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IMS Market Prognosis 2009-2013
EUROPE RUSSIA

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Published: June 2009

IMS Market Prognosis Europe 2009-2013

Russia 2009

Table of Contents
MARKET SYNOPSIS ....................................................................................................6 FORECAST SUMMARY .................................................................................................8
MARKET FORECAST ...................................................................................................................................... 8 THERAPEUTIC CLASS FORECASTS ................................................................................................................ 12

BUSINESS ENVIRONMENT .......................................................................................13
ECONOMIC ENVIRONMENT ..................................................................................................................... 13
ECONOMIC GROWTH .................................................................................................................................. 13 INFLATION ................................................................................................................................................ 13 POPULATION, EMPLOYMENT AND INCOMES ................................................................................................... 13 FISCAL POLICY ........................................................................................................................................... 14 MONETARY POLICY ..................................................................................................................................... 14 FOREIGN TRADE AND CURRENT ACCOUNT ..................................................................................................... 14 EXCHANGE RATE ........................................................................................................................................ 15

POLITICAL ENVIRONMENT ...................................................................................................................... 17
POLITICAL INSTITUTIONS ........................................................................................................................... 17 CURRENT GOVERNMENT .............................................................................................................................. 17 RELATIONS WITH THE UKRAINE ................................................................................................................... 18 RELATIONS WITH GEORGIA ......................................................................................................................... 18 RELATIONS WITH THE UNITED STATES ......................................................................................................... 19

HEALTHCARE ENVIRONMENT ...................................................................................20
HEALTHCARE PROVISION ....................................................................................................................... 20
Market Prognosis Scenario 2009-2013: Healthcare Provision ............................................................................ 20 HEALTHCARE SYSTEM ................................................................................................................................. 20 HEALTH STATUS ......................................................................................................................................... 21 HEALTHCARE REFORM ................................................................................................................................. 22 HEALTHCARE FUNDING AND EXPENDITURE ................................................................................................... 24 PHARMACEUTICAL EXPENDITURE ................................................................................................................. 26 PRIMARY CARE ........................................................................................................................................... 27 HOSPITAL SECTOR ..................................................................................................................................... 28 PRIVATE SECTOR ....................................................................................................................................... 29

PRESCRIBING AND DISPENSING ............................................................................................................. 30
Market Prognosis Scenario 2009-2013: Prescribing and Dispensing ................................................................... 30 PRESCRIBING INFLUENCES .......................................................................................................................... 30 PHARMACY DISPENSING ............................................................................................................................. 32 HOSPITAL PRESCRIBING AND DISPENSING ................................................................................................... 33

PRICING AND REIMBURSEMENT .............................................................................................................. 34
Market Prognosis Scenario 2009-2013: Pricing and Reimbursement .................................................................. 34

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IMS Market Prognosis Europe 2009-2013

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PRICE SYSTEM ........................................................................................................................................... 34 PRICE TRENDS ........................................................................................................................................... 35 REIMBURSEMENT ....................................................................................................................................... 37 TRADE MARGINS ........................................................................................................................................ 39

REGULATORY ENVIRONMENT .................................................................................................................. 41
Market Prognosis Scenario 2009-2013: Regulatory Environment ....................................................................... 41 DRUG REGISTRATION ................................................................................................................................. 41 INDUSTRY STANDARDS ............................................................................................................................... 42 INTELLECTUAL PROPERTY (IP) ..................................................................................................................... 43

PHARMACEUTICAL BUSINESS ENVIRONMENT ........................................................................................... 45
Market Prognosis Scenario 2009-2013: Pharmaceutical Business Environment .................................................... 45 OPERATING ENVIRONMENT ......................................................................................................................... 45 INDUSTRY STRUCTURE ............................................................................................................................... 46 LEADING CORPORATIONS ........................................................................................................................... 47 LEADING PRODUCTS ................................................................................................................................... 49 INVESTMENT ............................................................................................................................................. 51 GENERICS MARKET ..................................................................................................................................... 52 OTC MARKET ............................................................................................................................................. 54 DISTRIBUTION ........................................................................................................................................... 54 RETAIL PHARMACY ..................................................................................................................................... 55 SALES AND MARKETING .............................................................................................................................. 56

TREND ANALYSIS AND MARKET FORECAST .............................................................58
PRICE LEVELS ............................................................................................................................................ 58 MARKET OVERVIEW .................................................................................................................................... 59 FORECAST SUMMARY .................................................................................................................................. 64 BASELINE EXTRAPOLATIONS ....................................................................................................................... 64 RETAIL SECTOR BASELINE EXTRAPOLATIONS ................................................................................................ 65 HOSPITAL SECTOR BASELINE EXTRAPOLATIONS ............................................................................................ 65 DLO SECTOR BASELINE EXTRAPOLATIONS .................................................................................................... 66

EVENTED FORECAST ............................................................................................................................. 67
EVENT ANALYSIS ........................................................................................................................................ 67 RETAIL SECTOR FORECASTS ........................................................................................................................ 71 HOSPITAL SECTOR FORECASTS .................................................................................................................... 73 DLO SECTOR FORECASTS ............................................................................................................................ 75 SUMMARY OF THE PROGNOSIS 2009-2013 .................................................................................................... 77

THERAPEUTIC CLASS FORECASTS ............................................................................79
ALIMENTARY TRACT AND METABOLISM (ATC A) ............................................................................................. 80 BLOOD AND BLOOD FORMING AGENTS (ATC B) ............................................................................................. 82 CARDIOVASCULAR SYSTEM (ATC C) ............................................................................................................. 82 DERMATOLOGICALS (ATC D) ....................................................................................................................... 83

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IMS Market Prognosis Europe 2009-2013

Russia 2009

GENITOURINARY SYSTEM/SEX HORMONES (ATC G) ........................................................................................ 84 SYSTEMIC ANTI-INFECTIVES (ATC J) ............................................................................................................ 84 ANTINEOPLASTIC AGENTS/IMMUNOMODULATORS (ATC L) .............................................................................. 85 MUSCULOSKELETAL SYSTEM (ATC M) ........................................................................................................... 86 CENTRAL NERVOUS SYSTEM (ATC N) ............................................................................................................ 87 RESPIRATORY SYSTEM (ATC R) .................................................................................................................... 88

RUSSIA 2009 UPDATE .............................................................................................90
PRICE LEVELS ............................................................................................................................................ 90 FORECAST METHODOLOGY .......................................................................................................................... 90 FORECAST 2009 UPDATE ............................................................................................................................. 91 BASELINE EXTRAPOLATIONS ....................................................................................................................... 91 RETAIL PHARMACY SECTOR BASELINE EXTRAPOLATIONS ................................................................................ 92 DLO SECTOR BASELINE EXTRAPOLATIONS .................................................................................................... 92 HOSPITAL SECTOR BASELINE EXTRAPOLATIONS ............................................................................................ 93

EVENTED FORECAST ............................................................................................................................. 94
EVENT ANALYSIS ........................................................................................................................................ 94 RETAIL SECTOR EVENTED FORECAST ............................................................................................................ 98 DLO SECTOR EVENTED FORECAST .............................................................................................................. 100 HOSPITAL SECTOR EVENTED FORECAST ...................................................................................................... 102 TOTAL MARKET FORECASTS ....................................................................................................................... 104 SUMMARY OF THE PROGNOSIS 2009-2013 .................................................................................................. 104

APPENDIX A: GLOSSARY .......................................................................................106 APPENDIX B: SOURCES AND METHODS .................................................................108
COVERAGE .............................................................................................................................................. 108 REGIONAL OVERVIEWS ............................................................................................................................. 110 FORECASTING METHODOLOGY ................................................................................................................... 110 SOURCES ................................................................................................................................................ 111 EVENT IMPACT CALCULATION .................................................................................................................... 112 PHARMACEUTICAL MARKET COVERAGE ....................................................................................................... 116 USEFUL DEFINITIONS ............................................................................................................................... 117

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IMS Market Prognosis Europe 2009-2013

Russia 2009

MARKET SYNOPSIS
• Economic growth fell to 5.6% in 2008 after a three year period of growth averaging 7.4%, and is forecast to contract by at least 5.0% in 2009. Declining oil and natural gas prices, falling export demand and the global financial crisis are the influencing factors behind the declining growth. Inflation reached 14.1% in 2008 and is expected to decline in 2009 as inflationary pressure begins to subside as a result of the weaker economy, depleted inflows of foreign capital and low commodity prices. Economic conditions are expected to improve from 2010. • Following his election as president in March 2008 Dmitry Medvedev has worked closely with his prime minister, Vladimir Putin, the former president. The majority of Russians believe that power still lies with Mr Putin, but Mr Medvedev has shown signs of establishing his authority. Mr Medvedev may use the economic crisis as a means to establish himself as the person in charge who will lead the economy into recovery. • The financial crisis has set back prospects for much-needed reform of the healthcare system, with major structural reform now unlikely until late in the forecast period or beyond. • Commitments to existing programmes will drive up healthcare spending as a proportion of gross domestic product in the early part of the forecast period. The figure will settle back at around 6% in the wake of the crisis, however, with total spending and the government's contribution both remaining low by European standards. • The introduction of a universal outpatient drug reimbursement programme is among the most important reforms likely to be delayed by the financial crisis. Significant progress towards the provision of universal outpatient benefits now appears unlikely to be achieved in the next five years. • Efforts to improve the quality and availability of primary care will continue. The switch in emphasis from treatment to prevention will pay dividends in the long term. Progress will be slow, however, and key health indicators will remain poor throughout the forecast period. • Staff shortages in the public sector will ease further as a result of recent pay hikes. The hospital sector will remain costly and inefficient, however, and substantive reform of secondary care appears unlikely in the foreseeable future. • The financial crisis will limit demand for private provision and supplementary health cover. Private providers will see an upturn later in the forecast period, but the market for private health insurance will remain limited. • Attempts will be made to monitor prescribing more effectively. Tighter constraints are already in place for doctors prescribing to DLO (Dopolnitel'noe Lekarstvennoe Obespechenie) beneficiaries, but existing measures are unlikely to be stepped up until outpatient benefits are made available more widely. • Self-medication and the purchase of prescription drugs without the intervention of a physician will both remain widespread. Substitution at pharmacy level will be patientrather than pharmacist-led. • Broader controls on retail prices may be introduced if recent rates of price growth are sustained. These will focus on mark-ups rather than direct ex-manufacturer controls, however. More stringent regulations, probably including the establishment of a reference pricing mechanism, will accompany the eventual introduction of a universal reimbursement scheme. • DLO reimbursement listing procedures will continue to lack transparency, and expensive new drugs will find it difficult to access the schedule. Reimbursement policies will be tightened further following the eventual introduction of a universal outpatient benefits scheme. Price-volume agreements and other cost-containment policies may also begin to feature at that point.

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IMS Market Prognosis Europe 2009-2013

Russia 2009

• The drug registration process will remain lengthy and lacking in transparency. Bureaucratic import procedures will add to the cost and time taken to bring new drugs to market. • Good manufacturing practice compliance deadlines have already been extended several times. The latest cut-off, scheduled for 2012, is unlikely to be implemented strictly. • Further delays are anticipated before the introduction of data exclusivity provisions. Negotiations on Russia's accession to the World Trade Organisation, which are likely to hasten the eventual introduction of a data protection law, continue to make very slow headway. • Some further attempt will be made to clamp down on counterfeiting. Again, however, enforcement will remain an issue. • Real market growth will slow in the early part of the forecast period, and the financial crisis will have a major impact on both manufacturers and their partners along the distribution chain. Many small domestic manufacturers were already operating at a loss, and the economic downturn will trigger some closures. • Levels of foreign investment in the market will increase during the second half of the forecast period. More overseas companies will invest in local manufacturing capacity, tempted by government incentives and a desire to sidestep costly, bureaucratic import procedures. • Demand for generics will increase during the financial crisis, with patients trading down to cheaper products and hospitals dispensing more low-cost drugs in a bid to conserve their budgets. Branded generics will continue to dominate the sector. • Over-the-counter sales will slow in the face of the current economic downturn, but are expected to bounce back rapidly once the market environment begins to improve. • Leading distributors will increase their share of the wholesale market as smaller businesses run into financial trouble, and as manufacturers pursue contracts with larger players, which are regarded as less risky partners. • Pharmacy chains will feature among the casualties in the retail sector, where recent rates of expansion will be halted. Most chains will survive the financial crisis, however, and multiples will increase their share of the retail market during the second half of the forecast period. • Sales forces will be trimmed temporarily, but drastic cutbacks are unlikely in a market where levels of competition have intensified. The eventual introduction of universal reimbursement will have a major impact on promotional strategies, with reimbursement listings and formulary access both assuming greater importance.

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IMS Market Prognosis Europe 2009-2013

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FORECAST SUMMARY
MARKET FORECAST
The total market is forecast to grow at a compound annual growth rate (CAGR) of 15.3% between 2008 and 2013. Total Market Sales at Actual Prices (2008-2013) RUB (million) At Ex-Manufacturer Prices
2008 Retail Sector DLO Sector* Hospital Sector Budget Purchases* Total Market Annual Growth 177089 74283 39012 22878 313262 34.7% 2009 213788 76098 44715 26361 360962 15.2% 2010 247966 74649 51682 29489 403786 11.9% 2011 304247 77846 59893 34822 476807 18.1% 2012 368263 80475 69815 40854 559406 17.3% 2013 428970 81155 81082 46578 637785 14.0%

*Contract Prices Source: IMS Health Forecast Retail Sector (2008-2013) at Ex-Manufacturer Prices
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 190898 188401 201588 223544 247764 270770 Annual Growth 15.3% -1.3% 7.0% 10.9% 10.8% 9.3% Laspeyre's Index 100.0 115.7 127.7 142.6 153.9 162.7 Annual Growth 17.0% 15.7% 10.4% 11.6% 7.9% 5.8% RUB (million) 177089 213788 247966 304247 368263 428970 Annual Growth 27.1% 20.7% 16.0% 22.7% 21.0% 16.5% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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IMS Market Prognosis Europe 2009-2013

Russia 2009

Forecast Hospital Sector (2008-2013) at Ex-Manufacturer Prices
Year Sales at Constant Prices* Price Index** Sales at Actual Prices

RUB (million) 2008 2009 2010 2011 2012 2013

Annual Growth 40548 40661 42909 45608 49137 53183

Laspeyre's Index 12.3% 0.3% 5.5% 6.3% 7.7% 8.2%

Annual Growth 100.0 113.8 124.1 134.9 145.8 156.0

RUB (million) 12.9% 13.8% 9.1% 8.7% 8.1% 7.0%

Annual Growth 39012 44715 51682 59893 69815 81082 25.4% 14.6% 15.6% 15.9% 16.6% 16.1%

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health Forecast DLO Sector (2008-2013) at Contract Prices
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 76130 72968 71883 74063 76033 76820 Annual Growth 69.8% -4.2% -1.5% 3.0% 2.7% 1.0% Laspeyre's Index 100.0 104.8 103.9 105.9 105.8 105.6 Annual Growth -10.6% 4.8% -0.8% 1.9% -0.1% -0.2% RUB (million) 74283 76098 74649 77846 80475 81155 Annual Growth 45.2% 2.4% -1.9% 4.3% 3.4% 0.8% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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IMS Market Prognosis Europe 2009-2013

Russia 2009

Total Audited Market Forecasts (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 307575 302029 316380 343215 372934 400772 Annual Growth 24.8% -1.8% 4.8% 8.5% 8.7% 7.5% Laspeyre's Index 100.0 112.8 121.8 133.6 143.0 150.9 Annual Growth 10.2% 12.8% 8.0% 9.7% 7.0% 5.5% RUB (million) 290384 334601 374297 441986 518553 591207 Annual Growth 31.0% 15.2% 11.9% 18.1% 17.3% 14.0% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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IMS Market Prognosis Europe 2009-2013

Russia 2009

Events Impacting the Market (2009-2013)

Event Title

Healthcare reform Purchasing power increases Upturn in OTC market Expansion of DLO indications Innovative new products Demographic event Introduction of mandatory health insurance Prescribing controls in the DLO Price controls in the DLO Pressure on hospital prescribing Downturn in OTC market Increase in local production supports generic substitution Purchasing power decreases

1 1 1 1 1 1

2009 2011 2011 2011 2009 2009

35% 75% 55% 50% 90% 90%

45% 85% 75% 65% 90% 90%

55% 95% 95% 80% 90% 90%

60 24 12 12 60 60

5.0% 3.0% 5.0% 0.0% 0.2% 0.3%

0.0% 0.0% 0.0% 10.0% 0.2% 0.3%

3.0% 2.0% 0.0% 0.0% 0.2% 0.3%

1.0% 5.0% 5.0% 0.0% 0.5% 0.0%

0.0% 0.0% 0.0% 5.0% 0.5% 0.0%

1.0% 1.5% 0.0% 0.0% 0.5% 0.0%

1

2011

10%

10%

10%

36

5.0%

0.0%

5.0%

-2.0%

0.0%

-2.0%

1 1 1 1

2009 2010 2009 2009

55% 65% 65% 55%

65% 75% 75% 75%

75% 85% 85% 95%

36 60 36 12

0.0% 0.0% 0.0% 0.0%

0.0% 0.0% 0.0% 0.0%

0.0% 0.0% -0.1% 0.0%

0.0% 0.0% 0.0% -1.0%

-1.5% -3.0% 0.0% 0.0%

0.0% 0.0% -2.0% 0.0%

1

2011

25%

35%

45%

36

0.0%

0.0%

0.0%

-2.0%

-2.0%

-2.0%

1

2009

75%

85%

95%

18

-2.0%

0.0%

-2.0%

-1.5%

0.0%

-1.5%

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IMS Market Prognosis Europe 2009-2013

Russia 2009

THERAPEUTIC CLASS FORECASTS
The following therapeutic class analysis focuses on ten of the leading first level categories of the Anatomical Classification System (ATC 1), and is based on the combination of retail pharmacy, hospital and DLO sales. These ten classes accounted for 92.3% of the market in 2008 and market share is forecast to increase marginally to 93.1% in 2013. Therapeutic Class Forecasts to 2013
2005 ATC Class RUB (million) 29250 5582 27428 5166 8818 15867 11435 7180 20254 16113 Market Share 18.3% 3.5% 17.1% 3.2% 5.5% 9.9% 7.1% 4.5% 12.7% 10.1% 2008 RUB (million) 49859 7371 38660 14901 23906 32755 11847 15391 32714 40619 Market Share 17.2% 2.5% 13.3% 5.1% 8.2% 11.3% 4.1% 5.3% 11.3% 14.0% 2013 RUB (million) 91027 34346 75465 27798 41554 59095 56758 26546 63307 74640 Market Share 15.4% 5.8% 12.8% 4.7% 7.0% 10.0% 9.6% 4.5% 10.7% 12.6% CAGR (+/-) 2005 2008 11.3% 5.7% 7.1% 23.6% 22.1% 15.6% 0.7% 16.5% 10.1% 20.3% 2008 2013 12.8% 36.0% 14.3% 13.3% 11.7% 12.5% 36.8% 11.5% 14.1% 12.9%

ATC A ATC B ATC C ATC D ATC G ATC J ATC L ATC M ATC N ATC R All others Total

12928

8.1%

22360

7.7%

40669

6.9%

11.6%

12.7%

160020

100.0%

290384

100.0%

591207

100.0%

12.7%

15.3%

Source: IMS Health

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IMS Market Prognosis Europe 2009-2013

Russia 2009

BUSINESS ENVIRONMENT
ECONOMIC ENVIRONMENT
ECONOMIC GROWTH
After real growth averaging 7.4% in the period 2004-2007 economic expansion fell to 5.6% in 2008 and is forecast to contract by at least 5% in 2009. Slower economic growth results from dramatic declines in oil and natural gas prices, and volumes exported, caused by reduced levels of world trade and the effects of the global financial crisis. Thus, all the chief components of aggregate demand, private and government consumption, business investment and exports, had declined markedly by the end of 2008. Despite higher government consumption, this trend will continue through 2009, with the economy contracting by at least 5% in real terms due to continuing low commodity prices and depleted external demand, as well as to growing problems on the domestic market. These include rising unemployment and lower purchasing power. From 2010 economic conditions will slowly improve, yielding real growth of 2.0% in that year and averaging around 4.5% annually over the rest of the forecast period. A return to economic growth will be assisted by lower interest rates, fiscal stimulus, a depreciating currency and the absence of serious household debt obligations. However, there remains a downside risk of continuing recession in 2010 at least, if the world slump proves to be deeper and more sustained than forecast. In particular, the Russian economy will remain vulnerable to capital withdrawal, fluctuations in oil and gas prices, and to non-performing loans in the banking system which are currently estimated at 10% by end-year 2009.

INFLATION
Consumer price growth increased to 14.1% on average in 2008, up from 9% in 2007. This arose chiefly from currency depreciation affecting import prices, notably foodstuffs, as well as from utility price increases. The outlook for 2009 is for inflationary pressure to subside somewhat, as a result of a weaker economy, depleted inflows of foreign capital (which add to the money supply unless sterilised) and continuing low commodity prices. Thus, inflation will drop to 10.2% in 2010 and to around 7% by 2013. Nonetheless, consumer price growth will remain high by international standards, especially while competition in domestic retail markets remains weak.

POPULATION, EMPLOYMENT AND INCOMES
Russia's population will fall by 1.4 million between 2008 and 2013 at 0.3% per year. Both the 15-64 and the 65 plus years age groups will continue a decline begun in 2002 and 2008 respectively, with the 65 plus group affected by low average longevity of 65 years. The 15-64 years 'working' population will fall by around 1.9 million. The 65 plus age range will decline as a proportion of the whole to 13.3% by 2013, while the dependency ratio will fall to 18.7% from 19.8% in 2008. However, the decline in the 15-64 'working' population may prove a temporary phenomenon as the 0-14 years cohort began to expand once more in 2008, rising by around 1 million by 2013 as the low (1.3) fertility rate picks up. With the economy faltering, unemployment increased by 34% in 2008 and will rise to almost 10% of the labour force in 2009 as employment growth turns negative. Real incomes, though supported by falling inflation, will cease to grow, not least because of the increasing incidence of wages being paid neither on time nor, sometimes, at all.

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IMS Market Prognosis Europe 2009-2013

Russia 2009

FISCAL POLICY
The fiscal position will deteriorate seriously in 2009. Following a decade of balanced budgets, a federal deficit of between 8% and 10% of gross domestic product (GDP) is likely in 2009, after a 3.6% surplus in 2008. The original government calculations were based upon unrealistic oil price and growth assumptions, which had to be revised as the recession took hold. Fearing social discontent, more resources than previously allowed will be ploughed into employment programmes, and into unemployment and other social benefits. Infrastructure and defence spending will be pruned. Other stimulus measures include a tax cut of 10% in support of small businesses, while corporation tax is reduced from 24% to 20%. The 2009-2010 budget shortfalls will be financed by the Reserve Fund, but any further deficits will lead to the Fund becoming depleted. No return to balanced budgets is envisaged before 2011 at the earliest and three-year budget planning has been abandoned. Although there are no plans for widespread nationalisation, the state is strengthening its grip on certain strategic areas of the economy, notably energy production and distribution.

MONETARY POLICY
The Russian Central Bank (RCB) cut interest rates by 0.5% in April 2009, following a period of substantial monetary tightening. This reduced its refinancing rate to 12.5% - still relatively high due to inflation, and downward pressure on the rouble (which cost the RCB more than US$200 billion in foreign exchange support). Given the pessimistic outlook for the economy and a likely fall in inflation, further rate cuts may occur in 2009-2010, especially as the rouble now appears to have stabilised. The RCB and the government are working on plans to recapitalise part of the banking sector to counter the growing proportion of non-performing loans (NPLs or 'bad debts'). This would be achieved by acquiring bank shares in exchange for capital injections and, in extremis, by the creation of a ‘bad bank’ to hold toxic assets. However, full bank nationalisation is not on the government agenda. Providing sufficient domestic liquidity is the main policy objective.

FOREIGN TRADE AND CURRENT ACCOUNT
Contracting oil prices and shrinking foreign demand led to a 45% drop in export earnings yearon-year in the first quarter of 2009. This will lead to a small deficit on current account for the year, as visible export earnings decline by around 63%. Conversely, export earnings will exceed import costs from 2010, bringing the current account back into a slight surplus again, where it will remain over the medium term. The services and income accounts will remain in deficit, the latter due to net repatriation of profits by foreign-owned firms operating in Russia. Despite its G20 commitments, there are growing signs of protectionist sentiment gaining hold in Russia, although the average tariff level of 11% is roughly on a par with World Trade Organisation members. The weaker rouble is aiding import substitution in the domestic economy.

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IMS Market Prognosis Europe 2009-2013

Russia 2009

EXCHANGE RATE
In January 2009, the RCB adopted a new trading band for the rouble due to significant currency depreciation during 2008. By mid-May 2009 the rouble was trading at RUB32.00:US$1 against RUB23.90:US$1 a year earlier, positioning it in the centre of the trading band. Overall, the RCB has been successful in managing a controlled devaluation of the rouble during 2008 and into 2009. The rouble has stabilised and even appreciated slightly in early 2009, and will continue to strengthen gradually over the medium term as the economy and especially exports regain their momentum.

