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Q3 2012www.businessmonitor.com

pharmaceuticals & healthcare report

issN 2044-5849published by Business monitor international ltd.

sri laNKa INCLUDES BMI'S FORECASTS

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SRI LANKA PHARMACEUTICALS & HEALTHCARE REPORT Q3 2012 INCLUDES 10-YEAR FORECASTS TO 2021

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2012

Sri Lanka Pharmaceuticals & Healthcare Report Q3 2012

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary ......................................................................................................................................... 5

SWOT Analysis ................................................................................................................................................ 6

Sri Lanka Pharmaceuticals & Healthcare SWOT .................................................................................................................................................. 6 Sri Lanka Political SWOT ...................................................................................................................................................................................... 7 Sri Lanka Economic SWOT .................................................................................................................................................................................... 7 Sri Lanka Business Environment SWOT ................................................................................................................................................................ 8

Pharmaceutical Risk/Reward Ratings ........................................................................................................... 9

Table: Asia Pacific Risk/Reward Ratings, Q312 .................................................................................................................................................... 9 Rewards ............................................................................................................................................................................................................... 11 Risks ..................................................................................................................................................................................................................... 11

Sri Lanka – Market Summary ....................................................................................................................... 13

Regulatory Regime ........................................................................................................................................ 14

Regulatory Developments .................................................................................................................................................................................... 15 Counterfeits ......................................................................................................................................................................................................... 17 Pricing And Reimbursement Regimes .................................................................................................................................................................. 18 Pricing And Reimbursement Developments ......................................................................................................................................................... 20 Supply Chain ........................................................................................................................................................................................................ 20

Industry Trends and Developments ............................................................................................................ 22

Epidemiology ....................................................................................................................................................................................................... 22 Non-Communicable Disease ................................................................................................................................................................................ 23 Communicable Disease ........................................................................................................................................................................................ 24 Recent Public Health Developments .................................................................................................................................................................... 25 Healthcare System ............................................................................................................................................................................................... 26 Hospital Sector .................................................................................................................................................................................................... 26 Healthcare Financing .......................................................................................................................................................................................... 27 Clinical Trials ...................................................................................................................................................................................................... 28 Medical Devices ................................................................................................................................................................................................... 29

Industry Forecast Scenario .......................................................................................................................... 30

Pharmaceutical Market Forecast ......................................................................................................................................................................... 30 Table: Pharmaceutical Sales Indicators 2008-2016 ............................................................................................................................................ 31 Key Growth Factors – Industry ............................................................................................................................................................................ 32 Table: Healthcare Expenditure Indicators 2008-2016 ........................................................................................................................................ 33 Table: Healthcare Governmental Indicators 2008-2016..................................................................................................................................... 33 Table: Healthcare Private Indicators 2008-2016 ................................................................................................................................................ 34 Key Growth Factors – Macroeconomic ............................................................................................................................................................... 35 Table: Sri lanka - Economic Activity ................................................................................................................................................................... 40 Prescription Drug Market Forecast ..................................................................................................................................................................... 41 Medical Device Market Forecast ......................................................................................................................................................................... 42 Table: Medical Devices Sales Indicators 2008-2016 ........................................................................................................................................... 43 Pharmaceutical Trade Forecast ........................................................................................................................................................................... 44 Table: Exports and Imports Indicators 2008-2016 .............................................................................................................................................. 45 Other Healthcare Data ........................................................................................................................................................................................ 47



Key Risks To Forecasts ........................................................................................................................................................................................ 47

Competitive Landscape ................................................................................................................................ 49

Pharmaceutical Industry ...................................................................................................................................................................................... 49 Pharmaceutical Industry Developments ............................................................................................................................................................... 50 Pharmaceutical Distribution and Retail .............................................................................................................................................................. 50

Company Profiles .......................................................................................................................................... 52

Local Companies ................................................................................................................................................................................................. 52 State Pharmaceuticals Corporation (SPC) .......................................................................................................................................................... 52 Hemas Holdings ................................................................................................................................................................................................... 55

Multinational Companies .......................................................................................................................................................................................... 57 GlaxoSmithKline .................................................................................................................................................................................................. 57

Demographic Outlook ................................................................................................................................... 59

Sri Lanka's Population By Age Group, 1990-2020 ('000) .................................................................................................................................... 60 Sri Lanka's Population By Age Group, 1990-2020 (% of total) ........................................................................................................................... 60 Sri Lanka's Key Population Ratios, 1990-2020 .................................................................................................................................................... 61 Sri Lanka's Rural And Urban Population, 1990-2020 ......................................................................................................................................... 62

Glossary ......................................................................................................................................................... 63

BMI Methodology ........................................................................................................................................... 65

How We Generate Our Pharmaceutical Industry Forecasts ................................................................................................................................ 65 Pharmaceuticals Risk/Reward Ratings Methodology ........................................................................................................................................... 66 Ratings Overview ................................................................................................................................................................................................. 66 Table: Pharmaceutical Business Environment Indicators .................................................................................................................................... 67 Weighting ............................................................................................................................................................................................................. 68 Table: Weighting Of Components ........................................................................................................................................................................ 68 Sources ................................................................................................................................................................................................................ 68



Executive Summary

BMI View: The small size of the Sri Lankan pharmaceutical market (US$444mn in 2011) and the

subsequently restricted commercial opportunities for innovative drug companies mean the ban on sales

representatives visiting doctors in public hospitals will not be of much worry to drug companies selling

their products in the country. However, we believe that in the long term the lack of communication

between sales reps and doctors will prevent patients from getting access to up-to-date treatments.

