Industry Trend Analysis - Risks Rising In Romanian Pharmaceutical Market - JAN 2018

BMI View: Political instability, healthcare financing issues and aggressive pricing policies will pose significant challenges to drugmakers in Romania. While medicine sales growth is forecast to remain robust over the coming years, these growing challenges indicate that the market is becoming less attractive to investment. We note that the growth of the private healthcare sector may attenuate some of these headwinds.

Pharmaceutical firms will be faced by a multitude of challenges in Romania over both the short- and long-term. While we currently forecast the pharmaceutical market to expand at a robust rate in comparison to its fellow EU member states, we note that there are increasing downside risks to this view. Drug pricing, clawback taxes and uncertainty over healthcare system financing are likely to become more prominent issues over the coming months and years, painting an increasingly negative outlook for the market.

In 2016, we calculate that total pharmaceutical sales amounted to RON15.90bn (USD3.92bn). At present, we anticipate the market to growth to RON17.03bn (USD4.22bn) in 2017; an increase of 7.1% in local currency terms. By 2021, the market is expected to reach RON23.18bn (USD6.38bn) with a local currency compound annual growth rate (CAGR) of 7.8% (10.3% in US dollar terms). Over our long-term, 10-year forecast period to 2026, we expect market growth at a CAGR of 8.1% in local currency terms and 9.1% in US dollar terms to RON34.64bn (USD9.32bn). We note that while the market's growth is currently forecast to outgrow its EU peers, the continuation and/or escalation of these risk will pose considerable downside risks to this outlook.

Growing Downside Risks For Outperformer
EU Member States: 2016-2026 Drug Market CAGR
Source: BMI

Healthcare Funding Uncertain

Romania's healthcare system is struggling to provide adequate provision of care at the current level of funding through its national insurance system. In recent years (notably between 2009 and 2015), a number of reforms were proposed, planned and implemented to help address a number of issues. Such reforms include:

  • Launch of a national informatics integrated system of the health insurance system (SIUI) on a national scale in 2010. This aimed to increase the transparency of expenditure and to enable health care managers to make evidence-based decisions.

  • Inclusion of pensioners with an income over RON740 (USD186) per month to the pool of NHIF contributors. Any income over RON740 is liable for the 5.5% insurance contribution (pensioners with a monthly income below RON740 are exempt from contribution).

  • Decentralisation of public hospital administration (Emergency Ordinance 48/2010), National Strategy for Hospital Rationalisation (Government Decision 303/2011), the closing down of 67 hospitals (Government Decision 345/2011) and the approval of the National Plan for Hospital Beds, 2014-2016 (Government Decision 449/2011). These measures were taken to ensure better administration of hospitals and improve the performance of hospitals, as well as transforming underperforming hospitals to health care centres and shift the balance of care to primary, ambulatory and community care, and away from inpatient care.

  • Mechanisms to monitor healthcare expenditure on a monthly basis in 2012 (Common Order 858/1194/2012 of the Ministry of Health and Ministry of Finance). This order included provisions to prevent expenditure exceeding set monthly limits, including penalties and the potential for the dismissal of the manager.

  • Introduction of e-prescriptions for reimbursed drugs in 2012 (Ministry of Health/NHIH Order 674/252), designed to reduce errors in prescribing.

  • Introduction of the National Health Insurance Card (based on Law 95/2006). Since May 2015, n health service (except for minors and in medical emergencies) may be provided without the presentation of the Card. Aimed to increase the transparency and efficiency of health insurance expenditure by monitoring healthcare delivery.

  • Establishment of National Authority for Quality Management in Health Care (Government Decision 629/2015) to extend quality assurance to other providers in the healthcare system.

While these reforms have had a positive impact on healthcare, we note that funding issues remain the core problem preventing provision of care improving. Indeed, the proportion of the population reporting unmet medical need remains high compared to the EU average (9.1% compared to 2.4% in the EU), while life expectancy and mortality lag behind EU averages.

In the 2016 European Health Consumer Index (EHCI) report, Romania placed last out of 35 European countries analysed. The report highlighted the country's antiquated healthcare structure, high and costly ratio of in-patient care over out-patient care, and management problems. The report also highlights that a lack of funding in the healthcare sector has resulted in poor 'health outcomes'. This 'health outcomes' discipline in the report judges a country on their improvement in lowering mortality rates attributed to cardiovascular diseases, reducing infant deaths and improving cancer survival. Romania, with a health expenditure of just 5.4% of GDP in 2016, scored the worst out of all 35 countries for 'health outcomes'.

Exacerbating these issues, corruption remains a destabilising factor given the high prevalence of informal payments and irregularities regarding healthcare procurement ( see ' Corruption Placing Greater Pressure On Healthcare Financing ' , December 21 2016).

Political Instability Increases Risks To Healthcare Sector

There has been substantial political instability in Romania over the past few years posing additional downside risk to improvements in healthcare policy. BMI's Country Risk team notes that, following the government's failed attempt to dilute the country's anti-corruption laws and the ousting of former Prime Minister Sorin Grindeanu in June, has left the ruling coalition - an alliance between the leftist Social Democratic Party (PSD) and the centre-right Alliance for Liberals (ALDE) - weakened and lacking credibility. The team expects this vulnerability to persist in the months ahead, leaving the new cabinet, led by PSD member Mihai Tudose, in a precarious position, unable to obtain the necessary popular approval to implement its economic agenda. While economic growth in Romania will remain robust by EU standards in the years ahead, this will be unsustainable as fiscal and monetary policies tighten in the face of overheating risk. Moreover, uncertainty about the government's agenda will provide an additional headwind to investor confidence.

In light of this view, longer-term expansion of public healthcare expenditure is at risk. Currently accounting for 79% of total healthcare spending, were government health expenditures to face a downturn in growth, this will weigh heavily on an already-repressed healthcare budget and may lead to greater insurance contributions.

Private Healthcare Poses Opportunity

Despite growing challenges facing the dominant public healthcare sector, there are opportunities for growth within the private sector. Given the dissatisfaction with public healthcare provision, the private market has expanded rapidly in recent years. Indeed, a number of major domestic private healthcare firms are investing heavily in the market and experiencing high revenue growth, albeit from a low base. MedLife (9M17 turnover up 27% y-o-y) and Medicover Group (9M17 revenue up 19.3% y-o-y) anticipate continued market growth, while investment in the sector also remains strong. MedLife announced the acquisition of healthcare service provider Polisano in October 2017 while Regina Maria has invested in excess of USD10mn into the expansion and/or modernisation of units over the past 10 years. This growing sector certainly poses an opportunity for multinational drugmakers to increase their revenue, particularly as sales are repressed in the public sector by aggressive clawback taxes ( see 'Pharmaceutical Pricing Policies To Undermine Positive Growth Story', June 1 2017).