Key Economic Indicators
2009 Real GDP 2000 RUB (billion) Annual Growth Nominal GDP RUB (billion) Annual Growth Consumer Price Index 2000 = 100 Annual Growth Real Private Consumption 2000 RUB (billion) Annual Growth Real Government Consumption 2000 RUB (billion) Annual Growth Current Account Balance US$ (billion) Current Account Balance RUB (billion) Current Account Balance (% of GDP) Exchange Rate RUB:US$ Annual Growth 11497 -5.0% 41512 -0.1% 309.6 13.6% 2010 11727 2.0% 47424 14.2% 341.2 10.2% 2011 12221 4.2% 53396 12.6% 369.9 8.4% 2012 12766 4.5% 59409 11.3% 397.2 7.4% 2013 13362 4.7% 65713 10.6% 425.0 7.0%

7173

7336

7578

7845

8161

-4.0%

2.3%

3.3%

3.5%

4.0%

1332

1370

1413

1460

1511

3.5% -6.9 -242.5 -0.6% 35.00 40.8%

2.8% 11.6 418.3 0.9% 36.20 3.4%

3.2% 25.0 914.5 1.7% 36.60 1.1%

3.3% 21.6 794.8 1.3% 36.80 0.5%

3.5% 14.6 545.0 0.8% 37.20 1.1%

Source: Economist Intelligence Unit, Qtr II 2009

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IMS Market Prognosis Europe 2009-2013

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Population by Age Distribution (million)
2009 0-14 Annual Growth 15-64 Annual Growth 65+ Annual Growth Total Population Annual Growth 20.95 0.8% 101.14 0.1% 19.35 -3.4% 141.43 -0.3% 2010 21.12 0.8% 101.13 0.0% 18.73 -3.2% 140.98 -0.3% 2011 21.35 1.1% 100.88 -0.3% 18.30 -2.3% 140.53 -0.3% 2012 21.60 1.2% 100.00 -0.9% 18.40 0.5% 140.00 -0.4% 2013 21.86 1.2% 99.11 -0.9% 18.58 1.0% 139.55 -0.3%

Source: Economist Intelligence Unit, Qtr II 2009

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IMS Market Prognosis Europe 2009-2013

Russia 2009

POLITICAL ENVIRONMENT
POLITICAL INSTITUTIONS
Following a dramatic power struggle between Russia’s first president, Boris Yeltsin, and his opponents in parliament, a new constitution was written for the Russian Federation in 1993. It established a strong presidential regime. Russia’s president is elected every six years and is barred consecutive terms. The president is the chief executive with domestic and foreign policy. The head of the government is presidential appointee. The cabinet of ministers is selected by submit his choices for presidential approval. from serving more than two the power to determine both the prime minister, who is a the prime minister, who must

The Federal Assembly of Russia consists of two houses, the Duma and the Federation Council. The Duma is the more powerful lower house, with a total of 450 members, who are elected according to a proportional voting system every four years. As of 2007, parties face a threshold of 7% to gain representation in the Duma. The Federation Council is a more consultative body, which has the power to stall legislation but can be overridden by the Duma. The 176 members of the Federation Council are selected by the 86 provincial governors and legislatures for terms that vary according to province. Russia’s judiciary is divided into three branches. The highest appellate court of general jurisdiction is the Supreme Court. The highest appellate court for commercial law is the High Court of Arbitration. The 19-member Constitutional Court has the power of judicial review. Judges for all three courts are nominated by the president and approved of by the Federation Council.

CURRENT GOVERNMENT
Political power in Russia is currently shared in an unprecedented fashion given the country's long history of strong, individual rulers. The delicate balance between the president, Dmitry Medvedev, elected in March 2008, and his prime minister, Vladimir Putin, the former president, mirrors the struggle between the two major factions within the Kremlin: those known as the siloviki , who are associated with security services, military, and police, and are particularly interested in promoting a strong state and issues of law and order; and another faction dominated by lawyers and economists from St Petersburg whose interest appears to be in strengthening the rule of law as the basis of a more liberal regime. Mr Putin has close ties to the first group, while Mr Medvedev is perceived to be allied with the second. While the majority of Russians seem convinced that ultimate authority still lies in Mr Putin's hands, Mr Medvedev has, in his first year as president, shown some sign of his desire to assert the kind of authority which the constitution reserves for the chief executive. The impact of the global financial crisis has been particularly severe in Russia. Russia's leaders seemed to believe initially that the credit crisis in the US would have little effect on Russia. However, the Russian stock market has lost almost 80% of its value since May 2008. With an estimated ten million people out of work in mid-2009, the number of people earning US$15000 or more has dipped from an estimated 33% in early 2008 to an estimated 18% at the beginning of 2009. Two waves of bail-outs in the fall of 2008 and early 2009 have earmarked US$60 billion to refinance the ailing banking sector. At the heart of Russia's current economic troubles has been the drop in the price of oil which has forced the Kremlin into sharp budget cuts and devaluation of the rouble by around 15% since the summer of 2008. Even Russia's infamous group of billionaires, known as the oligarchs, has been hit hard by the crisis. The economic hard times faced by ordinary Russians presents a major threat to the clear social contract of the previous eight years of Putin rule. Mr Putin's popularity with most Russians was solidified by his capacity to deliver greater prosperity for all, made possible

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because of high oil prices, in exchange for a more authoritarian state compared with the Gorbachev and Yeltsin years. In addition, Mr Putin projected an image of strength and competence that appealed to the majority of Russians. The big political question now is whether Russians, faced with the consequences of a global recession, will grow disenchanted with Mr Putin and whether Mr Medvedev will seize the opportunity to shift, in the eyes of the public, from being Mr Putin’s protegé to being the man who really is in charge and who can steer the country back to a stronger economy. In February 2009, Mr Medvedev surprised many by indirectly criticising Mr Putin in a statement in which he asserted that the government was reacting too slowly to the financial crisis. In April 2009, Mr Medvedev published his first newspaper interview in one of the few publications that is openly critical of the Kremlin, Novaya Gazeta. A month later Mr Medvedev announced that he might roll back a key element of the Putin-era consolidation of power: the threshold of 7% for election to the Duma which has effectively kept opposition parties out of the legislature. Mr Putin is far more charismatic than Mr Medvedev and, for the moment, still enjoys a greater level of personal popularity with most Russians. While much is made of the opposition between Kremlin factions, Mr Medvedev and Mr Putin have worked together without too much public friction and the country's economic woes seem to dictate greater political stability rather than political turmoil, especially given how weak the political opposition is in Russia. Nevertheless, it is possible that Mr Medvedev could force Mr Putin out of office. There is still considerable speculation, on the other hand, that Mr Putin is preparing to reclaim the presidency. One of the more noteworthy reforms Mr Medvedev has enacted during his first year in office is an extension of the presidential term from four to six years.

RELATIONS WITH THE UKRAINE
In 2006, Russia briefly cut off all gas supplies to Ukraine as part of an ongoing dispute over prices, plus accusations by Russia's state-owned Gazprom that Ukraine has been illegally siphoning off gas. Every winter since 2006 the two nations have engaged in tense negotiations over the continuation of gas supplies during the winter months. The situation is further complicated by the fact the one quarter of the gas supplies for the European Union nations passes through Ukraine. In January 2009, Gazprom one again stopped all deliveries to Ukraine prompting diplomatic intervention by the EU. Ukranian prime minister Yulia Tymoshenko and Mr Putin finally reached an agreement brokered by the Czech prime minister Mirek Topolanek acting as the holder of the EU presidency. The EU agreed to provide observers to monitor the flow of gas through Ukraine. The long-term prospects for an agreement between Ukraine and Russia are complicated by a joint venture between Russia and its biggest European partner, Germany, to build a pipeline under the Baltic Sea. Completion of the pipeline would make it possible for Russia to cut off supplies to Eastern Europe without disrupting supplies to the west.

RELATIONS WITH GEORGIA
Relations with Georgia continue to be tense after the brief war of August 2008. In May 2009, Georgian officials accused Russia of backing an attempted military coup that broke out one day before NATO military exercises in Georgia began. Russia is thought have deployed 10000 troops in the breakaway provinces of South Ossetia and Abkhazia. In April 2009 Russia assumed control of the borders of the two provinces, an action decried by NATO and the United States.

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RELATIONS WITH THE UNITED STATES
The new American administration has expressed its desire to ‘press the reset button’ in its relations with Russia. Barack Obama met Mr Medvedev for the first time in London in April 2009, a prelude to the American president's scheduled visit to Russia in July 2009. While the proposed missile defence shield in Central Europe appears to be a lower priority for Mr Obama than his predecessor, the Americans have not abandoned the project, much to the consternation of Moscow. In April 2009 the two nations announced the beginning of talks to replace the 1991 Strategic Arms Reduction Treaty which expires at the end of 2009. Mr Obama has repeatedly made it clear that he considers nuclear non-proliferation a key to his foreign policy goals. Relations between Washington and Moscow are likely to be determined to a considerable extent by co-operation over this issue.

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HEALTHCARE ENVIRONMENT
HEALTHCARE PROVISION
Market Prognosis Scenario 2009-2013: Healthcare Provision While the government has pledged to maintain funding for several key initiatives, the financial crisis will set back prospects for much-needed reform of the healthcare system. Some further improvement in levels of public sector provision will be witnessed, but major structural reform now appears unlikely until late in the forecast period or beyond. Commitments to existing investment programmes are likely to drive up healthcare spending as a proportion of gross domestic product in the early part of the forecast period. Figures will settle back at around 6% in the wake of an eventual economic recovery, however, and the government's contribution to total healthcare spending will remain low by European standards. The proposed introduction of a universal outpatient drug reimbursement programme is among the key reform measures most likely to be delayed as a result of the financial crisis. Significant progress on this issue now appears unlikely during the forecast period. The pursuit of other long-term reform goals will continue. These will drive some further improvement in the quality and availability of primary care. The switch in emphasis from treatment to prevention, early diagnosis and effective management of disease will pay dividends in the long term, but progress will be limited during the next five years. Staff shortages in both the primary care and hospital sectors will ease further as a result of recent pay rises. Substantive reform of the public hospital sector does not appear likely in the near future, however. Demand for private provision and supplementary health cover will be hit by the financial crisis. The credit crunch may also claim some casualties in the sector. Groups or individuals that have borrowed heavily to fund clinic or hospital building programmes will be most exposed.

HEALTHCARE SYSTEM
Almost 20 years after the break-up of the Soviet Union, attempts to establish a workable insurance-based healthcare system are still far from complete. Plagued by funding and administrative problems, and compromised by bureaucracy and corruption, the system has failed patients badly – to the extent that the health status of the population has deteriorated alarmingly since the early 1990s (see Health Status). Belated efforts to address the situation have had a limited impact to date. A renewed push to improve healthcare provision has now been announced (see Healthcare Reform). The timing of the initiative could not be worse, however, coinciding as it does with an abrupt economic reverse that threatens the financial viability of planned reforms. Key proposals are likely to be delayed or watered down as a result, limiting progress during the next five years. Healthcare policy is determined by the Ministry of Health and Social Development (MOHSD), which oversees federal programmes – including a compulsory health insurance scheme. A significant degree of responsibility for funding and provision has been devolved to the regions, however, fostering both widespread duplication of resources and the emergence of regional

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disparities in the quality of care available to patients. Funding and the healthcare infrastructure are both heavily skewed in favour of major cities and their hinterlands, and patients in many remote rural areas are poorly served. A Federal Fund for Mandatory Medical Insurance (FFOMS) was established in the early 1990s. Equivalent regional funds were also established as part of a system designed to shift the focus of healthcare financing away from federal and state budgets, and to encourage competition for business at both payer and provider levels. Neither of these goals has been achieved, however. The result is a complex, fragmented system in which corruption and bureaucracy compromise levels of efficiency, and in which the quality of care available to patients in public sector facilities is often poor. Guaranteed medical benefits are defined at federal level. The package covers inpatient care, but free or subsidised outpatient provision is available only to a small proportion of the population. Nor, in reality, do inpatient benefits meet theoretical minimum standards. The capacity of the system to administer 'high-tech' care such as cardiovascular or cancer surgery, dialysis or transplantation is many-times lower than the demand for such services. Unofficial payments are accepted widely by providers from patients attempting to secure preferential access to specialist care. This inflates patient spending and limits the ability of many poor patients to access adequate treatment. The primary care sector is poorly developed, and provision is still heavily hospital-led, in spite of recent attempts to shift the focus of the system away from treatment towards prevention and the effective management of early-stage disease. Strengthening outpatient care is a key goal of healthcare policy, and will remain so throughout the forecast period (see Primary Care).

HEALTH STATUS
The failure of early post-Soviet reforms – and resulting deficiencies in healthcare provision – triggered a rapid decline in the health status of the Russian population through the 1990s and into the early part of this decade. Efforts are now being made to reverse that trend, but these have made little headway to date, and are unlikely to have a major impact for some time (see Healthcare Reform). At 65 years, life expectancy at birth is still significantly lower than the 1990 figure of 69 years. Gender-based statistics reveal a particularly wide gap between life expectancy for males (59 years) and females (72 years). That is a reflection in part of the heavy toll that smoking and drink-related health problems take on the male population. Almost two-thirds of adult males are smokers, while tobacco- and alcohol-related diseases claim an estimated one million lives every year. Mortality rates associated with circulatory problems, respiratory disease and cancer have all doubled since 1990. Over 450000 new cases of cancer are diagnosed every year, and the disease is responsible for an annual death toll of approximately 300000. As with cardiovascular disease, the widespread absence of early detection or diagnosis programmes is a contributing factor to high rates of mortality, which have been reversed in many European countries, but which have continued to rise in Russia. The country's low fertility rate is in keeping with trends across much of Europe, but its high mortality rate sets it apart, and has begun to drive worrying demographic trends. The population has begun to decline, and numbers are set to fall by almost three million during the next five years. Left unchecked, current trends could see Russia's population fall by up to one-third by the middle of this century. The extent of the country's health problems and the rate at which the structure of the population is changing have, belatedly, prompted the introduction of measures designed to tackle the situation. A national healthcare project was launched in 2005, while a further bundle of proposed reforms was unveiled by the government in 2008.

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Some of the 2005 measures – including improvements in neonatal care and increased coverage of immunisation programmes – already appear to be having a positive impact, with infant mortality rates beginning to decline. Other problems will present a much greater challenge, however, and the economic downturn will limit the availability of funds to support some new programmes.

HEALTHCARE REFORM
With health indicators stuck at stubbornly low levels, the government announced a new push to implement more effective healthcare reforms during 2005. Further planned changes were announced in 2008,and appeared set to build on early progress achieved by measures introduced in the middle of the decade. These have since been overtaken by the financial crisis, however, and while the government has underlined its commitment to the reform programme, the early implementation of some key policies now appears unlikely. The new national health project ('Zdorovie' ) was launched by President Vladimir Putin at the beginning of 2006. Backed by an injection of an extra RUB208 billion in funding for the healthcare sector through 2006 and 2007, major goals included: • Strengthening primary care provision; • Developing disease prevention programmes; • Broadening access to 'high-tech' medical care. Key targets for additional funds being pumped into the sector included an increase in the wages of general practitioners (GPs) and other primary healthcare staff, the purchase of new equipment for polyclinics and other outpatient facilities, and the construction of new medical centres offering state-of-the art treatment in areas such as cardiovascular surgery, neurosurgery, orthopaedics, endocrinology and reproduction. Money was also earmarked for the purchase of 12000 new ambulances, the expansion of immunisation programmes and the provision of improved training for primary care workers. Significantly, the 2005 reform package also aimed to broaden access to outpatient drug reimbursement, establishing a state drug reimbursement programme – the Dopolnitel'noe Lekarstvennoe Obespechenie , or DLO. Prior to this, some patients were covered by Regulation of the Russian Federation Government No 890, dated July 1994. However, inadequate funding led to high debts for pharmacies and eventually resulted in a decline in the quality and availability of healthcare. The main objective of the DLO was to standardise the provision of health care for defined groups of the population across the regions and ensuring provision of drugs of the required quality. As the DLO has evolved it is now seen as the first step towards the eventual creation of a universal reimbursement scheme (see Reimbursement). Impact of the 2005 Reform Package Some measures introduced since the beginning of 2006 have already begun to have a significant impact. Salaries for primary healthcare workers have risen appreciably, for example (see Primary Care), while better training for GPs and paediatricians, coupled with broader immunisation programmes and increases in the availability of high-tech equipment have driven improvements in some key health indicators. The availability of better primary care has seen inpatient stays begin to decline, while waiting times for access to some high-tech services have been reduced. Significant improvements in the infant mortality rate were reported in 2007, while the incidence of viral hepatitis and rubella was lower than at any time in the past 15 years, reflecting broader coverage of vaccination programmes. Progress in some other areas has been less impressive, however. Thus, while more than RUB13 billion has been ploughed into the construction of specialist clinics and medical centres since the beginning of 2006, only three have been completed to date. The building

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programme has been affected by delays, and costs associated with the construction of new high-tech centres continue to rise. Additional funding has been announced more recently to finance programmes targeting improved oncology (RUB6 billion) and cardiovascular (RUB3.1 billion) provision. Again, the focus is on early detection and better management of these conditions, with the establishment of diagnostic laboratories at the heart of the initiative. The new drug reimbursement scheme (DLO) also ran into problems at an early stage. Costs associated with the scheme rocketed in 2006, with poor management and corruption largely to blame. It has since been restructured (see Reimbursement), with a two-tier fund now overseeing the provision of: • Expensive drugs for the treatment of seven serious conditions; • A broader range of 'essential medicines' available to specific patient groups (the ONLS). The reimbursement scheme has certainly had a positive impact where patient access to drugs for the treatment of the seven life-threatening conditions is concerned. The programme offering broader subsidies for essential drugs has had a more modest impact – partly because those eligible for reimbursement benefits have been offered the chance to opt out of the scheme, receiving cash payments instead of subsidised outpatient provision. As a result, while almost 15 million people were covered by the programme when it was introduced, that figure has fallen to just five million. The reimbursement scheme has also had a significant effect on demand for drugs (see Pharmaceutical Expenditure and Pharmaceutical Business Environment). Indeed, since its establishment at the beginning of 2005, the DLO has been a major contributor to rapid increases (in 2006) in rates of pharmaceutical market growth. The Health Development Concept 2020 In 2008, the government unveiled plans to build on the 2005 package – this time over a tenyear period to 2020. Concrete goals have been set for the new reforms, which aim to drive up average life expectancy to 75 years by 2020 – principally through broadening access to 'hightech' medical services. These are currently available to only a quarter of patients, but the aim is to drive that figure up to 80%. Disease prevention initiatives, early detection programmes and improvements in the management of conditions such as cancer and cardiovascular disease will be a central part of the drive to improve the health status of the patient population. These are expected to deliver a 20% reduction in the incidence of strokes and heart attacks during the next ten years. Broader pharmaceutical provision is also a key element of the new reform proposals, which envisage the establishment of a beefed-up mandatory health insurance scheme capable of financing a universal outpatient drug benefits programme. This would have huge implications for the pharmaceutical industry, and for a range of other players in the healthcare system. For since it would drive a major increase in demand for pharmaceuticals, it would almost certainly be accompanied by the introduction of measures designed to limit costs associated with the reimbursement of those drugs. Price control mechanisms would no doubt play a central role, but the imposition of tighter controls on physicians and pharmacists are also likely to feature, over-prescribing and over-charging by retailers having been identified as two potential threats to the financial viability of a universal reimbursement scheme. Even with stronger cost-containment mechanisms in place, a universal reimbursement scheme would have major implications for public sector drug spending, and a new pharmaceutical policy features in the proposals that were discussed by the government during 2008. Key to this is a major push to increase the proportion of demand for pharmaceuticals that can be met by locally manufactured products, which the architects of the new policy want to see reach at least 50% inside the next ten years. While elements of the new reform proposals were unveiled during 2008, the package was still far from complete. Government officials said the Healthcare Development Concept 2020 plans

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would be finalised during 2009, and that implementation of key measures would begin in 2010. A pilot version of the universal drug reimbursement scheme was among the initiatives due to be launched in that year. The 2020 reforms have since been overtaken by the financial crisis, however, and the sharp economic downturn has almost certainly put paid to their introduction in the near future. "We all hear announcements that medical insurance may be introduced within the next one, two or three years, but we know the situation from the inside, and we believe this is unlikely to happen." (Wholesaler) The government's own finances will deteriorate rapidly through 2009, while sharp increases in unemployment will limit the ability – and willingness – of patients and their employers to contribute financially to an insurance-based universal reimbursement scheme. Thus, while other elements of the new reform package may begin to make some headway, universal drug benefits are unlikely to be introduced in the foreseeable future. Some believe the government may attempt to implement the scheme towards the end of the forecast period, but others do not expect it to feature at all during the next five years. Implications for the Pharmaceutical Industry The drive to improve healthcare provision has had a generally positive impact on the pharmaceutical industry to date. Of most significance has been the growth in demand for medicines driven by the establishment of the DLO. The introduction of a universal outpatient benefits scheme would have an even bigger impact on pharmaceutical consumption, but would be accompanied by the introduction of tougher cost-containment measures – with price controls almost certain to feature. In the longer term, the drive to improve life expectancy will also boost consumption – particularly of products for the treatment of chronic, age-related conditions, which will improve the prognosis for patients diagnosed with conditions such as cardiovascular and respiratory problems. Late-stage diagnosis of these problems is a major contributing factor to high rates of mortality currently associated with these conditions. It also limits the use of drugs that, in many other countries, are used widely to manage such diseases. "We have a product for COPD [chronic obstructive pulmonary disease], and I was told this must be a big product in Moscow where everybody smokes. I said, 'I'm sorry, but this will be a very small product.'[…]. In Europe or the States you develop COPD when you are in your fifties. Here you don't get it. The patient dies before he develops it." (Multinational Company Executive)

HEALTHCARE FUNDING AND EXPENDITURE
Having fallen back during the first half of this decade, the proportion of gross domestic product (GDP) devoted to healthcare had begun to rise again in recent years, and is believed to have reached 5.5% in 2008. Future trends are difficult to predict in the face of the current economic crisis but, in public at least, the government has underlined its commitment to investments in the sector. With the economy now forecast to contract by around 5% in 2009, healthcare spending as a proportion of GDP could increase sharply in the early part of the forecast period if it makes good on those pledges. This would mirror trends observed during the financial crisis that hit Russia towards the end of the 1990s, when spending on healthcare briefly exceeded 7% of GDP. Figures will settle again as the economy recovers this time around, but probably at a level close to 6%. A further rise will be observed following the eventual introduction of universal outpatient drug benefits – though this is a development that most observers doubt will be witnessed until late in the forecast period or beyond. Funds used to bankroll healthcare reforms introduced since the beginning of 2006 have been a major factor behind the recent upturn in rates of healthcare spending growth. These have seen the proportion of general government spending devoted to the sector rise from less than

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10% to more than 11% since 2004. The government's share of total healthcare spending has also increased – from less than 60% to more than 64% during the same period. As a result, public sector contributions to national healthcare spending are now higher than at any time since the late 1990s. At less than two-thirds, the government's share is still significantly lower than in most European countries, however. Healthcare Spending
2001 National healthcare spending as share of GDP Healthcare spending as share of total government spending Government share of national healthcare spending Private sector share of national healthcare spending 5.7% 2004 5.2% 2007 5.4%

9.6%

9.7%

11.2%

58.7% 41.3%

59.6% 40.4%

64.2% 35.8%

Source: WHO National Health Accounts Series (March 2009). Public healthcare spending is split between the federal government and regional and municipal authorities. Accurate information on spending at individual levels is hard to come by, reflecting the complex nature of healthcare financing mechanisms. The split between federal and regional expenditure has also altered significantly following recent reform of the DLO drug reimbursement scheme, which has seen responsibility for most outpatient subsidies devolved to the regions (see Pharmaceutical Expenditure). Private contributions to total healthcare spending rose rapidly through the 1990s and into the early part of this decade, but have begun to fall back again more recently. Private spending on healthcare is dominated by out-of-pocket payments made by patients at the point of care. According to the WHO National Health Accounts Series, out-of-pocket payments now account for 83% of private spending – a figure that has risen from just 55% in the mid-1990s, and from 74% at the beginning of this decade. In turn, patient spending is dominated by drug purchases, reflecting the limited availability of outpatient reimbursement. Fiscal surpluses built up by the government earlier this decade should enable it to maintain its commitment to healthcare spending in the short term. With a deficit of up to 10% being predicted in 2009 alone, however, its US$130 billion reserve fund could be wiped out by the end of 2010. The budget for 2009 has been revised downwards in the face of the rapidlyworsening economic situation. The MOHSD originally appeared likely to escape significant cuts, but Health Minister Tatiana Golikova has since announced that some programmes will be trimmed. She said cuts would focus on capital spending programmes, however, and said other elements of the healthcare budget – including funds earmarked for new reform projects – would not be affected. The government's financial situation, and the amount of money available for spending on public healthcare programmes, will depend largely on what happens to oil and other energy prices later in the forecast period. Oil and gas dominate Russia's export revenues, and were the platform on which the country's recent economic boom was based. Encouragingly, oil prices have edged up since the most recent round of budget calculations. Patient spending on healthcare is usually resilient in the face of economic volatility. The current crisis is bound to have some impact on private spending, however, with unemployment set to reach 12% by the end of 2009. The sharp rise in jobless numbers will also affect the government's tax take, which in turn will have implications for healthcare budgets in the early part of the forecast period.

