Lebanon Pharmaceuticals and Healthcare Report Q3 2012

BMI View: We believe Lebanon's inclusion on the Pharmaceutical Research and Manufacturers of America (PhRMA)’s priority watch list is an overreaction to a small number of relatively minor issues, two of which were partly resolved just before the publication of the Special 301 report submission.

Overall, we maintain a cautiously optimistic outlook towards the country's business environment and expect foreign direct investment to continue to flow into Lebanon, although spill-over from the Syrian conflict poses a risk to our current outlook for the country.

Headline Expenditure Projections

Pharmaceuticals: LBP1,807bn (US$1.20bn) in 2011 to LBP1,926bn (US$1.28bn) in 2012; +6.6% in local currency terms and +6.5% in US dollar terms. Forecast slightly lower from Q212 due to macroeconomic factors.

Healthcare: LBP4,423bn (US$2.94bn) in 2011 to LBP4,741bn (US$3.14bn) in 2012; +7.2% in local currency terms and +7.1% in US dollar terms. Forecast significantly lower from Q212 due to macroeconomic factors and the use of new historical data.

Medical Devices: LBP408.07bn (US$271mn) in 2011 to LBP451.44bn (US$299mn) in 2012; +10.6% in local currency terms and +10.5% in US dollar terms. Forecast slightly lower from Q212 due to macroeconomic factors.

Risk/Reward Rating: Lebanon again ranks eighth out of the 30 markets surveyed in the Middle East and Africa (MEA) region’s Q312 Risk Reward Rating (RRRs) matrix. Its composite score is again unchanged since the previous quarter, with the country receiving 52.3 out of the maximum 100 points. Generally speaking, Lebanon’s rewards and risks profiles are illustrative of the emerging nature of the country’s pharmaceutical market, although both scores are superior to the regional averages.

Key Trends & Developments

In March 2012, the Investment Development Authority of Lebanon (IDAL) announced a large tranche of incentives to local drugmaker Algorithm SAL for its planned new pharmaceutical factory. This is the first time Lebanon has offered incentives and, combined with the regulatory improvements the country has been making in recent years, this seems to BMI to be further evidence that the business environment is rapidly becoming very attractive for investment. The incentives are part of a Package Deal Contract (PDC), an IDAL programme through which investment projects are granted a package of incentives, exemptions and reductions.

As of April 2012, all doctors and pharmacists are to be mandated to use standardised prescription form. The development is expected to improve access to legitimate pharmaceuticals, reduce misuse and encourage better monitoring of consumption. Previously, patients could buy most drugs without a prescription through home delivery services, which has also been a boon for counterfeiters.

BMI Economic View: Latest data from the Banque du Liban reinforces our core view that Lebanon's economy continues to suffer under the weight of regional unrest. To be sure, the current slowdown is broad-based, with consumption, trade and investment indicators all pointing to an economy teetering on the edge of recession. At the moment, we are forecasting the economy to expand 3.0% in real terms in 2012, following growth of an estimated 0.9% in 2011, which is well below the 8.1% average rate of growth posted between 2007 and 2010. With little prospects for a lasting resolution to the Syrian conflict being found in the near term, we expect economic activity to remain depressed over the coming months.

That said, we reiterate that some benefit will derived from the ongoing uptrend in global oil prices, which impacts positively on Lebanon's economy through higher remittances, banking sector deposits and investment inflows from the Gulf.

BMI Political View: The collapse of the regime of Syrian President Bashar Assad raises significant questions surrounding the dynamics of Lebanon's domestic political environment going forward. At the moment, it remains unclear how Hizbullah will react to the loss of its key financial and military backer. Indeed, ongoing unrest in Syria will continue to pose a distinct risk to Lebanon's economic and political stability. Clashes on the border with Israel cannot be ruled out, and violence spilling over from Syria also remains a distinct possibility.