Spain Pharmaceuticals and Healthcare Report Q4 2012

BMI View: The sharp drop in public pharmaceutical expenditure in Spain in the first four months of2012 serves as a warning for the continuation of a fall in spending on medicines in the remainder of theyear. BMI notes that this does not bode well for drugmakers selling their products in Spain as the successof the implemented policies may encourage the enforcement of further cost-containment measures, which,together with the ongoing public hospital debt situation, seriously hampers the country's attractiveness asa location in which to sell drugs, despite its favourable demographic characteristics.

Headline Expenditure Projections

Pharmaceuticals: EUR20.15bn (US$28.00bn) in 2011 to EUR18.34bn (US$23.30bn) in 2012;-9.0% in local currency terms and -16.8% in US dollar terms.

Healthcare: EUR104.99bn (US$145.93bn) in 2011 to EUR105.51bn (US$133.99bn) in 2012;+0.5% in local currency terms and -8.2% in US dollar terms.

Medical Devices: EUR4.32bn (US$6.01bn) in 2011 to EUR4.35bn (US$5.52bn) in 2011; +0.7%in local currency terms and -8.0% in US dollar terms.Risk/Reward Ratings: In BMI’s Pharmaceutical Risk/Reward Ratings (RRRs) for Q412, Spain isranked eight among the 10 countries surveyed in Western Europe. While Spain offers investors positivefactors, such as its large drug market, it also has problems, such as the government’s focus on costcontainment, low population growth, cumbersome bureaucracy and provincial differences regarding drugregulations and reimbursement.

Key Trends And Developments

Government expenditure on medicines in Spain fell by 24% annually in July 2012, according tothe health ministry. The Spanish government spent about US$885mn on medicines in July 2012compared with about US$1.2bn in drug expenditure in July 2011. The number of prescriptiondrugs produced in Spain in July 2012 also fell by 14.14% year-on-year (y-o-y), with averagegovernmental spending on prescriptions decreasing by 11.41%. Notably, inflation increased by2.2% and drug prices rose 36% during the period. The drop in public healthcare expenditure wasattributed to severe austerity measures, particularly the mandatory patient co-payment schemeand revision of drug prices. The government withdrew 426 medicines worth about US$705mnfrom its basic co-payment list on July 1 2012.

Doctors, nurses and other healthcare professionals in Spain are protesting against a new law thatdenies free healthcare to illegal immigrants in the country. Some 850 doctors across the countryhave already expressed their opposition to the law by signing forms distributed by the Society ofFamily and Community Medicine and registering themselves as 'conscientious objectors'. Theruling is scheduled to become effective from September 1 2012. The ruling denies freehealthcare access at public hospitals and healthcare centres to immigrants who do not haveSpanish residency cards except when they are under 18 years of age, pregnant or requireemergency care. The healthcare reform is one of the many austerity measures taken by thegovernment to reduce public expenditure and meet budget deficit targets imposed by Brussels.BMI Economic View: On account of our expectation for Spain to receive a eurozone sovereign bailoutwithin the next few quarters as well as the deteriorating economic prospects in the wider eurozone, wehave revised down the country's medium-term growth forecasts. The domestic economy is facing a lostdecade in light of the degree of adjustment taking place within the housing market, the banking sector aswell as on the fiscal front. Short of a major pick-up in economic activity within the wider eurozone,exports will also fail to bring about a meaningful recovery in Spain.

BMI Political View: While Spain's centre-right government cannot be solely blamed for the depth ofSpain's current macroeconomic troubles, they have nonetheless contributed to the rapid deterioration ingovernment borrowing costs and broader credit conditions in recent months by, at times, failing to beproactive in addressing the country's fiscal and banking sector woes. With a eurozone sovereign bailoutfor Spain now looking unavoidable, and a lost decade ahead for the domestic sector, we believe thePeople's Party will find it difficult to arrest the decline in its popularity, leaving re-election in 2015looking like a pipedream.