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PHARMACEUTICAL EXPENDITURE
Pharmaceutical costs are a substantial contributor to overall healthcare spending. Their share of total health expenditure rose gradually through the 1990s, but has increased more sharply in recent years – most notably since the middle of this decade. The introduction of the DLO reimbursement scheme has been a major contributor to increases witnessed since 2005. More recently, the volatile economic situation – which has seen the rouble tumble in value – has triggered sharp increases in the price of many drugs. MOHSD figures indicate that drugs accounted for almost 23% of public health spending by regional governments in 2006. Federal purchasing programmes are also in place, but public funds account for little more than one-third of national pharmaceutical expenditure, with patients shouldering the bulk of the drug spending burden. Those figures reflect not only the limited availability of outpatient drug reimbursement, but also the need for patients to pay for some inpatient medicines. Drug purchases account for well over half of all private healthcare spending, and are made almost exclusively on an out-of-pocket basis. The DLO/ONLS Scheme The government's contribution to pharmaceutical expenditure was even lower until 2005, when the formal scheme for the reimbursement of outpatient drugs – the Dopolnitel'noe Lekarstvennoe Obespechenie , or DLO, was established. At less than 15 million, potential beneficiaries covered by the scheme still represented a very limited proportion of the total population. That figure has fallen dramatically – to a current figure of just five million – since 2005, reflecting the decision to give beneficiaries the choice of participating in the scheme or taking a cash payment with which to purchase their outpatient drug requirements (see Reimbursement). Nevertheless, the initiative has had a major impact, with the DLO sector accounting for almost 24% of total pharmaceutical market value in 2008. Mismanagement and corruption saw spending on the DLO rocket in 2006, when the fund ran up a huge deficit. The ensuing scandal led to the dismissal of several high-ranking officials at the FFOMS, which was responsible for managing the scheme, and of the head of Roszdravnadzor , which had been set up in 2004 to oversee medicines regulation and run the DLO. At RUB73 billion, the value of drugs actually dispensed to DLO beneficiaries was over twotimes higher than the scheme's budget in 2006. Spending declined sharply in 2007, following the introduction of tighter controls on the administration of DLO funding and efforts to streamline the programme. It was restructured in 2008, with the creation of two separate reimbursement schemes: one covering expensive drugs for the treatment of seven rare, lifethreatening conditions; and one covering a much broader range of 'essential drugs' which is now known as the ONLS, while the broader scheme is still referred to as the DLO. There is ongoing speculation in the market that the DLO will be expanded to include disease areas such as diabetes, cancer and cardiovascular disease. Less than 60000 patients are registered beneficiaries of the expensive diseases segment, but treatment of reimbursed conditions is dominated by expensive patent-protected drugs. As a result, spending on reimbursement for these patients is almost as costly as the provision of outpatient drug benefits for the five million beneficiaries of the basic ONLS scheme. Budgets for the two strands were set at RUB33 billion and RUB37 billion, respectively, in 2008. Budgets allocated for 2009 are RUB37 billion for the 'seven nosologies' and RUB40 billion for the broader reimbursement scheme. In 2008, specialist drugs for the treatment of the seven expensive disease beneficiaries were paid for directly out of the central government budget, and were purchased through federal tenders. The ONLS was also funded centrally, but administration was decentralised, with regional authorities responsible for purchasing drugs used under the scheme.

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Drug Spending Trends The recent rapid rise in drug prices has caused problems for patients and public sector budget managers alike. Tendering methods for the purchase of hospital drugs and ONLS products vary by region, but some have adapted buying strategies in a bid to limit their exposure to rising costs. The authorities in St Petersburg, for example, issued tenders for the purchase of their entire 2009 requirements at an early stage in 2009 in a bid to avoid the impact of further anticipated price increases. Patients have also been affected – though the full impact of recent price increases had yet to filter through the distribution chain in the early part of 2009. If prices continue to rise through the remainder of the year, many patients are expected to begin trading down from branded medicines to cheaper generic alternatives. The extent of recent increases, and their impact on both patients and public sector budgets, has prompted regulators to look more closely at drug prices, which will be subjected to tighter controls when a universal outpatient reimbursement scheme is eventually introduced (see Pricing). The government's 2020 reform proposals also include plans to boost local pharmaceutical production, which would help to shield both public and private budgets from the impact of currency fluctuations in future.

PRIMARY CARE
Major improvements in primary care provision will be required if government targets relating to the incidence and management of chronic diseases are to be met. The sector has been neglected over the years, but more funds have been channelled into the primary care network since the middle of this decade. Some signs of improvement are already evident, but the financial crisis may affect the ability of the government to meet future investment targets. Changing patient behaviour will also be a challenge. The first signs of a change in public healthcare spending patterns are evident in MOHSD figures, which show a modest increase in the share of funds being allocated to ambulatory and outpatient care. Almost 60% of government healthcare funds are still being pumped into the hospital system, however. Public Healthcare Spending by Sector
Proportion of Total Spending Sector 2002 Ambulatory Outpatient Inpatient Day Care 6.7% 30.6% 60.0% 2.7% 2007 7.2% 31.4% 58.7% 2.7%

Source: MOHSD. Salary hikes have been a significant contributor to recent increases in government spending on primary care. These are designed to address chronic staff shortages and strengthen the role of family doctors. Sharp improvements in pay have already begun to attract more health professionals into the sector, with increases of around 10% in the number of physicians and nurses employed in primary care reported in 2006 alone. Wages have risen further since then, with general practitioner (GP) pay now almost two-times higher than levels reported prior to the recent funding drive.

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"When the national project started in 2006, the average salary of a family doctor was 25-35000 roubles. Now it is about 60000." (Primary Care Physician) Altering patient behaviour may be more difficult to achieve. Self-medication is widespread, and many patients seek advice from pharmacies rather than GPs – or simply self-medicate, purchasing drugs that have been prescribed to them in the past. Where the intervention of a physician is required, many also present at hospital outpatient departments rather than GP clinics. Alongside salary increases, the government has also begun to target the construction of new polyclinics specialising in the provision of cardiovascular and cancer care. As well as increasing the quality of care available in the primary sector, this initiative also aims to improve the geography of provision. The public healthcare infrastructure is currently skewed towards major cities such as Moscow, St Petersburg and surrounding areas, with fewer facilities available in more remote areas of the country. The programme has fallen well behind schedule, however, and further delays are anticipated as the financial crisis eats into government healthcare budgets. A new electronic 'health passport' system is also being introduced. These will contain detailed medical records for individual patients, providing physicians with easy access to information on medical histories and previously prescribed medicines. They should also encourage a smoother transition between primary and secondary care provision.

HOSPITAL SECTOR
The public hospital sector is a major drain on healthcare spending, and is badly in need of an overhaul in order to cut costs and improve levels of efficiency. Provision in the private services sector – which accounts for around one-third of the country's inpatient facilities (9479 hospitals) – is concentrated to an even greater degree in major urban areas. Private hospitals cater mainly for cosmetology, plastic surgery and stomatology patients and the share of beds is small. Many hospital admissions are deemed unnecessary, reflecting the inadequate nature of both primary care provision and referral procedures. Hospital stay lengths are also excessive, averaging two-times the figure reported in most west European countries. Payment methods offer little incentive to address existing problems, based as they are on the number of patients treated by individual facilities. Indeed, if anything, they encourage unnecessary treatments and admissions. As in the primary care sector, hospital pay has improved since the middle of this decade, and more young physicians are seeking positions in practice after they qualify. Little has been done to address the more fundamental problems that continue to affect the sector, however, and no major changes are on the immediate horizon. In the longer term, policy-makers will have to address the geography of hospital provision, investment in major hospital infrastructure and improvements in both funding and efficiency. Although almost 60% of government healthcare funds are swallowed up by the hospital sector, hospital finances remain poor, and budget problems often affect the availability of drugs and equipment. It is not unusual for patients or their family members to purchase drugs which – in theory – should be available free of charge to inpatients. Hospital drug purchasing is dominated by tenders, which are carried out at both federal and regional level. Tender arrangements are a contentious issue for manufacturers, and there is no doubt that the system has been the subject of abuse in the past. Efforts have been made to clamp down on malpractice, however, while recent sharp increases in the cost of many drugs have focused attention on price rather than the source of individual products. Anticipating further price increases, the authorities in St Petersburg issued tenders at volumes sufficient to cover their requirements for the whole of 2009 at an early stage.

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PRIVATE SECTOR
Demand for private provision increased during the economic boom that preceded the current financial crisis, driving up levels of investment in private clinics and hospitals. The market for private health insurance is more limited, however, reflecting a culture in which patients are reluctant to pay in advance for provision that they may not necessarily require. "People are not ready to pay for services […]. It's basic psychology – a legacy of the Soviet past." (Primary Care Physician) Most private health plans are limited to inpatient cover which – while the quality and availability of care may be limited – is available free of charge in the public sector. As a result, most private cover is provided as part of employee benefit packages, and few patients possess their own private plans. Prior to the financial crisis, interest in private healthcare provision was continuing to grow. The European Medical Centre (EMC) group, which was sold in 2008 by the 36.6 pharmacy chain to Goldencorp Enterprises Ltd, is due to open a new US$65 million private hospital in Moscow during 2009, for example. Demand for private provision will be hit by the financial crisis, and companies that have borrowed heavily to fund construction or expansion programmes may run into financial problems. Prospects for future growth of the private health insurance market will also be set back by the economic downturn, and levels of private cover are now unlikely to increase significantly within the next five years.

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PRESCRIBINGAND DISPENSING
Market Prognosis Scenario 2009-2013: Prescribing and Dispensing Controls on prescribing and dispensing outside the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie - state restricted drug reimbursement scheme) will remain limited. Patient economics will represent the main constraint on decisions made by physicians and pharmacists in that segment of the market – though some attempt will be made to monitor retail channels as part of a bid to clamp down on counterfeiting. Tighter constraints have been introduced on prescribing and dispensing under the DLO since the scheme's annual budget was breeched little more than half way through 2006. Prescription monitoring has been introduced, and physicians are under growing pressure to prescribe the cheapest available version of multi-source drugs. Beneficiaries requesting more expensive versions of a product must pay on an out-of-pocket basis. Bureaucratic delays and availability issues will continue to result in broader out-of-pocket payments by DLO beneficiaries (excluding the seven chronic diseases). The eventual introduction of a universal outpatient drug reimbursement scheme will be accompanied by the introduction of broader controls on both prescribing and dispensing. Additional measures – probably including incentives for generic substitution – may also be introduced at that point. Self-medication and the purchase of prescription drugs without the intervention of a physician will both remain widespread until reimbursement is available on a more widespread basis.

PRESCRIBING INFLUENCES
Physicians have traditionally been subject to few prescribing controls. That remains the case for most drugs prescribed in the primary care sector, where patients are the major payers, and where patient economics are often the only real constraint. Tighter controls have been imposed on doctors prescribing to beneficiaries of regional reimbursement schemes, however, and monitoring has been stepped up at federal level since the introduction of the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie - state restricted drug reimbursement scheme) . A further move towards the imposition of tighter controls on prescribing will almost certainly accompany the eventual implementation of a universal outpatient benefits scheme – though this now looks unlikely until late in the forecast period or beyond. Prescribing by brand name is the norm, and will remain so in the foreseeable future. Physicians and patients are both more comfortable with familiar brands, partly because of concerns that surround the quality of 'unknown' alternatives. DLO Prescribing DLO spending spiralled out of control in 2006, and the programme's budget had been exhausted by the middle of the year. Over-prescribing and the inadequate nature of controls on prescribing were identified as a major cause of those budget-busting increases, prompting the introduction of tougher new controls on physicians prescribing to beneficiaries of the programme. Computer-readable forms have been introduced for prescriptions written by doctors treating affiliates of federal and regional reimbursement schemes. Multiple copies of these prescriptions must be generated, including one that is retained with patient medical records. The new rules also provide for prescribing by international non-proprietary name (INN) as well

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as brand name, while computerised prescribing should help insurance funds to monitor consumption trends and costs. Physicians are now under increasing pressure to prescribe the cheapest available products to DLO beneficiaries. Patients requesting more expensive versions of a drug are often issued with prescriptions for which they pay in full at retail pharmacies. Prescribing limits on a number of drugs reimbursed under the DLO scheme were tightened further in January 2009. This entailed a change in the status of the relevant products, which have been included on a register of drugs that can only be prescribed following receipt of consent from a doctors' committee. Physicians report that, where some drugs are concerned, the bureaucratic requirements now attached to prescribing are such that patients can face considerable delays before they are able to access the required medicines. Regular, confirmatory consultations are also required before repeat prescriptions may be issued to chronic patients, and those who can afford to do so often prefer to purchase drugs on an out-of-pocket basis. "There is no problem at all prescribing expensive drugs. But you have to go through so much red tape when you prescribe to a DLO beneficiary that sometimes it's easier for the patient to simply go and buy the drugs they need." (Primary Care Physician) Availability can also be an issue where the DLO is concerned, and prescribers must often contact nearby pharmacies to check that a drug they wish to prescribe is in stock. Initially, the formulary accompanying the DLO contained more than 2000 products. The reimbursement list has since been trimmed significantly, however, and the number of products contained on the schedule had declined to around 1600 by the end of 2007. Nor is it easy for new drugs to gain access to the list, and the situation has been complicated further since 2008, when responsibility for administering the main part of the scheme was transferred to the regions. This has major implications for manufacturers attempting to gain reimbursement status for new brands. It may also result in the development of regional prescribing controls. Fewer issues surround prescribing under the federally-managed expensive diseases scheme, which covers the reimbursement of drugs for the treatment of seven serious chronic disease conditions. Most are expensive patent-protected brands for which no generic alternatives are available, and the number of patients that benefit from this section of the reimbursement scheme is limited, at less than 60000. Nevertheless, its budget is similar in size to the fund set aside for the reimbursement of around five million beneficiaries of the broader DLO scheme (see Pharmaceutical Expenditure). While strict qualification criteria are applied to beneficiaries of the expensive medicines for the seven chronic diseases, once they have been accepted into the programme, prescribing is not a problem.

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High-Cost Drugs Reimbursed Under the DLO
Disease Condition Reimbursed Drugs Octocog alfa Haemophilia Eptacog alfa (activated) Factor VIII Factor IX Cystic fibrosis Growth hormone deficiency Gaucher's disease Dornase alfa Somatropin Imiglucerase Bortezomib Leukaemia Imatinib Rituximab Fludarabine Glatiramer acetate Interferon beta-1a; beta-1b Mycophenolare mofetil Post-transplant immune system suppression Mycophenolic acid Tacrolimus Ciclosporin

Multiple sclerosis

Source: MOHSD

PHARMACY DISPENSING
Like prescribing, the degree of control exerted over pharmacy dispensing varies according to the reimbursement status of patients. Few controls exist in the retail pharmacy sector, where the vast majority of transactions involve out-of-pocket payments, but pharmacies dispensing drugs to DLO beneficiaries are subject to much tighter scrutiny. Again, those controls are likely to be broadened when or if a universal outpatient reimbursement scheme is introduced. Under-the-counter dispensing is widespread in the retail sector, where patients are able to purchase a range of prescription drugs without obtaining a physician's prescription. This trend is a reflection in part of the tradition that sees many patients seek medical advice from sources other than doctors. The long queues that often prevail in general practioner (GP) clinics are also a contributory factor, however. "Only elderly people would go to a polyclinic or GP; others just drop into the pharmacy […] and if they have a chronic disease they will get a prescription once and then simply go to the pharmacy again and again, buying the same product or asking for something new of the same kind." (Pharmacy Director) Attempts to tighten up controls on pharmacy dispensing are being pursued in some regions – partly in response to concerns surrounding the prevalence of counterfeit medicines circulating in the retail sector.

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Many private retail pharmacies have little interest in the DLO scheme, where delays in the reimbursement process and limited margins make little appeal. Pharmacies located within polyclinics play a significant role in dispensing DLO drugs. These are required to check the eligibility of patients to outpatient benefits before dispensing prescriptions. The switch from central to regional administration of the broad ONLS reimbursement scheme in 2008 caused significant problems in the first half of the year, with many drugs listed on the schedule not available to patients in designated pharmacy outlets. These had largely been ironed out by the second half of the year, however.

HOSPITAL PRESCRIBING AND DISPENSING
Prescribing and dispensing in the public hospital sector is often dependent on budgets and the availability of individual drugs, most of which are purchased through regular regional tenders. Medicines prescribed to inpatients are fully reimbursed in theory, but it is not unknown for patients to pay for drugs where these are not available in a particular facility, or where accessing them would involve lengthy delays. Hospital doctors prescribe largely by brand name, but the version of an off-patent drug dispensed by the hospital pharmacy may be determined by availability and cost considerations. Hospital pharmacies are subject to their own specific budgets, and impose caps on prescribing by department. Where caps have been breeched, patients may be forced to purchase their own drugs, though pharmacy monitoring is pursued in a bid to manage stocks. Physicians prescribing expensive products may be asked to explain their choice of drug, while some high-cost products are the subject of consent orders.

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PRICING AND REIMBURSEMENT
Market Prognosis Scenario 2009-2013: Pricing and Reimbursement Tenders issued for the supply of reimbursed drugs and hospital products currently represent the only real form of control on drug prices, which are otherwise determined largely by market forces. Recent rates of price growth have prompted the consideration of tighter control measures, however. Prices have risen sharply since the final quarter of 2008, driven up by a combination of high inflation and exchange rate volatility. This has prompted regulators to consider the imposition of controls on distributor and retailer mark-ups for non-reimbursed drugs, which could be introduced at an early stage if price growth does not moderate. In the absence of a universal reimbursement scheme, responsibility for administering the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie - state restricted drug reimbursement scheme) will remain in the hands of regional authorities – though the federal government is expected to retain control of the high-cost medicines for the seven chronic diseases list. Reimbursement listing procedures will continue to lack transparency and expensive new drugs will find it difficult to access the schedule. Major pricing and reimbursement reforms are likely to accompany the eventual introduction of a universal reimbursement scheme. While patient co-payments will be a feature of such a programme, its arrival will trigger a significant increase in demand, but drug prices will be subject to stronger downward pressure. Obtaining listings for expensive new drugs may become even more of a challenge and, having looked closely at existing systems in a number of countries, Russian regulators are likely to adopt additional cost-containment measures. Price-volume agreements for expensive new drugs may well be among them.

PRICE SYSTEM
Drug prices remain largely free from explicit control mechanisms at manufacturer level. A more interventionist approach is being considered, however, and more stringent controls will accompany the establishment of a universal outpatient drug reimbursement scheme. Prospects for the early introduction of a universal outpatient benefits programme have receded since the onset of the financial crisis. Price controls have remained high on the agenda though – primarily because of the sharp hikes implemented by manufacturers since the closing months of 2008 (see Price Trends). As a result, controls could be implemented at an earlier stage for products on the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie - state restricted drug reimbursement scheme) reimbursement schedule and the country's Essential Drugs List (EDL). "Reference pricing is top of the agenda due to the financial crisis and the political situation – it really is a hot topic." (Multinational Company Executive) The Current System A proposed sale price must be included in dossiers submitted to regulators in support of marketing approval for all new drugs. Once approval has been granted, pricing is free from regulation, however, unless the drug is included on the DLO or the EDL. Prices declared by manufacturers when their product enters the EDL are used as a reference for public agencies purchasing these products, but actual purchase prices are determined largely by tenders. These are issued at federal level where products for the treatment of seven serious chronic health conditions are concerned, and at regional level for other DLO

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drugs and products on the essential list. Distributor and retailer mark-ups are controlled at regional level. These vary widely, reflecting the huge differences in logistical costs associated with the distribution of drugs to individual regions across the country. Since the establishment of the DLO, reimbursed prices for some imported drugs included on the schedule have been cut on several occasions. Adjustments have been pursued ostensibly to realign prices in the wake of currency fluctuations, though it is no coincidence that these interventions have usually come at times when DLO budgets are under particular pressure. With spending on the scheme spiralling rapidly out of control, retail prices of around 800 imported products on the DLO schedule were cut by between 5% and 14% in June 2006. Further cuts have been imposed since then. After a period during which growth moderated during 2007 and the first half of 2008, prices have begun to rise rapidly once again. This has prompted regulators to look closely at pricing structures, and could provide the catalyst for the introduction of more explicit price control mechanisms.

PRICE TRENDS
According to IMS Health data, average drug prices rose by only 8.2% during 2007, and price growth picked up throughout 2008. The financial crisis triggered a period of more rapid price growth in the final quarter of 2008, however, and further sharp increases were witnessed in the first quarter of 2009. Imported drugs account for a majority share of the market in value terms, while local manufacturers are heavily dependent on imported raw materials. As the rouble began to tumble in value through the closing months of 2008, manufacturers hiked prices in a bid to protect their margins. With consumer price index growth running at double-digit levels in the early part of 2009, inflation has also contributed to the size of recent price rises. These have sparked fears of an availability crisis, as DLO reimbursement budgets come under growing pressure, and as prices in the retail sector compromise the ability of some patients to purchase medicines on an out-of-pocket basis. Strategies employed by individual manufacturers in the face of recent developments have varied. Some have implemented price increases that mirror exchange rate trends. Others, in a bid to capture larger shares of the market, have raised prices more gradually or implemented hikes that do not compensate fully for the impact of currency factors. Prices have increased rapidly across the market as a whole, however, with the National Office of Statistics (Rosstat) logging a 5.2% rise in February 2009 (a month during which inflation was 1.7%). The scale of those increases has prompted regulators to look more closely at the price of reimbursed drugs in particular. The federal anti-monopoly service, FAS, examined the price of the expensive drugs for the seven chronic diseases reimbursed to patients under the DLO, and concluded that some are being supplied at prices higher than those obtained elsewhere in Europe. Letters were sent to manufacturers noting its concerns, while the FAS called on Roszdravnadzor to examine opportunities for generic substitution – though these are very limited where DLO drugs are concerned. Price growth cannot be laid exclusively at the door of manufacturers. Exchange rate fluctuations and the arrival of the credit crunch have combined to create problems for both distributors and retailers, which have also raised prices in a bid to bolster ailing margins. "The biggest price growth was in the distributor segment. They bought at a time when the dollar was worth 24 roubles and are selling with the dollar at 36, so they have to inflate the price accordingly." (Local Industry Association Executive) Import duties on some essential drugs are to be reduced in a bid to ease pressure for price growth. Federal and regional governments, which are grappling with their own budgetary problems, have also looked for ways to limit DLO reimbursement costs and hospital drug spending. Most suppliers of expensive drugs prescribed for the seven chronic diseases have

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given significant ground during negotiations with the federal government, which should be able to meet supply and reimbursement commitments as a result. Seven of the leading products in the DLO sector experienced a decline in the average standard unit price of over 20%, with Mabthera (rituximab) experiencing the largest decrease of 33.0%. Regional authorities are reliant largely on competitive tendering, and while individual manufacturers will be keen to land major supply contracts, most have seen their costs rise sharply in recent months. As a result, prices in the remainder of the DLO market are expected to continue rising. The authorities in St Petersburg moved to shield their drugs budget from the impact of anticipated price hikes by issuing tenders for the whole of 2009 during the final quarter of 2008. Most regions are still purchasing supplies either twice a year or on a quarterly basis, however, and will be exposed more widely to price increases witnessed during the past six months. Eight of the leading products in the retail sector experienced price growth in 2008. Terpincod (codeine) from THFZ saw the largest price increase of 39.4%, followed by Linex, an anti diarrhoeal/anti flatulence product from Lek. Viagra and Xenical were the only two products to record negative price growth in 2008. Average Price Per Standard Unit* of Leading Products (MAT Qtr IV) Retail Market at Ex-Manufacturer Prices (RUB)
Product Arbidol Viagra Actovegin Essentiale N Linex Anaferon Ocillococcinum Terpincod Heptral Xenical Manufacturer Masterlek Pfizer Nycomed Pharma Aventis Lek Materia Medica Boiron THFZ Hospira S.P.A. Roche 2007 9.34 259.05 21.31 5.44 5.64 3.26 26.68 6.63 57.35 26.61 2008 10.33 245.44 23.42 5.96 7.32 3.53 27.59 9.23 61.54 25.74 Annual Growth 10.7% -5.3% 9.9% 9.5% 29.9% 8.3% 3.4% 39.4% 7.3% -3.3%

*Standard Units equate the number of millilitres of liquid preparations to the standard solid dosage of one tablet, therefore making solid and liquid preparations comparable. Source: IMS Health

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Average Price Per Standard Unit* of Leading Products (MAT Qtr IV) DLO Market at Contract Prices (RUB)
Product Velcade Octanate Glivec Mabthera Betaferon Copaxone Teva Haemoctin Cdh Novoseven Cerezyme Eprex Manufacturer Janssen Cilag Octapharma Novartis Pharma Roche Bayer Schering Plough Teva Biotest Pharma Novo Nordisk Genzyme Janssen Cilag 2007 103171.32 9986.82 926.09 44772.99 3760.11 2237.24 8668.24 83365.21 65681.41 2839.46 2008 72273.36 8322.13 672.39 29982.05 2685.16 1592.72 7656.75 69058.22 52442.27 2085.29 Annual Growth -29.9% -16.7% -27.4% -33.0% -28.6% -28.8% -11.7% -17.2% -20.2% -26.6%

* Standard Units equate the number of millilitres of liquid preparations to the standard solid dosage of one tablet, therefore making solid and liquid preparations comparable. Source: IMS Health

REIMBURSEMENT
Most regions introduced reimbursement schemes for vulnerable patient groups during the 1990s, while a federal outpatient benefits programme was implemented in 2005. The latter was seen as a platform on which to base the eventual introduction of a universal reimbursement scheme, and plans for such an initiative were unveiled in 2008. Its roll-out was to begin in 2010, but the financial crisis has almost certainly ruled out implementation until late in the forecast period or beyond. In the meantime, the vast majority of patients will continue to pay on an out-of-pocket basis for drugs prescribed to them on an outpatient basis. The DLO Scheme Introduced in 2005, the DLO offered access to around 1000 essential drugs, free of charge, for certain strictly defined patient groups. These include war veterans, the disabled, infants, the elderly, patients that have been diagnosed with 'socially relevant' diseases and those exposed to radiation as a result of the Chernobyl nuclear power plant disaster. Potential beneficiary numbers totalled over 14 million when the scheme was introduced. In 2006, however, qualifying patients were offered the option of receiving a cash benefit instead of free drugs. Most patients with few health problems chose to pocket that money, and the number of active participants in the DLO has declined to a current figure of just five million. Funding for some of the ‘socially relevant’ diseases was moved to the national health project Zdorovie in 2006. Nevertheless, financing free provision for these patients – many of whom suffer from chronic illnesses – has driven public sector drug spending up sharply. Spending on the DLO mushroomed in 2006, and the scheme's budget had been exhausted by the middle of that year. Tougher cost-containment measures have been introduced since

