BMI View : Changes to price structures in the pharmaceutical supply chain threaten to bankrupt domestic wholesalers and pharmacies, and significantly impact the revenues of Croatian drugmakers. At the same time, spending on innovative drugs is set to increase as savings from the new measure are directly passed into this sub-sector of the market. These measures will potentially exacerbate liquidity and supply chain issues within the Croatian healthcare system.
In January 2014, the Croatian government published amendments to the mandated profit margins that wholesalers could realise from the sales of pharmaceuticals within its official gazette. The amendments introduced differentiated margins based on the ex-manufacturer price. The new wholesaler margins are outlined as below:
|Ex-Manufacturer Drug Price (HRK)||Wholesaler Margin (%)|
|Source: Croatian Chamber Of Pharmacists|
Effectively, these amount to a drug price reduction on the consumer end, lightening the impact of new co-payment fees and effectively pushing pharmacies and hospitals to stock up on much cheaper generics instead of branded equivalents. The old provisions provided wholesalers a margin ceiling of 8.5% regardless of the ex-manufacturer price. Now, the most expensive drugs are limited to a 1% margin. Considering that these expensive drugs make up almost 85% of the trade between wholesalers and hospitals, hospitals are effectively being handed a large discount on their purchases, while wholesalers face the prospect of subsisting on meagre returns.
The new provisions effectively reduce the revenues of wholesalers, and as a result the Croatian Chamber of Pharmacists has entered the debate and indicated that these new profit margins are insufficient to cover operating costs for wholesalers and that many pharmacists now fear that their supply chains will be disrupted as business between retailers and wholesalers may not be enough to provide solvency for the wholesale side. There may be some respite over the near-term, with the Croatian Chamber of Commerce stating it had directly spoken to the Ministry of Health on the 1% margin issue; the Chamber of Commerce was confident that there would be considerable amendments to the margins set within the year.
Given that the Croatian healthcare system still has issues of liquidity and timely payments (hospitals have been granted 600 days to make outstanding payments) and there are still unresolved debts owed by hospitals to suppliers, this could potentially exacerbate supply chain concerns within the entire healthcare system, especially as wholesalers have been forced to raise loans against these outstanding payments to ensure business continuity. With margins decreasing, interest and debt will become more difficult to service. Pharmacies are also expected to face pressure from these changes, with many expected to go out of business.
These new changes to pricing structures, as well as the health minister's goal of saving HRK135mn (US$ mn) through price cuts, will undoubtedly impact generic drug companies but especially local companies, who are already laying off workers as revenues decline. Local company Farmalu has made 40 workers redundant, Belupo has closed its plant in Ludbregu and shut down local production of antibiotics. Companies such as Pliva, which are geared towards export markets in Europe, Russia and the US, have fared much better, although the local industry association believes that heavy-handed regulatory measures will effectively decimate Croatian pharmaceutical companies, as the burden of pharmaceutical price cuts are primarily borne by them. Indeed, the HZZO has directly stated that the savings gained would be used to fund the purchase of expensive medicines, benefitting innovative drugmakers at the cost of generic companies.
Some local pharmaceutical companies have argued that the HZZO has been acting unfairly in cutting prices unilaterally without allowing them the right of reply. Indeed, companies are normally granted 30 days from the publication of the new reference prices to challenge the decision; drugmaker representatives are complaining that appeals against price changes are being met with a company's products being moved off the full reimbursement list and onto the supplementary list. As such, some drugmakers are considering launching administrative proceedings against the HZZO's decisions.
We expect generic drug sales to decline by 3.2% in local currency terms to HRK2.88bn (US$470mn) in 2014, owing to the continual revising of drug prices. Over the medium term, we expect growth to return, albeit from a low base. By 2018, we expect generic drug sales to have risen to HRK3.58bn (US$570mn), posting a 5-year, compound annual growth rate of 3.7% in local currency terms.
|Generic Drugs Sales See Short-Term Downside Risk|
|Generic Drug Sales, US$bn|