BBI Contributing Writer
LONDON – At least 10 CEE (Central and Eastern Europe) states are lining up to join the European Union. An inter-governmental meeting, held in Amsterdam (the Netherlands), considered as a priority the measures necessary to face enlargement of the Union by the accession of countries from the former Soviet Union. Of the 10 CEE candidates for membership, five were selected, in 1997, as being eligible for the first wave of enlargement: Poland, Hungary, Czech Republic, Slovenia and Estonia. Criteria for granting them this status were mainly that they met what were known as the Copenhagen criteria: that is, they had acceptably democratic government structures, and that they met important economic goals. However, these countries are not clones in any sense; each is a nation-state in its own right, with its own culture, heritage, political structure, health care system and pharmaceutical infrastructure.
There is considerable pressure within the CEE countries to achieve membership as soon as possible, not only for the economic benefits that are expected to accrue from being part of such a massive trading community but also for the political security they hope to gain; E pluribus unum is well understood in the parliaments of central and eastern Europe.
The pharmaceutical environment
Pharma market conditions in central and eastern Europe were recently discussed by Dubravko Mak, CEO of the leading Polish company Pliva, speaking at the sixth annual Pharmaceutical Conference organized by The Economist and held in London earlier this year.
The CEE region represents only 4% of the global pharma market but was targeted by some leading pharma companies in the early 1990s because they had high hopes of developing the pharmaceutical potential of the region, with its population of more than 300 million. However, they were deterred by the prospect of a costly and long-term market-building exercise and turned their attention elsewhere. The region is vast and consists of more than 27 separate countries, spreading not only over Europe but also extensively into Asia. As a market it is forbiddingly complex, with different languages and cultures, and a wide spectrum of prosperity as indicated by national GDP figures. The Soviet Union was by far the biggest customer for goods produced in other CEE countries, and its dissolution created a major problem because the level of trade between other CEE countries is modest, so manufacturers had to look elsewhere for new markets.
Mak quoted an IMS estimate to the effect that the world pharmaceutical market in 1998 was worth $302 billion. Pharma trade in the CEE region is worth $7.9 billion – just under a 4% share – and its share is projected to remain around 4% in the immediate future. GDP per capita varies widely, from $1,000 in Macedonia to $11,000 in the Czech Republic. Also, per capita spending on drugs is extremely low in some countries; in the Ukraine, for example, it is just $7. By contrast, in Slovenia, probably the most developed pharma market in the region, the figure is $135.
Mak's company, Pliva, is the largest in the region, with annual revenues of $500 million. Throughout its 80-year history it has devoted considerable resources to R&D, and one of today's blockbuster antibiotics, Zithromax (azithromycin), was discovered by Pliva scientists and licensed to Pfizer. Many other companies in the CEE region focus on reproduction products and on generics, and the major firms have managed to survive well by establishing strong regional sales operations. However cooperation between the companies in the region is practically non-existent, partly because of the great cultural differences from country to country, and Mak suggested that CEE pharma companies will have to learn the importance of cooperation if they are to survive into the future. For many smaller companies relying on their national markets, the future is uncertain; they do not have the resources to build marketing operations to drive expansion, and their R&D budgets also are too meager.
Mixed fortunes for multinationals
The leading multinationals which set up operations in CEE countries such as Hungary found that market conditions were less than favorable. In part this had to do with the fact that they were unable or unwilling to adapt to the local conditions, especially as regards to relations with government officials and departments. They expected to be able to function as they do in the West and found that this was not possible. A particular issue mentioned by Mak was product pricing; in general, Western companies were not prepared to reduce their prices to levels which could be afforded, with the result that many highly valuable pharmaceutical products such as Prozac and Losec did not reach the CEE marketplace.
The scaling-down of multinational activities in the CEE region leaves the door open for medium-sized companies, especially those based in Western Europe, to enter the CEE market, provided they adopt a realistic approach to issues such as pricing. But companies that simply establish a single CEE headquarters (often in Hungary, Poland or the Czech Republic) and set up a "one-stop shopping" operation are bound to fail because they underestimate the region's diversity.
Opportunities and challenges
Mak outlined some of the positive and negative aspects of the regional pharma market. CEE countries are undergoing the same demographic trends as developed countries elsewhere. The aged population is increasing and this creates market opportunities for drugs used to treat illnesses associated with advancing age. Prosperity is increasing in some countries, and a middle class of consumers is beginning to appear, able to afford even moderately expensive medicinal products. The most formidable challenge is the difficulty which governments in the region experience in grappling with the issue of health care provision for the populace. People were accustomed to free medical care, and any government that attempts to limit universal access to health care courts disaster at the next election. Pharmaceuticals are perceived as the most expensive element in the health care budget and the easiest to control by restricting reimbursement.
