The Reimbursement Act, which came into force in January 2012, has revolutionized the Polish pharmaceutical market. It has affected everyone involved in the market, including patients, doctors, producers, wholesalers and pharmacies. Its intended and unintended consequences will shape the market for years to come.
Arguably, the law’s main aim was to lower the price limits for reimbursed drugs so that savings could be used for the introduction of innovative drugs into the system. So far, the zł.2 billion saved in 2012 has been used to patch a hole in Poland’s health care budget.
However, it is true that some drugs have now become cheaper at the counter, proving that some prices had been artificially inflated. The Ministry of Health has also introduced several “drug programs” that cover the most expensive therapies, benefiting patients with serious diseases. The government’s expenditure on chemotherapy, for example, is expected to grow by 27 percent this year, according to Monika Stefańczyk, chief pharmaceutical analyst at research firm PMR.
But as with any revolution, the new law has also created many victims, causing bankruptcies and lay-offs. “Many pharmacies, especially those with large shares of reimbursed drugs in their turnover, have felt the pain,” said Tomasz Dzitko, chairman of the pharmaceutical committee at the Business Centre Club, Poland’s largest employer organization. Prices of a number of innovative, reimbursed drugs were cut to levels that made sales hardly profitable, said Ms Stefańczyk. Some drugs were completely removed from the outpatient sector’s reimbursement lists.
It is therefore unsurprising that Poland’s entire pharma market has shrunk. The number of employees fell by more than 9 percent, said Dr Dariusz Nowicki, director of the Polish Chamber of Pharmaceutical Industries and Medical Devices Polfarmed. The net profits for the whole sector dropped by almost half in 2012 – from more than zł.1.5 billion in 2010 to just over zł.820 million. Investment outlays decreased by more than 30 percent in the same year, compared with two years back.
The repercussions continue to be felt. Total wholesale margins are expected to drop further in 2014 from 9.8 percent in 2012 to just 5 percent this year, representing a nominal depletion of margins of over zł.600 million, according to Mr Dzitko.
Life after revolution
By now, however, most companies have adjusted to the new reality. The cost-reduction phase is over, according to Michał Pilkiewicz, country manager at the Polish branch of IMS, a health care information company. Looking ahead, companies will now seek to diversify their product portfolios by entering into new therapeutic areas and new market segments. Some will choose to remove their products from reimbursement lists. Others will seek profit in the inpatient market by entering into high-cost drug programs and chemotherapy. Generally, companies will increase the share of non-reimbursed medicines and over-the-counter (OTC) drugs in their portfolios, Mr Dzitko said.
Poland’s aging population, with better access to cheap generics, is going to be a powerful driver behind the increased consumption of non-reimbursed drugs. That trend has only been accelerated by the reimbursement reform.
Exports and innovation
According to IMS data, import sales volumes rose by a staggering 40 percent in the first half of 2013, compared with the same period last year. “It’s a rapidly growing phenomenon,” says Mr Dzitko. “So-called ‘parallel imports’ now include more than 350 product lines, with total sales of over zł.230 million.”
Paradoxically, exports are also rising, as low prices at home force wholesalers to look abroad for more revenue.
“The drop in the real prices of many drugs in Poland, coupled with the erosion of wholesale margins by nearly five percent over three years, has made wholesalers look for ways to improve their economic performance through exports,” said Mr Dzitko.
This has caused concerns about possible excessive exports. Mr Dzitko however dismissed the specter of drug shortages. “There has been no reliable data so far on the extent of the problem. Similar initiatives in Spain have resulted in temporary bans on exports of only four drugs out of over 15,000 registered items.”
More Catholic than the Pope
Nevertheless, provisions for export controls have been included in the amendment to the Reimbursement Act that will probably go into force in 2014. Such measures might not be welcomed by the European Union.
“The European Commission may want to look very carefully at our future regulations,” said attorney Łukasz Sławatyniec, managing associate and head of the pharmaceutical practice at Deloitte Legal. “If the national authorities reserve the right to block exports to other EU member states, the commissioners might decide it undermines the principle of the free movement of goods.”
Most Polish regulations in the sector reflect the EU’s legal framework, however. There are common rules for clinical trials and advertising, for instance. It’s where the member states are free to determine their own rules that Poland’s requirements are unparalleled – reimbursements being one such area.
“The European Union’s regulations are already strict, but Poland is more Catholic than the Pope,” said Tadeusz Pietrucha, CEO of Bio-Tech Consulting, a firm that specializes in valuation and assessment of biotechnology R&D projects. “This regulatory zeal reduces our competitiveness not only against such powers as the US but also against Asian countries.”