Headline Expenditure Projections

Pharmaceuticals: LKR49.04bn (US$444mn) in 2011 to LKR53.79bn (US$450mn) in 2012;

+9.7% in local currency terms and +1.5% in US dollar terms.

Healthcare: LRK250.62bn (US$2.27bn) in 2011 to LKR278.99bn (US$2.34bn) in 2012;

+11.3% in local currency terms and +3.0% in US dollar terms.

Medical devices: LRK11.20bn (US$101mn) in 2011 to LKR11.94bn (US$100mn) in 2012;

+6.6% in local currency terms and -1.3% in US dollar terms.

Risk/Reward Rating: According to our Q312 regional matrix, Sri Lanka’s is 17th out of the 18 markets

in surveyed, above Cambodia. Sri Lanka’s rewards and risks profiles are relatively evenly balanced, with

low per capita expenditure on drugs and the modest overall market size some of key factors contributing

to its low ranking.

Key Trends And Developments

In March 2012, Sri Lanka's Ministry of Health banned medical sales reps from visiting doctors

in public hospitals. Sales reps were previously permitted to arrange visits with doctors at 12-2pm

on Thursdays, Fridays and Saturdays. The ban was enforced as the ministry said large numbers

of sales reps were routinely interrupting doctors during work hours, often increasing patient

waiting times.

BMI Economic View: Given the Central Bank of Sri Lanka (CBSL)'s largely unexpected slew of policy

measures to combat overheating over the recent months, including currency devaluations and policy rate

hikes, we have cut Sri Lanka's 2012 real GDP growth forecast to 5.0% (from 6.0% previously), implying

a sharper slowdown from the 8.3% growth rate in 2011. Keeping in mind that the bank's measures were

mainly in response to the country's external imbalances, we expect this year to mark the start of the

country's 'rebalancing' as its external deficits moderate..

BMI Political View: We expect Sri Lanka to continue on a path towards increased accountability in

politics over the coming decade. While the end of armed conflict with Tamil separatists provides an

opportunity for politics to evolve, we maintain that tensions between the Tamil minority and the

Sinhalese majority are likely to remain a major political issue for the foreseeable future.



SWOT Analysis

Sri Lanka Pharmaceuticals & Healthcare SWOT

Strengths A reasonable ‘drug lag’ for a low-middle income country.

One of the few countries that provide life-long universal healthcare, which is free at the point of delivery.

Robust pharmaceutical market growth.

Number of medical staff has been maintained despite drop in hospital numbers.

Weaknesses Occasional shortages of essential medicines.

Frequent infectious disease outbreaks.

Need to source raw materials from abroad at high cost.

Low-margin government pharmaceutical tenders.

Most private expenditure on drugs and medical services sourced out-of-pocket and thus vulnerable to wider economic trends.

Hospital formulary has not been updated since 1994, indicating lack of comprehensive drug and healthcare policy.

Widespread corruption and red tape hampering business environment.

Opportunities A growing burden of non-communicable diseases.

An under-developed local manufacturing sector.

Unmet need for affordable biologics.

Government’s commitment to the improvement of rural healthcare provision.

Removal of import duties and VAT from pharmaceutical products in the 2011 budget to reduce prices.

Establishment of a dedicated drug manufacturing zone to attract investors.

Government is ramping up local drug production.

Threats Imports of low-cost pharmaceuticals from India.

Renewed political tensions.

Government proposals to introduce pharmaceutical price controls.

Low uptake of private insurance.

A drop in the prices of key export commodities, such as tea and textiles, will negatively impact wider purchasing power.

Insufficient allocation to healthcare in state budget.

Growing elderly population stretching healthcare resources.



Sri Lanka Political SWOT

Strengths Sri Lanka's democracy has survived since independence from Britain in 1948 despite widespread political violence. Some 74.5% of the island's 14mn-strong electorate turned out to vote at the last presidential election in January 2010.

Sri Lanka's strong executive presidency, with a six-year term, ensures broad continuity in government policy even when there is instability in the legislature.

Weaknesses Under Sri Lanka's 1978 constitution, the president wields sweeping powers, including the right to dismiss the prime minister. Poor relations between the president and a rival premier can be a source of instability and can result in frequent changes of government and policy.

Discrimination and violence are problematic; around 70,000 people were killed in the armed conflict between the government and Tamil Tiger separatists between 1983 and 2009. Ethnic Tamils still say the Sinhalese majority discriminates against them.

Opportunities A political solution to separatist conflict will be essential to achieving lasting peace. This would also pave the way for increased foreign aid.

The strong mandate given to President Mahinda Rajapaksa and his United People's Freedom Alliance in presidential and parliamentary elections in January and April 2010 respectively gives the current government scope for far-reaching political and economic reform.

Threats Divisions within the ruling coalition threaten policymaking and the peace process. Frequent crossovers between government and opposition benches in parliament threaten the passage of key legislation.

Although the government overran Tamil Tiger forces in May 2009, rebels could continue their campaign through targeted bomb attacks and other terrorist methods.

Sri Lanka Economic SWOT

Strengths Sri Lanka's strategic location on the main trade route between the Middle East and Asia, and its proximity to India, are major advantages.

