Pharmaceuticals & Healthcare Outlook For 2018: Central & Eastern Europe

BMI View: Drugmakers in Central and Eastern Europe will continue to benefit from the region's high pharmaceutical market growth potential although widespread public healthcare funding issues may restrict revenue growth. In 2018, a number of governments will seek to address these issues through the transformation of healthcare systems while pharmaceutical regulatory harmonisation will provide additional means to improve cost efficiency. Drugmakers must remain conscious of these developments in order to circumnavigate administrative hurdles to maximise revenue generation.

medicine

Central and Eastern Europe (CEE) will remain a key emerging region for the expansion of multinational pharmaceutical firms' revenue pools. In 2017, the region will grow by 11.1% year-on-year, from USD67.95bn to USD75.50bn. Over our five-year forecast period (2017-2021), the CEE pharmaceutical market will post an 8.7% compound annual growth rate (CAGR) in US dollar terms to USD102.92bn, outperforming all other regions globally. Despite this robust growth outlook, ongoing trends, such as protectionist measures in Eastern Europe and greater cost-containment in Central Europe, will continue to shape the outlook of the region as a whole, reflective of the growing financial pressures on healthcare systems. Here we highlight two key themes for 2018 that will define the evolving pharmaceutical market landscape of the region, providing a combination of challenges and opportunities for drugmakers.

Shifts In Healthcare Financing

Outperforming Region
Regional Pharmaceutical Sales Growth (2016-2021 CAGR, %, USD)
Source: BMI

Pharmaceuticals & Healthcare Outlook For 2018: Central & Eastern Europe

BMI View: Drugmakers in Central and Eastern Europe will continue to benefit from the region's high pharmaceutical market growth potential although widespread public healthcare funding issues may restrict revenue growth. In 2018, a number of governments will seek to address these issues through the transformation of healthcare systems while pharmaceutical regulatory harmonisation will provide additional means to improve cost efficiency. Drugmakers must remain conscious of these developments in order to circumnavigate administrative hurdles to maximise revenue generation.

medicine

Central and Eastern Europe (CEE) will remain a key emerging region for the expansion of multinational pharmaceutical firms' revenue pools. In 2017, the region will grow by 11.1% year-on-year, from USD67.95bn to USD75.50bn. Over our five-year forecast period (2017-2021), the CEE pharmaceutical market will post an 8.7% compound annual growth rate (CAGR) in US dollar terms to USD102.92bn, outperforming all other regions globally. Despite this robust growth outlook, ongoing trends, such as protectionist measures in Eastern Europe and greater cost-containment in Central Europe, will continue to shape the outlook of the region as a whole, reflective of the growing financial pressures on healthcare systems. Here we highlight two key themes for 2018 that will define the evolving pharmaceutical market landscape of the region, providing a combination of challenges and opportunities for drugmakers.

Outperforming Region
Regional Pharmaceutical Sales Growth (2016-2021 CAGR, %, USD)
Source: BMI

Shifts In Healthcare Financing

With growing and ageing populations across the region, healthcare funding is coming under increasing strain, resulting in the implementation of policies to increase the efficiency of expenditures while also improving the quality of, and access to, care. In the more developed Central European markets, cost-containment measures have been widely employed, with the pharmaceutical sector targeted as a politically palatable area for efficiency gains. In the emerging Eastern European markets, focus will remain on striving for universal access to healthcare; this will create considerable challenges for highly inefficient healthcare systems, many of which remain based on the former Soviet Semashko system with minimal healthcare infrastructure outside of major cities.

In 2018, we anticipate that a number of countries will seek to redress these funding issues by shifting their healthcare financing model. This will predominantly occur in the Commonwealth of Independent States (CIS) region, where the adoption of mandatory health insurance systems is growing in popularity. This system, widely viewed as the cheapest and simplest form of healthcare system to run, should enable greater equality in healthcare provision by providing a basic level of services covered by the state. Azerbaijan implemented a pilot mandatory health insurance program in October 2017 in two regions which is set to be expanded to additional regions in mid-2018. This pilot program is intended to assist in the development of the Compulsory Medical Insurance Act which will ensure coverage for the entire country and is hoped to be implemented in 2019. Kazakhstan also intends to roll out its own mandatory health insurance scheme on January 1 2018. Moreover, in October 2017 the Ukrainian Parliament passed a bill to reshape the current healthcare system to an insurance-based model operated through a state-run National Healthcare System (NHS). This bill is due to enter into force at the start of 2018, whereby the state will guarantee primary care and during 2018-2019 the program is planned to be expanded through pilot programs for secondary and tertiary care.

Given the more developed nature of healthcare systems in Central Europe, the majority of markets will not see widespread reform but an increase in cost-containment measures to improve spending efficiency. However the ruling Law and Justice (PiS) Party in Poland plans to implement a radical overhaul of the currently highly inefficient insurance-based system to a tax-based system in 2018. Moreover, a new healthcare financing bill is under consultation by Latvia's parliament and is set to be passed in 2018 before the changes' implementation at the start of 2019.

These reforms in general can be seen as positive in the long term. However, in the short term, improving access to services to a larger proportion of the population whilst also improving the efficiency of spending to release more funds for the purchase of medicines will be challenging. Changes to healthcare administration are likely to create uncertainty in medicine tenders, for example. Moreover, we note that the implementation of wide-ranging healthcare reforms is rarely a smooth process and anticipate a significant amount of political opposition to changes, as well as delays to program implementation.

Regulatory Harmonisation

In additional to individual countries employing cost-containment measures within the pharmaceutical sector, such as through greater generic substitution rhetoric, in 2018 we envisage greater collaboration between neighbouring markets with respect to pharmaceutical legislation. Following on from the signing of the Valetta Declaration in mid-2017, which encourages a number of countries in Central and Southern Europe to explore strategies to cooperate in medicine pricing negotiations, we expect an acceleration of markets entering into cooperation agreements. In addition, we expect greater dialogue between countries with increased exchange of information and the sharing of expertise on medicine pricing policies and health technology assessment, among other topics. Given increasing cooperation between similar European markets we anticipate a shift towards greater regulatory harmonisation, which will aid joint medicine procurement.

We note that such regulatory harmonisation and cross-border cooperation will pose both upside and downside risks to drugmakers. On the one hand, drugmakers will benefit from reduced regulatory hurdles, enabling easier access to markets. However, there will be greater scrutiny of medicine prices and more aggressive price negotiation tactics, posing downward pressure on drugmaker revenues.

Furthermore, we anticipate that there will be greater regulatory harmonisation in the CIS region in 2018 as the Eurasian Economic Union (EAEU) single medicines market gains traction. While this single market was officially launched in mid-2017, in reality there has been little evidence of any significant changes to the operating environment. Countries still require amendments to their pharmaceutical legislation to enable tariff-free trade of medicines between the five countries; however, regulatory changes to legislation are in development which will result in closer alignment of pharmaceutical policies.

We note that pharmaceutical policy within the EAEU markets will remain highly protectionist, favouring drugs manufactured within the region, and the regulatory challenges facing innovative drugmakers will remain. Drugmakers with considerable manufacturing capacity in the region - most likely Russia - will benefit from increased regional export opportunities, although those without production capacity may suffer from reduced market access and may need to consider localised production to benefit from the considerable growth opportunities in the region.

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