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then, but spending in 2009 is still expected to total around RUB80 billion (see Pharmaceutical Expenditure). The scheme was divided in 2008. The federal government has maintained responsibility for the purchase and provision of drugs prescribed to less than 60000 patients with seven lifethreatening medical conditions, while the administration of benefits for other patients (now known as the ONLS programme), – including the provision of drugs such as cancer therapies, diabetes treatments and cardiovascular products – was devolved to the regions. Drugs for the treatment of beneficiaries are purchased via tenders, administered at federal level for the expensive medicines for the seven chronic diseases and at regional level for the remainder of the DLO scheme. A reimbursement list for both strands of the programme is overseen by the Ministry of Health and Social Development (MOHSD), which receives advice on listing decisions from a committee of experts. Reimbursement listing procedures lack transparency, and there is no explicit appeals procedure. Nor have manufacturers received fully transparent explanations in the wake of reimbursement de-listings – of which there were many in the early stages of the DLO's development, when budgets were under severe pressure. The reimbursement list is supposed to be updated on an annual basis, but changes implemented at the beginning of 2009 were the first for two years. Some old products were de-listed, while a handful of new drugs – including tolperisone, bisoprolol and haloperidol – were admitted to the schedule for the first time. Manufacturers of innovative new drugs are still finding it hard to gain access to the reimbursement list, however. Generics have been added to the reimbursement schedule wherever possible, and generic competition has, until recently, kept the price of most multi-source drugs firmly in check. Foreign manufacturers complain that tenders are often framed in such a way as to favour local companies. Most drugs listed for the treatment of the seven major chronic conditions covered by the expensive diseases segment of the scheme are expensive multinational brands. As a result, while the number of such beneficiaries is less than 60000, its budget is almost as large as that of the broad-based ONLS programme. The average cost of prescriptions written for the expensive diseases patients in 2008 was RUB76000, compared with a figure of less than RUB500 for ONLS beneficiaries. The government is believed to have extracted concessions from a number of suppliers recently as it attempts to ensure that budgets will be sufficient to finance the provision of beneficiaries through 2009. Availability is likely to be an issue for some patients, however, reflecting financial problems not only at federal and regional government level, but within the distribution sector. Prospects for Universal Reimbursement Plans for the introduction of a universal outpatient benefits scheme, funded by a reformed compulsory health insurance programme, were unveiled in 2008. The financial crisis means these are now unlikely to be implemented until late in the forecast period or beyond. The crisis has already taken a huge toll on government finances, while rising unemployment will affect potential contributions to an insurance-funded scheme. Some now believe the proposals will be shelved for at least five years, though others expect to witness first moves towards the phased introduction of a broader reimbursement scheme in the second half of the forecast period. "Our belief is that it will not happen before 2011, and that they will expand it gradually to cover the whole population, but that could take five years, it could take ten." (Multinational Company Executive) Details of exactly how a universal scheme might work remain sketchy, though regulators have held discussions with their counterparts in a number of other countries, and are likely to 'borrow' from successful approaches that have been established elsewhere. This means cost-

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containment mechanisms will be an integral part of a new, universal initiative. These could have implications for a variety of players in the healthcare sector, including prescribers and pharmacists as well as manufacturers. Few drugs are likely to be reimbursed in full under a universal scheme, and patient copayments will be a feature. The introduction of a reference pricing mechanism is also widely anticipated, enabling the government to limit public sector drug spending while offering patients access to more expensive branded versions of multi-source products. For manufacturers, the introduction of universal outpatient benefits promises eventually to deliver a substantial increase in demand for pharmaceuticals. The impact of rising consumption will be offset in part by the imposition of tighter controls on prices, however, while reimbursement listing procedures and conditional listings will no doubt affect the commercial potential of many expensive multinational brands.

TRADE MARGINS
Margins are complex, and mark-ups imposed by distributors and retailers vary widely – both by region and according to the reimbursement status of individual products. Significant differences in the cost of distributing drugs to particular regions mean harmonisation of trade margins across the country is not a viable option. Nevertheless, regulators have attempted to exert a degree of control over mark-ups on DLO products, and the degree to which prices outside the DLO sector have risen since the final quarter of 2008 has prompted discussions on the implementation of broader constraints. Ceilings on wholesale and retail mark-ups have applied to reimbursed drugs since the DLO was introduced in 2005. These have been altered intermittently in a bid to limit reimbursement spending – initially by Roszdravnadzor , which cut combined mark-ups in most regions during 2007, and more recently by regional authorities, which assumed responsibility for administering the main ONLS scheme in 2008. Mark-ups still vary widely by region, from a low of less than 20% in Moscow to a high of more than 80% in the autonomous region of Chukot. Figures of 25-30% prevail in most major regions. Mark-ups on the EDL are controlled by the government on a federal level (based on the federal law). However, in a number of regions the mark-ups are controlled for all drugs, and are often significantly higher than those for DLO products (retailer mark-ups alone are often in excess of 30% where low-cost drugs are concerned). They can also vary widely by outlet, resulting in the availability of identical products at very different prices in neighbouring pharmacies. The government is currently developing regulations which will define a standard methodology for the calculation of mark-ups. The mark-ups will still vary across the regions, but the methodology for calculating them will be standardised. The EDL will also be revised and an updated list is expected in July 2009. The degree of variation that has emerged in the retail sector, and the extent to which prices have risen since the final quarter of 2008, is likely to prompt broader intervention by the authorities. This is a move that would be welcomed by some manufacturers. "The problem we have now is that, where we sell a product for 1000 roubles, we see it is being sold at 1400 roubles in some pharmacies, and at 1900 roubles in others. For us it's damaging to see that for the same product some of our customers have to pay such prices while we are selling at more or less the same price to all distributors." (Multinational Company Executive) Wholesalers and pharmacies are naturally less enthusiastic about the prospect of broader controls on mark-ups, especially at a time when many distributors and retailers are struggling financially.

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"If mark-ups are controlled for both essential and non-essential drugs then, frankly, selling pharmaceuticals will not be economical. Pharmacies will cut their product ranges and at the end of the day it is the patients who will suffer." (Pharmacy Chain Executive) Nevertheless, the introduction of broader controls is a strong possibility, and action will be hastened if prices continue to rise through the remainder of 2009. The imposition of controls outside the reimbursement sector will impose further pressure on margins, which have already been squeezed by the lower prices being offered by manufacturers in order to secure tender business.

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REGULATORY ENVIRONMENT
Market Prognosis Scenario 2009-2013: Regulatory Environment The regulatory framework has been amended gradually to align it more closely with international norms. Some key issues will continue to cause problems for manufacturers, however, and the government appears in no hurry to address existing deficiencies – partly because of the impact that tougher regulations may have on the local industry. The drug registration process remains lengthy and lacking in transparency, while imported drugs are subject to additional, often unnecessarily bureaucratic requirements. Some of these are very recent developments, highlighting the fact that the trend is not exclusively towards an improved regulatory framework. Good manufacturing practice (GMP) compliance deadlines have been postponed on several occasions, and the latest cut-off – scheduled for 2012 – is unlikely to result in the widespread closure of poor quality manufacturers. These are more likely to be squeezed out of the market gradually by preferential purchasing of GMP-compliant drugs in the institutional sector and more effective monitoring of retail channels. Patent legislation now broadly mirrors European regulations, but enforcement will remain an issue, with the legal system ill-equipped to settle disputes in a timely manner. The government also continues to stall on the introduction of data exclusivity provisions. Negotiations on Russia's accession to the World Trade Organisation, which would hasten the introduction of an explicit data protection law, continue to make very slow headway. Some further improvement in attempts to clamp down on counterfeiting will be witnessed in the early part of the forecast period. Again, however, levels of enforcement are unlikely to satisfy critics of the government completely.

DRUG REGISTRATION
Previously part of the Industry Ministry's remit, responsibility for drug registration and monitoring compliance with regulatory standards was switched to the federal healthcare surveillance and social development service, Roszdravnadzor , in 2006. The new body has since overseen the introduction of new regulations designed to bring drug approval procedures broadly into line with those in the EU. Despite those changes, foreign manufacturers complain that the marketing authorisation process remains lengthy, unpredictable and lacking in transparency. It is also weighed down by bureaucratic requirements – especially where imported drugs are concerned. As a result, while the registration process should be complete within 180 days, the time taken to obtain a new drug approval is typically in excess of 12 months. Generic approval procedures should be complete within 90 'clock' days, but usually take approximately six months. Drugs seeking reimbursement under the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie state restricted drug reimbursement scheme) face further lengthy delays before they are able to fulfil their market potential. The DLO list had not been updated at federal level for two years before changes implemented in January 2009. In the interim, manufacturers of new drugs that have received marketing approval pursued listings on regional reimbursement schedules in a bid to drive early sales. Re-registration was previously required every five years. In the wake of recent changes, new drug registrations are valid for the life of a product, however. All documentation in support of a marketing authorisation must be translated into Russian, while imported product packs must also incorporate a Russian translation of key information.

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Foreign companies may not apply directly for product approval unless they have established a Russian subsidiary. As a result, overseas players working through representative offices must engage a local partner to pursue registration on their behalf. Import Procedures New rules governing pharmaceutical imports were introduced at the beginning of 2007. These saw a system based on mandatory certification replaced by a 'Declaration of Conformity', which must now be produced by manufacturers for each batch of an imported drug. This must be based in part on third-party laboratory tests – an onerous requirement that has increased the cost and time taken to import drugs. No equivalent requirement is imposed on domestic manufacturers, which may produce a single declaration for an entire series of batches. The Association of International Pharmaceutical Manufacturers (AIPM) estimated in 2006 that certification procedures required under the old system added around US$200 million a year to costs involved in the import of drugs to Russia. Costs incurred under the new system are believed to be double that amount. The government also collects an import licence fee equivalent to 0.05% of the contract price, imposing additional costs on foreign manufacturers and – with administrative procedures taking in excess of a month – resulting in further delays.

INDUSTRY STANDARDS
Russia has been pursuing accession to the World Trade Organisation (WTO) for over a decade. Its bid to gain WTO entry was widely perceived as a driver of regulatory reforms that would benefit research-based manufacturers. Bringing national regulations into line with WTO requirements would have significant implications for many domestic manufacturers, however, and there are signs that the government's attitude towards WTO membership may be cooling. The potential implications for Russia's pharmaceutical manufacturing industry may be a factor behind this development. "I don't think they care that much about [WTO membership] to be honest, because it entails the implementation of a set of rules I'm not sure they are willing to follow." (Multinational Company Executive) The issue of manufacturing licences and monitoring pharmaceutical quality are among responsibilities that have been devolved to regional authorities in recent years. Effective regulation remains a challenge, however, and evidence of regulatory breaches is uncovered on a seemingly regular basis. Monitoring by Roszdravnadzor in 2008 revealed 60 pharmaceutical wholesale businesses that were not operating in areas covered by their licences, for example. The agency said these 'phantom' companies may be involved in criminal activity, and passed details of its investigation on to the Ministry of the Interior, which will decide whether further action is required. A number of product recalls have also been issued recently. These concerned drugs manufactured by 20 local companies and ten foreign corporations. Roszdravnadzor has called for the introduction of tighter controls on manufacturers and tougher penalties for violations of existing regulations. New quality control centres are to be established in each of the seven federal territories as part of its drive to improve standards. Good Manufacturing Practice (GMP) Most of Russia's leading domestic producers manufacture to accepted international GMP standards, but quality remains an issue where many small local companies are concerned. Attempts have been made to encourage broader compliance, but deadlines have been put back on several occasions. Many local companies are based on old Soviet-era manufacturing facilities, which have been the subject of little investment over the past 20 years. These are often the main employers in a particular town, and their closure through strict enforcement of quality standards would be politically sensitive. Roszdravnadzor has begun to step up pressure on manufacturers, issuing

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a quarterly list of companies whose products were tested and failed quality standards during the previous six months. The agency is unlikely to pursue a zero tolerance approach to latest GMP compliance deadlines, however – despite a recent call by Prime Minister Vladimir Putin for the implementation of a new 2012 cut-off. The closure of many small, poor quality manufacturers is inevitable in the long term, but is likely to be a gradual process. They will be frozen out of the institutional market by preferential purchasing from GMP-compliant producers, and will find it increasingly difficult to operate in the retail sector as quality monitoring is stepped up further. Clinical Trials Since there is no official recognition of US FDA (Food and Drug Adminstration) or EU product authorisations, local clinical trials are generally required in order to obtain new drug approvals. Russia has also become a favoured location for multi-centre trials in recent years, reflecting a generally favourable regulatory environment, relatively low costs and ease of patient recruitment. The Moscow and St Petersburg areas in particular boast a substantial number of registered trial sites, and patient recruitment is rapid. Moves to tighten the regulatory framework governing clinical trials have been witnessed over the past two years. These have clarified legal responsibilities and introduced new trial approval procedures. They have also introduced new requirements for the export of samples for testing in European laboratories – upon which the majority of trials in Russia are dependent.

INTELLECTUAL PROPERTY (IP)
Twenty-year exclusivity periods were introduced for pharmaceuticals under Russia's 1995 Patent Law, which has since been amended on several occasions in a bid to align regulations more closely with European norms. This has seen, among other things, the introduction of patent term extension provisions. Like the EU's Supplementary Protection Certificate (SPCs) regime, these enable patent holders to top up exclusivity periods by a maximum of five years to compensate for regulatory delays. While multinationals have few problems with patent legislation on paper, enforcement of intellectual property rights is an issue of some concern. Foreign companies complain that the legal system is not equipped to deal efficiently with IP disputes, and that more effective penalties for the violation of IP rights are required. Data Exclusivity The main deficiency in the regulatory framework governing intellectual property is the absence of protection for undisclosed trial data submitted by originators in support of marketing authorisation. Russia agreed to introduce a data protection law as part of a bilateral agreement reached with the US in 2006, while data exclusivity provisions are an integral part of the WTO's TRIPS (Trade-Related Aspects of Intellectual Property Rights) framework. Legislation that would have offered six-year data exclusivity periods – the minimum requirement for TRIPS compliance – was apparently drafted in the wake of the US agreement. There has been no sign of real movement on the issue since then, however, despite the fact that existing IP legislation was updated in 2008 under Part IV of the Civil Code, which came into effect at the beginning of that year. Multinationals and Russia's trading partners, including the US, will continue to lobby for the introduction of a data exclusivity law, but with the country's bid for WTO membership likely to be the subject of further delays, it may be some time before action is taken on this issue. Progress in talks surrounding Russia's WTO membership application continued to make painfully slow progress in the early months of 2009. Prospects for an early resolution have not been helped by the recent imposition of new import duties on some foreign goods.

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Counterfeiting Health Ministry estimates put the value of counterfeit drug sales in Russia at around US$300 million a year, though other sources indicate that illegal activity may be significantly more widespread, and Roszdravnadzor says it has noted an increase in imports of counterfeit drugs since the beginning of the current financial crisis. Products dispensed widely in the retail market – including high-profile antibiotic, analgesic and antihistamine brands – are popular targets for counterfeiters. Again, enforcement has traditionally been weak, and a legal definition of pharmaceutical counterfeits was not introduced until 2004. Efforts have been made to monitor retail channels more closely since then, but counterfeit hospital drugs are also being identified on a more regular basis. Amendments that would introduce tougher penalties for those found guilty of involvement in counterfeiting have been drawn up by parliament. Increases in both maximum fines and prison terms enforced by the courts are contained in the draft legislation.

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PHARMACEUTICAL BUSINESS ENVIRONMENT
Market Prognosis Scenario 2009-2013: Pharmaceutical Business Environment The financial crisis will have a major impact on the operating environment facing both manufacturers and their distribution chain partners during the first half of the forecast period. Real market growth will slow as patient incomes and public sector purchasing budgets come under pressure, while competition for market shares and the possible imposition of broader caps on mark-ups will affect margins. The establishment of a universal reimbursement scheme, which promises to trigger a significant increase in demand for pharmaceuticals, now appears unlikely until late in the forecast period or beyond. Many small domestic manufacturers were already operating at a loss before the current economic downturn, and financial problems in the sector will hasten consolidation of the local industry. Levels of overseas investment in the market will increase during the second half of the forecast period. Foreign generic specialists have led the way to date, but more multinationals will begin to invest in local manufacturing capacity, tempted by a combination of government incentives and the flexibility that a local presence offers. Demand for generics will increase in the early part of the forecast period, with patients trading down to cheaper brands and hospitals dispensing more low-cost generics in a bid to preserve their budgets. Branded generics will continue to dominate the market during the next five years. A sharp downturn in over-the-counter (OTC) sales is anticipated in the face of the deteriorating economic climate. The market will bounce back rapidly, however. The financial crisis will drive some further restructuring of both the wholesale and retail markets. Leading distributors will increase their existing market shares, but pharmacy chain expansion will be halted temporarily, and some retail chains may become casualties of the economic downturn. Sales forces will be trimmed by manufacturers attempting to cut costs. Competition for market shares is intensifying, however, and companies will be wary of drastic cuts that could jeopardise the position of key brands. The eventual introduction of a universal reimbursement scheme will have a major impact on promotional strategies, with reimbursement listings and formulary access both assuming greater importance.

OPERATING ENVIRONMENT
Having slowed temporarily in 2007, market growth accelerated again in 2008, with roublebased sales up by 34.7% on year-earlier figures. Strong volume and price growth contributed to this increase in 2008. By the end of the year it was clear that the financial crisis would have a major impact on the operating environment facing manufacturers and their distribution chain partners during the first half of the forecast period. Patients stocked up on drugs towards the end of 2008, as they anticipated price increases in 2009 as a result of the crisis. Prices continued to rise rapidly during the first quarter of 2009 as manufacturers attempted to offset the impact of inflation and the recent sharp decline in the value of the rouble. The full impact of price increases on demand had yet to feed through into the market, since wholesalers and retailers were still selling stocks purchased before manufacturers implemented their latest hikes. But demand had already begun to flatten out in the retail sector, where most patients are exposed to the full cost of outpatient drug purchases. The

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introduction of caps on distributor and retailer margins for non-reimbursed drugs is now being considered. Recent rates of market growth have been fuelled by a combination of rising incomes, higher consumer spending, demographic trends and the introduction of the DLO (Dopolnitel'noe Lekarstvennoe Obespechenie) reimbursement programme. While the number of DLO beneficiaries has declined dramatically since the scheme was introduced, its impact on the market cannot be overstated. It has emerged as a major target for multinational brands, which dominate federal purchases under the high-cost drug reimbursement programme. By the end of 2008 – a year during which sales to the DLO rose at almost twice the rate of increase witnessed in either the retail or hospital market segments – purchases under the twostrand scheme were responsible for approximately 24% of total market value. The government has pledged to maintain its commitment to the DLO through 2009 – though modest increases in the budget allocated to the scheme, allied to recent rates of price growth, will affect its ability to purchase at volumes witnessed in 2008. It is believed to have negotiated pricing deals with some major suppliers, but beneficiaries have begun to experience difficulties accessing some DLO products. Elsewhere, hospital purchasing budgets will also come under growing pressure, while sharp increases in unemployment will affect the ability of patients to purchase drugs on an out-ofpocket basis. These trends will drive increases in rates of generic substitution, with patient requests for cheaper alternatives to prescribed brands playing a major role. The financial crisis has also caused problems along the distribution chain as access to credit has dried up. Caught in the middle of this squeeze, distributors have attempted to reduce pharmacy payment terms, whilst requesting the deferral of their own payments to manufacturers. For their part, manufacturers have begun to implement budget cuts and freeze investment activity. There are also signs of an increase in levels of price competition, which is being driven by efforts to maintain volumes. While the financial crisis will clearly have a major impact on the operating environment in the first half of the forecast period, its effect on healthcare policy may have broader, longer-lasting implications. Most importantly, it appears to have dashed hopes of an early move towards the introduction of a universal outpatient benefits scheme. Plans for such an initiative were unveiled in 2008, and implementation was due to begin in 2010. The prevailing view now is that significant increases in the availability of reimbursed outpatient drugs will not be witnessed until late in the forecast period or beyond. The eventual introduction of a universal reimbursement scheme will have major implications for manufacturers. It will drive a further significant increase in demand for pharmaceuticals, but will be accompanied by cost-containment measures designed to limit reimbursement spending. These are almost certain to include the introduction of explicit price control mechanisms, as well as a more restrictive approach to reimbursement listing.

INDUSTRY STRUCTURE
With demand beginning to wane, costs rising rapidly and access to lines of credit drying up, the financial crisis has begun to squeeze margins throughout the entire distribution chain. The government has already bailed out some key players to prevent their collapse, but smaller companies will be less fortunate, and the crisis is expected to trigger a degree of consolidation at all levels. The impact of late payments and bad debts will filter back up the distribution chain, causing problems for manufacturers as well as wholesalers. The local industry remains fragmented at manufacturing level, and is in poor shape financially. Local market research company Pharmexpert estimates that almost half of the country's 500-plus registered pharmaceutical producers are unprofitable. Many are relics of Soviet-era drug production, and have suffered from a chronic lack of investment over the past 20 years. The soft line taken by regulators on the imposition of good manufacturing practice (GMP) and other quality standards has prevented widespread closures to date, but the future

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is bleak for many small local producers, and the financial crisis will hasten domestic industry consolidation. A small core of larger local companies produce to higher standards. Led by Pharmstandart – which claims a place among the ten biggest pharmaceutical businesses operating in the Russian market – these are important suppliers of the institutional market, and also operate widely in the retail sector. Leading players are not immune from the difficult market environment, however. Veropharm, which was the first Russian drug manufacturer to go public, completing an initial public offering (IPO) in 2006, posted a 22% decline in sales during the first quarter of 2009. Valenta, which also claims a prominent position in the local industry rankings, is also struggling financially. Investment programmes have been halted and its Krasfarma production subsidiary has been sold as the company attempts to restructure its debts. Other leading domestic producers, including Pharmstandart, Nizhpharm, Akrikhin, Biosintez and Sotex, may face less pressing financial problems, but most will see earnings affected by the financial crisis during the first half of the forecast period. Bad debts are likely to be a contributing factor, with Pharmstandart alone believed to be owed almost RUB500 million by the bankrupt St Petersburg-based wholesaler, Genesis. In the longer term, these are the companies that the government hopes will spearhead future growth of the local pharmaceutical industry. Concerned by the degree to which the country depends on imported pharmaceuticals, and by the rate at which foreign drug prices are rising, it has called for a major increase in domestic production. Its 2020 healthcare reform plan envisages the development of a broader local manufacturing base and increases in its capacity to supply essential drugs, enabling Russia to reduce dramatically its dependence on pharmaceutical imports. As part of that goal, the government will encourage not only the expansion of domestic producers, but also investment by foreign companies in the establishment of local manufacturing capabilities. Foreign companies already held substantial shares of the market, but those figures have risen sharply since the introduction of the DLO reimbursement scheme in 2005, and reached 80% in value terms during 2008. The most significant driver of recent increases has been the federally-administered programme under which drugs for seven serious chronic diseases are reimbursed fully for registered patients. The budget for this segment of the scheme – which is supplied almost exclusively by multinational brands – has been set at RUB37 billion in 2009. Locally-manufactured drugs account for more significant shares of the broader ONLS programme, and are sold widely in the retail market, but their share is at its highest in the hospital sector, where domestic products account for almost 30% of sales by value. Shares of these market segments claimed by the local industry are significantly higher in volume terms, reflecting low prices. Across the market as a whole, pharmaceutical output in Russia was worth an estimated RUB72 billion in 2008 – up by 18% on year-earlier figures.

