Russia Pharmaceuticals and Healthcare Report Q2 2012

BMI View: On the positive side, Russia’s pharmaceutical market should regain double-digit US dollar
growth from 2013 and the approval of the country’s entry to the WTO should provide a clearer
regulatory pathway for foreign original drugmakers through strong intellectual property (IP) legislation.

On the negative side, we anticipate a period of governmental and regulatory disarray following the
presidential election as a new government is formed. Reports suggest the Ministry of Healthcare and
Social Development may be split up and the health minister could be replaced in the new government,
while the long-promised Medicines Insurance System will not happen before 2015. The most interesting
development for investors in the sector is whether the state redoubles its efforts to prime domestic
pharmaceutical production through direct market intervention, or if it uses WTO accession to pursue
more cooperative efforts with large multinationals.

.Headline Expenditure Projections.
?? Pharmaceuticals: RUB609.49bn (US$20.73bn) in 2011 to RUB664.91bn (US$20.98bn) in
2012; up by 9.1% in local currency terms and 1.2% in US dollars. Forecast unchanged from
Q112 .

?? Healthcare: RUB2,554bn (US$86.88bn) in 2011 to RUB2,790 (US$88.05bn) in 2012; up by
9.2% in local currency terms and by 1.3% in US dollar terms. Forecast flat compared to Q112.

?? Medical devices: RUB175.99bn (US$5.99bn) to RUB191.12bn (US$6.03bn) in 2011; +8.6% in
local currency terms and +0.8% in US dollar terms. Forecast down slightly compared to Q112.
Risk/Reward Ratings: This quarter, Russia’s Risk/Reward Rating (RRR) holds steady at 58.7, putting
the country in fifth out of 20 Central and Eastern European (CEE) markets. The country’s high position
reflects its large population, potential for economic growth (albeit mainly driven by natural resources
extraction) and steady enlargement of state healthcare coverage. Downsides include growing market
regulation, state participation in the industry, corruption and exposure to exchange rate and other risks
due to the commodity cycle. The protests around the presidential election suggest the potential for rapid
destabilisation, as well as possible hopes for longer-term peaceful reform of the system.

Key Trends And Developments
?? In the coming months, WTO accession will be the driving force in Russian pharmaceutical
legislation. Russia is signed up to WTO rules on non-tariff barriers, in particular the regulations
on technical barriers to trade and on the protection of IP as part of the Trade-Related Aspects of
Intellectual Property (TRIPS) agreement. BMI is closely following the implementation of these
rules and their impact on the marketplace.

?? With WTO membership, one of the actions following accession should be a significant reduction
on import duties on pharmaceuticals to a maximum of 6.5% by 2016 at the latest. Tariffs on
medical devices will also be reduced and bound to an average of 5%. Quantitative restrictions on
imports, such as quotas, bans, permits, prior authorisation requirements or other requirements or
restrictions that cannot be justified under WTO provisions and will not be allowed following
accession. This will limit the means by which the government can control imports.

?? In February 2012, Minister of Healthcare and Social Development Tatyana Golikova said Russia
would not have a Medicines Insurance System in place until 2016, not 2013 as officials had
previously claimed. The remarks came in an interview with the Vedomosti newspaper. She said
the system would come into effect when efforts to promote domestic production would ‘yield
results’ and allow the system to function primarily on domestically made pharmaceuticals. She
said the system would need to function on reference prices that can sustain producers without
bankrupting the system. The state will also need to resolve regional budgeting mechanisms.

?? Longstanding plans to divide the Ministry of Healthcare and Social Development may be back
on the agenda, Vedomosti reported in February. The split was suggested in 2008 as part of a
wider raft of reforms but appeared to have been abandoned. According to the latest reports, the
division of the ministry could follow the formation of a new government in May 2012, when
several structural changes are expected to take place. The purpose of the split would be to put a
single body in charge of pension and labour reforms. BMI sees the proposal as potentially
promising as it could focus the attention of a new Ministry of Healthcare on regulatory reform.

BMI Economic View: Despite robust growth in 2011, we believe falling external demand, increasing
financing constraints and growing political uncertainty in Russia will mean growth slowing to 3.2% in
2012. We caution that a continuation in political tension could alienate foreign investors and mean
another year of major private sector capital outflows, undermining Russia’s fixed investment outlook and
resulting in a sharper slowdown in growth.

BMI Political View: Russia’s ability to confront its major challenges over the coming decade is being
overshadowed by political upheaval at a time of leadership transition. This will have profound
implications for Russia’s political landscape for years to come and could lead to a more pluralist
policymaking process. However, while the Kremlin continues to search for an effective response to
growing anti-Putin sentiment key challenges such as the increasing insurgency in the North Caucasus,
demographic decline and vying for greater influence in the former Soviet territories will be increasingly
difficult to address.