Sri Lanka is one of the world's main tea producers, and tea is its third-biggest source of foreign exchange after textiles and remittances. Tea export revenues were US$1.5bn in 2011, surpassing 2010 sales by US$83mn.

Weaknesses The export industry's over-reliance on the US and EU markets, where we predict subdued or negative growth over the medium term, is a key source of concern.

Years of civil war have taken their toll on public finances. The budget deficit has averaged 8.0% of GDP over the past two decades and thus is one of the highest in Asia. About 36% of Sri Lanka's US$46bn public debt is denominated in foreign currencies.

Opportunities A durable political solution would boost GDP growth and create jobs by restoring economic stability and attracting foreign investment.



The government is embarking on a much-needed infrastructure drive.

Sri Lanka is actively seeking to strengthen economic ties with emerging giants India and China, as well as with middle-ranked powers such as Iran.

Threats Although it has fallen from 102.3% of GDP in 2004, Sri Lanka's government debt, at 78.5% of GDP at the end of 2011, remains dangerously high. Increased foreign borrowing since late 2007 could become problematic when the debt comes due.

We believe that Sri Lanka, which runs twin deficits in the fiscal account and current account, will remain vulnerable to external shocks.

Sri Lanka Business Environment SWOT

Strengths Sri Lanka has a skilled but comparatively low-cost labour force. The country's workers are the most educated in South Asia, with more than 90% of adults able to read and write. About 10% of the labour force has received tertiary education.

Membership of the South Asian Association for Regional Cooperation and proximity to India are obvious strengths. Indian companies have pumped investment into their south eastern neighbour.

Weaknesses Sri Lanka has dismantled many controls, but competitiveness is undermined by government regulation, especially of the labour market. Firing a worker in Sri Lanka is a lengthy and expensive process.

Sri Lanka's competitiveness is undermined by a long 'negative list' of sectors where foreign investment is either wholly or partially restricted. Corruption remains a problem.

Opportunities Sri Lanka is aiming to tap into the business process outsourcing market, counting on its educated workforce and proximity to India.

The government's infrastructure drive will see the creation of new roads, port facilities and power stations. Oil exploration offers the possibility of new spin-off industries.

Threats Asset sales have stalled under President Mahinda Rajapaksa's left-leaning government, which was re-elected for another six-year term in April 2010.

Security remains a threat. Although the Tamil Tigers are now in disarray, they may yet have motive to regroup, and in that event would be likely to target physical infrastructure.



Pharmaceutical Risk/Reward Ratings

Table: Asia Pacific Risk/Reward Ratings, Q312

Rewards Risks

Industry Rewards

Country Rewards Rewards

Industry Risks

Country Risks Risks

Pharma RRR

Regional Rank

Japan 77 63 73 80 77 79 75.5 1

Australia 50 87 59 72 84 77 66.2 2

South Korea 60 67 62 70 69 70 64.9 3

China 67 50 63 67 56 63 62.5 4

Singapore 40 80 50 80 79 80 61.9 5

Taiwan 53 60 55 70 65 68 60.2 6

Hong Kong 47 70 53 67 79 72 60.2 7

Malaysia 50 60 53 70 69 70 59.3 8

New Zealand 30 83 43 60 87 71 54.4 9

India 60 43 56 53 50 52 54.4 10

Indonesia 53 50 53 40 46 42 48.4 11

Thailand 47 47 47 37 58 45 46.1 12

Philippines 43 57 47 43 45 44 45.7 13

Vietnam 43 47 44 40 30 36 40.9 14

Pakistan 40 47 42 33 40 36 39.5 15

Bangladesh 37 43 38 40 36 38 38.3 16

Sri Lanka 30 43 33 40 48 43 37.2 17

Cambodia 33 37 34 30 36 32 33.5 18

Regional Average 48 57 50 55 59 57 52.7

Scores out of 100, with 100 highest. Source: BMI

The Asia Pacific region will continue to remain highly attractive to pharmaceutical investors as unequal

levels of sector-specific development mean varied opportunities for different types pharmaceutical

companies (eg: innovative drugmakers, generic drug manufactures, medical devices suppliers and

companies that supply products to both the private and public sectors). We continue to expect

governments' increased commitment to healthcare provision to attract pharmaceuticals and healthcare

investment into various countries, including Malaysia and China.

In BMI's Q312 Pharmaceutical Risk/Reward Ratings (RRRs), the Asia Pacific region continues to rank

second globally with a score of 53 out of 100, behind Western Europe (65) but ahead of emerging Europe

(52), the Americas (50) and the Middle East and Africa (44).



Asia Pacific is a unique region where there is no single common theme that can describe the

pharmaceutical industry in each country as there is a significant differences in pharmaceutical

development across the region. For example, Japan is home to several multinational pharmaceutical

companies, such as Eisai, Takeda, Astellas and Daiichi Sankyo, while Cambodia's pharmaceutical

sector is largely underdeveloped.

Price Containment Policies

In Q312, South Korea slipped to third in our proprietary index, behind Australia, with its score decreasing

by 2.3% from 66.4 in Q212 to the current 64.9. Cost containment policy is a recurring theme in these two

countries, with South Korea presenting drugmakers with a more uncertain market situation given the

government's relentless implementation of price cuts. Comparatively, Australia's price reduction policies

appear to be more regulated.