LEADING CORPORATIONS
Novartis maintained its position at the head of the corporate sales rankings in 2008 in the combined retail and hospital sectors. The Swiss company heads the pharmacy sales rankings, and is the second largest supplier of drugs to both the hospital and DLO segments, where revenues are generated by its Sandoz generics arm as well as Novartis brands. Bayer now holds fourth position in the combined retail and hospital sectors, and sixth position in the DLO sector, its Russian business having been boosted by the acquisition of Schering AG. Sanofi-Aventis is the outright leader in the hospital market. Johnson & Johnson (incorporating Janssen-Cilag) heads the rankings where DLO sales are concerned and saw its sales in the DLO sector double in 2008 as a result of Velcade (bortezomib) sales increasing by 309.0%. Octapharma experienced the strongest growth in the DLO sector at 218.2% driven by its blood coagulation products Octanate (factor VIII) and Octanine F (factor IX). Multinationals and

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regional branded generic specialists occupy five of the six remaining places among the top ten companies, with Pharmstandart the only domestic representative. Sales of Leading Corporations (MAT Qtr IV 2008) Retail and Hospital Market at Ex-Manufacturer Prices
Company Novartis Sanofi-Aventis Pharmstandart Bayer Servier Menarini Gedeon Richter Teva GlaxoSmithKline Johnson & Johnson RUB (million) 13760 11285 8884 8220 8195 6732 6460 4767 4302 4249 Market Share 6.4% 5.2% 4.1% 3.8% 3.8% 3.1% 3.0% 2.2% 2.0% 2.0% Annual Growth 31.6% 19.7% 50.5% 34.4% 19.3% 24.1% 25.2% 27.0% 20.9% 18.0%

Source: IMS Health

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Sales of Leading Corporations (MAT Qtr IV 2008) DLO at Contract Prices
Company Johnson & Johnson Novartis Roche Novo Nordisk Octapharma Bayer Teva Sanofi-Aventis AstraZeneca Biotest RUB (million) 9892 7983 7648 5860 5382 3905 3377 2368 2151 2052 Market Share 13.3% 10.7% 10.3% 7.9% 7.2% 5.3% 4.5% 3.2% 2.9% 2.8% Annual Growth 100.2% 27.6% 58.9% 59.4% 218.2% 94.1% 60.8% 19.3% -2.7% 49.9%

Source: IMS Health

LEADING PRODUCTS
Multinational brands dominate the product sales rankings in the combined retail and hospital market. Janssen-Cilag's anti-cancer drug, Velcade (bortezomib) heads the rankings in the DLO sector, while the significance of the antineoplastics market is underlined further by the presence of Novartis's Glivec (imatinib) and Roche's Mabthera (rituximab) among the five best-selling brands. The establishment of the DLO reimbursement scheme has boosted sales of many expensive multinational drugs since the middle of this decade. Velcade is the leading product prescribed to DLO patients, and cancer therapies account for a quarter of all DLO sales. Antihemorrhagics (led by Octopharma's Octanate brand) and diabetes treatments are responsible together for a further 26% of the DLO market. Anti-infectives account for over 20% of hospital sales, while plasma products and cancer drugs both generate shares of close to 10%. The retail market is much more fragmented, and multinational portfolios in that segment are typically much broader in Russia than ranges sold in many other countries. "We don't have a corporate core product portfolio here, we have a very balanced portfolio. We have generics, branded generics, we have prescription ethicals, we have OTC (over-the-counter) and so on. That broad spectrum is because we need volumes." (Multinational Company Executive)

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Sales of Leading Products (MAT Qtr IV 2008) Retail and Hospital Market at Ex-Manufacturer Prices
Product Arbidol Actovegin Essentiale N Viagra Linex Heptral Anaferon Ocillococcinum No Spa Mildronat Manufacturer Masterlek Nycomed Pharma Aventis Pfizer Lek Hospira S.P.A. Materia Medica Boiron Chinoin Grindex RUB (million) 2472 1967 1648 1560 1381 1212 1164 1157 1075 1051 Market Share 1.1% 0.9% 0.8% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% Annual Growth 46.9% 20.5% 32.8% 25.2% 30.3% 40.3% 49.0% 128.3% 13.9% 49.5%

Source: IMS Health Sales of Leading Products (MAT Qtr IV 2008) DLO at Contract Prices
Product Velcade Octanate Glivec Mabthera Betaferon Copaxone Teva Haemoctin Cdh Novoseven Cerezyme Eprex Manufacturer Janssen Cilag Octapharma Novartis Pharma Roche Bayer Schering Plough Teva Biotest Pharma Novo Nordisk Genzyme Janssen Cilag RUB (million) 6794 4546 4342 3148 2620 2577 2033 1782 1521 1390 Market Share 9.1% 6.1% 5.8% 4.2% 3.5% 3.5% 2.7% 2.4% 2.0% 1.9% Annual Growth 309.0% 234.7% 57.9% 280.1% 62.9% 97.5% 53.7% 192.8% 160.2% -9.2%

Source: IMS Health

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INVESTMENT
The financial crisis will have implications for levels of investment by the pharmaceutical industry during the first half of the forecast period, with local and foreign companies alike looking to trim costs in a bid to bolster margins. The recent fall in the value of the rouble – coupled with financial problems – may expose some local manufacturers as potential acquisition targets, but few leading multinationals are currently pursuing a major manufacturing presence in Russia. That situation could soon begin to change, however, as the government steps up incentives available to companies that invest in local production. Russia has become a favoured location for the conduct of clinical trials, reflecting the ease and speed with which patient enrolment can be completed, as well as the ready availability of certified trial centres. Roszdravnadzor approved 615 new clinical trials in 2008 – up by 9% on the 2007 figure. Most are multi-centre studies undertaken by multinationals, with 364 such trials given the go-ahead in 2008. By contrast, interest in early-stage research investments remains very limited, while few multinationals have established more than a superficial presence in the market where manufacturing is concerned. Bureaucratic obstacles, infrastructure deficiencies and concerns surrounding the absence of explicit data exclusivity provisions have all acted as deterrents to more substantial levels of investment. "It is more expensive to produce locally in Russia than it is in Denmark, just to take one example. And I can tell you why – it is due to the poor infrastructure and the bureaucracy. Labour is the only thing that is cheaper." (Multinational Company Executive) While multinationals have continued to service the market almost exclusively through imports, regional generic players have invested in the development of a more extensive local presence. Richter and Krka have both built up a strong local presence, while German generics specialist Stada has completed three acquisitions in Russia since the beginning of this decade. The purchase by Actavis of Zio Zdorovie and Polpharma's acquisition of Akrihin – both completed in 2007 – maintained that trend. Servier's Russian subsidiary, Serdix, is the first local affiliate of a foreign multinational to begin manufacturing original drugs from its range in the country. Nycomed is among the other foreign companies beginning to look more closely at stepping up local manufacturing activity. A presence within the market would enable overseas players to avoid the costs and bureaucracy associated with import licensing, and would give them greater flexibility to adjust production in line with local demand. Pricing and tax breaks are also being offered by the government in a bid to encourage more substantial levels of foreign investment. "Another thing they did was give a 15% price premium to local products. So for specific products where it makes sense, we are planning local production." (Multinational Company Executive) An increase in levels of foreign investment is a distinct possibility during the second half of the forecast period. Leading multinationals will continue to import major patented brands, but some may begin to produce more established parts of their portfolio locally. The financial crisis will limit the ability of many small local producers to invest in upgrading or expanding their manufacturing operations. The government remains keen to increase institutional purchases of locally-manufactured drugs, however, and is expected to offer additional incentives to the country's leading producers. This will drive an upturn in levels of investment by Pharmstandart and other major domestic players during the second half of the forecast period.

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GENERICS MARKET
Physicians and patients remain highly brand-conscious, but there was a marked increase in demand for cheap generics during the financial crisis of 1998, and a similar trend is anticipated during the current economic downturn. Anecdotal evidence suggested some patients were already beginning to trade down to cheaper products towards the end of 2008, and sales of low-cost generics are expected to increase further as unemployment continues to rise through 2009. Attempts by hospitals to conserve limited drugs budgets will also see cheaper alternatives to branded generics dispensed more widely to inpatients in that segment of the market. Branded generics are the products of choice for most patients, and branded copies dominate the market in volume terms. The market for unbranded generics remains limited by comparison, with unbranded products accounting for just 7.8% of the market by volume and 5.1% of sales by value. Value Shares of the Retail and Hospital Market by Licensing Category (MAT Qtr IV) Ex-Manufacturer Prices
Market Sector Original Brands Licensed Brands Unbranded Generics* Other Products** 2007 19.5% 5.5% 5.5% 69.5% 2008 19.3% 5.5% 5.1% 70.2%

*Products marketed under the generic name of active ingredients(s). ** Includes: branded generics, copy products, products where there is no evidence of a licensing agreement, products for which a licensing category has not been identified, and nonpatentable products. Source: IMS Health Volume Shares of the Retail and Hospital Market by Licensing Category (MAT Qtr IV)
Market Sector Original Brands Licensed Brands Unbranded Generics* Other Products** 2007 4.1% 2.1% 7.9% 85.9% 2008 4.4% 2.4% 7.8% 85.4%

*Products marketed under the generic name of active ingredients(s). ** Includes: branded generics, copy products, products where there is no evidence of a licensing agreement, products for which a licensing category has not been identified, and nonpatentable products. Source: IMS Health

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Value Shares of the DLO Market by Licensing Category at Contract Prices
Market Sector Original Brands Licensed Brands Unbranded Generics* Other Products** 2007 36.9% 20.8% 3.6% 38.7% 2008 33.4% 28.4% 2.2% 36.0%

*Products marketed under the generic name of active ingredients(s) ** Includes: branded generics, copy products, products where there is no evidence of a licensing agreement, products for which a licensing category has not been identified, and nonpatentable products. Source: IMS Health. Volume Shares of the DLO Market by Licensing Category
Market Sector Original Brands Licensed Brands Unbranded Generics* Other Products** 2007 14.6% 1.9% 20.9% 62.6% 2008 16.5% 1.9% 19.5% 62.1%

*Products marketed under the generic name of active ingredients(s) ** Includes: branded generics, copy products, products where there is no evidence of a licensing agreement, products for which a licensing category has not been identified, and nonpatentable products. Source: IMS Health. Patients and prescribers remain wary of products with which they are not familiar – largely because of suspicions regarding quality. As a result, in the absence of stronger pro-generic policies, any increase in sales of unbranded generics during the early part of the forecast period is likely to be reversed in the longer term. Most foreign generic manufacturers generate the bulk of their revenues in the retail market, and will continue to do so while reimbursement remains available to a limited proportion of the patient population. Payment problems have deterred these companies from pursuing broader involvement in the DLO scheme, and with DLO budgets likely to be stretched in 2009, the situation is unlikely to change. The eventual introduction of a universal outpatient benefits programme will have significant implications for the generics market. The availability of widespread reimbursement will drive up demand, but is likely to be accompanied by the establishment of a reference pricing mechanism, which will see patients required to make additional co-payments for products priced at levels in excess of reimbursement benchmarks. With small, low quality domestic producers being squeezed out, competition for shares of a growing generics market will be dominated by leading local manufacturers and foreign generic specialists.

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OTC MARKET
Sales of OTC medicines plummeted during the financial crisis at the end of the 1990s, and there are already signs that a similar trend will be witnessed in 2009. Equally, however, the sector is expected to bounce back rapidly, just as it did at the beginning of this decade. Most patients have no access to subsidised outpatient drugs. Combined with their ability to purchase many prescription products in the retail sector without visiting a physician, this has encouraged widespread self-medication, blurring the distinction between the ethical and OTC segments of the market. Sales of non-prescription medicines are substantial, however, accounting for almost one-third of total market value in 2008. Prices in the sector are low, and non-prescription drugs account for almost two-thirds of sales by volume. OTC sales are generated almost exclusively through retail channels, and were responsible for 48% of pharmacy drug sales by value in 2008. Their share of the hospital and DLO markets is very limited, with OTCs accounting for less than 5% of sales by value in both of these sectors. Cough/cold remedies and respiratory medicines generate more than a quarter of OTC sales. Digestive and other intestinal treatments account for a further 16% of the market by value, while pain relief products are responsible for around 13% of OTC sales. Pharmstandart is a leading player in the OTC market, but multinationals also feature prominently, with Novartis enjoying an outright leadership position and Sanofi-Aventis challenging Pharmstandart for second spot in the rankings. Multinationals have invested heavily in the promotion of OTC brands, and dominate mass media advertising of pharmaceuticals in Russia. Despite the size of the OTC market it has received little attention from regulators in recent years. The official list of OTC medicines has not been updated since the beginning of this decade, while no formal procedure for switching prescription drugs to OTC status exists. The eventual establishment of a universal reimbursement scheme will prompt closer scrutiny of OTC regulations, with the government expected to pursue a more positive line on switching.

DISTRIBUTION
The viability of distribution businesses hinges on the availability of working capital, and wholesalers are perhaps more exposed than any other players to the current financial crisis. Problems accessing credit, late payments and bad debts, along with the propensity of manufacturers to switch their business away from small wholesalers – which are perceived as high-risk partners in the current climate – will all take their toll on the sector. A significant reduction in wholesaler numbers is anticipated as a result. Geographical considerations mean distributors play a pivotal role in the Russian market, and explain the continued existence of many small local and regional businesses, which help manufacturers to access remote areas of the country. Substantial shares of the market are already concentrated in the hands of a few leading players, however, and their dominance is expected to increase during the next five years. SIA International and Protek account between them for around half of the market. Katren is the third largest competitor in the sector, with a share of around 13%, while Rosta and Apteka are also significant players. There are approximately 900 wholesalers operating in Russia, with six companies which operate on national scale and 20-30 interregional distributors. The national distributors such as Protek, Katren and Rosta are vertically integrated with pharmacy chains or production. The interregional companies are medium sized companies which hold strong positions in some regions and can also specialise in specific market segments such as retail, hospital or DLO. Regional distributors tend to operate in a single region and can specialise in several therapeutic segments. Even the country's leading wholesalers are struggling in the face of current market conditions. Protek has been forced to cancel a planned IPO, and has fixed its contracts in roubles in a bid

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to shield its business from the impact of exchange rate fluctuations. All wholesalers are exposed increasingly to problems being encountered in the retail sector, however. The demise of the St Petersburg-based distributor, Genesis, which was declared bankrupt in December 2008, highlights the extent of the financial pressures facing wholesalers. Genesis was previously the biggest distributor of Pharmstandart's products, and owes the latter almost half a billion roubles – of which about half will almost certainly have to be written off. Other major creditors include Schering-Plough, GSK and Solvay. In an effort to maximise liquidity, wholesalers have pushed for extended payment terms from manufacturers, whilst at the same time imposing tighter repayment periods on retailers. Nevertheless, some pharmacy chains have run up substantial debts with wholesalers. The 36.6 chain is among the most prominent examples (see Retail Pharmacy). Most leading wholesalers are also involved to some extent in the pharmacy sector, or are part of vertically-integrated businesses that span manufacture as well as wholesale and retail activities. Protek, for example is in the same ownership as the Sotex manufacturing business and the Rigla retail pharmacy chain. As one of the country's biggest wholesalers, it boasts broad regional coverage, operating 23 regional supply depots and delivering to over 44000 retail outlets and medical institutions across the country. It currently claims a market share of just over 20%, including the supply of products prescribed under the DLO reimbursement scheme. The establishment of the DLO may have had a positive impact on the size of the market, but wholesalers working with the programme have encountered a number of problems. The administration of DLO distribution contracts has also been the focus of investigations into alleged corruption, which culminated in the arrest of Protek's director-general in 2007. Its share of DLO contract business, which had reached 40% in 2006, has since declined sharply. Wholesalers operating in the DLO sector have run into additional problems more recently. Tender prices for the supply of drugs reimbursed under the federal expensive drugs segment of the programme were fixed in roubles, and allowed for distributor mark-ups of 5-7%. Drug prices have risen by more than twice that amount since contracts for 2009 business were signed, however, and wholesalers are now making a loss on DLO business. Foreign interest in the Russian wholesale market has increased following the establishment of the DLO. Finnish companies Oriola-KD and Tamro have both acquired stakes in local distributors. Alliance Healthcare has also gained a foothold in the market through its acquisition of Apteka Holding, but German wholesale giant Celesio failed in a recent bid to purchase Protek. With market value continuing to increase rapidly, and with the government unveiling plans for the introduction of a universal reimbursement scheme, investment in the sector still appeared an attractive option for foreign wholesalers as recently as the middle of 2008. Events since then have almost certainly ruled out the completion of further significant deals in the near future, but further increases in overseas investment are likely in the longer term.

RETAIL PHARMACY
Sales generated in retail pharmacies and kiosks, where the vast majority of purchases are made on an out-of-pocket basis, account for around two-thirds of total market value, and the retail sector has been the focus of considerable investment in recent years. This has seen the emergence of pharmacy chains as increasingly significant players in the retail market. Multiples that have borrowed to fund recent expansion have been hit hard by the credit crunch, however, and with more established independent retailers also under pressure, a degree of restructuring will be witnessed in the sector. With demand weakening, pharmacies are reluctant to keep passing on the full impact of price increases implemented further up the chain.

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"We are not interested in prices growing all the time, because even in recent months we've seen the number of customers going down." (Retail Pharmacist) Patient behaviour has also begun to change in the face of the financial crisis. Some have begun to trade down, purchasing cheaper alternatives to the brands prescribed by physicians or the products with which they previously self-medicated. At the same time, pharmacies are under growing pressure from wholesalers, which have reduced payment terms, and which have even begun to request payment in advance from some retailers. Large pharmacy chains should in theory be best placed to resist the pressure being imposed by distributors. Some multiples have run into major financial trouble, however, as access to credit – on which aggressive expansion strategies were previously based – has dried up. The largest chains are focused on major cities, with most based in and around Moscow (36.6, Rigla and Dr Stoletov) or St Petersburg (Pharmacor and Nevis). Multiples are believed to control around 20%, in value, of the country's 47000 outlets, but most have begun to close down unprofitable outlets as they attempt to cut their costs. Product ranges are also being adjusted, with many retailers stocking a narrower selection of medicines. Cost-containment efforts have not been sufficient to balance the books of some retail businesses, prompting a number of closures in the sector. By the end of 2008 it was clear that the 36.6 chain, which with 1200 outlets is the largest player in the retail sector, was in major financial trouble. 36.6 announced that it would be able to raise little more than half of the RUB5.6 billion in debt repayments due in 2009. The government has stepped in to prevent a total collapse, agreeing to back a RUB1 billion loan, but 36.6 has been put up for sale by its owners. The future of the Pervaya Pomosch pharmacy chain, which was in the same ownership as the failed Genesis drug wholesaling business, is also uncertain. Despite these high-profile problems, most private pharmacy chains are expected to ride out the financial crisis. Their profits will be badly hit, however, and some restructuring will be required before they embark on future expansion. A few multiples, having built up their businesses on equity capital rather than debt, may actually continue to grow through the crisis, picking up new business at advantageous prices. These chains will also be in a stronger position to resist pressure being imposed by distributors. Municipal authorities in parts of the country have retained ownership of state-run pharmacy outlets, and run them effectively as municipal chains. By purchasing at large volumes, these are able to lever discounts from suppliers. Most are inefficient in comparison with private chains, however, and some impose a significant financial burden on municipal or regional health budgets. Some local authorities will pursue the sale of municipal pharmacies. They will not be particularly attractive to private chains, however – largely because of their often poor locations. Many will probably be converted to alternative uses as a result. Chains will resume their expansion in the wake of eventual economic recovery, and will control a growing share of the retail market – especially in Moscow, St Petersburg and other major cities. Vertically integrated chains with direct access to in-house distribution – and, in some cases, manufacturing – capabilities will become an increasingly common feature of the market.

SALES AND MARKETING
Manufacturer sales forces, which had been expanded rapidly during the recent period of market growth, will be a target for cost-containment measures implemented during the financial crisis. Most companies will be wary of cutting representative numbers sharply at a time when competition for shares of the market is intensifying, however, and a resumption of the recent upward trend is expected later in the forecast period. Recruiting highly-qualified reps had become something of a problem for manufacturers prior to the economic downturn – largely because of the improvement in salary levels for doctors working in the public sector. It had previously been easy for manufacturers to attract newly-

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qualified doctors, but more graduates are now pursuing careers in practice. This will be an issue when companies look to start expanding sales forces again. Pharmacy-led substitution is not a major feature of the market, and physicians will remain the key promotional target where prescription drugs are concerned. Converting representative visits into prescription volumes will become more challenging in future, however, as prescribing habits are scrutinised more closely, and as providers attempt to limit costs associated with prescribing. Some providers have already begun to limit representative access to prescribers. With the eventual advent of a universal reimbursement scheme, promotional strategies will be adapted to a new market environment. Gaining access to federal and regional reimbursement lists will become increasingly important once reimbursement is available on a more widespread basis. Manufacturers may also be forced to devote more resources to the retail sector, where pharmacy substitution will be practised on a more widespread basis if – as expected – universal reimbursement is accompanied by the introduction of a reference pricing mechanism. Branded generics are promoted along similar lines to original products, and most large generic manufacturers employ sizeable field forces. The emergence of a substantial market for unbranded drugs, sold along commodity-oriented lines, is likely in the long term, but will not be witnessed during the next five years.

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TREND ANALYSIS AND MARKET FORECAST
PRICE LEVELS
The values in this report are based on the new enhanced data for Russia for the retail and hospital panels and the new Dopolnitel'noe Lekarstvennoe Obespechenie, DLO, panel. This is a state restricted drug reimbursement programme introduced in 2005 to provide subsidised pharmaceuticals in the out-patient sector for the disabled, war veterans, children under three years of age and families with three or more children. Data for the retail and hospital panels is available from 2004 and the DLO from 2005. Values in the hospital and retail sectors are shown at ex-manufacturer prices and in local currency. Values in the DLO sector are shown at contract prices and in local currency. The total market forecast is compiled from the retail, hospital and DLO panels, which accounted for 92.7% of the total market in 2008. The retail and hospital panels are based on all registered medicines and food supplements and homeopathic products. The DLO panel is based on all registered medicines in the DLO programme including expensive drugs for the seven life threatening diseases.
Market Share Retail Sector Hospital Sector DLO Sector Budget Purchases 56.5% 12.5% 23.7% 7.3%

Sales of the budget purchases are calculated historically using information from the federal government.

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MARKET OVERVIEW
Retail Sector: The Russian retail sector has seen strong sales growth since 2005. Volume has been the main driver of growth, driven by increased consumer expenditure as a result of a buoyant economy and increasing world oil prices. However, volume growth began to slow in the latter part of 2008 due to the financial crisis. As inflation crept up towards the end of 2008 and exchange rates fluctuated, price growth increased to reach 17.0%, while sales at actual prices grew by 27.1%.

Table 1: Retail Sector (2004-2008)
Sales at Constant Prices* Year RUB (million) 2004 2005 2006 2007 2008 109503 117982 139845 165529 190898 Annual Growth 7.7% 18.5% 18.4% 15.3% Laspeyre's Index 75.2 77.8 80.4 85.5 100.0 Annual Growth 3.4% 3.4% 6.2% 17.0% RUB (million) 80847 90020 111126 139366 177089 Annual Growth 11.3% 23.4% 25.4% 27.1% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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Hospital Sector: Growth in the hospital sector declined from 2005 to 2007 as a result of declining price growth, most notable from 2005-2006. Hospital drug purchasing is dominated by tenders, but hospital finances remain poor and budget problems can often affect the availability of drugs. The hospital sector experienced two years of stable price growth before the crisis impacted prices in the latter part of 2008, resulting in price growth of 12.9% in 2008, while sales at actual prices grew by 25.4%.

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Table 2: Hospital Sector (2004-2008)
Sales at Constant Prices* Year RUB (million) 2004 2005 2006 2007 2008 35060 34341 35361 36116 40548 Annual Growth -2.0% 3.0% 2.1% 12.3% Laspeyre's Index 62.5 75.7 81.8 88.6 100.0 Annual Growth 21.2% 8.0% 8.3% 12.9% RUB (million) 20575 24194 27954 31117 39012 Annual Growth 17.6% 15.5% 11.3% 25.4% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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DLO Sector: The DLO was established in 2005 and provides subsidised pharmaceuticals in the outpatient sector for a defined population. The scheme started with nearly 15 million potential beneficiaries and the number had fallen dramatically to five million in 2009 as eligible people opted out and took a cash payment to purchase their drugs. Despite the number of people in the DLO declining, mismanagement saw spending on the DLO increase by 59.4% in 2006. The annual revision of the DLO saw a decline in funding in 2007 (the budget is calculated on a per beneficiary basis and in 2007 there were 8.3 million beneficiaries compared to nearly 15 million in 2005) and the government also introduced tighter controls on the DLO funding and administration. The scheme was then split in two in 2008. One segment covers the cost of drugs for seven rare, life-threatening conditions and the other segment, the ONLS, covers a broader range of essential drugs. Budgets for the two strands were RUB33 billion and RUB37 billion respectively. Sales at actual prices grew by 45.2% in 2008, despite a decline of 10.6% in the price index. Table 3: DLO Sector (2005-2008)
Sales at Constant Prices* Year RUB (million) 2005 2006 2007 2008 31277 59933 44848 76130 Annual Growth 91.6% -25.2% 69.8% Laspeyre's Index 122.1 121.0 111.8 100.0 Annual Growth -0.9% -7.6% -10.6% RUB (million) 45806 72999 51148 74283 Annual Growth 59.4% -29.9% 45.2% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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FORECAST SUMMARY
The IMS Market Prognosis projections are based upon ten years of volume and price quarterly sales data. Pharmaceutical volume and price data in each audited market sector are independently analysed using both univariate time series models and multiple regression based models incorporating macroeconomic variables. The macroeconomic variables are provided to IMS Health by a third party, the Economist Intelligence Unit (EIU). The best model – univariate or macroeconomic - is selected based on forecasting accuracy, modelling fit and robustness. Then demand (volume) and price equations are developed and combined to give a baseline extrapolation of actual sales for each audited market sector. Where an econometric model is selected, the demand and price equations are used in combination with macroeconomic indicator forecasts provided by the EIU. The macroeconomic indicator forecasts are tabulated below. After the baseline projection has been optimised, events are applied to obtain a final forecast for each audited market sector. This final forecast is also summarised below, and the most important events described.

