Mark-up for additional import services: maximum 8.5%


Theoretically, prices can vary from one pharmacy to another, but without exceeding the maximum price. The current pricing methodology is rooted in the regulation first introduced in 2009 that redefined the calculation method by considering the prices in the 12 reference countries. Furthermore, MoH decided the adjustment of drug prices in EUR based on the conversion rate EUR – RON used in yearly government budget calculations, and of those in other currencies based on the corresponding exchange rate forecasted by the National Prognosis Commission.

 

Recent updates with respect to claw-back tax


Since its first appearance in 2009, the Romanian legislation concerning the claw-back tax on sales of state subsidized drugs suffered several modifications.


Currently, the claw-back represents an additional level of taxation applied to all producers and importers of drugs, meant to cover budget deficits, if sales of subsidized drug exceed the maximum levels accepted by the state.


In the first version of the law (Emergency Ordinance no. 104 / 30.09.2009, further amended by Order no. 928 / 15.06.2010 and Order no. 351 / 21.04.2011), the claw-back tax imposed the payment of a quarterly contribution as a percentage of total sales between 5% - 11% (concerning all producers of subsidized drugs). Funds of around EUR 23.6 m were expected to be cashed in by MoH by January 2010 and a total of EUR 135.4 m was estimated to add up to the national budget at the end of 2010. However, collections to the state budget in 2010 amounted to only EUR 7.1 m.


The claw-back law was again modified in Q3 2011 (Emergency Ordinance no. 77 / 21.09.2011 consolidated by Emergency Ordinance no. 110 / 07.12.2011). According to it, producers and importers had to pay a quarterly tax for sales of subsidized drugs that surpassed the corresponding budgets previously set by the MoH.


The amount to be paid by each company is calculated using a formula that allocates the increase above budget among all producers / importer. First, the total tax per market is calculated as the difference between the reference budget for subsidized drugs set by MoH and the total sales of subsidized medicine. Then, the actual claw-back tax is calculated as a weighted ratio in which 2/3 represent the individual market share and 1/3 represents a ratio of the differences between the individual and total reference budget and the individual sales and total market sales, respectively.


Payments have already been made for Q1 2012, and the Romanian Association of Generic Drug Producers (APMGR) announced that the value of the tax represents ~ 20% - 25% of the member companies' sales, as the Q1 2012 tax level increased by 50% compared to Q4 2011. The organization urged the Romanian government in May 2012 to suspend the claw-back tax and develop an improved solution.


It is important to notice that in its previous form (Q4 2009 – Q3 2011), the tax did not derive major implications for market players as the legislation suffered from certain ambiguities (i.e. lack of clear procedures for tax collection) that hindered its applicability. Due to the legislative vagueness, the Government has not collected the budgeted taxes for that period.


This issue was addressed by the latest modification of the claw-back tax - (Emergency Ordinance no. 17 / 23.08.2012) – which contains a retroactive clause requiring all companies still liable to fulfill their late 2009-2011 fiscal obligations. MoF waives all penalties incurred from the delay in payment for all companies that manage to pay within 30 days after the clause becomes effective (August 27, 2012).


This latest modification also contains a measure that alleviates some of the pressure on producers and importers by increasing the "recommended" subsidized limit from EUR 317 m to EUR 337 m (no VAT) and by subtracting the VAT from the sales value considered in the formula. However, it does not change anything in the algorithm of the tax, which means that producers of generic medicine will still pay a high relative tax, considering the low margins they operate with. This reluctance to adapt the formula to different segments of the industry could lead to the majority of medicine currently marketed bellow RON 10 to be removed from the Romanian market.

 


As a response to criticism on behalf of drug producers, the Government presents the claw-back tax as a measure to fulfill the commitments towards the IMF. Romania has the possibility of using EUR 475 m IMF loan funds representing the 5th tranche of a EUR 3.5 bn preventive stand-by agreement due to the fact that it has met all evaluation criteria. However, there is no specific instruction on behalf of the IMF agreements as to the method used to achieve lowering arrears in the Health Sector (one of the evaluation criteria). Thus, IMF indicates that the Government is responsible for the formulation and implementation of a form of claw-back tax that allows proper tackling of the existent arrears.


All in all, the evolution of the claw-back law – though not certain at the moment – will certainly impact the development of the local pharmaceutical industry, influencing investment decision, continuation or discontinuation of certain drugs on the market and overall activity for certain producers.

 

Main aspects regarding Pharmacy Law


After more than two years of debate on the Pharmacy Law Project, the Romanian Parliament adopted the Pharmacy Law no. 266/2008 in November 2008 that became effective as of July 2009. Previously, the setting-up and operation of pharmacies was regulated only through MoH's legislative acts. In December 2010, some articles of the Pharmacy Law were modified via an Emergency Ordinance, most important of which referring to retail market liberalization, postponed from beginning of 2011 to beginning of 2013. Discussions about a new Pharmacy Law lead to no developments yet.


One important aspect of the Pharmacy Law concerns the process of retail expansion, performed according to the demographic restrictions outlined in the Law that is currently in force and that are to be modified beginning of January 2013. According to Art 12, Chapter II of Law no. 266/2008, a pharmacy can be opened for every 3,000 inhabitants in Bucharest, whereas in county residence cities a pharmacy is set to be opened for every 3,500 inhabitants. In all other cities across the country, a pharmacy is allotted for every 4,000 inhabitants. By contrast, there are no restrictions for opening up pharmacies in rural areas. The exception from these demographic criteria (an additional pharmacy could be opened in train/bus stations and airports, as well as commercial centers with a selling area of more than 3,000 sq m) was abrogated in December 2010, due to the high number of pharmacies already functioning in these locations.


