Romania Pharmaceuticals and Healthcare Report Q1 2013

BMI View: While it is clear that drugmakers operating in Romania are far from happy with the latestrevisions to the pharmaceutical claw-back tax, and the tax remains unfairly punitive, all thingsconsidered, the August 2012 amendments are a small improvement, though definitely not what producerswould have wanted ideally. With part of the objective of the claw-back tax to improve the timeliness ofpayments for reimbursed medicines, which has been a major difficulty for drug producers anddistributors over the last four years, there are some upsides to this mechanism working effectively. Thetax remains most punitive for generic drugmakers with lower-value medicines and could lead to thesecheaper medicines exiting the market. The tax continues to weigh on BMI's assessment of Romania'sPharmaceutical and Healthcare Risk/Reward ratings.

Headline Expenditure Projections:

Pharmaceuticals: RON12.76bn (US$4.18bn) in 2011 to RON13.52bn (US$3.78bn) in 2012;+6.0% in local currency terms and -9.7% in US dollar terms. Local currency forecast slightlydown from Q412 on account of macroeconomic factors; US dollar forecast furtherimpacted by exchange rate factors.

Healthcare: RON30.17bn (US$9.90bn) in 2011 to RON32.07bn (US$9.86bn) in 2012; +6.3%in local currency terms and -9.5% in US dollar terms. Local currency forecast slightly downfrom Q412 on account of macroeconomic factors; US dollar forecast further impacted byexchange rate factors.

Medical devices: RON1.61bn (US$527mn) in 2011 to RON1.69bn (US$471mn) in 2012;+5.0% in local currency terms and -10.6% in US dollar terms. Local currency forecast slightlydown from Q412 on account of macroeconomic factors; US dollar forecast furtherimpacted by exchange rate factors.

Risk/Reward Rating: Our Risk/Reward rating score for Romania's pharmaceutical market remainsunchanged in Q113, at 55.3 out of the maximum 100 points. Despite operational improvements in recentyears, Romania remains a challenging market, largely on account of low per capita incomes and spendingon medicines, while the US dollar forecast for its pharmaceutical market continues to be negativelyimpacted by leu weakness. Regionally, Romania is again ranked sixth out of the 20 key markets surveyedin the Emerging Europe region.

Key Trends And Developments

An estimated EUR85mn (US$110mn) is expected to be collected by the Romanian healthministry through the claw-back tax in 2012, supplementing the EUR33mn (US$43mn) recentlyallocated to the ministry by the government. The tax revenue, which will be transferred to thesingle health insurance fund, will be spent on hospitals, with priority given to regional networkand emergency hospitals. Newly-launched drugs and medical supplies supervision programmesin Romania will reportedly also be allocated EUR880,000 (US$1.14mn).

In October 2012, it was revealed that medicines and sanitary materials for emergency care unitswill be procured centrally in Romania from 2013, according to statements made by the interimhealth minister Raed Arafat. The government is to issue tenders for all medicines and sanitarymaterials that are used in the 63 state-funded emergency care centres in the country. The tenderswill help to control cost in emergency care, thereby reducing healthcare expenditure. The publichealth departments and health units have also been asked by Arafat to spend all available fundsso that none remains at the end of the year.

A new proposal related to patient co-payment rules in Romania stipulates that patients with acompulsory health insurance policy might pay less in patient co-payments, reported PMR inSeptember 2012. The proposal suggests RON2-RON4 (US$0.57-1.15) patient co-payment tariffsfor a consultation, subject to the professional qualifications of the doctor. The proposal alsorecommends RON10-30 (US$2.87-8.63) patient tariffs for one day in hospital and RON20-40(US$5.75-11.51) for an extended hospital stay.

Around 88.5% of Romanians prefer innovative drugs for the treatment of serious illnesses,Business Review reported in October 2012, citing a survey conducted by the IMAS Marketing& Sondaje Institute. Almost 80% of respondents feel that it is imperative to buy innovativedrugs; however, only 19.5% were able to distinguish between generic drugs and original drugs.

Of the total 1,036 Romanians surveyed, 45% stated that they wanted access to innovative drugsand 17% preferred generic drugs.

BMI Economic View: Romanian consumer price inflation ticked up significantly in September, rising to 5.3%year-on-year (y-o-y) from just 3.5% the previous month. While this puts the inflation rate well above thecentral bank's target range (2.5% +/- 1 percentage point), we do not anticipate monetary policymakers to hikerates anytime soon, as price pressures appear to be mainly supply-side driven. Nevertheless, while we agreewith Central Bank Governor Mugur Isarescu that the price spike is transitory, we are revising up our end-2012inflation forecast, from 3.3% to 4.3%, to reflect the impact of higher food prices.

BMI Political View: According to recent polls released by GSS 2000, Romania's governing Social-LiberalUnion (USL) coalition would win 51.2% of the vote in an election held now, with the opposition centre-rightcoalition gaining just 23.4%. This supports our long-held view that Prime Minister Victor Ponta is set toremain in power following the December 2012 election, which we expect to prompt ongoing tensions betweenthe Romanian government and European Union (EU)/International Monetary Fund (IMF), as his anti-austerityrhetoric raises questions over his administration's commitment to fiscal consolidation.