BASELINE EXTRAPOLATIONS
The following table reports the macroeconomic indicator forecasts used to produce the baseline extrapolations (see Economic Environment). Table 4: Key Macroeconomic Indicators
2009 Real GDP 2000 RUB (billion) Annual Growth Nominal GDP RUB (billion) Annual Growth Consumer Price Index 2000 = 100 Annual Growth Real Private Consumption 2000 RUB (billion) Annual Growth Real Government Consumption 2000 RUB (billion) Annual Growth Exchange Rate RUB : US$ Annual Growth 11497 -5.0% 41512 -0.1% 2010 11727 2.0% 47424 14.2% 2011 12221 4.2% 53396 12.6% 2012 12766 4.5% 59409 11.3% 2013 13362 4.7% 65713 10.6%

309.6

341.2

369.9

397.2

425.0

13.6%

10.2%

8.4%

7.4%

7.0%

7173

7336

7578

7845

8161

-4.0%

2.3%

3.3%

3.5%

4.0%

1332

1370

1413

1460

1511

3.5% 35.00 40.8%

2.8% 36.20 3.4%

3.2% 36.60 1.1%

3.3% 36.80 0.5%

3.5% 37.20 1.1%

Source: Economist Intelligence Unit, Qtr II 2009

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RETAIL SECTOR BASELINE EXTRAPOLATIONS
Table 5: Baseline Retail Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 190898 188999 203039 218789 235042 252245 Annual Growth 15.3% -1.0% 7.4% 7.8% 7.4% 7.3% Laspeyre's Index 100.0 117.0 129.7 138.7 146.3 153.6 Annual Growth 17.0% 17.0% 10.8% 6.9% 5.5% 5.0% RUB (million) 177089 215902 253465 294041 334931 378218 Annual Growth 27.1% 21.9% 17.4% 16.0% 13.9% 12.9% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

HOSPITAL SECTOR BASELINE EXTRAPOLATIONS
Table 6: Baseline Hospital Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 40548 40830 43331 45707 48659 52226 Annual Growth 12.3% 0.7% 6.1% 5.5% 6.5% 7.3% Laspeyre's Index 100.0 114.9 126.3 137.4 148.1 158.7 Annual Growth 12.9% 14.9% 9.9% 8.8% 7.7% 7.2% RUB (million) 39012 45183 53020 61123 70284 80972 Annual Growth 25.4% 15.8% 17.3% 15.3% 15.0% 15.2% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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DLO SECTOR BASELINE EXTRAPOLATIONS
Table 7: Baseline DLO Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 76130 72933 71773 71773 71773 71773 Annual Growth 69.8% -4.2% -1.6% 0.0% 0.0% 0.0% Laspeyre's Index 100.0 105.0 104.7 105.0 105.0 105.0 Annual Growth -10.6% 5.0% -0.2% 0.2% 0.1% 0.0% RUB (million) 74283 76131 74933 75275 75358 75377 Annual Growth 45.2% 2.5% -1.6% 0.5% 0.1% 0.0% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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EVENTED FORECAST
EVENT ANALYSIS
This section contains an analysis of each of the events applied to the baseline forecasts, based on IMS Health research. Healthcare reform: The national health project, Zdorovie, was launched at the beginning of 2006 with the aims of strengthening primary care provision, developing disease prevention programmes and broadening access to 'high-tech' medical care. So far health practitioner’s salaries have increased, resulting in an increase in professionals working in the primary care sector, while broader immunisation programmes and increases in the availability of high-tech equipment have led to an improvement in some of the key health indicators. The Health Development Concept 2020 programme has set more concrete goals for reform with the aim of increasing average life expectancy to 75 years by 2020 where it currently stands at 65. Disease prevention initiatives, early detection programmes and improvements in the management of chronic conditions such as cardiovascular disease and cancer will be key components of the reform. An improved primary care sector, combined with disease prevention initiatives has the potential to significantly improve the health status of many patients in Russia. Early detection of diseases will lead to an increase in the number of patients being treated and this will also ease the burden on the hospital sector as more patients are treated in the primary care setting. However, any short term benefits of the programme will be limited by cuts in the healthcare budget as the government’s finances deteriorate in the current financial crisis. See also: Healthcare Provision Purchasing power increases: Purchasing power is expected to increase as the economy recovers from the current financial crisis. Out-of-pocket payments for pharmaceutical drugs are common and accounted for 83% of private expenditure in 2007. As drug prices experienced rapid growth in the early part of 2009 as a result of high inflation and exchange rate fluctuations the trend of switching to more expensive drugs slowed, especially in the retail sector. As the economy begins to recover from 2010 a return to previous purchasing patterns is expected and will continue to strengthen in-line with the economy. Patients will switch back to more expensive products driving volume and price growth in the retail and hospital sectors. See also: Healthcare Provision, Pharmaceutical Business Environment Upturn in OTC market: The OTC market experienced a slowdown in growth at the beginning of 2009 due to the financial crisis. The trend is similar to that of the financial crisis at the end of the 1990s and the sector is expected to bounce back again, just as it did at the beginning of the decade. See also: Pharmaceutical Business Environment Expansion of DLO indications: The development of the DLO is uncertain as much depends on the impact the financial crisis will have on the government’s budgets. However, speculation continues as to whether or not the DLO will be expanded to include disease areas such as diabetes, cancer and cardiovascular disease. IMS Health assumes that the government will add at least one additional indication over the prognosis period. See also: Healthcare Provision Innovative new products: Innovative new drugs will be introduced at high prices boosting market growth. See also: Therapeutic Class Forecasts Demographic event: The population growth rate over the 2009-2013 period will increase compared to the previous five-year period. See also: Economic Environment Introduction of mandatory health insurance: The introduction of a mandatory health insurance system which is capable of financing a universal drug benefits programme is a key element in the Health Development Concept 2020 programme. Details of how the scheme would work are, as yet, unclear, but it is thought that regulators will 'borrow' from successful approaches that have been built on elsewhere. Original plans for the scheme were to use the DLO programme as a starting point and then expand to the wider population. It is thought that

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patient co-payments would be introduced and introduction of a reference pricing mechanism is widely anticipated which would limit government spending whilst at the same time offering patients access to more expensive branded versions of multi-source products. The introduction of such a system would lead to an increased demand in drugs and tighter control on prices. The system was originally planned for introduction as early as 2010 but the financial crisis has taken a toll on government finances and some believe it could be delayed for at least another five years whilst others believe the government will go ahead with plans as soon as 2011. See also: Healthcare Provision, Pricing an Reimbursement, Pharmaceutical Business Environment Prescribing controls in the DLO: Doctors prescribing under the DLO programme are expected to come under increased pressure to reduce costs further in the wake of the financial crisis and as prices increase due to currency fluctuations. Products in the expensive drug segment are purchased at a federal level by tender. The majority of these products are expensive multinational brands to which there is no cheaper generic alternative. The the federal anti-monopoly service, FAS, has investigated prices of the products in this sector and found that some of these drugs are being supplied at costs higher than those obtained elsewhere in Europe and has sent letters to the manufacturers noting its concerns. The government is able to exert more pressure on the ONLS segment of the DLO programme and doctors are finding it increasingly difficult to prescribe expensive drugs in this sector and so patients are often prescribed a cheaper alternative which they can claim under the DLO or they are encouraged to purchase the branded product on an out-of-pocket basis, thereby shifting the cost onto the patient. See also: Healthcare Provision Price controls in the DLO: Prices of drugs in the DLO sector are expected to come under increased scrutiny as the government seeks to contain costs. The FAS has already started investigating the prices of the expensive drugs for the seven chronic diseases sector of the market. The government will have less control over the prices of the drugs in the ONLS sector, as these are conducted at a regional level and it will be the responsibility of the regions to push for lower tender prices. See also: Pricing and Reimbursement Pressure on hospital prescribing: The public hospital sector is one of the major drains on healthcare spending and is in dire need of an overhaul in order to cut costs and improve levels of efficiency. Prescribing in the hospital sector is often dependent on budgets and the availability of medicines which are purchased via regional tenders. Funding of the hospital sector has been under pressure, and the 2009 healthcare budget was revised downwards in early 2009. The regions are pushing for lower prices in the tenders as one approach to saving costs and some have been conducting tenders on an annual basis to avoid the higher prices expected later in the year due to currency fluctuations and high inflation. From the hospital side, doctors will be under increased pressure to prescribe cheaper alternatives or to push more of the cost onto patients as patients frequently purchase drugs which, in theory, should be available free of charge to inpatients. See also: Healthcare Provision, Prescribing and Dispensing Downturn in OTC market: The OTC market experienced a slowdown in growth at the beginning of 2009 due to the financial crisis. The trend is similar to that of the financial crisis at the end of the 1990s and the sector is expected to bounce back again, just as it did at the beginning of the decade. See also: Pharmaceutical Business Environment Increase in local production supports generic substitution: One of the key goals in the Health Development Concept 2020 plan is to increase the proportion of demand for pharmaceuticals that can be met by locally manufactured products to 50% enabling Russia to reduce its dependence on pharmaceutical imports. As part of this goal the government will encourage the expansion of local producers as well as investment from foreign companies in the establishment of local manufacturing capabilities. The definition of locally manufactured goods still needs to be defined, and there is debate as to whether or not the active pharmaceutical ingredient must be produced locally for the product to be considered locally produced. Some of the larger local companies have started developing their own products and in some cases are producing generic copies of leading brands (patent law allowing). If these companies are successful in launching cheaper alternatives which are substituted at the

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pharmacy, then it would lead to vast savings for the government across all sectors. See also: Pharmaceutical Environment Purchasing power decreases: Out-of-pocket payments for pharmaceutical drugs are common across the retail and hospital sectors, even though hospital medicines should in reality be paid for by the state. As drug prices experienced rapid increases in the early part of 2009 as a result of high inflation and exchange rate fluctuations the trend of switching to more expensive drugs has slowed, especially in the retail sector. Patients have started shopping around to find the cheapest drugs possible and will often visit four to five pharmacies in order to get the best price. Some hospitals have already tried to address the price increases by conducting annual tenders early on in the year, before prices increased significantly, instead of the normal biannual tenders. By procuring lower cost products the hospitals will be able to pass on the savings to the patients. If the crisis continues and unemployment increases the rate of switching to cheaper products will increase in the retail and hospital sectors. See also: Healthcare Provision, Pharmaceutical Business Environment

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Table 8: Events Impacting the Market (2009-2013)

Event Title

Healthcare reform Purchasing power increases Upturn in OTC market Expansion of DLO indications Innovative new products Demographic event Introduction of mandatory health insurance Prescribing controls in the DLO Price controls in the DLO Pressure on hospital prescribing Downturn in OTC market Increase in local production supports generic substitution Purchasing power decreases

1 1 1 1 1 1

2009 2011 2011 2011 2009 2009

35% 75% 55% 50% 90% 90%

45% 85% 75% 65% 90% 90%

55% 95% 95% 80% 90% 90%

60 24 12 12 60 60

5.0% 3.0% 5.0% 0.0% 0.2% 0.3%

0.0% 0.0% 0.0% 10.0% 0.2% 0.3%

3.0% 2.0% 0.0% 0.0% 0.2% 0.3%

1.0% 5.0% 5.0% 0.0% 0.5% 0.0%

0.0% 0.0% 0.0% 5.0% 0.5% 0.0%

1.0% 1.5% 0.0% 0.0% 0.5% 0.0%

1

2011

10%

10%

10%

36

5.0%

0.0%

5.0%

-2.0%

0.0%

-2.0%

1 1 1 1

2009 2010 2009 2009

55% 65% 65% 55%

65% 75% 75% 75%

75% 85% 85% 95%

36 60 36 12

0.0% 0.0% 0.0% 0.0%

0.0% 0.0% 0.0% 0.0%

0.0% 0.0% -0.1% 0.0%

0.0% 0.0% 0.0% -1.0%

-1.5% -3.0% 0.0% 0.0%

0.0% 0.0% -2.0% 0.0%

1

2011

25%

35%

45%

36

0.0%

0.0%

0.0%

-2.0%

-2.0%

-2.0%

1

2009

75%

85%

95%

18

-2.0%

0.0%

-2.0%

-1.5%

0.0%

-1.5%

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RETAIL SECTOR FORECASTS
Table 9: Forecast Retail Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 190898 188401 201588 223544 247764 270770 Annual Growth 15.3% -1.3% 7.0% 10.9% 10.8% 9.3% Laspeyre's Index 100.0 115.7 127.7 142.6 153.9 162.7 Annual Growth 17.0% 15.7% 10.4% 11.6% 7.9% 5.8% RUB (million) 177089 213788 247966 304247 368263 428970 Annual Growth 27.1% 20.7% 16.0% 22.7% 21.0% 16.5% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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HOSPITAL SECTOR FORECASTS
Table 10: Forecast Hospital Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 40548 40661 42909 45608 49137 53183 Annual Growth 12.3% 0.3% 5.5% 6.3% 7.7% 8.2% Laspeyre's Index 100.0 113.8 124.1 134.9 145.8 156.0 Annual Growth 12.9% 13.8% 9.1% 8.7% 8.1% 7.0% RUB (million) 39012 44715 51682 59893 69815 81082 Annual Growth 25.4% 14.6% 15.6% 15.9% 16.6% 16.1% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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DLO SECTOR FORECASTS
Table 11: Forecast DLO Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 76130 72968 71883 74063 76033 76820 Annual Growth 69.8% -4.2% -1.5% 3.0% 2.7% 1.0% Laspeyre's Index 100.0 104.8 103.9 105.9 105.8 105.6 Annual Growth -10.6% 4.8% -0.8% 1.9% -0.1% -0.2% RUB (million) 74283 76098 74649 77846 80475 81155 Annual Growth 45.2% 2.4% -1.9% 4.3% 3.4% 0.8% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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Table 12: Total Audited Market Forecasts (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 307575 302029 316380 343215 372934 400772 Annual Growth 24.8% -1.8% 4.8% 8.5% 8.7% 7.5% Laspeyre's Index 100.0 112.8 121.8 133.6 143.0 150.9 Annual Growth 10.2% 12.8% 8.0% 9.7% 7.0% 5.5% RUB (million) 290384 334601 374297 441986 518553 591207 Annual Growth 31.0% 15.2% 11.9% 18.1% 17.3% 14.0% Price Index** Sales at Actual Prices

*Qtr IV 2008 Prices **Qtr IV 2008 = 100 Source: IMS Health

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SUMMARY OF THE PROGNOSIS 2009-20 1 3
The final prognosis is based on the forecasts of Tables 9, 10 and 11. IMS Health captures 92.7% of the total pharmaceutical market. The prognosis contains a projection of the DLO sector. The DLO is a government funded programme with a budget of RUB76 billion for 2009, RUB36 billion is assigned to the expensive drug segment and RUB40 billion to the broader reimbursement scheme (the ONLS). In 2008 the government announced that it would introduce a universal out-patients benefit scheme, funded by a reformed compulsory health insurance programme which would in effect replace the DLO. The financial crisis means that these changes are unlikely to be implemented until late in the forecast period or beyond. The future of the DLO as it currently stands is uncertain. The forecast assumes that the government will continue funding of the DLO and exert strict control over prices. The government may also add new indications to the programme such as diabetes or cancer. The prognosis incorporates an estimate of the value of the Budget Purchases sector at and assumes that this sector will grow in line with the rest of the market and hold a 7.3% share during the forecast period. The total pharmaceutical market is expected to grow at a compound annual growth rate of 15.3% in the period 2008-2013. In US$ terms the market will grow at a CAGR of 6.3%. Table 13: Total Market Sales at Actual Prices (2008-2013) RUB (million)
2008 Retail Sector DLO Sector* Hospital Sector Budget Purchases* Total Market Annual Growth 177089 74283 39012 22878 313262 34.7% 2009 213788 76098 44715 26361 360962 15.2% 2010 247966 74649 51682 29489 403786 11.9% 2011 304247 77846 59893 34822 476807 18.1% 2012 368263 80475 69815 40854 559406 17.3% 2013 428970 81155 81082 46578 637785 14.0%

*Contract Prices Source: IMS Health

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Table 14: Total Market Sales at Actual Prices (2008-2013) US$* (million)
2008 Retail Sector DLO Sector** Hospital Sector Budget Purchases** Total Market Annual Growth 7125 2989 1570 921 12605 38.6% 2009 6108 2174 1278 753 10313 -18.2% 2010 6850 2062 1428 815 11154 8.2% 2011 8313 2127 1636 951 13028 16.8% 2012 10007 2187 1897 1110 15201 16.7% 2013 11531 2182 2180 1252 17145 12.8%

*Using forecast exchange rates **Contract Prices Source: IMS Health

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THERAPEUTIC CLASS FORECASTS
The following therapeutic class analysis focuses on ten of the leading first level categories of the Anatomical Classification System (ATC 1), and is based on the combination of retail pharmacy, hospital and DLO sales. These ten classes accounted for 92.3% of the market in 2008 and market share is forecast to increase marginally to 92.9% in 2013. Therapeutic Class Forecasts to 2013
2005 ATC Class RUB (million) 29250 5582 27428 5166 8818 15867 11435 7180 20254 16113 Market Share 18.3% 3.5% 17.1% 3.2% 5.5% 9.9% 7.1% 4.5% 12.7% 10.1% 2008 RUB (million) 49859 7371 38660 14901 23906 32755 11847 15391 32714 40619 Market Share 17.2% 2.5% 13.3% 5.1% 8.2% 11.3% 4.1% 5.3% 11.3% 14.0% 2013 RUB (million) 91027 34346 75465 27798 41554 59095 56758 26546 63307 74640 Market Share 15.4% 5.8% 12.8% 4.7% 7.0% 10.0% 9.6% 4.5% 10.7% 12.6% CAGR (+/-) 2005 2008 11.3% 5.7% 7.1% 23.6% 22.1% 15.6% 0.7% 16.5% 10.1% 20.3% 2008 2013 12.8% 36.0% 14.3% 13.3% 11.7% 12.5% 36.8% 11.5% 14.1% 12.9%

ATC A ATC B ATC C ATC D ATC G ATC J ATC L ATC M ATC N ATC R All others Total

12928

8.1%

22360

7.7%

40669

6.9%

11.6%

12.7%

160020

100.0%

290384

100.0%

591207

100.0%

12.7%

15.3%

Source: IMS Health

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ALIMENTARY TRACT AND METABOLISM (ATC A)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass A10M Expected Start of Generic Competition 2011 Total Sales of the Molecule in 2008* (RUB million) 73.8

repaglinide

* MAT Qtr IV Source: IMS Health

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Major Launches
Cerezyme (A16A; imiglucerase) Lantus (A10C; insulin glargine) Novorapid Flexpen (A10C; insulin aspart) Levemir (A10C; insulin detemir) Glucophage (A10J; metformin) Avandamet (A10K; rosiglitazone + metformin) Berocca Plus (A12A; vitamin B complex) Byetta (A10S; exenatide) Lindaxa (A8A; sibutramine) Herboton (A13A; oxycoccus palustris + echinacea purpurea + ribes nigrum + crataegus senticosus + rosa canina + eleutherococcus senticosus) Januvia (A10N; sitagliptin) Alogliptin (A10N) Casopitant (A4A) Dapagliflozin (A10X) Fosaprepitant (A4A) Lorcaserin (A8A) Liraglutide (A10S) Otelixizumab (A10X) Pioglitazone + alogliptin (A10N) Prucalopride (A3F) Saxagliptin (A10N) Sitagliptin + metformin (A10N) Taspoglutide (A10S) Teplizumab (A10X) Vildagliptin (A10N) Vildagliptin + metformin (A10N)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

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BLOOD AND BLOOD FORMING AGENTS (ATC B)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector No major patent expiries expected in the prognosis period. Major Launches
Octanate (B2D; factor viii) Haemoctin Cdh (B2D; factor viii) Octanine F (B2D; factor ix) Recombinate (B2D; octocog alfa) Fraxiparine (B1B; nadroparin calcium) Aggrenox (B1C; acetylsalicylic acid + dipyridamole) Aranesp (B3C; darbepoetin alfa) Mircera (B3C; methoxy PEG-epoetin beta) Metalyse (B1D; tenecteplase) Vilate (B2D; factor VIII) Antithrombin alfa (B1E) Apixaban (B2C) Dabigatran etexilate (B1E) Eltrombopag (B6D) Ecallantide (B2C) Epoetin delta (B3C) Epoetin zeta (B3C) Idraparinux (B2C) Prasugrel (B1C) Rivaroxaban (B2C) Romiplostin (B6D) SCH 530348 (B1E) Thrombin alfa (B2G) Ticagrelor (B1C)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

CARDIOVASCULAR SYSTEM (ATC C)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass C1F C9C C9C Expected Start of Generic Competition 2012 2012 2011 Total Sales of the Molecule in 2008* (RUB million) 90.2 64.4 42.7

levosimendan telmisartan irbesartan

* MAT Qtr IV Source: IMS Health

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Major Launches
Noliprel Forte (C9B; indapamide + perindopril) Crestor (C10A; rosuvastatin) Concor Cor (C7A; bisoprolol) Amlotop (C8A; amlodipine) Lozap Plus (C9D; hydrochlorothiazide + losartan) Exforge (C9D; valsartan + amlodipine) Naviten (C9C; eprosartan) Prestarium A (C9A; perindopril) Tracleer (C6A; bosentan) Tricor (C10A; fenofibrate) Naviten (C9C; eprosartan) Acadesine (C6A) Ambrisentan (C6A) Aliskiren (C9X) Aliskiren + valsartan (C9D) Choline fenofibrate (C10A) Choline fenofibrate + rosuvastatin (C10A) Clazosentan (C4A) Darusentan (C2A) Dronedarone (C1B) Nicotinic acid + laropiprant (C10C) Fenofibrate + simvastatin (C10A) Ranolazine (C1D) Tedisamil (C1B) Tolvaptan (C3A) Vernakalant (C1B)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

DERMATOLOGICALS (ATC D)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector No major patent expiries expected in the prognosis period. Major Launches
Elidel (D5X; pimecrolimus) Merz Special Beaut (D11A; ascorbic acid + retinol + vitamin e + ubidecarenone + fish + zinc) Fenistil Pencivir (D6D; penciclovir) Basiron As (D10A; benzoyl peroxide) Lamisil Uno (D1A; terbinafine)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

No products were identified

Potential high growth pipeline products 2009-2013

CIP-isotretinoin (D10B) NM 100060 (D1A) Retapamulin (D6A) Rusalatide (D3A) Ustekinumab (D5B)

Source: IMS Health

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GENITOURINARY SYSTEM/SEX HORMONES (ATC G)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass G4E Expected Start of Generic Competition 2011 Total Sales of the Molecule in 2008* (RUB million) 1560.8

sildenafil

* MAT Qtr IV Source: IMS Health Major Launches
Yarina (G3A; ethinylestradiol + drospirenone) Cialis (G4E; tadalafil) Genferon (G4X; taurine + interferon alfa-2a + benzocaine) Omnic Ocas (G4C; tamsulosin) Novaring (G3A; ethinylestradiol + etonogestrel) Ovitrelle (G3G; choriogonadotrophin alfa) Arzoxifene (G3J) Bazedoxifene (G3J) Conjugated estrogens + bazedoxifene (G3J) Corifollitropin alfa (G3G) Esmirtazapine (G3X) Fesoterodine (G4D) Lasofoxifene (G3J) Ospemifene (G3J) XP 12B (G2X)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

SYSTEMIC ANTI-INFECTIVES (ATC J)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass J1P J2A J5B Expected Start of Generic Competition 2013 2011 2012 Total Sales of the Molecule in 2008* (RUB million) 31.3 91.8 20.2

ertapenem voriconazole lamivudine

* MAT Qtr IV Source: IMS Health

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Major Launches
Flucostat (J2A; fluconazole) Wilprafen (J1F; josamycin) Shanvak (J7A; vaccine, hepatitis b) Ampisid (J1C; sulbactam + ampicillin) Valcyt (J5B; valganciclovir) Baraclude (J5B; entecavir) Doriprex (J1P; doripenem) Fuzeon (J5C; enfuvirtide) Gardasil (J7A; vaccine, human papillomavirus) Hiberix (J7A; vaccine HiB) Invanz (J1P; ertapenem) Kivexa (J5C; abacavir + lamivudine) Noxafil (J2A; posaconazole) Prezista (J5C; darunavir) Sebivo (J5B; telbivudine) Telzir (J5C; fosamprenavir) Twinrix (J7B; vaccine, hepatitis A and B) Vacc Grippol Plus (J7A; vaccine, influenza) Anidulafungin (J2A) Boceprevir (J5B) Ceftobiprole medocaril (J1D) Cethromycin (J1F) Dalbavancin (J1X) Efungumab (J2A) Etravirine (J5C) Iclaprim (J1X) Motavizumab (J5B) Maribavir (J5B) Raltegravir (J5C) Oritavancin (J1X) Pleconaril (J5B) Telavancin (J1X) Telaprevir (J5B)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

ANTINEOPLASTIC AGENTS/IMMUNOMODULATORS (ATC L)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass L1B L4A L4A Expected Start of Generic Competition 2013 2009 2013 Total Sales of the Molecule in 2008* (RUB million) 532.3 15.3 1.6

capecitabine daclizumab everolimus

* MAT Qtr IV Source: IMS Health

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Major Launches
Velcade (L1X; bortezomib) Herceptin (L1X; trastuzumab) Rebif 44 (L3B; interferon beta-1a) Avastin (L1X; bevacizumab) Myfortic (L4A; mycophenolic acid) Campath (L1X; alemtuzumab) Dacogen (L1B; decitabine) Erbitux (L1X; cetuximab) Neulastim (L3A; pegfilgrastim) Nexavar (L1X; sorafenib) Sutent (L1X; sunitinib) Sertican (L4A; everolimus) Tyverb (L1X; lapatinib) Belimumab (L4A) Bosutinib (L1X) Certolizumab pegol (L4A) Eculizumab (L4A) Lapatinib (L1X) Nelarabine (L1X) Nilotinib (L1X) Ofatumumab (L1X) Panitumumab (L1X ) Pazopanib (L1X) Pixantrone (L1X) Ranpirnase (L1X) Temsirolimus (L1X) Trabectedin (L1A) Tocilizumab (L4A) Vandetanib (L1X)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

MUSCULOSKELETAL SYSTEM (ATC M)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
ATC Subclass Expected Start of Generic Competition

Molecule

Total Sales of the Molecule in 2008* (RUB million)

cisatracurium besilate

M3A

2011

17.7

* MAT Qtr IV Source: IMS Health

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Major Launches
Theraflex (M5X; glucosamine + chondroitinsulfuric acid) Resorba (M5B; zoledronic acid) Artra (M5X; glucosamine + chondroitinsulfuric acid) Bystrumgel (M2A; ketoprofen) Bonviva (M5B; ibandronic acid) Aclasta (M5B; zoledronic acid) Humira (M1C; adalimumab) Abatacept (M1C) Canakinumab (M1C) Denosumab (M5B) Esomeprazole + naproxen (M1A) Febuxostat (M4A) Golimumab (M1C) Ocrelizumab (M1C) Odanacatib (M5B)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

CENTRAL NERVOUS SYSTEM (ATC N)
Leading Molecules Facing Generic Competition (2009-2013) Retail, Hospital and DLO Sector
Molecule ATC Subclass N5A N2C N2C Expected Start of Generic Competition 2011 2011 2011 Total Sales of the Molecule in 2008* (RUB million) 176.2 32.6 21.4

olanzapine zolmitriptan eletriptan

* MAT Qtr IV Source: IMS Health

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Major Launches
Pentalgin N (N2B; caffeine + phenobarbital + metamizole sodium + naproxen + codeine) Rispolept Consta (N5A; risperidone) Phenotropil (N6D; phenotropil) Aphobazol (N5C; afobazole) Zorex (N7E; unithiol + pantothenic acid) Invega (N5A; paliperidone) Sinemet (N4A; carbidopa + levodopa) Stalevo (N4A; carbidopa + entacapone + levodopa) Valdoxan (N6A; agomelatine) Asenapine (N5A) Eplivanserin (N5B) Eslicarbazepine (N3A) Gabapentin enacarbil (N7X) Iloperidone (N5A) Indiplon (N5B) Istradefylline (N4A) Paliperidone palmitate (N5A) Lacosamide (N3A) Lurasidone (N5A) Rufinamide (N3A) Saredutant (N6A) Tapentadol (N2A) Telcagepant (N2C) Teriflunomide (N7X)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

RESPIRATORY SYSTEM (ATC R)
Leading Molecules Facing Generic Competition (2008-2011) Retail, Hospital and DLO Sector
ATC Subclass Expected Start of Generic Competition

Molecule

Total Sales of the Molecule in 2008* (RUB million)

tiotropium bromide

R3G

2010

419.2

* MAT Qtr IV Source: IMS Health

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Major Launches
Spiriva (R3G; tiotropium bromide) Teraflu Extra (R5A; ascorbic acid + paracetamol + phenylephrine + pheniramine) Coldrex Maxigrip (R5A; ascorbic acid + paracetamol + phenylephrine) Rhinonorm (R1A; xylometazoline) Xyzal (R6A; levocetirizine) Hexoral Tabs (R2A; benzocaine + chlorhexidine) Xolair (R3X; omalizumab) Aclidinium bromide (R3G) Fluticasone furoate (R1B) Mometasone + formoterol (R3F) Roflumilast (R3H)

Top five performing products launched in 2003-2008 (ranked by sales at MAT Qtr IV 2008)

Potential high growth products launched 2007-2008 (MAT Qtr IV)

Potential high growth pipeline products 2009-2013

Source: IMS Health

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RUSSIA 2009 UPDATE
PRICE LEVELS
The values in this report are based on the new enhanced data for Russia for the retail and hospital panels and the new Dopolnitel'noe Lekarstvennoe Obespechenie, DLO, panel. This is a state restricted drug reimbursement programme introduced in 2005 to provide subsidised pharmaceuticals in the out-patient sector for the disabled, war veterans, children under three years of age and families with three or more children. Data for the retail and hospital panels is available from 2004 and the DLO from 2005. Values in the hospital and retail sectors are shown at ex-manufacturer prices and in local currency. Values in the DLO sector are shown at contract prices and in local currency. The total market forecast is compiled from the retail, hospital and DLO panels, which accounted for 92.7% of the total market in 2009. The retail and hospital panels are based on all registered medicines and food supplements and homeopathic products. The DLO panel is based on all registered medicines in the DLO programme including expensive drugs for the seven life threatening diseases. Market Coverage 2009
Market Share Retail Sector Hospital Sector DLO Sector Budget Purchases 56.5% 12.5% 23.7% 7.3%

Sales of the budget purchases are calculated historically using information from the federal government.

