Belarus Pharmaceuticals and Helathcare Report Q3 2012

BMI View: The short-term outlook for the Belarusian pharmaceutical market is deeply uncertain due toexchange-rate volatility and the economy’s lack of capacity for progress without fundamental reformsthough Russian financial support, in exchange for market access, may keep it ticking over.

However,aside from some public statements about Chinese and Indian investments, which BMI regards withscepticism, foreign pharmaceutical players will stay out of Belarus until the economy reaches a newequilibrium.

In addition, despite the existence of a Customs Union with Russia and Kazakhstan, thecountry is isolated from international trade flows by Russia’s accession to the World Trade Organisation(WTO).

There is an argument that foreign retail, wholesale or production players could find a bargainunder current circumstances.

But potential meddling by the state, in particular by President AlexanderLukashenko, who plays a personal role in most foreign investment decisions, complicates even thisprocess.

Headline Expenditure Projections

Pharmaceuticals: BRB3,598bn in 2011 (US$692mn) to BRB5,075bn (US$634mn) in 2012;+41.0% in local currency terms and -8.4%% in US dollar terms. US dollar forecast upgradedfrom Q212 on the basis of updated data.

Healthcare: BRB12,775bn (US$2.46bn) in 2011 to BRB16,305bn (US$2.04bn) in 2012;+27.6% in local currency terms and -17.1% in US dollar terms. US dollar forecast virtuallyunchanged since Q212.

Medical Devices: BRB2,174bn (US$418mn) in 2011 to BRB3,067bn (US$383mn); +41.1% inlocal currency terms and -8.4% in US dollar terms. US dollar value substantially upgraded onthe basis of new data.

Risk/Reward Rating: Belarus ranks 18th of 20 Central and Eastern European (CEE) markets again thisquarter.

Its ranking is a result of its poor – and still worsening – economic and political prospects.

We arepessimistic that any incremental reforms will take place in the foreseeable future.

The most likelyscenario is continued status quo, with the country increasingly mortgaged to the Russian state, or a periodof prolonged unrest, with consequent instability.

Key Trends And Developments

Alongside devaluation, another potential blow to primarily foreign companies selling over-thecounter(OTC) medicines in Belarus was dealt by its parliament considering a ban on alladvertisement of pharmaceuticals.

The ban appears to include drugs on the OTC product list.

While a similar move in neighbouring Ukraine has not been successful, BMI suspects this banmight have greater success, not least because the government has shown little willingness topromote the sector and advertising benefits primarily imported, branded products.

On a morepositive note, Remedium.ru reported in June that the Belarusian authorities had approved a newlist of prescription-only and OTC drugs, with a 20% increase in registered OTC medicines,which now total 3,279.

In May, local newswire Belta reported that the Belarusian authorities have invited Chinese firmsto ‘cooperate’ in the production of pharmaceuticals and medical equipment.

The country has alsoreached out the government of the city of St Petersburg, a Russian drug production hub, to seekinvestment and technology transfer.

BMI remains sceptical of such calls for cooperation andmemorandums of intent, which are common in many CIS states, but rarely yield concrete, valueaddedprojects.

Against our expectations that Belarus's currency crisis would lead to slower pharmaceuticalimports in 2011, full-year trade data released in May has shown imports reached BRB2,908bn(US$559.5mn) in 2011, up 8.2% in US dollar terms and equal to an 88.7% increase in localcurrency terms.

Exports for the year were also higher than expected, totalling BRB630.9bn(US$121.4mn), with growth of 7.7% in US dollar terms and 87.9% in local currency terms.

BMIis sceptical about the data, although it could represent stockpiling by distributors.

During 2011,the consumer price index across the Belarusian economy averaged 59.3% and the Belarusianruble lost more than half its value.

BMI Economic View: We continue to forecast real GDP growth of just 3.6% in Belarus this year, downfrom 5.3% in 2011 owing to the knock-on effects of the country's recent financial crisis and ourexpectation for the authorities not to resort to expansionary policy prematurely.

If the government was topush for a significant fiscal boost this year, it could serve to reignite inflationary concerns and currencyinstability further down the line, in turn sacrificing future growth for near-term gains.

BMI Political View: Belarus's ongoing isolation from the EU will continue moving the country closer,both politically and economically, to Russia.

While economic support from Moscow is mitigatingimmediate financing concerns for Minsk, there are sizeable risks associated with Belarus becomingoverly dependent on its ex-Soviet neighbour in the long term.

In the near term, authorities must avoid apremature return to expansionary policy to boost growth, given that the country's macroeconomicstabilisation remains fragile at this stage.