Private medical services in rude health

While the public healthcare system is ailing, the market of private services is in robust health. The recession has not really stemmed the flow of people leaving the flawed public system for private care, and the private healthcare operator market is seeing takeovers and new openings. Insiders told Business Review about the challenges they face when dealing with state measures. 

Otilia Haraga

The value of the pharmaceuticals delivered in Romania in the first nine months of the year reached RON 7.3 billion by distribution price, up 24.2 percent y-o-y, according to findings from the Pharma & Hospital Report released by Cegedim Romania. The growth rhythm has slowed since the middle of the year, following steps to reduce public support for subsidized medicines.

The total value of drugs released to patients in the third quarter of this year stood at RON 2.41 billion, up 20.4 percent compared to Q3 of the previous year. The growth is due mainly to the segment of prescription drugs, which was worth RON 1.83 billion, up 23.8 percent. OTC (over the counter) products posted a value of RON 0.32 billion, up 15 percent, while the hospital sector stood at RON 0.26 billion, up 10.7 percent compared to the third quarter of 2009.

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Between October 2009 and September 2010, the entire market stood at RON 9.52 billion, up 21.6 percent y-o-y. For the pharmaceuticals released on prescription segment, the growth rate was 27.4 percent, for the OTC sector 10.7 percent, and 2.6 percent for the hospital segment.

Topping the hierarchy of company sales on the local market is Sanofi-Aventis (including Zentiva and Sanofi-Pasteur), with 12-month sales standing at RON 891.4 million.

Roche posted sales of RON 873.8 million, while Pfizer (including Wyeth) had sales of RON 636 million.

Novartis posted sales of RON 583.9 million, GlaxoSmithKline of RON 581.3 million, Servier of RON 484.2 million, Merck&Co of RON 439.5 million, AstraZeneca of RON 366.2 million, Daiichi-Sankyo of RON 348.2 million and Abbott of RON 266.6 million. The next ten position are taken up by Bayer, Antibiotice, Lilly, Menarini, Krka, Johnson & Johnson, Labormed, Richter Gedeon, Actavis and Reckitt Benckiser.

No major changes are foreseen on the pharma market, says Dragos Dinu, shareholder in consultancy practice Link Resource.

“The pharma industry is reeling after a spiral of regulations over the last few years and needs more predictability. However, the authorities typically act in an unpredictable way, under the pressure of the moment and the budget,” he explains.

In the pharma industry, spectacular growth over the coming years is unlikely unless the process of market consolidation is re-started, especially in retail and among the producers of generic medicines, where the impetus before 2006-2007 has died down, with a few notable exceptions, says Dinu.

The industry is struggling as the sum allotted to the health sector from the GDP is far from sufficient. The sector also suffers from a lack of predictability, which is due mainly to the lack of a strategy in this field. There is also an absence of regulations and fiscal deductions that should provide impetus for the private health insurance market.

The market of private health insurance is not in top form. This year it is tipped to decrease by 8-10 percent to RON 20-22 million, which would bring it to a level last seen in 2005. In 2011, the market is expected to remain at the same level as this year, both from the point of view of gross subscribed premiums and the number of insured individuals, according to Carmen Radu, deputy general manager of Eureko Romania.

Elsewhere, Agata Jakoncic, country manager at Merck, Sharp & Dohme (MSD), mentions “the over-taxation of the pharmaceutical companies,” which is “unique in the world – everywhere else the clawback is related to the reimbursed value of the medicines”.

She says that Romania has minimum European prices and very long payment terms (as much as 300 days in some extreme cases). Therapeutical reference pricing puts patients in a very difficult situation, she adds.

Other insiders take a similar weary tone. “The worst problem is the lack of transparency regarding clawback. We, local medicine producers, are paying profit taxes to the Romanian state, and yet international companies are not paying these taxes. We are now forced to also pay this clawback as a supplementary tax,” says Stephen Stead, CEO and president of the Labormed administration board.

According to Dinu, it is necessary to reform primary care, which is the first interface of the system with the patient. If done properly, this reform could reduce costs that can later appear in the system, says Dinu.

Nor is the system equal everywhere. In rural areas, primary care, pharma & medical services are lagging behind. This should be part of a national strategy that is currently nonexistent, says Dinu.

Once reform of the healthcare system is underway, it will take at least seven-eight years, according to Radu. The current legislation needs to be modified and application norms drawn up. After this, the system will have to be perfected, as has happened in other European countries.

“The success of such a reform cannot happen without the involvement of all the elements on this market – medical staff, pharmacies, medicine producers, civil society, medical service providers, private insurers and, last but not least, the National House of Health Insurance and the Health Ministry,” she says.

Bureaucracy is a particular burden. “The over-regulation of this industry is a disadvantage, especially when guidelines are not used as guidelines but act as norms that restrict the activity of local companies rather than offer support and coordination so that they can become more competitive on a European and regional level. If the authorities really want this country to have a chance, they must introduce a proper financing system, control expenses transparently and annihilate corruption and waste in the healthcare system” says Stead.

