Latvia Pharmaceuticals and Healthcare Report Q4 2012

BMI View: Despite a downward revision to our overall assessment of the size of Latvia's pharmaceutical market, we remain cautiously optimistic about the development of the market and our historic revisions have not had an overly significant impact on our growth projections over our five- and 10-year forecast periods. We have maintained our growth rate for 2012 of 4.0% in local currency terms, but we warn this is equivalent to a 5.2% contraction in US dollar terms. High out-of-pocket contributions to healthcare remain the key source of spending on medicines. We envisage further tightening of government budgets, in line with the commitment to fiscal austerity and joining the euro.

Headline Expenditure Projections

Pharmaceuticals: LVL206mn (US$405mn) in 2011 to LVL214mn (US$384mn) in 2012; +4.0% in local currency terms and -5.2% in US dollar terms. Historic expenditure figures revised, local currency y-o-y growth forecast broadly in line with Q312.

Healthcare: LVL893mn (US$1.76bn) in 2011 to LVL926mn (US$1.66bn) in 2012; +3.7% in local currency terms and -5.4% in US dollar terms. Local currency forecast broadly in line with Q312.

Medical devices: LVL78mn (US$153mn) in 2011 to LVL81mn (US$145mn) in 2012; +3.7% in local currency terms and -5.4% in US dollar terms. Local currency forecast unchanged from Q312.

Risk/Reward Rating: Despite its composite score being some 3.0% lower in relation to the previous quarter, Latvia is again ranked 10th out of the 20 markets surveyed as part of the emerging Europe region in the Q412 Pharmaceutical Risk/Reward Ratings (RRRs). While Latvia offers a favourable risk profile, supported by a business-friendly operating environment, its pharmaceutical market value is expected to shrink in 2012, as measured in US dollars, which negatively impacts its potential commercial rewards.

Key Trends And Developments

We have revised our assessment of the Latvian Pharmaceutical market, including historic and current figures. We now calculate that the size of the market reached LVL205.75mn (US$405mn) in 2011, down from our previous figure of LVL284.01mn (US$559mn). Our revised figure reflects the market's turnover for medicines reaching a consumer (through general pharmacies, medical treatment institutions, hospitals, veterinary health care establishments and other consumers at final prices including VAT), rather than our previous assessment that was based on total medicines turnover in the country at final prices including VAT, which included resales between distributors and therefore did not adequately reflect the dynamics of the market.

The Latvian State Agency of Medicines (Zalu Valsts Agenturas, ZVA) remains our primary source for pharmaceutical consumption data.

In July 2012, domestic pharmaceutical major Grindeks announced a long-term partnership with the Latvian University. Their collaboration covers projects such as the Baltic Innovative Research and Technology Institute Infrastructure (BIRTI) and technology transfer. The university is expected to provide infrastructure for pharmaceutical research and development including clinical trials and bioequivalence studies. The collaboration also supports the efforts to promote Latvian pharmaceutical and chemical industries as priority economy sectors.

Another domestic major, Olainfarm, expects LVL40mn (EUR57mn) in unconsolidated turnover and unconsolidated profit of LVL8.3mn. Consolidated turnover is expected to come in at LVL47mn, with consolidated profit at LVL8.6mn, largely in line with analyst expectations.

The company’s preliminary 2011 sales were LVL36.3mn, up by 45% year-on-year (y-o-y). BMI Economic View: We forecast Latvia's real GDP growth in 2012 and 2013 to come in at 3.1% and 3.9% respectively. These upward revisions come on the back of a strong headline growth figure – of 6.9% y-o-y – in Q112. However, these growth figures are still coming from a low base. We also continue to expect economic growth to ease due to investment and consumer spending coming off the boil as persistent uncertainty in the eurozone feeds through to weaker confidence.

BMI Political View: While we view Latvia's commitment to joining the euro in 2014 as wholly credible and increasingly plausible, there remain potential roadblocks to gaining access to the common currency bloc. Besides meeting technical criteria, Economic and Monetary Union (EMU) expansion fatigue in light of the ongoing eurozone sovereign debt crisis and rising public aversion to adopting the euro could mean further delays to Latvia's eurozone accession. While Latvia remains the most likely next member to the bloc, we expect that, without a firm resolution to the ongoing eurozone sovereign debt crisis, expansion of the bloc could remain on hold