Switching Ranks: China And Singapore, Indonesia With Thailand And The Philippines

Similarly, Singapore and China have switched positions, with Singapore now fifth, behind China, with a

score of 61.9. While the city-state has higher per capita pharmaceutical expenditure of US$138.10 and an

increasingly ageing population, its small population of 5mn people resulted in a low overall

pharmaceutical spending value of US$716mn in 2011, leading to a below-average industry rewards score

of 40. In contrast, China's 1.3bn, increasingly ageing, population provides significant opportunities for

pharmaceutical companies despite lower per capita pharmaceutical expenditure of US$49.60.

Indonesia's overall RRR increased by 3.2% from 46.9 in the previous quarter to 48.4 in Q312, while the

scores for Thailand and the Philippines declined by about 6% to 46.1 and 45.7 respectively.

Consequently, Indonesia now ranks 11th, in front of Thailand (12th) and the Philippines (13th). We

forecast that the pharmaceutical sector in Indonesia will experience a high compound annual growth rate

(CAGR) of 9.9% through to 2016. In contrast, through to 2016, the CAGRs for the Thai and Philippine

pharmaceutical markets will only reach 5.3% and 4.8% respectively.

Long-Term Outlook: Regional Governments' Commitment To Healthcare

We continue to hold our view that government healthcare plans will play a significant role in attracting

investors to the region. In recent months, there has been increased government commitment to boost

healthcare provision in countries such as Singapore, Malaysia, Indonesia and China. However, we caution

that governments may look towards drug price reduction in order to maintain their healthcare expenditure,

posing downside risks for pharmaceutical companies.



Rewards

Industry Rewards

Sri Lanka’s score for this segment of the

rating system stands at 30, below the

regional average of 48. Valued at

US$444mn in 2011, Sri Lanka’s

pharmaceutical market is one of the

smallest in the region, mainly due to the

small population and government efforts to

encourage the prescribing of generic drugs.

Nevertheless, BMI expects the uptake of

patented products and treatments for

chronic disease to increase, which should

provide modest commercial opportunities.

Country Rewards

Sri Lanka’s demographic profile is moderately attractive to drugmakers. According to the World Bank,

approximately 80% of the population lives in urban areas. The crude birth rate (18.7 per 1,000

population) exceeds the death rate (6.5 per 1,000) and life expectancy is 69 for males and 76 and females.

On account of new population data, Sri Lanka’s Country Rewards score stands at 43, which is

nonetheless considerably below the slightly improved regional average of 57.

Risks

Industry Risks

Sri Lanka’s pharmaceutical regulatory regime is atypical of an emerging market. Healthcare is free at the

point of delivery, and rational prescribing is encouraged. Regulations are clear and frequently updated by

the authorities. The country’s score comes in at 40 this quarter, below the regional average of 55.

Country Risks

Following the defeat of the LTTE in May 2009, political stability has returned to Sri Lanka for the first

time in over 25 years. This could lead to renewed foreign investment and a stronger economy, although

the South Asian country remains beset by bureaucracy and red tape.

However, factors such as corruption – including in relation to pharmaceutical supply – are seen as

increasing problems. Local press reports suggest that some hospital directors and health ministry officials

purchase drugs from the private sector and favoured companies, in exchange for handsome commissions.

Transparency International gave the country a score of 3.2 out of 10 in its 2011 Corruption Perceptions

Risk / Reward Rankings By Sub-Sector Score

Q312

f = BMI forecast. Source: BMI



Index, down from a high of 3.7 in 2002. Similarly, the Heritage Foundation gave Sri Lanka a score of 31

out of 100 in 2011 for its ‘freedom from corruption’ score, down from a high of 50 in 2003.

Some observers worry that President Mahinda Rajapaksa – who was sworn in for a second term in

November 2010 – may become increasingly complacent over relations with the country’s Tamil minority,

having presided over the end of the island’s civil war in 2009. Rajapaksa’s apparent belief that the

country’s economic boom will be his second major triumph could lead him to overlook important and

necessary political changes. This is especially important in the case of the country’s perceived corruption,

which deters foreign direct investment (FDI). This could be all the more concerning considering

September 2010’s constitutional change that removed Sri Lanka’s two-term limit on being president.



Sri Lanka – Market Summary

In 2011, Sri Lanka’s pharmaceutical market was valued at LKR49.04bn (US$444mn), accounting for just

under 20% of the country’s healthcare expenditure. Sri Lanka has an enlightened pharmaceutical sector.

During the 1970s, the country demonstrated that a state buying agency linked to a national formulary was

a viable and powerful instrument for reducing drug costs without compromising quality. It also had the

important attributes of preserving valuable foreign reserves, rationalising medicine usage and supplying

essential drugs at reasonable prices to the whole community.

Sri Lanka was not mentioned in Pharmaceutical Research and Manufacturers of America (PhRMA)’s

Special 301 submissions for 2011 and 2012. This indicates that the country does not abuse intellectual

property rights, and is therefore not a concern for US-based multinational companies, although the low

purchasing power of the majority of the population will continue to constitute a barrier to higher

penetration levels for innovative medicines.

Additionally, BMI notes that the presence of countries on PhRMA’s list does not directly correlate with

those that have the worst IP regimes. Instead, PhRMA’s focus is on high potential pharmaceutical

markets. For example, many smaller countries – such as Sri Lanka – have much poorer regimes; however,

their lack of importance to US firms means they generally remain off radar. Nevertheless, there is little

information in the public domain to suggest that Sri Lanka’s intellectual property regime should be a

concern for research and development (R&D)-based drugmakers.