The health industry also faces a shortage of qualified staff, as medical professionals are leaving to work abroad.

 “I think the most acute personnel issues lie in the public sector as medical workers are migrating out of the country or towards the private sector, says Dinu.

One noteworthy fact is that in the private medical services sector nearly all entrepreneurs who have started businesses in this domain are still active in management. As the market develops, it will probably involve a transfer of such duties from the entrepreneur or founder to specialized management, even more so because private investment funds are making their presence felt, he adds.

M&As, new units and future expansion

Recent data indicate that many Romanians would rather be treated in private clinics than by the state system. The latest report from IMAS Marketing and Surveys found that 44 percent of Romanians said they preferred private clinics, 51 percent would use state institutions while the remaining 5 percent did not answer the question.

In Bucharest, 52 percent of respondents said that they would rather be treated in a private clinic.

People who prefer private centers are typically aged between 18 and 44 and come from small and average sized towns with over 50,000 inhabitants. They have higher education and a good social status, with monthly earnings of more than RON 750.

However, the number of Romanians who go to the doctor annually is still very low: 20 percent of the people interviewed said they go to the doctor only once a year. Approximately 30 percent see their doctor two or three times a year while 29 percent visit a medical practitioner five-six times annually or more often. Of the people who were questioned, 13 percent said they never go to the doctor throughout the year. In Bucharest, one interpretation of the figures is that people take better care of their health, with 40 percent of citizens in the capital going to the doctor five-six times or even more a year, while in the rest of the country only 30 percent do so.

“Romania is well represented in certain segments such as general medicine clinics, maternity wards, X-ray centers and laboratories. It is in a less developed state, however, where high-performance services are concerned, says Marina Otelea, general manager of Medicover. 

Dinu believes that growth on the market of medical services has been impressive in recent years and will most likely continue over the next few years. The main reason he sees for this is the obvious flaws in the public system.

But the market is still small. The largest player on this market will probably post a turnover of around EUR 30 million this year, he adds, by way of illustration.

“I am convinced that we will see new acquisitions and notable projects for another two-three years at a sustained rate,” says Dinu.

The plans of major players seem to be in tune with this prediction. Next year MedLife will continue its expansion by opening three hospitals in Bucharest and another in Brasov.

“In the capital, we will have a pediatrics hospital in Baneasa, a urology hospital in Obor and a large hospital with 120 beds, six surgical wards and an emergency section,” says Mihail Marcu, president of MedLife. The firm will also inaugurate a hyper-clinic in Bucharest, in the Titan district, and another in Cluj.

Further plans include developing a new compound of luxury self-contained apartments in the maternity section of the already operational Life Memorial Hospital in Bucharest.

And a new operating theater will be added to the MedLife hyperclinic, which is set to require an investment of approximately EUR 1 million.

“Most of our clinics function in spaces we have rented or purchased. From many points of view, it is quicker and more practical this way. Naturally, we also consider the area in which we wish to expand – if it allows a new construction or if it is easier to buy an existing building. In Bucharest it is rather hard to find spaces fit for construction in an area close to the center, which should be accessible and allow clients direct access,” says Marcu.

MedLife will also expand its chain of PharmaLife pharmacies, which currently numbers four units. Next year the company will open pharmacies in other cities – Brasov, Cluj and Constanta. The budget for these investments will be EUR 20 million, of which EUR 10 million has come from the company’s own funds.

The other EUR 10 million is financing from the International Finance Corporation, which is a MedLife shareholder.

“Most of the projects we implement are done with our own funds. We have very few bank loans. We are a company with a very good liquidity level as cash is generated by the large weight of the paid-for service segment,” says Marcu.

This summer MedLife took over an outfit in Brasov, Policlinica de Diagnostic Rapid, which runs one clinic and two laboratories. “The transaction was in excess of EUR 3 million and will definitely be followed by other acquisitions by the end of this year,” says Marcu.

MedLife has nearly 1,500 employees, most of whom work full time. Four fifths of the personnel are medical staff. Prominent specialists or those who work in niche domains are recruited through “sources”, either following recommendations from doctors working for the firm or at managerial levels, but most employees are recruited via HR.

Aside from the Marcu brothers, the firm has two more shareholders: the IFC, the investment and consultancy division of the World Bank, and SGAM Eastern Europe, a private investment fund of Societe Generale Asset Management, a subsidiary of Societe Generale Group. MedLife posted a EUR 26.2 million turnover for 2009 and estimates a 40 percent growth in its turnover this year.

 “The entrance of private equity funds to the shareholding structure of the top two players on this segment, MedLife and Centrul Medical Unirea (CMU), will accelerate the development strategy by expanding nationwide operations, starting from big cities,” says Dinu.

The expected advent on the market of private health insurance and the introduction of in-system co-payment for services that for the moment, at least theoretically, are free, are other factors tipped to influence private medical services positively. 

This March, investment fund Advent International acquired 80 percent of CMU. Centrul Medical Unirea has drafted an investment plan for the next two years that exceeds EUR 20 million and intends in particular to acquire medical equipment and attract mid-level and highly specialized medical staff.

