Industry Trend Analysis - Czech Republic - Q2 2017 - MAR 2017

Research-Based Industry

Although most innovative drugmakers are present in the Czech market, their manufacturing presence is limited. The vast majority of multinationals import drugs for retail, with a small number of manufacturers, such as GlaxoSmithKline, licensing production to local companies. The Czech Republic has been a challenging market for businesses involved within the production, distribution and retailing of pharmaceutical goods in recent years. The impact of the eurozone recession, anaemic macroeconomic activity and reconciling healthcare spending with affordability has applied significant pressure to market participants. Given the high-value nature of innovative and patented drugs, sales have shifted towards the low-value generic medicines.

However, strong economic expansion and healthcare sector growth fundamentals, including high underlying demand for healthcare and rising expenditure per capita, are expected to provide improved commercial opportunities to drugmakers over the next few years. Furthermore, the lack of currency depreciation in 2015, with respect to almost all other CEE neighbours, meant that the Czech Republic was sheltered from the huge price hikes for imported foreign medicines. It has such been seen as one of the most attractive markets for multinational pharmaceutical firms within the region. In the long term, the broader European economic recovery will continue to act as a tailwind to high fixed investment rates in the export-intensive Czech Republic's economy, which will benefit pharmaceutical producers.

Multinational Market Activity
Company Operations
Source: BMI
Novartis Novartis Czech Republic was founded in 1997 and has a representative office in Prague. Medicines tend to be imported. Subsidiaries of the Novartis Group, generic drugmaker Sandoz and eye care specialist Alcon, also have representative offices in Prague. As a whole, Novartis employs 290 employees in the Czech Republic.
Pfizer The Czech subsidiary of Pfizer was founded in 1993, and employs 228 staff at its representative office in Prague. The subsidiary deals with the sale of human drugs and medical devices as well as engaging in clinical trials of drugs in the country. Pfizer has no manufacturing facility in the country; products tend to be imported. The company has a share of approximately 5% of the market.
Roche Roche's Czech subsidiary was opened in 1992. It focuses on the marketing and sales of medicines within oncology, virology and haematology, among others. The company has no manufacturing presence in the country but employs 190 people at its representative office based in Prague. Products tend to be imported.
Sanofi Sanofi is represented in the Czech Republic by three subsidiaries. Zentiva, formerly a Czech generics manufacturer acquired in 2009, is a dominant generic drug producer for the entire CEE region, with a manufacturing plant outside Prague. Sanofi's vaccine subsidiary, Sanofi Pasteur, and Genzyme, a rare disease medicine firm, both have representative offices in Prague. The company employs 1,600 people in the country.
Merck & Co Merck & Co (MSD) has been operating since 1992, with a representative office in Prague. It focuses on a number of treatment areas, ranging from cardiology, the treatment of asthma and allergies, diabetes and infectious diseases, to vaccines and healthcare for women and children.
Johnson & Johnson Janssen is the pharmaceutical arm of Johnson & Johnson. The company has no manufacturing presence in the country, but employs around 250 people at its representative office in Prague.
GlaxoSmithKline GlaxoSmithKline has 230 employees in the Czech Republic, involved in the marketing and sales of medicines and healthcare products, and in conducting clinical trials. The company has no manufacturing presence in the country but does have a representative office in Prague.
AstraZeneca AstraZeneca is a dominant figure in the Czech Republic market. The company has no manufacturing presence in the country; products tend to be imported. A representative office, at which around 110 people are employed, is based in Prague. AstraZeneca also participates in global clinical trials within the country and in the Czech Republic is investing more than CZK100mn a year in clinical research.
Takeda Takeda's presence in the country is due to the acquisition of Nycomed, which had previously bought German firms Byk Gulden and Altana Pharma. It has no manufacturing presence in the Czech Republic; products tend to be imported. Takeda has a representative sales office in Prague.
AbbVie AbbVie has no manufacturing presence in the Czech Republic; products tend to be imported. It has a representative sales office in Prague.

Generic Drugmakers

According to the State Institute for Drug Control (SUKL), there are 81 local drug manufacturers in the Czech Republic. Companies with a significant presence include Zentiva (now part of the Sanofi group), Slovakofarma, Ivax CR (now part of Teva), Pliva (also part of Teva) and Novartis' Hexana. Of the multinationals, only Teva and Baxter have considerable manufacturing investments in the country. Since the economic downturn, the Czech Republic - like many other European countries - has sought to increase generic medicine share of the market. As such, generic and regional pharmaceutical companies have steadily increased their presence in terms of manufacturing over the last decade. In 2015, Zentiva was the dominant company in the overall Czech drug market, accounting for 20%, while competitors Teva and Novartis accounted for approximately 7% each.

There are also a number of manufacturers of bulk drugs in the country, notably Farmak and Valeant (formerly ICN Czech Republic), although these tend to concentrate on export markets. There are also contract manufacturing organisations (CMOs) such as Lonza which have established multiple manufacturing sites in Bohemia over the years and are primarily exporters.

The improving economic situation in the country and plans to widen healthcare access will boost sales in pharmaceuticals, particularly in the generic sector.

Pharmaceutical Distribution

The major pan-European wholesalers - Phoenix, Alliance and Gehe Pharma Praha (Celesio) - have a strong presence in the Czech Republic and, along with Pharmos, control an overwhelming share of the market. According to SUKL data, the number of wholesalers registered by the authorities (but not necessarily in operation) in 2008 exceeded 500, with 221 active at the time.

Pharmaceutical Retail Sector

The Czech Republic pharmaceutical retail sector has improved substantially over the last decade as chains from Germany, Western Europe and domestic chains have increased their presence in the country. The majority of pharmacies are privately owned with the remainder, largely based in hospitals, owned by the state. Dr Max pharmacies in the Czech Republic are run by Ceska Lekarna, which is part of investment group Penta. Ceska Lekarna's closest rival is Europharm, owned by Alpha Union Invest. Having further strengthened its leading position in the Czech market, the number of pharmacies owned by the Dr Max is above 500. Included in this growth is Ceska Lekarna's acquisition of eleven Novopharm pharmacies in November 2014 from pharmacy chain Novolekarna.

In a move to differentiate itself from the competition and obtain favourable pricing terms, Dr. Max has also started selling private label OTC products, which are considered to be competitively priced and offer better profit margins than branded products; in August 2013, Dr Max entered into a purchasing agreement with Genmed for the supply of paracetamol tablets, which began shipping towards the end of the year.

This increased usage of private label brands is expected to increase within chains, as these products present an opportunity to build customer loyalty, develop a product brand over which pharmacy chains hold control, improve their gross margin profiles and compete with developed brands on pricing. Pricing is becoming a crucial battleground between chains, with consumers choosing to forego more expensive brands in favour of cheaper replacements.

Recently, privately-owned, independent pharmacies are entering into co-operatives and strengthening their position in the Czech Republic. They are increasingly standardising brands, marketing strategy and offering patients more personalised services to compete with larger chains. These co-operatives have also obtained favourable pricing terms from pharmaceutical distributors through collective bargaining. One of the oldest co-operatives in the country is Druzstvo Lekaren, and this has been followed by other co-operatives such as Moje Lekarna, Alphega and Copharm. These co-operatives preserved pharmacist-ownership whilst enabling scaling benefits to co-operative members.