BMI View: Despite being driven by private consumption, the Ukrainian pharmaceuticals market is expected to see a greater proportion of spending coming from the state in the medium term. The rollout of further reimbursement programmes for vulnerable patient groups will set the stage for universal health insurance. We expect pharmaceutical expenditure to continue its growth trajectory in the medium term as the relationship between private-public expenditure continues to shift.
Partial Reimbursement For Hypertension Medicines
The Ministry of Health has released a draft resolution for public review; the draft revolves around a pilot project that regulates pricing for hypertension medicine. The document includes a list of medicines covered by the reimbursement programme for the treatment of hypertension, which are divided into three sub-categories. Specific medicines, based on their international non-proprietary names, will either be fully reimbursed by the state, partially reimbursed or paid through out-of-pocket expenditure. Drugs that are not reimbursed currently may be added to the reimbursement list if their wholesale prices fall below or match the price of medicines on the full and partial reimbursement list. The draft resolution leaves the responsibility of establishing reference pricing, wholesale and pharmacy margins with the Ministry of Health.
While we view margin ceilings as regressive measures, we welcome the introduction of reimbursement as a means of improving patient access to medicines. The rollout of pilot projects such as these represents a step towards universal reimbursement of medicines for all Ukrainians. Although national health insurance is not expected to be rolled out until 2015-16, pilot projects like these are being launched for specific patient groups including cancers, diabetes and rare diseases.
Drugmakers Voice Concern Over Possible VAT On Medicines
The Association of International Pharmaceutical Manufacturers in Ukraine (AIPM) has written to the Cabinet of Ukraine in order to voice concerns over the planned introduction of VAT on medicines. AIPM argues that socially important goods are normally exempted from VAT throughout Europe and medicines should be characterised as such. Although most EU member states apply VAT to both prescription and OTC medicines, they are afforded a lower tax rate than standard VAT. Given that the majority of pharmaceutical expenditure is through out-of-pocket payments, the industry association believes that the tax will fall on consumers. There are concerns that VAT would expedite black market activity, counterfeiting and smuggling as consumers and sellers attempt to avoid paying the additional taxes.
Although we believe the imposition of VAT on medicines will moderate growth when it enters into effect, the level of taxation will disproportionately affect foreign drugmakers as they will be double-taxed at both the point of sale and on their income statements.
Pharmaceutical Market Outlook
We forecast the Ukrainian pharmaceutical market will post growth of 11.6% in local currency terms and -2.0% in US dollar terms to a value of UAH35.53bn (US$3.86bn). Over the five-year period from 2013 to 2017, we forecast the market will post compound annual growth rates of 11.2% in local currency terms and 6.8% in US dollar terms, reaching a value of UAH54.2bn (US$5.48bn).
|Growth Trajectory To Continue|
However, there are several risks to our forecasts for 2013 and in the medium term. BMI's Country Risk team believes that the Ukrainian hryvnia will devalue moderately over the course of 2013. This would raise debt servicing costs and add further pressure on Ukrainian consumers, given that almost 38% of consumer loans are foreign-exchange denominated. The cost of petrol, electricity and gas would follow suit, eating away at discretionary spending. Given that the pharmaceutical market in Ukraine is primarily consumer driven, spending patterns may revert back towards a preference for cheaper drugs as household spending declines.
In the medium term, deterioration in the balance of payment dynamics, a widening of the current account deficit and a desire from the state to reduce import reliance and bolster domestic enterprises could result in tariffs on pharmaceutical imports, revenue taxes or compulsory licensing to stem the burgeoning pharmaceutical trade gap. Although Ukrainian drugmakers produce the majority of medicines consumed in volume terms, imported medicines contribute far more proportionally to the value of the overall market, primarily because imported medicines are high-value, innovative therapeutics and/or branded generics that are made under GMP considerations.