Innovate or die
With a number of world patents for biological and biosimilar drugs about to expire, Polish pharmaceutical firms are standing before a major opportunity. Some 75 percent of companies surveyed by market research firm PMR think they could benefit from the patent expiry trend.
However, in order to manufacture new drugs, they would have to procure the expensive know-how, and invest in new production lines and labs, the costs of which are seen as a significant barrier. “This will be an opportunity mostly for larger companies, which have funds for investment,” the PMR report reads.
Polish pharmaceutical companies are also wary of the competition from Chinese firms, which have been preparing to flood the market with their generic drugs as soon as the patents expire. Excessive bureaucracy in Poland, particularly for clinical trials, is also seen as a major obstacle.
Mr Pietrucha was unequivocal about the restrictiveness of Polish law, which he said stifles the innovative potential of the domestic pharma industry. “Polish companies need to increase investment in R&D, otherwise they’ll face marginalization or even go out of business altogether.” Authorities, on the other hand, including tax officials, should stop treating innovative companies as potential crooks, he added.
Experts agree that with a few noble exceptions, Polish companies rarely invest in truly innovative medicines. “Their R&D activities are mostly limited to generics, said Michael Turczyk, senior manager of research and development and government incentives at Deloitte. “Though they’ve had some visible successes, it has not spurred development of innovative drugs.”
“Poland is not very attractive for manufacturers of innovative drugs,” Ms Stefańczyk confirmed. New, innovative molecules are an extremely rare addition to the reimbursement lists and government grants are just enough to fund the development of cheap generics. “Generally, the help is insignificant and the companies too weak,” she added.
But though they may not exactly be world-class, Poland’s innovative drug manufacturers do have potential for growth. Available technologies enable them to work on upgraded formulations of the existing drugs and – a new thing on the market – biosimilars.
Not to be confused with traditional small-molecule generics that make up 90 percent of the present market, these bioequivalents of original biotech drugs for which patent protection has expired, will play a growing role, Mr Pietrucha said.
Experts spot innovative potential among domestic players. Celon Pharma, Mabion, Adamed, and Polpharma are among the favorites. Polpharma Biologics’ modern R&D center in Gdańsk Science and Technology Park are good examples. Another local innovative firm, Adamed, has allocated zł.200 million to research and development activities over the past five years.
But the country’s generics industry can face tough competition from the Far East, warned Ms Stefańczyk. Some Polish drug companies may even relocate manufacturing there. “A different question is whether this can only be seen as an unfavorable development in the globalized world,” she added.
Michał Pilkiewicz of IMS Poland believes the price advantage will keep pharma production at home. Its cost-competitiveness, coupled with investments in new modern facilities and qualified personnel, have made Poland one of the leading exporters of innovative medicines to the Nordic countries, Benelux and Germany. Unintentionally, the new reimbursement law may only deepen this trend.
The OTC factor
According to IMS, a 7.1 percent slump in the 2012 volume of sales of OTC drugs was followed by a 6.9 percent increase in the first half of 2013, compared with the same period last year, mainly due to the flu season.
“The surge in OTC, dietary supplements and ‘lifestyle’ drugs is taking place precisely because they are not subject to the regulator’s restrictions,” said Mr Pilkiewicz. “Price, margin and discount management has remained firmly in the companies’ hands.”
Up for grabs
This means that distributors with a significant OTC share in their portfolios will gain the upper hand, while players depending on reimbursed drugs will struggle to survive. The latest purchase of ACP’s wholesale arm by Neuca is a forerunner of an expected trend of consolidation, experts said.
The pharmaceutical wholesale market however is already highly consolidated and stable. The dominant three full-profile wholesalers control more than 70 percent of the market, Mr Dzitko of BCC pointed out, while the consolidation of the pharmacy segment is progressing at a slower rate: most pharmacies still operate as independent entities. Mr Pilkiewicz of IMS says acquisitions of small, local pharmaceutical wholesalers are possible but this will not alter the balance of power between the top ranking wholesalers in the country.
The impact of the new law will also be felt by domestic drug producers. The government’s slashing of the reimbursement expenditure may even threaten their very existence.
“Polish domestic drug production quantitatively makes up more than 50 percent of overall drug sales,” said Dr Nowicki. That keeps prices low. But as distributors adapt to the new economic conditions and focus on products that generate big, quick returns, the market will witness a progressive dilapidation of drug offer at pharmacies, he predicts. This deteriorating condition of domestic producers must lead to continuing replacement of domestic production with imports. If that indeed happens, the result could be a twofold hike in prices – up to the current European level, he predicts.
Levied additionally with very high administrative fees that exceed the European average five- to six-fold, domestic producers have already begun switching to the production of dietary supplements, cosmetics and even non-healthcare businesses, he says.
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