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Based on Croatias deteriorating macroeconomic outlook, combined with our expectations that the new Kukuriku coalition government will pursue more severe austerity measures and the fact the Croatian Institute For Health Insurance (HZZO) announced huge – though probably not achievable – cuts to its Q112 healthcare budget, BMI has downgraded the 2012 and 2013 outlooks for Croatias pharmaceutical, healthcare and medical device market. We expect further cost-cutting measures to be announced in the coming months. Croatias pharmaceutical market will continue to be a modest prospect for foreign companies despite some opportunities provided by the operating environment improvements expected in the leadup to EU membership.

Headline Expenditure Projections

- Pharmaceuticals: HRK7.16bn (US$1.34bn) in 2011 to HRK6.94bn (US$1.29bn) in 2012; - 3.1% in local currency and -3.7% in US dollar terms. Forecast down significantly from Q112 due to economic factors and analyst modification.

- Healthcare: HRK27.10bn (US$5.07bn) in 2011 to HRK26.19bn (US$4.86bn) in 2011; -3.4% in local currency and -4.0% in US dollar terms. Forecast down significantly from Q112 due to economic factors and analyst modification.

- Medical devices: HRK1.46bn (US$274mn) in 2011 to HRK1.45bn (US$274mn) in 2012; -1.0% in local currency and -1.6% in US dollar terms. Forecast down significantly from Q112 due to economic factors and analyst modification.

Business Environment Rating

Croatia remains stable in our Q212 ranking, but is likely to come under additional pressure next quarter. The country remains one of the least attractive markets for multinationals in the CEE region. While Croatia has made concerted efforts to meet its EU membership requirements, thus facilitating market access for foreign players, its longer-term demographic and pharmaceutical market dynamics are considered subdued.

Key Trends And Developments

- Our medium-term outlook for Croatias pharmaceutical, healthcare and medical device markets is increasingly tied to the countrys weakening economic outlook. Our top-line macroeconomic projections are directly tied to our reduced expectations for private and public expenditure for the medical service sector. With decisions pending on how quickly and how deeply the new government can install public expenditure cuts, the immediate outlook for the economy has the potential to shape more long-term funding policy for healthcare and pharmaceuticals.

- In mid-December 2011, the Croatian Institute for Health Insurance (HZZO) adopted a provisional budget of HRK4.4bn (US$822mn) for Q112, HRK1bn (US$181mn) less than in Q111, representing a 20% year-on-year (y-o-y) decline. It also emerged that the Ministry of Health had selected Croatias budget for prescription pharmaceuticals as the main source from which savings will be drawn, with a cut equivalent to 60% y-o-y reduction for Q112. While we have revised our 2012 outlook downwards, we are sceptical about whether this size of cut can be achieved in Q112, especially with the apparent lack of measures to achieve these savings.

- The VAT which applies to non reimbursed prescription drugs, over-the-counter medicines and private healthcare services is set to rise from 23% to 25% in March 2012.

Economic View

We have revised down our real GDP forecast for Croatia, expecting the country to post negative growth of 1.5% this year. We expect the governments expenditure cuts to weigh heavily on already paltry economic growth. We also highlight the potential risks to the economy stemming from the bloated banking sector. We now expect the Balkan economy to return to recession in 2012.

Political View

We long predicted the centre-left Kukuriku coalition, led by the Social Democratic Party, to win the parliamentary election on December 4 2011, with official results showing it won 81 out of 151 seats. The coming years will pose many difficulties for the new government, including balancing the aims of boosting economic growth and implementing fiscal austerity, keeping the EU accession drive on track and tackling corruption. In this context, and against a backdrop of financial market uncertainty, we expect the government to seek support from the IMF in 2012.

Click for Report details:Croatia Pharmaceuticals and Healthcare Report Q2 2012