Ukraine Pharmaceuticals and Healthcare Report Q1 2013

BMI View: Foreign and domestic drugmakers in Ukraine will see their operating margins squeezedfrom 2013 as the Ministry of Health introduces more severe limits on mark-ups. Combined with the likelydevaluation of the hryvnia, these factors represent a very large business risk for internationaldrugmakers operating in the country. While Ukraine remains one of Central and Eastern Europe (CEE)'smore promising pharmaceutical markets given its favourable demographics and disease profile, itschronic lack of economic and political stability remains a critical impediment to fulfilling this potential.

Headline Expenditure Projections

Pharmaceuticals: UAH26.75bn (US$3.35bn) in 2011 to UAH30.79bn (US$3.75bn) in 2012;+15.1% in local currency terms and +12.1% in US dollar terms. Forecast unchanged fromQ412.

Healthcare: UAH96.98bn (US$12.14bn) in 2011 to UAH109.66bn (US$13.37bn) in 2012;+13.1% in local currency terms and +10.1% in US dollar terms. Forecast slightly up fromQ412 on account of new historical figures.

Medical devices: UAH6.38bn (US$799mn) in 2011 to UAH7.39bn (US$901mn) in 2012;+15.8% in local currency terms and +12.8% in US dollar terms. Forecast slightly up fromQ412 on account of new historical figures.

Risk/Reward Ratings: In BMI's latest Risk/Reward Ratings Ratings (RRRs) for the 20 markets ofCentral and Eastern Europe (CEE), Ukraine receives a composite pharmaceutical rating of 49.4, which isan improvement on 47.9 in Q412. The new score - propped up by the now more favourable industryrewards score - ranks Ukraine 12th overall, up from 14th previously. However, risks to our forecastsexpressed in US dollars will continue to be posed by the weakness of local currency.

Key Trends & Developments

In August 2012, a new laboratory for quality control of drugs was inaugurated in the Rivneregion of Ukraine. The laboratory will enable technicians to determine the quality of medicineson eleven parameters, compared with four elements earlier. The laboratory spent UAH6.8mn(US$0.82mn) from the state budget to upgrade its processes, which are now automated and willprovide more precise and operational research results.

In November 2012, the Volyn Regional State Administration in Ukraine instructedretailers Volynfarm, Volynfarmpostach and Salve to lower the prices of their drugs. The moveis aimed at offering affordable medicine access to socially vulnerable groups in the country.Volynfarm has been asked to cut the cost of 100 essential medicines by 10%, whileVolynfarmpostach has been instructed to give a discount of 5-10% on 88 medicines. Theadministration ordered Salve to discount 104 medicines.

Changes in maximum mark-ups for selling medicinal products and medical devices will beimplemented from January 1 2013. The new mark-up levels will be applicable to productsincluded in the National List of Medicinal Products and Medical Devices as well as tomandatory minimum assortment for pharmacies. The cabinet restrictions specify a 10% purchaseprice for wholesale mark-ups, with the maximum level depending on the level of purchase pricefor retail mark-ups. The changes include expansion of the mandatory minimum assortment ofmedicinal products and medical devices.

In October 2012, Horizon Capital, a Ukrainian private equity fund, and FMO, a Dutchdevelopment investment bank, acquired a stake in Biofarma, a leading Ukrainianpharmaceutical manufacturer. In exchange for equity, Horizon and FMO will inject capital intoBiofarma for constructing a modern plant in the capital Kyiv. Biofarma is a leading Ukrainianpharmaceutical manufacturer of plasma protein products, organic drugs and recombinantproteins. The company is also unique among domestic manufacturers in that it is goodmanufacturing practice (GMP)-certified for the production of plasma protein products. Thedrugmaker has hired Linde, a German engineering company with expertise in pharmaceuticalproduction, to construct the facility and bring its manufacturing practices in line with leadingGMP standards and Western regulations.

BMI Economic View: Recent economic indicator readings suggest a more aggressive economicslowdown earlier than we anticipated. We have long-held a negative outlook for Ukrainian economicactivity, on our negative outlook for global metallurgical markets, a hryvnia devaluation and a weakerexternal demand. As a result, we have downgraded our real GDP growth forecasts to -0.1% and 1.0% in2012 and 2013 respectively, from a previous forecast of 2.0% and 0.9%.

BMI Political View: In line with our expectations, the ruling Party of Regions has held onto its majorityfollowing the parliamentary elections on October 28 2012, providing President Viktor Yanukovych with apro-presidential majority. With the Party of Region's majority now secured and the next election threeyears away, the government will turn its long overdue focus to economic policy and reform, including asyet unfulfilled promises to the International Monetary Fund (IMF). This could potentially lead to anunfreezing of Ukraine's US$16.4bn Stand-By Arrangement (SBA) with the Fund, which would provide aboon to domestic economic stability, as well as reducing default risks and lowering internationalborrowing costs. Energy policy and currency stability will present major-near term obstacles to economicgrowth and the government will have to undertake difficult decisions to avoid a full-blown crisis.