Kazakhstan Pharmaceuticals and Healthcare Report Q2 2012

BMI View: Kazakhstan remains the most accessible and competitive pharmaceutical market in Central Asia and the growing expectation it will gain World Trade Organisation (WTO) membership by the end of 2012 is driving continued regulatory reform. The acquisition of market leader Chimpharm and the reported imminent sale of a large stake in top-three player Global Pharm to a Turkish buyer reflect the strength of the market. Clearly, the provision of loans by the Kazakhstan Development Bank and Innovation Fund for expansion under the country’s Accelerated Industrial Development Plan, as well as forward contracts signed with state wholesaler guaranteeing a market for their products, has greatly enhanced the value of local companies. There are, however, major questions with regard to how Russia and Kazakhstan will reconcile their Customs Union with Belarus with WTO membership and – following snap parliamentary polls – the longevity of the current regime and broader social stability.

Headline Expenditure Projections

Pharmaceuticals: KZT191.4bn (US$1.30bn) in 2011 to KZT215.0bn (US$1.56bn) in 2012; up by 12.4% in local currency terms and 19.9% in US dollar terms. Forecast up from Q112 due to updated macroeconomic data.

Healthcare: KZT1,042.5bn (US$7.11bn) in 2011 to KZT1,183.4bn (US$8.61bn) in 2012; up 13.5% in 2011 in local currency terms and 21.1% in US dollar terms. Forecast up from Q112 due to improved 2011 data. .

Medical devices: KZT86.51bn (US$590mn) in 2011 to KZT95.28bn (US$693mn) in 2012; up 10.1% in local currency terms and 17.5% in US dollar terms. Forecast down slightly from Q112 due to adjusted 2011 data.

Risk Reward Rating: Kazakhstan again ranks 17th in BMI’s Q212 Pharmaceutical and Healthcare Risk Reward Ratings (BERs) for the region. The country faces some stark limitations to its growth; primarily a relatively small population and hugely challenging geography. The country’s political stability remains a key issue as there is no clear successor or succession process yet in place for the current president.

Corruption and underlying social tensions also threaten long-term stability. On the bright side, the prospect of WTO accession is driving regulatory liberalisation and improved intellectual property (IP) regulation.

Key Trends And Developments

The Caspian Group, a shareholder in leading local manufacturer Global Pharm, reported that it is ‘merging’ with Turkish pharmaceutical company Abdi Ibrahim. This follows reports in late 2011 that the company was up for sale. If true, the deal would follow fast on the heels of the sale of Chimpharm to Polpharma. The sale of a significant stake would incorporate the Turkish firm into Global Pharm’s shareholder base, which includes a long-standing South Korean investor. The recent deals are something of a vindication of the government’s strategy for industry development.

A less cheery assessment of state-backed wholesale company, SK Farmatsiya, has come from the Accounts Committee for Control over Execution of the Public Budget, the state spending watchdog. A press release published in January 2012 summarised the committee’s concerns that the wholesaler had yet to develop the required logistical capacity to fulfil its broader agenda of creating efficient infrastructure for pharmaceuticals for the state hospital sector. The report noted that SK Farmatsiya had ‘only’ succeeded in purchasing the necessary volume of medicines for the state’s medicines scheme. The development of broader infrastructure represents a huge challenge for SK Farmatsiya.

BMI Economic View: While we estimate that the Kazakh economy grew by a robust 6.9% in 2011, our deteriorating external demand outlook has prompted us to modestly revise down our 2012 real GDP growth forecast to 5.8%, from 6.0% previously. Despite our anticipation of weaker export revenues and concurrently slower domestic economic activity, we believe the government's fiscal ammunition and commitment to growth should help avoid a more pronounced slowdown.

BMI Political View: Kazakhstan's parliamentary election on January 15 2012 saw the country move from single-party to multi-party parliamentary representation, and represents a limited transition towards higher political pluralism. The results of the election will boost President Nursultan Nazarbayev's desire to improve the country's democratic credentials. However, we note that there is still much to do in this respect, and risks to the country's long-term political stability remain.