“After the merger with Euroclinic, no further acquisitions are planned for 2010. Next year we intend to develop our hospitals,” says Wargha Enayati, general manager of CMU.

The firm recently announced that it had taken over from insurer Eureko the Euroclinic Hospital and Euroclinic Medical Centers in Romania. Euroclinic ran a hospital and three medical centers. It has 350 employees and posted revenue of about EUR 8 million in 2009.

CMU also opened a new medical unit in Bucharest, CMU Dorobanti, following an investment of approximately EUR 1 million. Located on Dorobanti Avenue it consists of a pediatrics hospital with a capacity of 10 beds, a polyclinic and a diabetes center for children and adults.

When making an acquisition CMU typically uses a mix of reinvested profit, bank loans and capital from shareholders. However, it used mainly reinvested profit and capital from shareholders to finance these moves.

CMU currently has 1,000 employees. The medical staff represents a mix between people who only work for CMU and those who are also employed in state hospitals. Mainly, the personnel is recruited through recommendations. CMU is attempting to attract back Romanian doctors who have emigrated abroad, after they learn certain techniques and skills which bring added value for the patients.

CMU posted over EUR 10 million in total income for the first six months of the year, a 36 percent increase on the same period of last year. The company’s best performing unit was CMU Regina Maria Maternity which posted a 132 percent turnover growth.

At the beginning of the year, A&D Pharma announced plans to tap into the private medical services market with a new dedicated division, Anima Specialty Medical Services. The company has so far opened four clinics in Bucharest and a central laboratory. By the end of the year the number of doctors in the Anima clinics was set to surpass 300.

A&D Pharma posted sales of EUR 482.2 million in the first nine months of this year, which represented a 32 percent growth on the same period of last year. These revenues also include the EUR 16.7 million third quarter revenues from newly acquired marketing & sales operations outside Romania. On the wholesale segment, where it is represented by Mediplus, the group posted an increase of 47 percent to EUR 391.4 million in the first nine months of 2010.

The marketing & sales division recorded unaudited revenues of EUR 11.4 million. On the retail side, where the group’s operator is Sensiblu pharmacies, sales rose 32 percent to EUR 179.3 million for the first nine months of 2010, as compared with EUR 135.7 million for the same period in 2009.  

Local operators are also active in newer areas of medicine. This year Biogenis opened a new stem cell storage bank. Until then, the firm had stored stem cells in its bank in Poland.

“In our domain, Romania is a very dynamic market and has had constant growth in the three years since Biogenis has been operational on this market. We hope in two-three years to bring in further investments of approximately RON 2 million and over the same period we want to increase our personnel by approximately 20 people,” said Jakub Baran, president of the Polish Bank of Stem Cells. Biogenis is the third cell storage unit in Romania, after Eurocord and CMU.

The local market is home to other specialist players. In October, West Eye Hospital Group opened the first ophthalmology hospital in Bucharest, West Eye Hospital. The hospital took two years to build and covers 1,400 sqm. The West Eye team in Bucharest comprises 10 specialty doctors. 

After opening a central laboratory, Medicover will start a hospital unit project next year. “We will have the first functional hospital in mid-2011. New clinics in Bucharest will follow, and we will continue regional expansion,” says Otelea. She adds that the company will enter certain cities through acquisitions.

Medicover has recently completed the acquisition of land on which it will build its hospital in Bucharest, which the company says will be larger than the existing private hospitals in the capital.

“After the opening of the Warsaw hospital it is the second largest project Medicover is undertaking in the coming period,” said Otelea.

Currently, Medicover has approximately 800 employees. “We recruit medical staff both in and out of the country. Usually, there are doctors who go to work abroad and after a period they want to return home. Unfortunately, the balance is tipping towards those who leave the country instead of those who return: we can only hope that in the future we will manage to reverse this trend. Some of the doctors work both in the private and public sector. However, lately most prefer to work only in the private healthcare,” says Otelea.

Past and future legal changes in healthcare (source: A&D Pharma)

the methodology for calculating the prices of the medicines introduced on April 1 remains unchanged. The price in RON of imported medicines is calculated at an exchange rate of RON 4.25 per EUR, RON 3.06 per USD and RON 2.80 per CHF.

a therapeutic reference price was introduced in July 2010 for prescription medicines for acute afflictions (lists A and B). The therapeutic reference price for medicines for chronic diseases (the C1 list) came into force in October

the implementation norms of the claw-back mechanism were approved at the end of June 2010. These stipulate that the license owner who sells subsidized medicines will pay the state a percentage of the turnover generated by all the prescription drugs it sells. This will be applied retroactively starting with the date of January 2010. However, this measure has not yet been applied.

starting with July 1, the VAT was increased from 19 to 24 percent for products except prescription medication, where the VAT stays at 9 percent

the IMF prompted the government to approve in August the payment of EUR 454 million in arrears in the health system

Co-payment may be applied for all medical services starting next year. This is still in project stage.