While Kuwait will continue to be of interest to multinational drugmakers - on account of traditional preference for branded medicines and the populations wealth - we caution that strengthening regional harmonisation will make for an increasingly challenging operating environment across the Gulf Cooperation Council (GCC) as a whole. We still expect Kuwaits pharmaceutical market to grow steadily, driven by epidemiological and demographic changes, as well as healthcare system reform, but the distributors of branded drugs will have to accept lower margins, which will likely lead to industry consolidation and repositioning .
Headline Expenditure Projections
- Pharmaceuticals: KWD204mn (US$737mn) in 2011 to KWD216mn (US$771mn) in 2012; +6.1% in local currency terms and +4.7% in US dollar terms. Forecast down from Q112 due to analyst intervention.
- Healthcare: KWD1.13bn (US$4.09bn) in 2011 to KWD1.23bn (US$4.41bn) in 2012; +9.3% in local currency terms and +7.9% in US dollar terms. Forecast broadly unchanged from Q112.
- Medical devices: KWD75mn (US$273mn) in 2011 to KWD82mn (US$292mn) in 2012; +8.5% in local currency terms and +7.1% in US dollar terms. Forecast broadly unchanged from Q112.
Kuwait now ranks first in our latest Pharmaceutical Risk/Reward Rating (RRR) matrix for the Middle East and Africa (MEA), having overtaken the United Arab Emirates (UAE) this quarter. Its composite score has been boosted by the improvement to its rewards variable, although we caution that risks to our forecasts are on the downside, given the regional price harmonisation initiatives and the ongoing political instability. Kuwait ranks 28th out of the 95 countries surveyed globally.
Key Trends & Developments
- At the 72nd session of the GCCs Health Ministers Council, the ministers announced the formation of a unified drug pricing unit for the region. The unit will set pharmaceutical prices for branded drugs across all countries so the maximum profit margins for distributors and retailers combined would not exceed 45% of the cost, insurance and freight (CIF) import prices. The establishment of this unit supports our view that public regulatory bodies in emerging markets will become increasingly involved in reducing the prices of pharmaceuticals, especially in markets where the state is responsible for a large percentage of total healthcare spending. Furthermore, the growth of health insurers as an interest group in pharmaceutical pricing means there is additional commercial pressure to control drug prices.
- In December 2011, United Arab Emirates (UAE)-based investment company Alchemist Healthcare reported that it would fully manage and operate one of the oldest diagnostic and laboratory centres in Kuwait, as part of its foray into the countrys diagnostic segment. The decision, in addition to its investment in two healthcare assets in Abu Dhabi in 2011 and a third acquisition in Dubai, will enable the company to become a regional healthcare player offering healthcare services across a wide spectrum. According to Shailesh Dash, the founder of al-Masah Capital, which manages Alchemist Healthcare, the addition of the new centre will allow the company to strengthen its geographic presence and diversify its healthcare offering by tapping into the high-growth laboratory and diagnostics sector.
We remain above consensus on Kuwaits growth prospects in 2012. Heavy government spending is likely to ensure the economy grows robustly in the near term, bolstering the outlook for domestic consumption, while there is a likelihood that fixed investment will pick up in the coming quarters. We forecast real GDP growth of 5.4% in 2012, down only moderately on our estimate of 6.1% growth in 2011, but still surpassing many of the countrys neighbours. We expect household expenditure to grow robustly over the coming year, boosted principally by rapidly rising wages in both the public and the private sector. However, the transformation of the healthcare system - from a welfare state into a system of public-private partnerships (PPPs) - is now in doubt, given the current political instability.
As we had predicted, the outlook for political stability in Kuwait remains highly uncertain, as the governments popularity wanes. In the aftermath of the Islamist oppositions strong performance in the February 2012 parliamentary election, the key question facing the country concerns the extent to which the regime is willing to allow these groups a greater role in government. If a degree of political liberalisation is not forthcoming, instability is likely to persist throughout 2012. In fact, in the event anti-government MPs seek to harness their current popularity to disrupt the government and press for institutional change, the country could be in for another year of instability, and downside risks to our forecasts for government spending and growth would increase.