The Estonian State Agency for Medicines, Ravimiamet, has released pharmaceutical consumption data for Q313. Figures show that sales of medicines rose year-over-year by 5% to EUR55mn at wholesale prices, in line with our forecast for a slowdown in sales growth in 2013. Growth in pharmaceutical spending in Estonia will continue to be held back as the Estonian government's policy of fiscal restraint continues. Estonia will continue to present a relatively limited market for pharmaceuticals despite having a positive business environment. Fiscal tightening has lead to pressure on the Estonian Health Insurance Fund to rein in pharmaceutical expenditure through pricing limits, generic prescribing and reference pricing mechanisms on reimbursed drugs. Whether or not a fiscally conservative policy in healthcare spending can survive Estonia's ageing population and the subsequent growth in demand for medicine is highly dependent on the unemployment levels and the raising of premiums by the health insurance fund. Thus, pharmaceutical sales in Estonia tend to emulate broader macroeconomic trends.
Headline Expenditure Projections
- Pharmaceuticals: From EUR276mn (US$360mn) in 2013 to EUR291mn (US$370mn) in 2014; +5.6% in local currency terms and +1.6% in US dollar terms. Local currency forecast of 5.5% in 2014 picks up modestly after 5.3% in 2013 before continuing on a long-term decline. The 2014 local currency forecast represents a marked decline from the growth of 9.2% in 2012 due to new market data and macroeconomic expectations.
- Healthcare: EUR1.06bn (US$1.39bn) in 2013 to EUR1.10bn (US$1.40bn) in 2014; +4.3% in local currency terms and +0.3% in US dollar terms.
Estonia scores 52.1 out of 100 in BMI's Pharmaceutical Risk/Reward Rating (RRR) tool, remaining in 10th position out of the 20 key markets covered in Central and Eastern Europe. Estonia's Industry Rewards score is still the weakest part of its pharmaceutical profile, at 12.8, significantly below the regional average of 18.9. This is mainly due to by above-average scores in the urban/rural split and pensionable population. As the population ages, the dominant types of disease will shift, with the emergence of many more longlasting chronic conditions, cancers and degenerative illnesses. This will tip the ratio of working people to dependants towards the latter, increasing the pressure on overall funding for the healthcare system.
Fiscal tightening has already led to pressure on the Health Insurance Fund (HIF) to rein in pharmaceutical expenditure through pricing limits, generic prescribing and reference pricing mechanisms on reimbursed drugs. Nevertheless, there are also factors that present potential rewards in this market. Any growth in demand for medicine is highly dependent on the unemployment levels and the raising of premiums by the HIF. These are tied to the overall economic cycle, and as a result Estonia's pharmaceutical market broadly reflects macroeconomic trends.
Key Trends And Developments
In December 2013, Prime Minister Andrus Ansip reiterated Estonia's commitment to see research and development (R&D) spending reach 3.0% of GDP by 2022, from 2.1% in 2012, already well above emerging Europe averages. Although the state has previously spearheaded R&D spending, Ansip expressed a desire for the government to encourage more private sector involvement. Research, investment and technological advances will be crucial for Estonia to achieve sufficient productivity growth to maintain GDP growth rates amidst a gradually shrinking population.
In December 2013, Estonia's Union of drug manufacturers has modified its Code of Ethics to bring maximum transparency to the relationship between health professionals and pharmacists. The first modification is that pharmaceutical companies need to publish all details of any contractual relationship they have with doctors and other medical professionals. The second modification is that pharmaceutical companies have been banned from giving gifts to doctors and from arranging expensive banquets for them. The changes are expected to be implemented in 2016.
In November 2013, the Estonian government has approved certain amendments to the law on medicines, making it necessary for pharmaceutical companies to explain the reasons for stopping or suspending the supply of certain medicines to the country. Under the existing law, licensed pharmaceutical companies are only required to continue selling medicines in the country for two months after notifying Estonia's medicine department of a decision to suspend or terminate the supply of certain medicines. However, the new amendment makes it mandatory for the companies to explain the reasons for stopping or suspending the supply of certain medicines to the market.
In December 2013, Estonia and Finland signed an agreement for the common development of e-services. The government of Estonia, who held the world's first general election using internet voting in 2005, is an ardent supporter of e-governance and is eager to share its expertise with other EU member states. With cross-border data exchange a potential end-result of the agreement, the streamlining of bureaucratic procedures could more closely integrate the two economies.
BMI Economic View: Following a pronounced deceleration of headline GDP growth in 2013 and as regional economic activity gradually recovers, we believe the Estonian economy is poised for a relatively robust rebound in 2014 and 2015, when we forecast real GDP to expand by 3.3% and 3.5% respectively. Although this gradual acceleration of external demand will be vital for sustainable growth, domestic demand will remain the primary engine of the economy over the medium term. Domestic demand has remained relatively robust, driven by strong wage and employment gains that have bolstered consumer spending. However, according to latest figures from Eurostat, the Estonian house price index expanded by 11.1% year-on-year in Q313, by far the highest rate in the European Union. This follows growth of 7.3% in 2012, and has raised concerns about a real estate bubble. Household and bank balance sheets are in much better shape today than in 2009 with mortgage and total consumer lending remaining far below pre-crisis levels and with price increases being instead driven by rising incomes, supply constraints, and foreign investment. Nevertheless, we would question the sustainability of house prices continuing to outpace inflation and wage growth if it were to continue for several more quarters.
BMI Political View: Estonia's political environment is characterised by consensus among major political parties towards liberal economic policy, conservative fiscal management, and EU convergence. This has helped to substantially mitigate policy risks through the recession, preventing any major breakdown in the leadership despite worsening economic conditions for the majority of the electorate. However, deep divisions between ethnic Estonians and ethnic Russians will remain a primary source of domestic political tensions. With support for Estonia's governing centre-right Reform Party (RE) in decline due to a series of corruption scandals that have damage its reputation, we see a potential shake-up of Estonia's ruling coalition following national elections in 2015. More recently, a relatively poor showing in local elections in October 2013 marked another setback. Public support has plummeted to multi-year lows, with opinion polling from December 2013 indicating that the RE now has the lowest approval rating among Estonia's four main political parties. Meanwhile, according to Prime Minister Andrus Ansip, initial negotiations with the EU regarding its 2014-2020 budget were successful, with Estonia securing at least EUR5.9bn in funding. This will allow the government to support economic growth without straining public finances, allowing Estonia to remain among the most fiscally conservative countries in the EU. On the European level, elections for the European Parliament (EP), due to be held in May 2014, will provide a useful barometer of public support or antipathy for the EP and the European Union (EU) as a whole. It will also prove crucial in determining the policy direction and zeal for deeper EU integration over the course of 2014-2019 with important implications for domestic Estonian politics.