Latvia Pharmaceuticals and Healthcare Report Q3 2012

BMI View: We have revised downwards our 2012 projections for the growth of the Latvian pharmaceutical market on account of weaker growth towards the end of 2011, combined with ongoing concerns over the external economic environment in Europe, which will not be supportive of Latvian exports and therefore economic growth. We forecast 4.3% year-on-year (y-o-y) local currency growth in 2012, with the market expected to be valued at LVL296mn (US$540mn) by the end of the year. Risks are mostly to the downside, depending on the wider economic performance – given the high proportion of out-of-pocket drug expenditure – and also the possibility that the Baltic-wide single procurement scheme for medicines and medical devices will be rolled out before the end of the year.

Headline Expenditure Projections

?? Pharmaceuticals: LVL284mn (US$559mn) in 2011 to LVL296mn (US$540mn) in 2012; +4.3% in local currency terms and -3.4% in US dollar terms. Local currency forecast broadly in line with Q212.

?? Healthcare: LVL891mn (US$1.75bn) in 2011 to LVL921mn (US$1.68bn) in 2012; +3.4% in local currency terms and -4.2% in US dollar terms. Local currency forecast slightly lower from Q212, on account of changes to historical data.

?? Medical devices: LVL78mn (US$153mn) in 2011 to LVL81mn (US$147mn) in 2012; +3.7% in local currency terms and -3.9% in US dollar terms. Local currency forecast broadly in line with Q212. Risk/Reward Rating: Despite its composite score being unchanged from Q212, Latvia has risen to 10th in the emerging Europe region in the Q312 Pharmaceutical Risk/Reward Ratings (RRRs). Its rewards profile is considered significantly less attractive than its risks, on account of small population size and cost-containment measures. However, Latvia benefits from a strong risk profile and a business-friendly operating environment

Key Trends And Developments

?? In February 2012, Estonia, Latvia and Lithuania moved closer to finalising the agreement to merge their state drug purchase systems for pharmaceuticals and medical equipment to reduce costs and negotiate better deals with manufacturers. Estonia and Lithuania are administratively ready to execute the plan and they are waiting for the Latvian parliament to approve the changes to its legislation on public procurement. A working group, established in September 2010, has prepared documents for the single procurement system.

?? In February 2012, a leading local drugmaker Grindeks said it will create 20 new products, including new combinations of Mildronate (meldonium) and generics. The company will launch the new products on a regular basis, expanding its product portfolio by a minimum of four new medications a year. The introduction of new final dosage forms and active pharmaceutical ingredients (APIs) will enable the company to enhance its future competitiveness and it aims to raise its total turnover to LVL70mn (US$132.99mn).

?? In December 2011, Latvian pharmaceutical company Olainfarm reached a cooperation agreement with a large European drugs manufacturer. The agreement makes Olainfam a distributing and marketing partner of the unnamed larger company and it will distribute 23 products in Latvia and Belarus. The company has also said its management board has increased the estimates for sales and net profit in 2011. Olainfarm estimated LVL35mn (US$66.9mn) in sales in 2011, while its outlook for net profit was revised to LVL6.3mn (US$12.0mn). BMI Economic View: Latvia’s economic growth will slow in 2012 to 2.1% in real GDP terms from 5.5% in 2011. Weak external demand and a high degree of uncertainty regarding the eurozone sovereign debt crisis will hamper export growth this year. Uncertainty and rising unemployment will also hit household consumption at a time when the government remains firmly committed to fiscal austerity.

BMI Political View: The coming decade will be marked by the scars of the global financial crisis of 2008/09. Latvian governments will struggle to return the economy to pre-crisis growth, which has translated into heightened ethnic tensions. Our expectation for tensions in the Baltic region is to remain high against the backdrop of an increasingly confrontational Russian state and we expect this theme to dominate Latvia’s long-term political outlook, as it did in the past. We also caution that there are a number of risks to the country’s longer-term stability.