According to MoH, the European Union pharmacy distribution average is about 3,400 inhabitants per pharmacy, whereas in Romania the average is about 3,100 inhabitants per pharmacy. The number of pharmacies has more than doubled mainly through "openings by exception" (e.g. in commercial centers), as in 2000 3,140 registered pharmacies existed as compared to around 7,000 at the end of 2011, out of which ~60-65% are in the urban environment.


The liberalization process due to start in 2013 is expected to favor consolidation on the retail market, to facilitate more intense competition, especially in urban areas, lead to margins decrease and higher degree of vertical integration of large players.


When liberalization takes place, the number of newly licensed pharmacists might become an important factor to hinder the expansion of the pharmacies, as it is currently below the level of other European countries. In 2010 there were approximately 13,624 pharmacists (one pharmacist for every 1,573 inhabitants), whereas in Germany the ratio was one pharmacist for every 1,388 inhabitants.


A second important legislative aspect is the elimination of pharmacy caps starting with October 2008 (GO 1225/2008). This measure changed the contracts with CNAS so that there were no longer fixed amounts that CNAS could pay to pharmacies. This measure led to significant increases especially in the revenues of the large pharmaceutical chains – as they are usually more likely to sustain the significant delays in payments from CNAS, as opposed to small chains or individual pharmacies that usually face cash shortages.

 

Delays in payments from CNAS for reimbursed drugs


There are two types of normative acts that regulate the compensation for reimbursed drugs. Firstly, for the drugs pertaining to the CNAS compensation lists, the methodology is established by the Framework Contract of the Decision no. 1389 / 2010, whilst for the National Health Program, Decision no. 1388 / 2010 provides the compulsory guidelines. According to the current Framework Contract of 22/06/2012, state payment terms to pharmacies reach 210 days (30 days for validation of invoices and up to 180 days for actual payment), whereas payments for drugs pertaining to the National Health Program total 120 days (30 days for validation of invoices and up to 90 days for actual payment).


The previous payment deadlines were extended in October 2009 from 60 days to 210 days for reimbursed drugs covered exclusively by CNAS and from 30 days to 120 days for drugs covered by the National Health Programs. This was a direct consequence of the fact that the government’s healthcare budget became exhausted and emergency measures were necessary to prevent a blockage in the system.


The trend is to align the payment deadlines for both types of drugs invoices issued by pharmacies for all drugs compensated through CNAS (included or not included in the National Health Programs). An increase of payment terms to 210 days for the National Health Program medicines was expected in 2011, however no such measure was enforced.

 


In practice, drug manufacturers have to wait up to 300 days for the payment of prescription drugs invoices, as wholesalers fail to make prompt payments, as a consequence of to the payment delays on behalf of pharmacies. Whilst the larger pharmaceutical companies supplying the market are able to cope with the increasing payment delays, the local and smaller players are more likely to struggle. The status quo of payment delays highlights the important role of producers within the pharmaceutical values chain in Romania, as they ultimately finance the entire market.


FUTURE OUTLOOK FOR THE ROMANIAN PHARMACEUTICAL MARKET


The market was forecasted for the period 2012-2015, based on historical evolution, trends in private insurance sector and a set of key drivers, grouped into several categories: macroeconomics (GDP, inflation rate, exchange rate, etc.), demographics (population, life expectancy, etc.), consumption patterns (public healthcare expenditure, total private consumption, pharmaceutical private consumption) and legislation (the impact of the claw-back tax, the announced liberalization of retail pharmaceutical market).


The overall market dynamics is expected to remain positive, with rather tempered growth rates as compared to recent years, displaying advances of 4.2% in EUR and 9.9% in RON in 2012, followed by a compounded annual growth rate of 7.7% in EUR for 2013-2015. The growth pattern is highly impacted by the slow economic recovery, the critical currency depreciation but also by the low predictability of the legislation framework, with an emphasis on the recently modified claw-back tax. Other influencing factors are overall weak public financing and longer payment terms resulting in a deterioration of liquidity positions for all players present across the value chain. In terms of volumes, the market is expected to register a very slight increase (0.6% CAGR 2011-2015), with slow consumption convergence towards CEE/ EU levels expected in the following years.


Rx drugs are expected to increase in value (8.5% increase in EUR 2011 – 2015 CAGR) and record a slight increase in volume (0.7% CAGR 2011 - 2015), a trend fueled by the decrease in self medication, by the development of the private health insurance sector and by the increase of medicine consumption per capita to close to gap to EU. Most of the Rx growth is likely to stem from generics growth, as co-payment will favor these cheaper drugs as opposed to originals. Factors like increase in prevention medicine consumption and again EU gap close regarding drug consumption will most likely generate a similar growth in OTC drugs, with a 8.4% advance in value (CAGR 2011 - 2015) and a yearly increase in volumes sold of 0.3% for the studied period 2011 - 2015. The hospital sales will continue to lose share in total sales and will increase at a 2.9% pace, below the market one of 7.7% (CAGR 2011-2015).


Although generally stable, currently the Romanian pharmaceutical market might prove to be quite fragile if confronted with major legislative framework modifications such as retail market liberalization. However, by far the most complex challenge stems from the controversial claw-back tax that directly affects local producers and importers – who actually finance the de facto pharmaceutical market in Romania, by dealing with average payment delays of more than 250 days on behalf of CNAS. Should legislation framework acquire more transparency, predictability and socio-economic consistency, the pharmaceutical market perspectives are actually promising, as current consumption still allows for significant growth.