Regulatory Regime

Operating under the Ministry of Health, the Cosmetics, Devices and Drugs Authority (CDDA) is

responsible for ensuring the safety, efficacy and quality of healthcare products in Sri Lanka. The

Cosmetic, Devices and Drugs (CDD) Act No. 27 of 1980 (as amended by Act No. 38 of 1984, No. 25 of

1987 and No 12. of 1993) provides the legislative framework for controlling the use of cosmetics,

medical devices and medicinal drugs in the country. The regulations under the CDD Act were published

in Gazette Extraordinary No. 378/3 of 02/12/1985 and further amendments are made occasionally.

The main provisions of the CDD Act with regard to the drugs are:

Only drugs which are registered with the Authority can be manufactured, imported, offered for

sale or used in the country;

Licences are required for importation, manufacture, wholesale trade/retail trade, and

transportation of drugs;

All drugs registered with the CDDA should conform to specified standards; and

Labelling on the packs and advertisements regarding drugs should conform to the relevant

regulations.

The registration of drugs is one of the main functions of the CDDA. The first step of the drug registration

procedure is the evaluation of the manufacturer’s compliance to good manufacturing practices (GMP)

standards. Applications for the registration of drugs are accepted only if the production facilities of the

relevant manufacturer conform to required standards of GMP.

Sri Lankan regulatory standards are expected to improve under the health ministry’s plans to set up a

Pharmaceuticals Standards Regulatory Authority to ensure drugs used in the country meet certain quality

standards. The establishment of the new authority will provide the ministry with additional powers to take

legal action against low quality drugs importers. Presently, regulatory approvals are managed by a single

person, the Director General of Health Services, which leaves the system open to corruption. The new

authority would be staffed by a Ministry of Health-appointed board. Plans to establish a National

Medicinal Drug Regulatory Authority (NMDRA) were originally tabled in 2005.

Foreign manufacturers are evaluated by their company profiles, while local manufacturers are inspected

by a team of officers attached to the Office of Medical Technology and Supplies (MT&S) and the

National Drug Quality Assurance Laboratory (NDQAL) for GMP compliance. Every foreign

manufacturer has to appoint an agent in Sri Lanka who is responsible for registration and other activities

related to their products in Sri Lanka.



The manufacturer should submit registration applications to the Office of the Director of MT&S through

the local agent along with samples for quality testing. The Drug Evaluation Sub-Committee (DESC)

comprises specialists in medical and pharmaceutical fields and, with the administrative sector of the

Ministry of Health, makes recommendations on the registration of drugs. Quality, safety and efficacy are

considered the main criteria for registration.

The DESC makes use of the World Health Organization (WHO)’s GMP certification scheme – regarding

the quality of pharmaceutical products moving in international commerce – when assessing GMP

standards and the registration status of a product in its country of manufacture. The Director of MT&S’s

approval (or rejection) of the product’s registration is based on the recommendations of the DESC. The

registered drugs are entered in a register maintained at the MT&S director’s office and periodically

published through government gazette notifications.

According to Levision (2002), pharmaceuticals in Sri Lanka are subject to the following mark-ups: port

charges (4%); importer margin (25%); wholesale margin (8%); and retail margin (16.25%). Therefore, the

total mark-up is 64%, which is comparable to Tanzania and Nepal (74%), and Mauritius (59%).

Sri Lanka uses several developed states – such as the US, Canada and the UK – as reference regulatory

authorities for its pharmaceutical matters, but not without consulting internal investigations. This is

demonstrated by the Posicor affair. Swiss firm Roche developed the calcium channel blocker mibefradil

under the brand name Posicor during the 1990s. It was indicated for hypertension and subsequently

approved by 53 countries across the globe. However, Sri Lanka believed that it offered no therapeutic

advantages over other drugs in the same class, and thus would not have been a cost-effective addition to

the armamentarium.

Moreover, the country had concerns over mibefradil’s safety, so it decided to reject the regulatory

submission. After being marketed worldwide for several months, reports of adverse interactions between

Posicor and other drugs started to emerge. At first, regulators expanded the product’s label, but the

number of contraindications quickly became too many and Posicor was voluntarily withdrawn after only

six months of sale, thereby validating Sri Lanka’s measured approach.

Regulatory Developments

According to leading medical professionals in the country, Sri Lanka only needs around 800 medical

products (with the WHO suggesting a maximum of 1,000). However, as much as ten times this figure is

imported into the country. Imports are also reportedly wasted due to their questionable quality, as well as

due to a poor match between demand and supply, resulting in a major strain on public healthcare

resources.



In June 2010, it was revealed that imports of low quality and outdated drugs cost the Sri Lankan

government LKR450mn (US$3.96mn) in 2009, according to a report submitted to the parliament by the

Auditor General. The Auditor General added that the loss incurred on medical goods in 2009 was an

increase of more than 106% on 2008.

More recent reports in the local press similarly suggest that the lack of a mechanism to restrict registration

has led to the dumping of thousands of non-essential drugs in Sri Lanka. According to Ceylon Daily

News, more than 9,000 varieties of medicinal drugs are imported, compared with a requirement of less

than 350 types by the country. According to the People’s Movement for the Rights of Patients (PMRP),

patients have to pay high prices on medicinal drugs due to the presence of thousands of brand names in

the market. Christine Perera, a member of the PMRP, stated that the dumping of non-essential drugs has

been attributed to the non-implementation of the National Medicinal Drug Policy (NMDP), which was

drafted in 2005.

