Hospital Sales Decline As Instability Impacts Procurement

BMI View: Hospital sales in Ukraine saw a significant decline as the acute political and economic situation forced cancellations and delays to government procurement. A revision of the budget and changes in the prevailing exchange rate will force further changes to the scope and value of government tenders. However, with tenders set to become more transparent and open, we see new opportunities for companies to submit competitive bids. On the whole, 2014 and 2015 will be challenging years for the industry in Ukraine.

The acute political and economic situation in Ukraine has impacted the delivery of public healthcare within the Ukrainian hospital system. Hospital purchases of medicines in Ukraine are normally quite muted in the first quarter of 2014 relative to retail pharmacy sales as the harsh winter sees a boost in Ukrainians purchasing medicines. In Q114, the proportion of hospital sales of the overall market fell 25% year-on-year to 6.3%. In value terms, sales in Q114 within the Ukrainian hospital system came to UAH595mn (USD50.7mn), a 16.6% y-o-y decline. Volumes of medicines sold tumbled by 26.2% as the Ministry of Health mothballed tenders for procurement of medicines under government programmes as the interim government dealt with the fallout of the Crimea crisis and the International Monetary Fund debt deal.

The purchasing patterns within hospital sales in Q114 saw a shift towards domestic producers; in value terms, 49.7% of medicines sold to the Ukrainian healthcare system were from domestic companies, an increase of almost 6.2% relative to the previous year (43.5%). In volume terms, domestic companies continued to dominate, providing almost 88% of medicines (2013: 84.0%).

Pharmaceutical Market To Face Challenging Medium Term
Pharmaceutical Sales, USDbn

BMI View: Hospital sales in Ukraine saw a significant decline as the acute political and economic situation forced cancellations and delays to government procurement. A revision of the budget and changes in the prevailing exchange rate will force further changes to the scope and value of government tenders. However, with tenders set to become more transparent and open, we see new opportunities for companies to submit competitive bids. On the whole, 2014 and 2015 will be challenging years for the industry in Ukraine.

The acute political and economic situation in Ukraine has impacted the delivery of public healthcare within the Ukrainian hospital system. Hospital purchases of medicines in Ukraine are normally quite muted in the first quarter of 2014 relative to retail pharmacy sales as the harsh winter sees a boost in Ukrainians purchasing medicines. In Q114, the proportion of hospital sales of the overall market fell 25% year-on-year to 6.3%. In value terms, sales in Q114 within the Ukrainian hospital system came to UAH595mn (USD50.7mn), a 16.6% y-o-y decline. Volumes of medicines sold tumbled by 26.2% as the Ministry of Health mothballed tenders for procurement of medicines under government programmes as the interim government dealt with the fallout of the Crimea crisis and the International Monetary Fund debt deal.

The purchasing patterns within hospital sales in Q114 saw a shift towards domestic producers; in value terms, 49.7% of medicines sold to the Ukrainian healthcare system were from domestic companies, an increase of almost 6.2% relative to the previous year (43.5%). In volume terms, domestic companies continued to dominate, providing almost 88% of medicines (2013: 84.0%).

The Ukrainian government's budget for 2014 called for medicine purchases to the value of UAH2.2bn (USD187mn) but this is unlikely to be fulfilled owing to the considerable cuts that the Ukrainian parliament is expected to make to government expenditure. However, purchases are to become more transparent and organised, following the discovery of discrepancies in previous state procurements. Earlier in May, the Deputy Minister Of Health Natalia Lisnevska announced at a parliamentary committee that new tendering procedures had been established after it was found that the Ministry Of Health had engaged in procurement well above the market price in return for 'kickbacks' to corrupt officials.

The deputy health minister also stated that many drug companies or suppliers for government contracts did not want to renew in 2014 owing to the currency fluctuations and introduction of VAT on medicines. Over the coming months, the Ministry of Health will hold open public auctions, and discuss supply with foreign drugmakers. Some drugmakers have stated that if tenders are held fairly and transparently, they would be willing to quote drug prices that are some 30-40% lower, in return for long term contracts. The elimination of corruption in procurement is one of the key objectives of the current government, and beginning in 2015, the Ministry of Health will restructure government procurement programmes towards long-term contracts.

2014 Outlook Remains Subdued

Our forecast remains unchanged in light of these new figures, as we had expected such levels of decline. On the whole, our outlook for 2014 is bleak and our 2015 forecast is subject to tangible downside risks. We believe that the Ukrainian pharmaceutical market will endure large swings in demand, disruption to supply and taxation changes over the medium term, as the Ukrainian government seeks to address the imbalances within the economy and pay off the country's obligations to creditors. The primary drivers of pharmaceutical consumption, namely consumers, will be pressed over the next two years, facing squeezed incomes (in real terms).

Following the election of President Poroshenko, the emergency standby funding conditional agreement went into effect, and as part of the agreement, the Ukrainian government agreed to end gas price subsidies; as a result, consumers will face 40% price hikes this year alone. With EU countries arranging to re-route gas supply into Ukraine via Hungary and Poland, there may be potential relief, but consumers will be hard-pressed by the burden of higher energy costs. Because of this, we hold a negative view on the domestic pharmaceutical market in 2014 and 2015.

Pharmaceutical Market To Face Challenging Medium Term
Pharmaceutical Sales, USDbn

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Geography: Ukraine
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