Slovakia Pharmaceuticals and Healthcare Report Q1 2013

BMI View: Slovak Prime Minister Robert Fico plans to unify the country's private and public healthinsurance funds into a single state-owned insurer, but there is likely to be a lengthy negotiation and alegal battle before this is realised. We do not expect either of the two private insurers - Dôvera or DutchownedUnion - will surrender their businesses without a fight, with Union in particular well-placedto oppose the move, potentially invoking EU law on protectionism. The outcome of this step towards asingle insurer is broadly neutral for BMI's healthcare expenditure projections and is unlikely to have anymeaningful impact until 2014 at the earliest, after which it would be negative for private healthcareproviders.

Headline Expenditure Projections

Pharmaceuticals: EUR1.72bn (US$2.39bn) in 2011 to EUR1.65bn (US$2.10bn) in 2012; -3.8%in local currency terms and -12.1% in US dollar terms. Local currency forecast broadlyunchanged from Q412.

Healthcare: EUR5.92bn (US$8.23bn) in 2011 to EUR6.03bn (US$7.65bn) in 2012; +1.7% inlocal currency terms and -7.0% in US dollar terms. Local currency forecast slightly lower fromQ412, on account of new historical trends.

Medical devices: EUR396mn (US$550mn) in 2011 to EUR396mn (US$503) in 2012; +0.2% inlocal currency terms and -8.4% in US dollar terms. Local currency forecast considerably lowerfrom Q412, on account of new historical data.

Risk/Reward Rating: In our latest Pharmaceutical Risk/Reward Rating (RRR) matrix assessing the 20key markets in Emerging Europe, Slovakia remains in seventh position, with an unchanged compositescore. We expect its risk profile to remain above average, supported by a pro-business operatingenvironment, although risks are on the downside, considering authorities' move to unify healthcareinsurance and improve labour conditions. In the meantime, rewards will continue to be depressed byfactors including fiscal austerities and low population growth.

Key Trends And Developments

As of the start of October 2012, the State Institute for Drug Control (SUKL) charges new feeslist for marketing authorisations, variations, renewals and other procedures. Marketingauthorisation holders will be able to generate variable symbols for their payments from theelectronic application system. Charges now stand at EUR9,600 (US$12,525) for self-standingmarketing authorisations of new products. For generic medicines or medicines with a wellestablisheduse, the government increased the fees to EUR8,000 (US$10,437).

In August 2012, an analysis by the Institute for Economic and Social Reforms (INEKO) andTransparency International Slovakia (TIS) was reported to have found that the number ofcompanies taking part in public tenders organised by hospitals in Slovakia were fewer than thatin other industry sectors between January 2009 and March 2012. While hospital tenders attractedan average of just 1.7 bidders per tender during the period, three companies bid for publictenders in other sectors. Among reasons identified by the analysis for the small amount ofbidders was announcing tenders for specific products that could only be delivered by onecompany. Other factors included late payments by hospitals, strong regulatory practices,corruption, political issues and a segregated provider market.

BMI Economic View: Economic activity slowed in Q312 according to flash estimates, with Slovakia'sreal GDP expanding by 2.2% year-on-year (y-o-y), from 2.6% y-o-y in the previous quarter. In quarteron-quarter (q-o-q) terms, the economy expanded by 0.6% q-o-q. While a more detailed breakdown ofeconomic growth has not been made available yet, we expect that growth was driven by external demand,while household and government demand remained negligible contributors to economic activity. We holdto our end-2012 forecast for real GDP growth to reach 2.5%, falling to 2.0% of GDP in 2013. Over our10-year forecast period, Slovak real GDP growth is forecast to average 2.9%.

BMI Political View: The adoption of a number of revisions to Slovakia's labour market code designed toimprove worker's rights poses both near- and long-term risks to the economy. From a short-termperspective, increasing labour market rigidity at time of slowing economic growth and rising payrolllevies could prompt companies to begin laying off employees in anticipation of additional costs. From along-term viewpoint, the reforms could reduce Slovakia's competitiveness, prompting foreign investors toseek new bases for manufacturing operations