Hungary Pharmaceuticals and Healthcare Report Q1 2013

BMI View: Our outlook for Hungary's pharmaceutical market remains negative, given the government'spolicies that shift the burden of the National Healthcare Fund (OEP) on to drug manufacturers. Pricingpressure and claw-back taxes have squeezed domestic manufacturers' margins and introduced insecurityto an already difficult economic environment, and we continue to expect a contraction in the size of theHungarian pharmaceutical market in 2012 and 2013. Consequently, Hungarian drugmakers will have tobecome even more export-orientated. That said, a favourable tax regime for research and developmentshould attract foreign investment, though these multinationals will focus most of their salesefforts on external markets, supporting our view that Hungary's status as a net exporter ofpharmaceutical products will increase.

Headline Expenditure Projections:

Pharmaceuticals: HUF691.61bn (US$3.44bn) in 2011 to HUF608.22bn (US$2.71bn) in 2012;-12.1% in local currency terms and -21.2% in US dollar terms. Forecast down from Q412 dueto cost-containment measures.

Healthcare: HUF2,013bn (US$10.01bn) in 2011 to HUF2,003bn (US$8.92bn) in 2012; -0.5%in local currency terms and -10.8% in US dollar terms. Forecast in line with Q412.

Medical Devices: HUF117.09bn (US$582mn) in 2011 to HUF117.95bn (US$526mn) in 2012;+0.7% in local currency terms and -9.7% in US dollar terms. Forecast in line with Q412.

Risk/Reward Rating: In our Risk/Rewards Rating (RRR) matrix for Q113, Hungary's composite scoreagain stands at 53.1 out of the maximum 100 points, ranking the country 8th out of 20 markets surveyed inthe emerging Europe region. We also retain our pessimistic outlook for its pharmaceutical marketrewards, on account of government's cost-containment policies.

Key Trends & Developments

In July 2012, the Pharmapolis Pharmaceutical Scientific Park was established in Debrecen,following an investment of HUF 6bn (US$26.9mn). Of the total figure, HUF 3bn was allocatedby the EU under the New Szechenyi Plan framework. The Park involves collaboration betweenHungarian Gedeon Richter, the Chamber of Commerce and Industry of the county of Hajdu-Bihar and the Debrecen city, which owns a 25% stake in the Park. The project features a 10,500square metre modern research base that will act as a research and development as well as aninnovation centre. The new project will create 120 new jobs for researchers.

In September 2012, the Hungarian Chamber of Pharmacists (MGYK) published the list ofmedicines; the prices of which will be reduced due to the biannual price competition betweendrug manufacturers in the region. The producer prices of 485 different drugs included by theMGYK in the list will experience a cut of between 65.01% and 0.02%. The tentative drug list,effective from October 1 2012, contains results only of the first round of the competition onAugust 21 2012. Companies that have been dropped out of the list of drugs available withreimbursement in Hungary in the first round can submit their request to MGYK to allowinclusion of their drugs with lower prices.

In October 2012, Israeli generic drugmaker Teva Pharmaceutical Industries established a newsterile medicines plant in Gödöll?, Hungary. The company will invest US$110mn in the newfacility, which will produce 160-200mn units of injectables when operating at full capacity. Theplant, which will supply medicines to patients in more than 70 countries in North America,Europe and Asia, is to mainly manufacture cytotoxics that are used in oncology therapeutics.

BMI Economic View: Continued deterioration in economic activity in the eurozone, and the failure ofthe government to thus far reach an external financing arrangement with the IMF/ EU continue to weighon all areas of the economy. As it stands, net exports will provide some degree of support to headlinegrowth this year given how weak import demand has been. However, risks to our medium-term growthforecasts lie firmly to the downside.

BMI Political View: The government's recent resistance to IMF conditions notwithstanding, we stillexpect Hungary to reach some form of external financing arrangement with the IMF and EU, most likelyat some point in Q113. As it stands, we expect the domestic population to remain most concerned withthe harsh economic situation at home, and as a result, we do not anticipate an improvement in the rulingFidesz party's public support anytime soon. We see a lot of potential for extremist parties such as the farrightJobbik to benefit from an increasingly disillusioned electorate.