The All Ceylon Government Medical Officers Association (ACGMOA) president Nishantha

Dassanayake said in September 2010 that the government’s hospital formulary has not been revised since

1994, as reported by the Sri Lankan Daily Mirror. The formulary, introduced by co-founder of the

country’s pharmaceuticals policy Senaka Bibile, is a handbook given to doctors and officers in

government hospitals that provides information on pharmaceutical drugs and their effects. However,

Dassanayake said the government has not shown keenness towards revising the formulary.

In June 2010, India’s Pharmaceutical Exports Promotion Council (Pharmexcil) urged the authorities to

examine Sri Lanka’s policy on biosimilars, which it considers ‘unjustified’. From the start of February

2010, Sri Lanka mandated that biosimilars need to have been registered in at least one developed

reference country, such as the UK or the US. Moreover, the submission of clinical trials data is also

required in order to compare the biosimilar with the originator. In a related previous development, in

December 2009, India’s commerce ministry said it was to protest formally about discrimination against

Indian pharmaceutical companies by the Sri Lankan drug authorities.

However, in April 2011, a total of 10 Indian drug companies were blacklisted by Sri Lankan authorities,

according to Minister of Health Maitripala Sirisena, although their names have not been disclosed. This

comes after the companies were found to be violating tender procedures, supplying substandard products

and disregarding delivery schedules, which are requirements stipulated for their registration with the

ministry. The minister had ordered the Director General of Health Services to cancel the tenders awarded

to the erring companies and acquire drugs from other countries to counter the shortage of quality drugs in

government hospitals, despite India’s moves to avert the ban.

In March 2012, Sri Lanka's Ministry of Health banned medical sales reps from visiting doctors in public

hospitals. Sales reps were previously permitted to arrange visits with doctors at 12-2pm on Thursdays,



Fridays and Saturdays. The ban was enforced as the ministry said large numbers of sales reps were

routinely interrupting doctors during work hours, often increasing patient waiting times. BMI believes the

decision fails to recognise the contribution of medical sales reps in providing a quick and efficient means

of updating doctors on therapeutics without them having to update their knowledge through their own

research. Furthermore, the All Ceylon Government Medical Officers Association (ACGMOA) president

Nishantha Dassanayake's September 2010 statement that the government's hospital formulary has not

been revised since 1994 further highlights the importance of medical sales reps' communication with

doctors. The formulary, introduced by the co-founder of the country's pharmaceuticals policy, Seneka

Bibile, is a handbook given to doctors and officers in government hospitals that provides information on

pharmaceutical drugs and their effects.

The government highlighted the proliferation of non-communicable diseases in the country in its 2011

budget. As part of the budget, the government intends to initiate an LKR900mn (US$8.08mn), three-year

plan to mitigate non-communicable disease through improvements in the country's primary healthcare

system. We believe banning sales reps from communicating with doctors goes against the government's

aim, as the proliferation of long-term illnesses will mean doctors in Sri Lanka will have to familiarise

themselves with new medicines as the epidemiological profile of the country changes

Counterfeits

Counterfeit medicines represent a moderate problem in Sri Lanka. The government runs seminars to

educate medical practitioners about the prevalence and other issues regarding counterfeit drugs. The

authorities have commended cooperation provided in this regard by the members of pharmacy, medical

and other relevant professional bodies.

In mid-2009, doctors claimed that nearly a third of pharmaceuticals dispensed were fake, and thereby

endangered the health of patients. However, the Ministry of Health says the issue is overblown and that

the prevalence of imitation drugs is low. BMI’s stance is somewhere in between. As with all other

countries, the true prevalence of counterfeits in Sri Lanka is unknown, and generally exaggerated or

underplayed depending on the stakeholder asked.

Healthcare professionals believe the proliferation of fraudulent pharmaceuticals is due to weak controls.

Operating under the Ministry of Health, the Drugs Regulatory Authority simply does not have the

necessary resources to check all batches of imported drugs and foreign registration documents, which are

frequently forged. According to the UN Commodity Trade Statistics Database (UN Comtrade), during

2010, Sri Lanka imported medicines worth around US$200mn.

Due to its geographical proximity, India has been blamed as the source of most of the counterfeits sold in

Sri Lanka. Pakistani and Chinese manufacturers are also thought to be involved in illegal trade on the



island. In addition to traditional bulk freight, import channels include fishing vessels and commercial

passenger luggage. Unlike developed states, where the majority of counterfeits are high-value medicines,

all kinds of fake pharmaceuticals – from basic painkillers to innovative cardiovascular agents – are

available in Sri Lanka.

A worrying allegation made by healthcare professionals in a series of interviews with The Sunday Leader

in April 2009, is that a degree of bribery is behind the widespread prevalence of counterfeits. Corrupt

officials within the Health Ministry, the Criminal Investigation Department and the police have a vested

interest in allowing distribution of counterfeit medicines to go unpunished. Moreover, the fine for trading

fake drugs in Sri Lanka is just LKR5,000 (US$43) – a shockingly low figure, even in a country where the

average monthly income for a family is US$50.

Nevertheless, according to local press reports from February 2011, Sri Lankan authorities are to introduce

a new bill prohibiting the sales of state-manufactured pharmaceutical products in private pharmacies,

following a scandal concerning fraudulent sales in the country. Under the proposed bill, the Ministry of

Health will have rights to take strict actions against those found guilty of violating the provisions of the

act. In Sri Lanka, the state-owned State Pharmaceuticals Corporation (SPC) sells state-manufactured

pharmaceutical products through its network of outlets, Osu Salas, which has allegedly been accused of

issuing incorrect medicines.