FORECAST METHODOLOGY
The IMS Market Prognosis projections are based upon ten years of volume and price quarterly sales data. Pharmaceutical volume and price data in each audited market sector are independently analysed using both univariate time series models and multiple regression based models incorporating macroeconomic variables. The macroeconomic variables are provided to IMS Health by a third party, the Economist Intelligence Unit (EIU). The best model – univariate or macroeconomic - is selected based on forecasting accuracy, modelling fit and robustness. Then demand (volume) and price equations are developed and combined to give a baseline extrapolation of actual sales for each audited market sector. Where an econometric model is selected, the demand and price equations are used in combination with macroeconomic indicator forecasts provided by the EIU. The macroeconomic indicator forecasts are tabulated below. After the baseline projection has been optimised, events are applied to obtain a final forecast for each audited market sector. This final forecast is also summarised below, and the most important events described.

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FORECAST 2009 UPDATE
The forecasts below represent an update of the forecasts published in the IMS Market Prognosis report in June 2009. Updated economic forecasts and IMS MIDAS data up to Qtr I 2009 have been used to develop a new baseline forecast for each audited market sector. Each event has been re-evaluated and, where necessary, events have been added or deleted. The updated events have then been applied to the new baseline forecasts to obtain a new final forecast for each audited market sector.

BASELINE EXTRAPOLATIONS
The following table reports the macroeconomic indicator forecasts. Table 1: Key Macroeconomic Indicators
2009 Real GDP 2000 RUB (billion) Annual Growth Nominal GDP RUB (billion) Annual Growth Consumer Price Index 2000 = 100 Annual Growth Real Private Consumption 2000 RUB (billion) Annual Growth Real Government Consumption 2000 RUB (billion) Annual Growth Exchange Rate RUB : US$ Annual Growth 11491 -5.0% 41503 -0.1% 305.6 12.1% 7167 -4.1% 1332 3.5% 32.80 32.0% 2010 11721 2.0% 46567 12.2% 334.6 9.5% 7332 2.3% 1370 2.8% 33.50 2.1% 2011 12215 4.2% 52745 13.3% 362.7 8.4% 7574 3.3% 1413 3.2% 34.00 1.5% 2012 12760 4.5% 59081 12.0% 389.5 7.4% 7841 3.5% 1460 3.3% 34.50 1.5% 2013 13356 4.7% 65841 11.4% 416.7 7.0% 8156 4.0% 1511 3.5% 35.00 1.4%

Source: Economist Intelligence Unit, Qtr II 2009

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RETAIL PHARMACY SECTOR BASELINE EXTRAPOLATIONS
Table 2: Baseline Retail Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 210720 199761 209589 230296 253502 278376 Annual Growth 15.3% -5.2% 4.9% 9.9% 10.1% 9.8% Laspeyre's Index 90.6 109.7 118.4 124.3 130.9 137.4 Annual Growth 17.0% 21.1% 7.9% 5.0% 5.2% 5.0% RUB (million) 177079 210526 241181 281575 325930 376103 Annual Growth 27.1% 18.9% 14.6% 16.7% 15.8% 15.4% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

DLO SECTOR BASELINE EXTRAPOLATIONS
Table 3: Baseline DLO Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 79556 75922 75452 75452 75452 75452 Annual Growth 69.8% -4.6% -0.6% 0.0% 0.0% 0.0% Laspeyre's Index 95.7 102.3 102.7 102.7 102.7 102.7 Annual Growth -10.6% 6.9% 0.4% 0.0% 0.0% 0.0% RUB (million) 74283 77125 77481 77481 77481 77481 Annual Growth 45.2% 3.8% 0.5% 0.0% 0.0% 0.0% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

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HOSPITAL SECTOR BASELINE EXTRAPOLATIONS
Table 4: Baseline Hospital Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 43447 42884 44230 45039 46039 47340 Annual Growth 12.3% -1.3% 3.1% 1.8% 2.2% 2.8% Laspeyre's Index 93.3 106.8 117.4 127.6 137.7 147.8 Annual Growth 12.9% 14.4% 9.9% 8.7% 7.9% 7.4% RUB (million) 39012 44729 50204 55745 61626 68133 Annual Growth 25.4% 14.7% 12.2% 11.0% 10.5% 10.6% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

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EVENTED FORECAST
EVENT ANALYSIS
This section contains an analysis of each of the events applied to the baseline forecasts, based on IMS Health research. Expansion of DLO indications: The development of the DLO is uncertain as much depends on the impact the financial crisis will have on the government’s budgets. However, speculation continues as to whether or not the DLO will be expanded to include disease areas such as diabetes, cancer and cardiovascular disease. IMS Health assumes that the government will add at least one additional indication over the prognosis period. See also: Healthcare Provision Healthcare reform: The national health project, Zdorovie, was launched at the beginning of 2006 with the aims of strengthening primary care provision, developing disease prevention programmes and broadening access to 'high-tech' medical care. So far health practitioner’s salaries have increased, resulting in an increase in professionals working in the primary care sector, while broader immunisation programmes and increases in the availability of high-tech equipment have led to an improvement in some of the key health indicators. The Health Development Concept 2020 programme has set more concrete goals for reform with the aim of increasing average life expectancy to 75 years by 2020 where it currently stands at 65. Disease prevention initiatives, early detection programmes and improvements in the management of chronic conditions such as cardiovascular disease and cancer will be key components of the reform. An improved primary care sector, combined with disease prevention initiatives has the potential to significantly improve the health status of many patients in Russia. Early detection of diseases will lead to an increase in the number of patients being treated and this will also ease the burden on the hospital sector as more patients are treated in the primary care setting. However, any short term benefits of the programme will be limited by cuts in the healthcare budget as the government’s finances deteriorate in the current financial crisis. See also: Healthcare Provision Purchasing power increases: Purchasing power is expected to increase as the economy recovers from the current financial crisis. Out-of-pocket payments for pharmaceutical drugs are common and accounted for 83% of private expenditure in 2007. As drug prices experienced rapid growth in the early part of 2009 as a result of high inflation and exchange rate fluctuations the trend of switching to more expensive drugs slowed, especially in the retail sector. As the economy begins to recover from 2010 a return to previous purchasing patterns is expected and will continue to strengthen in-line with the economy. Patients will switch back to more expensive products driving volume and price growth in the retail and hospital sectors. See also: Healthcare Provision, Pharmaceutical Business Environment Upturn in OTC market: The OTC market experienced a slowdown in growth at the beginning of 2009 due to the financial crisis. The trend is similar to that of the financial crisis at the end of the 1990s and the sector is expected to bounce back again, just as it did at the beginning of the decade. See also: Pharmaceutical Business Environment Innovative new products: Innovative new drugs will be introduced at high prices boosting market growth. See also: Therapeutic Class Forecasts Demographic event: The population growth rate over the 2009-2013 period will increase compared to the previous five-year period. See also: Economic Environment Introduction of mandatory health insurance: The introduction of a mandatory health insurance system which is capable of financing a universal drug benefits programme is a key element in the Health Development Concept 2020 programme. Details of how the scheme would work are, as yet, unclear, but it is thought that regulators will 'borrow' from successful approaches that have been built on elsewhere. Original plans for the scheme were to use the DLO programme as a starting point and then expand to the wider population. It is thought that

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patient co-payments would be introduced and introduction of a reference pricing mechanism is widely anticipated which would limit government spending whilst at the same time offering patients access to more expensive branded versions of multi-source products. The introduction of such a system would lead to an increased demand in drugs and tighter control on prices. The system was originally planned for introduction as early as 2010 but the financial crisis has taken a toll on government finances and some believe it could be delayed for at least another five years whilst others believe the government will go ahead with plans as soon as 2011. See also: Healthcare Provision, Pricing and Reimbursement, Pharmaceutical Business Environment Prescribing controls in the DLO: Doctors prescribing under the DLO programme are expected to come under increased pressure to reduce costs further in the wake of the financial crisis and as prices increase due to currency fluctuations. Products in the expensive drug segment are purchased at a federal level by tender. The majority of these products are expensive multinational brands to which there is no cheaper generic alternative. The federal anti-monopoly service, FAS, has investigated prices of the products in this sector and found that some of these drugs are being supplied at costs higher than those obtained elsewhere in Europe and has sent letters to the manufacturers noting its concerns. The government is able to exert more pressure on the ONLS segment of the DLO programme and doctors are finding it increasingly difficult to prescribe expensive drugs in this sector and so patients are often prescribed a cheaper alternative which they can claim under the DLO or they are encouraged to purchase the branded product on an out-of-pocket basis, thereby shifting the cost onto the patient. See also: Healthcare Provision NEW EVENT: Budget increases for the DLO: In August 2009, RUB1.96 billion extra was allocated to the ONLS programme to cover costs for the remainder of 2009. The budget from 2010 is expected to remain in the region of RUB78 billion. Pressure on hospital prescribing: The public hospital sector is one of the major drains on healthcare spending and is in dire need of an overhaul in order to cut costs and improve levels of efficiency. Prescribing in the hospital sector is often dependent on budgets and the availability of medicines which are purchased via regional tenders. Funding of the hospital sector has been under pressure, and the 2009 healthcare budget was revised downwards in early 2009. The regions are pushing for lower prices in the tenders as one approach to saving costs and some have been conducting tenders on an annual basis to avoid the higher prices expected later in the year due to currency fluctuations and high inflation. From the hospital side, doctors will be under increased pressure to prescribe cheaper alternatives or to push more of the cost onto patients as patients frequently purchase drugs which, in theory, should be available free of charge to inpatients. See also: Healthcare Provision, Prescribing and Dispensing Downturn in OTC market: The OTC market experienced a slowdown in growth at the beginning of 2009 due to the financial crisis. The trend is similar to that of the financial crisis at the end of the 1990s and the sector is expected to bounce back again, just as it did at the beginning of the decade. See also: Pharmaceutical Business Environment UPDATED EVENT: Increase in local production supports generic substitution: One of the key goals in the Health Development Concept 2020 plan is to increase the proportion of demand for pharmaceuticals that can be met by locally manufactured products to 50% enabling Russia to reduce its dependence on pharmaceutical imports. As part of this goal the government will encourage the expansion of local producers as well as investment from foreign companies in the establishment of local manufacturing capabilities. The definition of locally manufactured goods still needs to be defined, and there is debate as to whether or not the active pharmaceutical ingredient must be produced locally for the product to be considered locally produced. Some of the larger local companies have started developing their own products and in some cases are producing generic copies of leading brands (patent law allowing). If these companies are successful in launching cheaper alternatives which are substituted at the pharmacy, then it would lead to vast savings for the government across all sectors. UPDATE: The Ministry of Industry and Production has drawn up a list of foreign drugs that they wish to have produced in Russia. The list is based around products for chronic diseases such as cancer and diabetes. The government intends to use companies such as

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Russian Ventures Company to boost local drug development. Russian Ventures Company was set up by the government in 2006 to provide low-cost financing to early stage innovative companies. See also: Pharmaceutical Business Environment Purchasing power decreases: Out-of-pocket payments for pharmaceutical drugs are common across the retail and hospital sectors, even though hospital medicines should in reality be paid for by the state. As drug prices experienced rapid increases in the early part of 2009 as a result of high inflation and exchange rate fluctuations the trend of switching to more expensive drugs has slowed, especially in the retail sector. Patients have started shopping around to find the cheapest drugs possible and will often visit four to five pharmacies in order to get the best price. Some hospitals have already tried to address the price increases by conducting annual tenders early on in the year, before prices increased significantly, instead of the normal biannual tenders. By procuring lower cost products the hospitals will be able to pass on the savings to the patients. If the crisis continues and unemployment increases the rate of switching to cheaper products will increase in the retail and hospital sectors. See also: Healthcare Provision, Pharmaceutical Business Environment NEW EVENT: New price controls: Products on the essential drug list and within the DLO are subject to pricing regulations, whilst no pricing regulation exists for all remaining products. Following the price hikes at the end of 2008/beginning 2009 as a result of currency fluctuations, and as part of the wider healthcare reform, the government has reviewed the state price regulations. Regulation No654 seeks to increase pricing controls by revising the calculation for the maximum selling price and for the maximum margins at retail and wholesale levels. Due for implementation in Q1 2010 the government proposes to monitor prices of drugs on the EDL throughout the whole logistics channel. The ex-manufacturer price will be the base price for the control for locally produced drugs and for imported drugs the import price will provide the base. Maximum wholesale and retail margins will then be set for all drugs on the list and regional differences will be determined using coefficients. There is some concern that as a result of regulated margins some cheaper products may disappear from the market as they will no longer be profitable for wholesalers and pharmacies to sell. The new system could also lead to an increase in distributors working at a national level and could lead to consolidation within this sector. Prices of drugs in the DLO sector are also expected to come under increased scrutiny as the government seeks to contain costs. The FAS has already started investigating the prices of the expensive drugs for the seven chronic diseases sector of the market. The government will have less control over the prices of the drugs in the ONLS sector, as these are conducted at a regional level and it will be the responsibility of the regions to push for lower tender prices.

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Table 5: Events Impacting the Market (2009-2013)

Event Title

Expansion of DLO indications Healthcare reform Purchasing power increases Upturn in OTC market Innovative new products Demographic event Introduction of mandatory health insurance Prescribing controls in the DLO Budget increases for the DLO Pressure on hospital prescribing Downturn in OTC market UPDATED EVENT: Increase in local production supports generic substitution Purchasing power decreases NEW EVENT: New price controls

1 4 1 1 4 4

2011 2009 2011 2011 2009 2009

50% 35% 75% 55% 90% 90%

65% 45% 85% 75% 90% 90%

80% 55% 95% 95% 90% 90%

36 57 24 12 57 57

0.0% 5.0% 3.0% 5.0% 0.2% 0.3%

10.0% 0.0% 0.0% 0.0% 0.2% 0.3%

0.0% 3.0% 2.0% 0.0% 0.2% 0.3%

0.0% 1.0% 1.5% 1.5% 0.5% 0.0%

5.0% 0.0% 0.0% 0.0% 0.5% 0.0%

0.0% 1.0% 1.5% 0.0% 0.5% 0.0%

1

2011

10%

10%

10%

36

5.0%

0.0%

5.0%

-2.0%

0.0%

-2.0%

4 9 4 4

2009 2009 2009 2009

55% 99% 65% 55%

65% 99% 75% 75%

75% 99% 85% 95%

32 0 32 12

0.0% 0.0% 0.0% 0.0%

0.0% 1.5% 0.0% 0.0%

0.0% 0.0% -0.1% 0.0%

0.0% 0.0% 0.0% -1.0%

-1.5% 1.5% 0.0% 0.0%

0.0% 0.0% -2.0% 0.0%

1

2011

25%

35%

45%

36

0.0%

0.0%

0.0%

-2.0%

-2.0%

-2.0%

4 1

2009 2010

75% 65%

85% 75%

95% 85%

18 48

-2.0% 0.0%

0.0% 0.0%

-2.0% 0.0%

-1.5% -5.0%

0.0% -5.0%

-1.5% -5.0%

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RETAIL SECTOR EVENTED FORECAST
Table 6: Forecast Retail Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 210720 199407 208162 235360 267184 298749 Annual Growth 15.3% -5.4% 4.4% 13.1% 13.5% 11.8% Laspeyre's Index 90.6 108.8 115.7 121.8 127.6 132.6 Annual Growth 17.0% 20.1% 6.3% 5.3% 4.8% 4.0% RUB (million) 177079 209333 234977 281653 335448 390857 Annual Growth 27.1% 18.2% 12.3% 19.9% 19.1% 16.5% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

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DLO SECTOR EVENTED FORECAST
Table 7: Forecast DLO Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 79556 76483 75548 76360 77754 79428 Annual Growth 69.8% -3.9% -1.2% 1.1% 1.8% 2.2% Laspeyre's Index 95.7 103.6 101.5 101.0 100.8 100.6 Annual Growth -10.6% 8.3% -2.1% -0.5% -0.2% -0.2% RUB (million) 74283 78209 76983 77265 78423 79964 Annual Growth 45.2% 5.3% -1.6% 0.4% 1.5% 2.0% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

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HOSPITAL SECTOR EVENTED FORECAST
Table 8: Forecast Hospital Sector (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 43447 42782 43824 44906 46451 48167 Annual Growth 12.3% -1.5% 2.4% 2.5% 3.4% 3.7% Laspeyre's Index 93.3 105.9 114.4 123.1 131.9 139.8 Annual Growth 12.9% 13.5% 8.0% 7.6% 7.2% 5.9% RUB (million) 39012 44460 48769 53830 59752 65888 Annual Growth 25.4% 14.0% 9.7% 10.4% 11.0% 10.3% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

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TOTAL MARKET FORECASTS
Table 9: Total Audited Market Forecast (2008-2013)
Sales at Constant Prices* Year RUB (million) 2008 2009 2010 2011 2012 2013 333723 318672 327534 356625 391389 426345 Annual Growth 24.4% -4.5% 2.8% 8.9% 9.7% 8.9% Laspeyre's Index 92.2 107.2 112.2 117.5 122.8 127.5 Annual Growth 10.6% 16.3% 4.7% 4.7% 4.5% 3.8% RUB (million) 290375 332003 360729 412748 473624 536709 Annual Growth 31.0% 14.3% 8.7% 14.4% 14.7% 13.3% Price Index** Sales at Actual Prices

*Qtr I 2009 Prices **Qtr I 2009 = 100 Source: IMS Health

SUMMARY OF THE PROGNOSIS 2009-2013
The prognosis for the Russian Federation has been revised downwards. The economic forecasts have remained inline with those in June 2009. The inflation forecast has declined marginally for 2009 and 2010 however. US$ exchange rate forecasts are lower in 2009 and 2010 but higher for the medium-longer term. Sales growth in the first half of 2009 was lower than that in the first half of 2008 and this has lowered the prognosis. Price growth increased in Qtr I 2009 as a result of high inflation and fluctuating currency rates caused by the financial crisis and this in turn led to a fall in volume sales. Price growth was less volatile in Qtr II 2009 but volume sales in the retail sector continued to decline combined with lower price growth. Price growth is forecast to become more constrained over the prognosis period as the inflation rate declines and a new pricing system is introduced by the government in 2010. Exchange rate fluctuations will also play an important role in price growth and is expected to stabilise as the economy improves following the financial crisis. As confidence returns to the financial markets consumers are expected to return to their normal purchasing behaviour. An extra RUB1.96 billion was added to the ONLS budget for the remainder of 2009. The budget from 2010 is expected to remain in the region of RUB78 billion. The final prognosis is based on the forecasts of Tables 6, 7 and 8. IMS Health captures 92.7% of the total pharmaceutical market. The prognosis contains a projection of the DLO sector. The DLO is a government funded programme with a budget of RUB76 billion for 2009, RUB36 billion is assigned to the expensive drug segment and RUB40 billion to the broader reimbursement scheme (the ONLS). In 2008 the government announced that it would introduce a universal out-patients benefit scheme, funded by a reformed compulsory health insurance programme which would in effect replace the DLO. The financial crisis means that these changes are unlikely to be implemented until late in the forecast period or beyond. The future of the DLO as it currently stands is uncertain. The forecast assumes that the government will continue funding of the DLO and

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exert strict control over prices. The government may also add new indications to the programme such as diabetes or cancer. The prognosis incorporates an estimate of the value of the Budget Purchases sector at and assumes that this sector will grow in line with the rest of the market and hold a 7.3% share during the forecast period. The total pharmaceutical market is expected to grow at a compound annual growth rate (CAGR) of 13.1% in terms of roubles and 5.6% in terms of US$ during the period 2008-2013. Table 10: Total Market Sales at Actual Prices (2008-2013) RUB (million)
2008 Retail Sector DLO Sector* Hospital Sector Budget Purchases* Total Market Annual Growth 177079 74283 39012 22878 313252 34.7% 2009 209333 78209 44460 26158 358161 14.3% 2010 234977 76983 48769 28421 389150 8.7% 2011 281653 77265 53830 32519 445267 14.4% 2012 335448 78423 59752 37315 510939 14.7% 2013 390857 79964 65888 42286 578995 13.3%

*Contract Prices Source: IMS Health Table 11: Total Market Sales at Actual Prices (2008-2013) US$* (million)
2008 Retail Sector DLO Sector** Hospital Sector Budget Purchases** Total Market Annual Growth 7125 2989 1570 921 12604 38.6% 2009 6382 2384 1355 797 10920 -13.4% 2010 7014 2298 1456 848 11616 6.4% 2011 8284 2272 1583 956 13096 12.7% 2012 9723 2273 1732 1082 14810 13.1% 2013 11167 2285 1883 1208 16543 11.7%

*Using forecast exchange rates **Contract Prices Source: IMS Health

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APPENDIX A: GLOSSARY
AIPM CTD Association of International Pharmaceutical Manufacturers Common Technical Document State Restricted Drug Reimbursement Scheme - Dopolnitel'noe Lekarstvennoe Obespechenie Essential Drug List European Medical Centre European Union Federal Anti-Monopoly Service Food and Drug Administration (US) Federal Fund for Mandatory Health Insurance Gross Domestic Product Good Manufacturing Practice General Practitioner International Non-Proprietary Name Intellectual Property Initial Public Offering Moving Annual Total Ministry of Health and Social Development Mandatory Health Insurance System State Restricted Drug Reimbursement Scheme Over-The-Counter Russian Central Bank Supplementary Protection Certificate Trade-Related Aspects of Intellectual Property Rights Value Added Tax World Health Organisation

DLO

EDL EMC EU FAS FDA FFOMS GDP GMP GP INN IP IPO MAT MOHSD OMS ONLS OTC RCB SPC TRIPS VAT WHO

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WTO

World Trade Organisation

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APPENDIX B: SOURCES AND METHODS
COVERAGE
The IMS Market Prognosis reports 2009–2013 comprise the following elements: • Country reports. • Market forecasts. • Therapeutic class forecasts. • Regional overviews (only available with full regional reports). The forecasts for each country in IMS Market Prognosis are updated within six months after the publication of the main reports. The Updates include new economic forecasts, a brief summary of major events in each country and are an integral part of the IMS Market Prognosis subscription. Country Reports The IMS Market Prognosis series comprises 42 countries, listed in the table below. Each country report provides an analysis of the key environmental issues affecting the future of the pharmaceutical industry, together with conclusions on the operating environment over the next five years, summarised in the form of brief scenarios. Each country report also provides an assessment of the economic and political climate. Issues analysed include: • Economic Environment • Political Environment • Healthcare Provision • Prescribing • Reimbursement • Dispensing • Pricing • Regulatory Environment • Pharmaceutical Business Environment IMS Market Prognosis reports utilise IMS Health expertise, data and methodology.