Mak offered some advice on the cost of success in the CEE pharma market, drawing on the experience of Pliva as a company successfully operating in the region. Outside of its base in Croatia, Pliva has some 2,000 employees in the region, including a sales force of 400. This is a costly operation, but he said any company wishing to compete on even terms throughout this trading area will have to make at least the same level of investment. There are opportunities for pharmaceuticals in the CEE countries, but the diversity of the region means that penetrating the market will continue to be an expensive exercise for the foreseeable future.
The 'Russian crisis'
The economies of all the CEE countries were shaken by the economic crisis that hit the Russian economy (and those of its closest trading partners) in August 1998. Pharmaceutical companies in the CEE states, which had been enjoying something of a boom in 1997 and the first half of 1998, were severely affected by the devaluation of the ruble and the collapse of the Russian banking system. Pharma companies in Hungary, which had contributed 10% of drugs consumed by the Russian market, were hard hit by the crisis. Gedeon Richter, for instance, saw its sales fall by 9%. However (and here's a lesson in the importance of flexibility), Egis, another major player in Hungary, logged a rise of 8.5% in 1999 sales because the effect of the Russian collapse was more than compensated by an increase of 40% in sales to Western Europe and the U.S.
The economic crisis was drawn out because of the initial lack of government help, due to the frailty of the political regime in Russia. By the end of 1998, most importers had decided to weather the crisis and continue to probe the potentially vast Russian market. By mid-1999, analysts at Merrill Lynch could comment on ongoing recovery in the Russian pharma market, which was estimated to be running at 60% of 1998 levels.
The pace heats up
Perhaps as a result of the Russian crisis, the momentum of negotiations between the European Union and the five front-line new candidate members was stepped up, and ministers from these countries met with their counterparts from the 15 existing EU member states in November 1998 to begin negotiations towards accession. The agenda for negotiations covered 37 areas in which agreement was sought. The most important areas for the pharmaceutical industry are industrial policy, intellectual property, science and research, and the free movement of goods. One of the critical overall issues is the implementation of the whole body of EU law, known by the French term "acquis communautaire," by the new member states. An EU ministerial report in December 1998 welcomed progress already made but added that adoption of the acquis varies significantly between countries and sectors; furthermore adoption must be followed by implementation and enforcement.
The thorny issue of intellectual property
Intellectual property is likely to be one of the thornier issues to be addressed when the CEE countries become full members of the EU. Protection of intellectual property is of prime concern to the research-based pharmaceutical industry. Prior to 1990, central and eastern European countries in effect did not recognize international patent law. This meant that domestic companies could copy and produce western products simply by altering the manufacturing process. Most of the pharmaceutical products manufactured in the Iron Curtain countries were either copies of existing drugs manufactured by different processes or generic drugs. The advantage of reproduction drugs was that they could be manufactured soon after the original patented drug had been launched. The only delay was the time required to research an alternative manufacturing process.
From the early 1990s onward, product patent protection was introduced in the CEE countries, but its effects will not become fully operational for more than 10 years from now, due to transitional arrangements. The situation in the five first-line candidates is shown in Table 5.
|Country||Product Patents Introduced||New Laws Fully Effective|
|Source: The BBI Newsletter|
In its 1999 report to the U.S. Trade Representative, the Pharmaceutical and Research Manufacturers of America (Washington) cited four CEE countries – Poland, Hungary, Romania and Slovenia – as offering inadequate intellectual property protection for imported pharmaceuticals.
Future market prospects
The immediate future size and growth of the CEE pharmaceutical markets will depend largely on what happens in Russia because that country still represents the most important trading partner for many of the countries in the region. The accession of CEE members to the EU will represent a very substantial enlargement of the market accessible to companies already trading in the EU. And this is just a first step; soon, some or all of the remaining CEE countries will assimilate into the European Union. But there is at present a gap between spending power in western and central/eastern Europe, and the full development of CEE pharmaceutical markets must wait until that gap is substantially narrowed.
Every year the Wall Street Journal publishes a list of the Top 500 corporations in the CEE region. Its 1999 list included several pharma companies (Table 6).
|Company||Country||Rank among national |
|Source: The BBI Newsletter|
As an example of the scale of pharma operations in these countries, Gedeon Richter, the leading pharma company in Hungary, posted total sales (domestic and export) of $176 million in 1999. This was down 4% from the previous year, reflecting the continuing effect of the Russian crisis. But a quarterly analysis of sales shows that a recovery began as early as the first quarter of 1999 and is continuing. In general, a similar recovery is occurring in pharma markets throughout the region.