Previously, efforts to stop fraud were undermined in 2006. The notorious smuggler Vadivel Sivaneswaran

was arrested for dealing in counterfeits and paid his nominal penalty. He was released from custody and

soon resumed his activities. No further effort was made by the authorities to investigate Sivaneswaran or

his associates.

It is not just copy medicines that are sold in Sri Lanka. Fake fashion items, DVDs, computer software and

other high-value manufactured goods are freely available in markets across the country, particularly in

Mattakkuliya and Kotahena. A 2006-07 Gallup survey found that just under a quarter of respondents in

Sri Lanka had knowingly purchased counterfeit goods. This was slightly below the average recorded in a

sample of Asian countries.

Pricing And Reimbursement Regimes

In January 2008, in keeping with its enlightened and patient-centric pharmaceutical policy, Sri Lanka

introduced regulations that promoted generic prescribing and simultaneously banned medical

representatives from government healthcare institutions. Both developments will reduce costs by limiting

the market for branded products sold by multinational companies.



Doctors, however, are reportedly continuing to prescribe drugs under their brand names, although the

authorities are working to change this pattern. Drugs dispensed at public hospitals are generic and free of

charge. Under the 2011 budget, some LKR15bn (US$135.9mn) was allocated by the Ministry of Health

for drug purchases by state hospitals, although shortages are common.

In January 2010, Athula Kahandaliyanage, secretary at the Ministry of Healthcare and Nutrition, said that

the Sri Lankan government was spending more than LKR13bn (US$114mn) a year on drugs, meaning Sri

Lanka has one of the best-value free healthcare systems in the world. Meanwhile, the Director General of

Health Services, Ajith Mendis, said that drug shortages – which occurred after the ministry banned five

Indian drug companies from selling contaminated drugs and vaccines to Sri Lanka – would be resolved

without delay. The Ministry also appointed an ombudsman in order to avoid drug shortages in state

hospitals.

In May 2010, it was reported that the ongoing shortage of drugs in some state hospitals in Sri Lanka

would be rectified in the near future. Sirisena said the government had been largely successful in dealing

with the issue by undertaking remedial action. He also highlighted that a special team had been sent to

India to purchase 95 essential medicines to counter the drug shortage.

The Sri Lankan Supreme Court heard a case on drugs policy on November 3 2010, the Daily Mirror

reported. Petitioners appealed to the court over the authority’s perceived failure to present the draft Bill

for a NMDP in the parliament. Under the NMDP, all people are entitled to obtain quality drugs at

affordable prices. The petitioners (of two separate petitions) allege that the ministry failed to present the

bill despite several public assurances from the health minister since 2005. The petitioners reportedly

claim that the continuous delays are function of the illegal pressure by ‘influential’ drugmakers that stand

to lose out if such legislation is introduced.

According to the same source, during the November 2010 hearing, Senior State Counsel Viveka

Siriwardane (who appeared for the respondents) indicated that the legislation is to be introduced within

three months. The Daily Mirror reported in February 2011 that the Supreme Court advised that the

petition aiming to direct the Court to instruct the Ministry of Health to present the draft NMDP bill was to

be discussed again in May 2011. According to local press reports from early December 2011, NMDP

legislation is due to be presented in parliament shortly. The discussions will also involve criteria for the

purchase of drugs for state hospitals.

In the meantime, the PMRP and several prominent medical specialists have asked the Sri Lankan

government to lower the prices of essential drugs, the Sunday Times reported in March 2010. They have

requested that the government cement legislation for the implementation of the NMDP. Under the

NMDP, all people are entitled to obtain quality drugs at affordable prices. The PMRP added that out of

over 9,000 medicinal drugs registered in Sri Lanka, only 340 are listed as essential drugs by the Health



Ministry. According to analysis, several billion rupees can be saved through the use of effective and good

quality essential drugs sold under a government-regulated regime.

Pricing And Reimbursement Developments

In November 2011, the Sri Lankan Chamber of Pharmaceutical Industries (SLCPI) was reported to be in

disagreement with the government’s attempt to introduce price controls for pharmaceuticals. SLCPI

president Vish Govindasamy said the local pharmaceutical industry was experiencing growth, while

essential pharmaceutical prices have been declining or flat during the last couple of years due to healthy

competition.

Govindasamy added that Sri Lankan pharmaceutical prices are the lowest in the region and are much

lower than WHO’s reference prices for developing countries. With the implementation of price controls,

large pharmaceutical companies will be forced to leave the country, he said. This would result in a

scarcity of essential pharmaceuticals, leading to a rise in medicine prices. It would also generate a grey

market and force people to import illegal pharmaceuticals.

Supply Chain

The government has increased its focus on ensuring the timely delivery of medicines to public hospitals

across the country. Following the recommendations of Minister of Health Maithripala Sirisena, in March

2012 it was announced that the health authorities will set up a drugs review committee and a procurement

planning committee to assess medicine consumption patterns, drug stock levels and medicine prices. This

information will help with the calculation of drug requirements and procurement planning.