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Country Coverage 2009
Argentina Australia Belgium Brazil Canada Chile China Colombia Czech Republic Denmark Finland France Germany Greece Hong Kong Hungary India Indonesia Italy Japan Korea Malaysia Mexico Netherlands Norway Peru Philippines Poland Portugal Romania Russia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand Turkey UK USA Venezuela

Market Forecasts The five-year pharmaceutical market forecasts are based on an IMS Health proprietary econometric analysis using IMS Health data, and on third party analysis and five-year forecasts of the main macroeconomic indicators, including - where used – forecasts of exchange rates, provided by the Economist Intelligence Unit (a sister firm of The Economist ). The development of an econometric model is the approach best suited to country market forecasts. This approach allows IMS Health to uncover long-term equilibrium relationships between different sets of variables (ie economic and pharmaceutical variables). In turn, this also allows the determination of the speed of adjustment to these equilibria, together with any short-term relationships that may exist (see 'Forecasting Methodology'). Five-year forecasts are provided for: • Pharmaceutical price growth • Sales at constant prices or standard units • Sales at actual prices • Gross domestic product* • Consumer price index* • Population by age distribution* • Real private consumption* • Real government consumption* • Current account balance* • Exchange rate movements* * These data are provided by the Economist Intelligence Unit Therapeutic Class Forecasts The therapeutic class forecasts cover ten key ATC1 classes accounting for an average of more than 80% of pharmaceutical sales in the individual country markets. These forecasts are provided individually for all the countries covered (see 'Forecasting Methodology'). The therapy areas included are: • ATC A: Alimentary Tract and Metabolism • ATC B: Blood and Blood-Forming Organs

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• ATC C: Cardiovascular System • ATC D: Dermatologicals • ATC G: Genitourinary System and Sex Hormones • ATC J: Systemic Anti-infectives • ATC L: Antineoplastic Agents and Immunomodulators • ATC M: Musculoskeletal System • ATC N: Central Nervous System • ATC R: Respiratory System

REGIONAL OVERVIEWS
The analyses and findings of the country reports and forecasts are consolidated in seven Regional Overviews (Asia/Australia, Core Countries, Europe, Latin America, Nordic Europe, North America and Pharmerging Countries). The Regional Overviews identify significant trends affecting the pharmaceutical industry in each region and provide a strategic analysis of the prognosis period. The forecasts are reported in US dollars at constant exchange rates. The constant exchange rates used to convert from local currency into US dollars are the rates as of end Qtr IV 2008 for the main report, and as of end Qtr I 2009 for the Updates. The exchange rates are the IMS Health standard middle rates, sourced on a daily basis from various financial institutions and calculated as monthly arithmetic means. In the Appendix, a consolidated five-year forecast for each country is also provided in US dollars at forecast exchange rates. Forecast exchange rates are provided to IMS Health by the Economist Intelligence Unit.

FORECASTING METHODOLOGY
The pharmaceutical market for each IMS Market Prognosis country is modelled and forecast by market sector in terms of both price-driven growth (Laspeyre’s index or price per standard unit) and real volume (constant price or standard unit) growth. From this analysis, the results of which are presented in full, actual price forecasts are derived (see 'Useful Definitions'). The primary market data source for each forecast is the IMS MIDAS database. Total Market Forecasting Process The IMS Market Prognosis projections are based upon ten years of volume and price quarterly sales data. Pharmaceutical volume and price data are independently analysed, with respect to macroeconomic variables, using multiple regression techniques. Then an econometric model is used to develop two equations - a demand (volume) equation and a price equation - on which the forecast is built. These are used in combination with macroeconomic indicator forecasts provided to IMS Health by the Economist Intelligence Unit to obtain a baseline extrapolation of actual sales for each audited market sector. After the baseline projection has been optimised, events (ie expected environmental and legislative developments, which are not reflected in the historical data or the economic forecast) are applied to derive a final forecast. This step takes into account all the results from qualitative research amongst local industry experts and opinion leaders. Each event is quantified by four parameters: • The date the event is expected to occur.

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• The probability that it will occur. The probability is quantified in the short term (ie at the potential start date of the event) in the medium term (18 months after the starting date of the event) and in the long term (36 months after the starting date of the event). • The percentage impact it will have on the baseline projection. This is separately quantified for each sector of the market and for the volume and price component. • The time it will take to exert its full effect. The forecasts are consolidated at actual prices and augmented to account for unaudited market sectors, thus providing total national market forecasts at actual prices. Therapeutic Class Forecasting Process IMS Market Prognosis total audited market forecasts are produced using the econometric model as described above. Ten years of historical actual price sales data, in local currency at ATC1 level are retrieved from the IMS MIDAS database, and growth rates are calculated. These are then weighted to give greater emphasis to the later years. An average weighted annual growth rate is used to project the historical data. This creates an initial five-year forecast for each ATC1. Forecast sales for each ATC1 are added up for every forecast year to derive total audited market figures. An adjustment factor is then calculated for each year and used to convert the forecasts of the audited market back to the IMS Market Prognosis forecast of the audited market for each year. This factor is then applied to every ATC1 for that year, so each therapy class is scaled up or down (in proportion to their size). The overall totals are now equal to IMS Market Prognosis total audited market forecasts.

SOURCES
Primary and Secondary Market Research The information presented in each country report is collected through extensive fieldwork. Face–to-face interviews are conducted with key industry and government personnel, including: • Ministry of Health officials. • Multinational research-based pharmaceutical development/strategic planning). • Local pharmaceutical companies. • Generics companies. • Trade and industry associations. • Retail pharmacists/primary care physicians/specialists. • Hospital physicians/pharmacists. • Wholesalers/distributors. Further information relevant to each country is collected from a wide variety of information sources. These include: • IMS Health publications. • Government reports and statistical yearbooks. • Special studies and position papers from international healthcare agencies, consumer groups and other organisations. companies (marketing/business

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All findings are derived in co-operation with the IMS Health local offices in each country. Pharmaceutical Market Data The pharmaceutical market data source for each report is the IMS MIDAS database. All sales and price levels used in the IMS Market Prognosis country reports are given at exmanufacturer level with the exception of Japan, where NHI (public) prices are used, and Taiwan, where sales data are presented at trade level. It should be noted that ex-manufacturer price is only one basis for measuring industry performance. Clawbacks and other forms of taxation, especially in Europe, market dynamics such as parallel trade, and discounting mean that actual values are likely to be lower than those derived from ex-manufacturer prices. All historical and forecast sales data in the IMS Market Prognosis reports are provided in local currency.

EVENT IMPACT CALCULATION
Demographic Changes There is an event within each forecast that considers the impact of projected demographic changes. The specific changes for each country are estimated using data from the Economic Intelligence Unit (see Deriving Demographic Impacts for Age Groups). These changes are then applied to the baseline to adjust for changes in population. For those countries covered by IMS Prescribing Insights, (Argentina, Canada, Japan, USA, Brazil, Mexico, France, Germany, Italy, Spain, UK ), the population changes are then weighted to account for usage by age. For volume calculations, the demographic impacts by age are multiplied by the proportion of total prescriptions written for each age group. For sales and price calculations, the demographic impacts by age are multiplied by the Diagnosis Value (DV) for each age group. The DV apportions total sales by age group, and therefore provides a better measure of the impact of population changes on sales. Deriving Demographic Impacts for Age Groups For each country, demographic changes are measured over the historical period. It is then assumed that the baseline projection will incorporate an identical change over the forecast period. • For example, if the number of 15-64 year olds increased from 100 to 105 over the fiveyear historical period, then the baseline projection would assume an increase to 110 over a further five years. This projection is then compared to the EIU forecast population changes for the 15-64 age group to derive a five year demographic impact for this age category. • Suppose that the EIU provides a five-year forecast of those aged 15-64 of 122. Impact = (Forecast Population - Baseline Population) / Baseline Population = (122-110)/110 = 0.109 Therefore, in this age group, demographic changes would have an impact of 10.9%. This calculation is made for every age group and then summed to create a total market impact. Applying Demographic Impacts to Country Level Forecasts For each country, the demographic impacts are then multiplied by the percentage of prescriptions for each age group. By summing the impacts across age groups, a total demographic impact on volume is obtained. In the example below, the final impact is 0.32%.

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Example Canada:
Age group 0-14 15-64 65 plus Total Demographic impact 1.17% -2.06% 5.47% X Distribution of prescriptions 8.5% 63.5% 28.0% 100% = Country impact 0.10% -1.31% 1.53% 0.32%

To calculate a price impact for each country, the demographic impacts are then multiplied by the diagnosis value distribution for each age group. By summing the impacts across age groups, a total demographic impact on sales is obtained. A price impact is then calculated by dividing the sales impact by the volume impact. For example (1+0.54)/(1+0.32) = 0.22%. Example Canada:
Age group 0-14 15-64 65 plus Total Demographic impact 1.17% -2.06% 5.47% X Distribution of diagnosis value 4.9% 62.6% 32.5% 100% = Country impact 0.06% -1.29% 1.78% 0.54%

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The population growth, prescription and diagnosis value distribution for each country are detailed below.
Age groups Historical Growth 2003-2008 1.9% 6.6% 8.4% 4.2% 9.3% 20.7% -4.9% 5.1% 13.5% 2.7% 4.1% 5.8% -7.5% -1.4% 13.1% -2.6% -1.0% 7.0% -4.6% -3.5% 14.6% -2.1% 8.9% 20.8% Forecast Growth 2008-2013 2.9% 6.1% 10.8% 2.5% 8.3% 22.2% -1.2% 2.1% 17.5% 2.9% 1.6% 11.7% -4.1% 0.4% 3.2% -4.2% -1.5% 5.6% -8.5% -4.7% 11.2% -2.4% 7.8% 19.5% Total Population Prescription Distribution Total Population Diagnosis Value Distribution

Country

0-14 Argentina 15-64 65+ 0-14 Brazil 15-64 65+ 0-14 Canada 15-64 65+ 0-14 France 15-64 65+ 0-14 Germany 15-64 65+ 0-14 Italy 15-64 65+ 0-14 Japan 15-64 65+ 0-14 Mexico 15-64 65+

15.9% 71.1% 13.0% 19.8% 70.4% 9.8% 8.6% 63.5% 27.9% 13.9% 53.9% 32.2% 10.0% 44.6% 45.4% 6.5% 49.0% 44.5% 9.2% 38.4% 52.4% 21.0% 68.8% 10.2%

9.9% 73.5% 16.6% 13.2% 73.3% 13.5% 3.9% 63.9% 32.3% 5.5% 53.0% 41.5% 7.0% 49.2% 43.8% 5.7% 50.4% 43.9% 5.0% 39.8% 55.2% 17.4% 70.1% 12.5%

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0-14 Spain 15-64 65+ 0-14 UK 15-64 65+ 0-14 USA 15-64 65+

6.8% 6.0% 8.7% -4.3% 4.7% 5.0% 0.4% 5.1% 7.7%

2.8% -0.2% 8.0% -1.8% 2.8% 13.0% 4.3% 2.9% 13.8%

11.7% 55.8% 32.5% 5.2% 45.6% 49.3% 17.1% 55.9% 27.0%

5.2% 52.4% 42.4% 3.3% 49.4% 47.2% 7.6% 64.9% 27.5%

New Product Launches For the majority of markets, the impact of new products entering the market has been quantified based on the results of primary research. For those countries covered by IMS Therapy Forecaster (Canada, China, France, Germany, Italy, Japan, Mexico, Spain, UK and the USA), the impact of new product launches has been calculated from IMS Therapy Forecaster new product events. Therapy Forecaster provides impacts for all anticipated product launches across 43 therapy classes over the next ten years. For each country, these new product impacts were totalled, taking into account the probability of launch and the size of the therapy class, and then extrapolated to derive a fiveyear impact of all product launches on the total country market. Calculation of Generic Competition Impact IMS MIDAS Market Segmentation was launched in November 2006 and offers a new global standard for measuring and analysing the generics market segment. It is currently available for Australia, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Japan, Netherlands, Norway, Poland, Portugal, South Africa, Spain, Sweden, Switzerland, Turkey, UK and USA. These data allow us to provide a more comprehensive analysis of patent expiry impact on the market. Generic Impact Using IMS MIDAS Market Segmentation For those countries covered by market segmentation, the following methodology has been used to calculate the impact of generic competition: A combination of historical data analysis and expert local opinion was used to determine the following for each country: • Average erosion rate of brand following patent expiry. • Average price differential between generic and original brand (prior to patent expiry). • Average time to peak generic erosion. For each country, the factors determined above were applied to all products predicted to lose patent protection over the five-year prognosis period (from IMS MIDAS Market Segmentation). Generic erosion, price differential and market share of brand were multiplied to derive the impact of each patent expiry on the total market sector. These impacts were applied over time according to expected date of patent expiry and time to peak generic

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erosion. Finally, the year-on-year impacts for each patent expiry were totalled to generate a total sector patent impact for each of the five forecast years. Generic Impact without Market Segmentation For the remaining countries, the following approach has been used in order to identify the molecules that will face generic competition in the forecast period: The analysis has been limited to the top three molecules ranked in terms of sales in each of the ten leading ATC1 classes. In respect of the identification of the expected start date of generic competition for each of these molecules, IMS Market Prognosis adopts a conservative approach. If there is an extension of the product patent protection of a particular form/salt of a molecule, IMS Market Prognosis takes this as the starting date for generic competition. However, it might happen that generic versions of other salt forms enter the market at the product patent expiry of the base form. In Germany, for example, this has happened in cases like enalapril and amlodipine. Therefore, molecules for which generic versions are already present in the market are excluded from the section of the report on likely start of generic competition. Therapeutic Class Forecast Analysis Tables 1. Leading Products/Molecules Facing Generic Competition For the 23 countries with the Market Segmentation feature, patent expiry dates are sourced directly from the IMS MIDAS Market Segmentation database. Categorisation is made at the product level (see Generic Definition). For the remaining countries, this table shows the top three molecules facing patent expiry during the forecast period. Information on patent expiry dates is sourced from the IMS MIDAS database and the IMS LifeCycle database. 2. Major Launches Information is sourced from IMS LifeCycle, the IMS MIDAS database, and IMS Therapy Forecaster. • Top five performing products launched in 2003-2008 This table shows the major product launches in the past five years based on sales revenue from the IMS MIDAS database. Products are ranked by sales at MAT Qtr III 2008 and only the top five products are shown. This table shows products with potential for high growth during the forecast period that were launched in the 12 months to MAT Qtr III 2008. • Potential high growth pipeline products 2009-2013 This table shows the main pipeline products with potential for high growth during the forecast period.

PHARMACEUTICAL MARKET COVERAGE
Pharmaceutical sales figures for individual market sectors shown in this report are audited by IMS Health using a representative sample of pharmaceutical suppliers available in the distribution channels. These sales figures are projected to include the whole of the sector and are held on the IMS MIDAS database.

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Total market sales forecasts take into account the audited sales as well as any market sector not audited by IMS Health. The value of the unaudited market sector is calculated by applying a grossing up factor to the audited sales, depending on the percentage of coverage in the country. The grossing up factor is calculated based on information collected locally by IMS Health offices. The unaudited share of the market is assumed to remain constant for the duration of the forecasting period.

USEFUL DEFINITIONS
Compound Annual Growth Rate (CAGR) The CAGR is the compound growth rate required for the first value to grow to the level of the second value – if the growth rate is the same each year. In reality, the growth rates may have been higher in some years, and lower in others, but the CAGR is a measure of the overall growth rate. For instance, suppose you have a sector of a market, which is 100. To make the calculations easy, imagine that the first year’s growth rate is 15% and 0% in the second year. At the end of two years, you have 115. In statistics, the first year is called the base period or the reference period, and the second year is called the given period. The CAGR is calculated using the formula: ((value in given year)/(value in base/reference year))^(1/(number of years different)) In the example the formula would be: (115/100)^(1/2) = 1.0724 or a CAGR of 7.24%. So, an annual interest rate of 7.24% in each of the two years would give the same final increase of 15%. Constant Price In some of the markets covered by IMS Market Prognosis, volume growth is calculated by showing growth at constant prices. The method of calculating trends over time at constant prices is standard and is how the government, for example, converts actual or nominal GDP to real GDP. Sales at constant prices are calculated by dividing actual sales in a given year by the price index in that year. Assuming in 1999 actual sales (=sales at actual prices) are 1000 and in 2000 they are 1100, they will have risen by 10%. If however, prices also rose by 10%, then volume sales will not have changed. If prices had risen by 15%, then volume sales would actually have fallen.

The method of calculation is simple. Supposing prices are indexed at 100 in 1999, and prices rose by 15%, then in 2000 the price index will have increased to 115. The calculation for volume sales (= constant price sales) is this: (actual sales in year)/(price index in year)*100 1999: 1000/100*100 = 1000 2000: 1100/115*100 = 956.5 The actual calculations are more complicated because they are done on a quarterly basis, but the principle is the same. The price index used is the Laspeyre’s index (see below).

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Laspeyre’s Index The Laspeyre’s index is a commonly used index to measure how prices change at different points of time. In the case of IMS Market Prognosis, it is a measure of how pharmaceutical prices change over time. A simple example of an index number is when an item’s price in a given period is compared to its price in another period. In statistics, the first year is called the base period or the reference period, and the second year is called the given period. For example, suppose in 1993 a product cost 4.50 and in 2003 it cost 5.40. Taking 1993 as the base year and 2003 as the given year, the 2003 price relative to the 1993 price is 5.40/ 4.50 = 1.2 = 120%. The 2003 index is 120, meaning that the 2003 price increased by 20% over the 1993 price. As with all indices, the Laspeyre’s index is at some point centred at 100. Indices are given as the percentage relative price compared to the base. The relative price of the base period is therefore 100% (the price being divided by itself in this example), and so the index for the base period is 100. The calculation of index numbers for groups of items, rather than a single item is more complicated. For a price index, all the prices (of the selected products) in the given year could be added up, and divided by the sum of all the prices in the base year. Such an index is called an aggregate index. These indices do not take into account the relative importance of the various products. To overcome this problem, it is common to weight the price of each item in an index by a suitable factor. The more important a product, the heavier its weight or importance to the index. Often this factor is taken to be the quantity of the item sold in the base or given years. Laspeyre’s index is a weighted aggregate price index with base-year quantity weights. Laspeyre’s (price) index is: Standard Units In some of the markets covered by IMS Market Prognosis standard units are used as a measure of volume. These are the number of dose units, such as the number of tablets, the number of 5ml doses, or the number of vials, sold for a particular product. Standard units equate the number of millilitres of liquid preparations such as 5ml of liquid, to the standard solid dosage of one tablet. This lets us compare solid to liquid forms more precisely. Standard units are defined for all product forms. Generic Definition using the IMS Market Segmentation Feature For countries for which the IMS Market Segmentation feature is available, IMS Market Prognosis uses the product status categories defined in the feature. It includes the following categories: • Generic Products: This category includes rx-bound unbranded products sold under their international non-proprietary name (INN), company branded products and branded generics (where these products have never been under patent protection, were launched after the protection expired on the original product and are subsequently launched products). • Non-Generic Products: This category includes rx-bound products that are currently under patent protection, original products that are no longer under patent protection, and line extensions. • Non-Categorised Products: This category includes rx-bound products out of scope of the IMS Market Segmentation feature, products for which the product status is unknown and products which are under investigation.

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• Other Products: This category includes rx-bound products that have never been under patent protection and were launched before the protection expired on the original product (copy products). OTC products are excluded from the above described categorisation to form a separate category.

Generic Definition without the Market Segmentation Feature For the purpose of this report the generic market definition excludes products which have never been patented. These include: • Diagnostic products eg glucose blood tests and multiple urine tests. • Chemical containing products eg acetylsalicylic acid, glycerol, magnesium. • General products eg baby milks, mouth washes, skin lotions. • Natural products eg albumin, antithrombin II, bioflavonoids, factor IX. Once these products have been taken out, the IMS MIDAS database classifies the products into four categories: • Original Brands: a branded product that is being manufactured and/or marketed by the originator of its active ingredient. If an original brand is marketed as a parallel import, it is also classified as an original brand. • Licensed brands: a licensed brand is a product that is being manufactured and/or marketed by a company under the terms of licensing agreement with the molecule originator. A product is also considered to be a licensed brand if it is marketed by a distributor, a co-marketing company, a co-promoting company, a co-development company, a sub-license holder, a parallel importer, or if the originator does not market the product at all but has licensed it out to another company (companies) to market it on its behalf. • Unbranded: an unbranded product is a product marketed under the generic name of its molecule ingredient(s), rather than a brand name. A product name with a slight variation in the spelling of its ingredient(s), or with the manufacturer name or abbreviation added to the ingredient name as suffix is also considered to be unbranded. • Other Brands: an ‘other’ brand is a branded product that is marketed by a company that is not the molecule originator and for which there is no evidence of a licensing

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agreement between the originator and the marketing company. A branded product in this context has its own (non-generic) name and registered trademark. The generics market definition used in this report includes only the unbranded category. This allows for analyses of the unbranded generics market. Although unbranded can be used to calculate the size of the generics market in many countries, it underestimates the size in those countries with branded generics. Other brands cannot just be added to unbranded since many products in this category whilst not being original brands are not generics either. All the data in this report refer only to the unbranded category.

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...Harley-Davidson Case Analysis Harley-Davidson Case Analysis Rayzhaun Jones Mississippi Valley State University Strategic Management Dr. Jimmie S. Warren Abstract With the growing global economy, companies are looking for ways to improve their market share. Many excellent firms have learned how to beat their competitors through the implementation of new management, marketing, and manufacturing techniques. Harley-Davidson is one of those excellent companies whom have challenged traditional ideas. We intend to show through this case study that any company can follow Harley-Davidson’s techniques and lead them to excellence. Mission Statement “We fulfill dreams through the experiences of motorcycling by providing to motorcyclists and too the general public an expanding line of motorcycles, branded products, and services in selected market segments.” Vision Statement “Harley-Davidson is an action-oriented, international company, a leader in its commitment to continuously improve its mutually beneficial relationships with stakeholders. Harley-Davidson believes the key to success is to balance stakeholders’ interests through the empowerment of all employees to focus on value-added activities. Company Profile and Case Analysis Harley-Davidson Inc. is an American motorcycle manufacturer. Harley-Davidson specializes in the sales of heavyweight motorcycles that are designed for cruising on highways. Harleys have a distinct design and exhaust sound that have......

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...CHAPTER IX STRENGTHS, WEAKNESS, OPPORTUNITIES, AND THREATS ANALYSIS Strategic planning is a tool for organizing the present on the basis of the projections of the desired future. A strategic plan is a road map to lead an organization from where it is now to where it would like to be in five or ten years.It is necessary to have a strategic plan for your organization. In order to develop a comprehensive plan for your organization which would include both long- range and strategic elements.One of the most important parts of the strategic planning process is the examination of the internal and external environment of the business. The strengths or weaknesses of the business can be seen by considering its internal environment. On the other hand, the external environment factors of the business define the threats and opportunities it will face. Strengths, Weaknesses, Opportunities, and Threats analysis can be used for all sorts of decision making and proactive thinking rather than relying in habitual or instinctive reactions in the business. Specifically, SWOT analysis is basic straight-forward model that assesses what an organization can and cannot do as well as its potential opportunities and threats. SWOT analysis is essential in a business in accomplishing its objectives and what obstacles must be overcome or minimized to achieve the desired result. It is but inevitable for business enterprises to be faced with serious problems and be burdened with critical decision......

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...1. EXECUTIVE SUMMARY Financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating the future. Financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. Financial analysis can be undertaken by management of the firm, or by parties outside the firm, viz. owners, creditors, investors and others. The nature of analysis will differ depending on the purpose of the analyst. 1. Investors: Who invested their money in the firm’s shares, are most concerned about the firm’s earnings. They more confidence in those firm’s that show steady growth in earnings. As such, they concentrate on the analysis of the firm’s present and future profitability. They are also interested in the firm’s financial structure to that extent influence the firm’s earning ability and risk. 2. Trade creditors and financial institution: they are interested in firm’s ability to meet their claims over a very short period of time. Their analysis will, therefore, confine to the evolution of the firms liquidity position. And the financial institutions are interested in the financial statements of the borrowing concern to ascertain its short- term as well as long-term solvency and also it profitability. 3. Suppliers: On the other hand, are......

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...Topic Gateway Series Strategic Analysis Tools Strategic Analysis Tools Topic Gateway Series No. 34 Prepared by Jim Downey and Technical Information Service 1 October 2007 Topic Gateway Series Strategic Analysis Tools About Topic Gateways Topic Gateways are intended as a refresher or introduction to topics of interest to CIMA members. They include a basic definition, a brief overview and a fuller explanation of practical application. Finally they signpost some further resources for detailed understanding and research. Topic Gateways are available electronically to CIMA Members only in the CPD Centre on the CIMA website, along with a number of electronic resources. About the Technical Information Service CIMA supports its members and students with its Technical Information Service (TIS) for their work and CPD needs. Our information specialists and accounting specialists work closely together to identify or create authoritative resources to help members resolve their work related information needs. Additionally, our accounting specialists can help CIMA members and students with the interpretation of guidance on financial reporting, financial management and performance management, as defined in the CIMA Official Terminology 2005 edition. CIMA members and students should sign into My CIMA to access these services and resources. The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom T. +44 (0)20 7663 5441 F.......

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