Changes To VAT Applied To Medicines


BMI View: Historic and planned changes to the VAT rate applicable to pharmaceuticals may complicate the assessment of actual market growth. The Czech Republic increased the VAT applied to pharmaceuticals, including prescription and OTC medicines, from 10% to 14% at the start of the 2012, and is now expected to further increase this to 15% from the start of 201 3 . While our market size calculations are for consumer prices including VAT, we do not include changes in the VAT rate in projected figures, and our y-o-y growth rate for 2012 and 2013 exclude the expansion of the market due to changes in tax. This enables a more accurate comparison of the actual growth rates for manufacturers and retailers.

As previously reported, BMI calculates the Czech drug market was worth CZK80.71bn (US$4.56bn) in 2011 at final consumer prices and CZK58.93bn (US$3.33bn) at producer prices. The number of defined of defined daily doses reached 5,872mn in 2011, an increase of 1.01% y-o-y, though the number of units of medicine distributed in Czech Republic continues to fall, contracting for the fourth year running from 304mn in 2010 to 297mn.

The lower VAT rate on medicines, including prescription and over-the-counter medicines, has risen to 14% from the start of 2012 (up from 10%), which will lead to higher prices and moderately affect affordability. Public expenditure on healthcare and pharmaceuticals has risen to reflect the increase in VAT but not significantly above this. Last year, the government postponed plans to unify the upper and lower rate of VAT at 20% and agreed to introduce a lower rate of 14% exists in parallel with the 20% basic rate. As of the start of September 2012, the Czech parliament is discussing further increase in the VAT rate by 1%, this will increase the VAT paid on prescription and OTC to 15% in 2013, while the standard VAT rate is expected to increase to 21%. While our current and historic expenditure figures are shown at consumer prices, which include VAT, our projected figures and y-o-y do not include the higher rate, enabling a more accurate comparison of the actual growth rates for manufacturers and retailers that are expected in the coming years.

Increasing VAT On Pharmaceuticals
Czech Pharmaceutical Expenditure At Various Pricing Levels

In 2012, we now expect a y-o-y contraction of 1.2% - slightly less pessimistic that previously reported, due to higher-than- expected 2.3% growth in Q112; this y-o-y growth figure excludes the VAT rate rise from 10% to 14%. Between 2011 and 2016, we forecast a compound annual growth rate of 2.4% in local currency terms, and just 0.6% in US dollar terms due to the expected weakness of the Czech koruna, with the market reaching a value of CZK90.76bn (US$4.71n) this number reflects pharmaceutical sales at consumer prices, including VAT, but using a constant 2011 VAT Rate. Including the full VAT rate rise to 15%, pharmaceutical expenditure at consumer prices will reach CZK94.92bn. When 2012 expenditure is confirmed, we will move our constant VAT rate to the 2012 value.

Below, we detail the changes to the applicable VAT rate, including other regional markets for comparison.

European VAT Rates On Medicines
Standard VAT Rate (%) Prescription VAT (%) OTC VAT (%)
Austria 20 10 10
Belgium 21 6 6
Bulgaria 20 20 20
Croatia 23 0 23
Cyprus 15 5 5
Czech Republic (2011) 20 10 10
Czech Republic (2012) 20 14 14
Czech Republic (2013) 21 15 15
Denmark 25 25 25
Estonia 20 9 9
Finland 23 9 9
France 1 19.6 2.1 7
Germany 19 19 19
Greece 23 6.5 6.5
Hungary 27 5 5
Iceland 25.5 25.5 25.5
Ireland 2 23 0-23.0 0-23.0
Italy 20 10 10
Kazakhstan 12 0 0
Latvia 22 12 12
Lithuania 3 21 5-21.0 5-21.0
Luxembourg 15 3 3
Malta 18 0 0
Netherlands 19 6 6
Norway 25 25 25
Poland 23 8 8
Portugal 23 6 6
Romania 24 9 9
Russia 18 10 10
Serbia 18 8 8
Slovakia 20 10 10
Slovenia 20 8.5 8.5
Spain 18 4 4
Sweden 25 0 25
Switzerland 8 2.5 2.5
United Kingdom 20 0 20

Applied As Of January 2012. Source: BMI, EFPI . , [ 1 ] France: Reimbursable medicines 2.1%; non-reimbursable medicines 7.0%, [ 2 ] Ireland: Oral Medication 0%, other medication 23%. [ 3 ] Lithuania: reimbursable medicines 5.0%, non reimbursable medicines 21.0%

Despite medium-term concerns, after 2012 we expect stronger growth to resume, and BMI maintains our more optimistic long-term view. We believe that the need for innovative medicines will drive growth well above the rates of expansion achieved in Western Europe over our 10-year forecast period. In the longer-term, the Czech Republic's disease and drug consumption profile illustrates a considerable gap between this market and Western Europe, suggesting that the population's demand for high value innovative medicines will continue until convergence. However, the health of the Czech population remains superior to that of the less-developed markets of Eastern and South Eastern Europe, demonstrating that demand in these regions will be even higher. However, governments' short-term ability to provide these medicines remains a key challenge. Over our extended 10-year forecast period, pharmaceutical expenditure will reach CZK115.4bn (US$6.55bn) by 2021 (pharmaceutical sales at consumer prices, including VAT, but using a constant 2011 VAT Rate), achieving a CAGR 3.6% in local currency terms, or 3.7% in US dollars.

Czech Pharmaceutical Expenditure
2010 2011 2012f 2013f 2014f 2015f 2016f
Pharmaceutical sales (CZKbn), Consumer Prices Inc VAT (Forecast At 2011 VAT Rate) 80.60 80.71 79.74 82.02 84.54 87.37 90.76
Pharmaceutical sales (CZKbn) Consumer Prices Inc VAT 80.60 80.71 82.64 85.78 88.42 91.37 94.92
Pharmaceutical sales (CZKbn) Consumer Prices Exc VAT 73.27 73.37 72.49 74.59 76.89 79.45 82.54
Pharmaceutical sales (CZKbn) at Manufacturers Selling Price 58.85 58.93 58.22 59.91 61.75 63.81 66.30
Pharmaceutical sales (CZKbn), % chg y-o-y 1.1 0.1 -1.2 2.9 3.1 3.3 3.9

f= BMI forecast, Notes: Applicable VAT rates, Rx & OTC 2007:5%, 2008-2011:10%, 2012:14%, 2013: 15% Expected, Source: State Institute for Drug Control (SUKL), BMI Calculations

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