Serbia Pharmaceuticals and Healthcare Report Q1 2013

BMI View: While the market is small in terms of absolute numbers, relative per capita spending on medicinesis expected to improve over the long term. As the country continues its economic convergence with developedEurope, drug consumption is also expected to rise. However, financial inefficiencies within the healthinsurance system mean that the National Health Insurance Institution (RZZO) is unable to always meet itsobligations on time, leaving patients to pay for formerly reimbursed medicines or hospitals having to cover thedifference.

Headline Expenditure Projections

Pharmaceuticals: RSD75.70bn (US$1.03bn) in 2011 to RSD81.44bn (US$0.92bn) in 2012; +7.6% inlocal currency terms and -11.0% in US dollar terms.

Healthcare: RSD347.71bn (US$4.74bn) in 2011 to RSD367.32bn (US$4.14bn) in 2012; +5.6% inlocal currency terms and -12.6% in US dollar terms.

Medical devices: RSD16.64bn (US$223mn) in 2011 to RSD19.98bn (US$223mn) in 2012; +20.1%in local currency terms and -0.7% in US dollar terms.

Risk/Reward Rating (RRR): In BMI's RRR matrix for Q113, Serbia scored 44.7 and ranked 17th out of 20pharmaceutical markets surveyed in the Emerging Europe region. The Serbian market's key selling pointsinclude its advantageous geographical position, which allows easy access to the rest of Europe, a largelyuntapped pharmaceutical market and the low cost and abundant supply of skilled labour - a position helped bya growing network of free trade agreements. However, Serbia will continue to be a challenging market forforeign investors because of the prevalence of corruption, a large-scale black-market economy, and the poorstate of the country's infrastructure and finances, in both public and private spheres.

Key Trends & Developments

The government will introduce a central procurement policy for medical drugs in Serbia toeliminate price and structural mismatch between local pharmacies and the Republic HealthInsurance Fund, according to finance and economy minister Mladjan Dinkic. The health ministryis expected to adopt measures to prevent accumulated debt in the country by the end of 2012.

Dinkic asked the ministry to propose a law to convert the existing debt into public debt afternegotiating with drug manufacturers. The law should allow conversion of some debt into publicdebt, with the remaining to be paid by the state over five years. The net debt in Serbia currentlystands at RSD25bn (US$286mn), with RSD15bn (US$172mn) owed by the Republic HealthInsurance Fund and RSD10bn (US$115mn) owed by local hospitals.

The quality of healthcare in Serbia is the worst in Europe despite consolidated health spending ofEUR20bn (US$26bn) over the last 10 years, Doctors Against Corruption announced in October2012. Serbia was ranked last among the 34 European countries for its mortality rate, with 14deaths per 1,000 inhabitants. The country was ranked third in the region for mortality andnumber of patients suffering from heart disease. The poor healthcare in Serbia has beenattributed to bad health policies since 2002 and growing corruption. Doctors Against Corruptionsaid citizens spend EUR225 (US$291) on average on bribes, 57% of which goes to doctors. Lackof basic medical supplies in hospitals, limited access to medicines and a large section of thepopulation without health cards were indentified as indicators of the deteriorating healthcaresystem in Serbia.

BMI Economic View We forecast Serbia's current account deficit to widen to 11.6% of GDP in 2012 from9.3% in 2011. The perennially high deficits are the result of several structural factors including an economicmodel that has focused on consumption rather than export competitiveness. Government policy has also beenan important driver of the widening shortfall, particularly the fiscal expansion in the run-up to the May generalelection. The budget deficit increased from 4.5% of GDP in 2011 to 7.1% in H112, and we expect recentlyannounced fiscal consolidation measures to reduce the shortfall somewhat to 6.4% of GDP by end-2012,resulting in negligible improvement in the trade balance. We expect the deficit to narrow to 8.9% of GDP in2013 as the new government implements austerity measures, but we caution that Serbia's external positionremains precarious..

BMI Political View: The EU's Serbia 2012 Progress Report, released on October 10 2012, highlightedshortcomings in a number of governance areas. This has prompted Brussels to delay announcing a date for thestart of accession talks until more concrete progress towards the Stabilisation and Association Process criteriacan be observed. We expect Serbia to continue progressing towards EU membership despite a recent criticalEU report and the new Serbian government rekindling relations with Russia. However, progress towardsaccession will be a halting decade-long process.