Positive For Patients

Highlighting the poor availability of medicines in public hospitals, a national survey of the availability of

25 key essential medicines for children in Sri Lanka found the mean availability of the basket of

medicines in public hospitals was 52%, compared to 80% in the private pharmacies and 88% in state-run

Rajya Osu Sala (ROS) pharmacies. The survey, conducted in mid-2009, assessed the availability of the

medicines in 40 public hospitals, 40 private pharmacies and eight ROS pharmacies across eight

provinces.

The authors concluded that in addition to the rational selection and use of essential medicines, and

sustainable financing, the government needs to ensure the establishment of reliable medicine supply

systems to improve access to key essential medicines for children, especially in public hospitals where

children are deprived access to effective and safe medicines.



Efficient Supply Chain Is Necessary

BMI believes the government’s focus on improving the availability of medicines for the population is

positive, particularly as Sri Lanka’s reliance on imported drugs makes an efficient procurement process

necessary. Domestic manufacturers account for just 10% of the country’s pharmaceutical market.

The vast majority of imported medicines come from neighbouring India. In 2010, the top-five import

partners were India (US$106.57mn, accounting for 58.2% of the total by value), followed by Pakistan

(US$8.54mn), Ireland (US$8.13mn), Switzerland (US$5.80mn) and Singapore (US$5.59mn).

Medicine Tender Process Needs To Be More Transparent

Referring to the link between procurement issues and the shortage of medicines in state hospitals, in early

2011 Ananda Samarasinghe, then president of the SLCPI, said it was vital the medicine tender process

was made more transparent. The procurement of drugs through open tenders takes at least nine months.

He said there should be timeframes for each step of the tender procedure, such as predetermined times for

tender boards and awards, and companies must be aware of these. To further ensure the adequate supply

of medicines to hospitals, Samarasinghe recommended suppliers should be assessed on their reliability

and the timeliness of deliveries, while drug companies should be assessed on their production capacity.

Medicine Tender Process Needs To Improve Efficiency

A 2010 study published by the University of Colombo assessing the medicine tender process said poor

coordination between the different departments responsible for the execution of the various processes lead

to delays that result in shortages of drugs. Furthermore, delays after the bid validity period provide

bidders with the opportunity to increase their quoted prices.

The study proposed the creation of a Procurement Monitoring and Coordination Unit (PMCU), consisting

of representatives from each department involved in the tender process, and the use of IT to monitor and

coordinate the procurement of medicines. The study recommended drug requirements and stock levels at

central and regional drugs stores should be tracked by the PMCU and if any tender file stagnates at one

unit then automatic warning massages should be sent to the responsible department.



Industry Trends and Developments

Epidemiology

BMI’s Burden of Disease Database

(BoDD) reveals that the number of

disability-adjusted life years (DALYs) lost

to non-communicable diseases in Sri

Lanka will increase over the coming

years. Meanwhile, the number of DALYs

lost to communicable disease will fall, as

diagnosis, treatment and prevention

techniques improve.

In fact, Sri Lanka has been ranked the

most successful of the South Asian

countries with regard to showcasing

improved healthcare results, according to

the State of World Population report released by the UN Population Fund (UNFPA) for 2010. The

country’s infant mortality rate, of 15 deaths per 100,000 births in 2010, is one of the most promising

results, compared with the rate in other Asian countries including India, Pakistan, Bhutan, Nepal and

Maldives.

Similarly, Sri Lanka possesses the lowest maternal death rate among the countries of South East Asia – at

58 deaths per 10,000 live births. Moreover, life expectancy limits for males and females – 71 and 74 years

respectively – in Sri Lanka are better than those in India, Bangladesh, Pakistan, Nepal and the Maldives.

The Sri Lankan health ministry attributed the achievement to the government’s efforts to prioritise free

healthcare services and high literacy rates among citizens.

Sri Lanka may be able to eliminate the transmission of HIV and syphilis between mother and child by

2015, according to College of Venereologists senior venereologist Dr Sujatha Samarakoon, speaking to

the Sunday Observer. The organisation hopes to eradicate the sexually-transmitted diseases through free

screenings, Samarakoon said.

Malaria has been largely contained, although dengue fever and chikungunya cases have been rising. The

country has also reported around 500 cases of swine flu, despite importing A (H1N1) treatment Tamiflu

(oseltamivir) as a precautionary measure in May 2009. In August 2010, the authorities warned of a

Burden Of Disease Projection

2005-2030

f = forecast. Source: BMI’s BoDD



possible second wave of swine flu, following the re-emergence of the virus in India, with the WHO

recently donating medicines for the treatment of infected children.

Another issue facing Sri Lanka is the growth of the population and ageing. According to a recent report

by John Keelis Stock Brokers, the country will have the fastest growing ageing population in South

Asia, which will clearly affect the level and the extent of adequate medical provision.

Non-Communicable Disease

Sri Lanka has seen a rise in the number of people suffering from non-communicable disease (NCDs),

with about 300-400 people dying from such illnesses every day, according to statements by the country’s

Ministry of Healthcare and Nutrition spokesperson W.M.D. Wanninayake in July 2010. He added that the

prevalence of NCDs is expected to rise over the next 10 years. NCDs such as diabetes, high cholesterol,

heart disease, high and low blood pressure and cancer are caused by unhealthy food patterns, lack of

exercise, intake of alcohol and genetic factors.

In fact, the government highlighted the proliferation of non-communicable diseases in the country in its

2011 budget, from which the government intends to initiate a LKR900mn (US$8.08mn), three-year plan

to mitigate NCDs through improvements in the country’s primary healthcare system.

Stroke is the second leading cause of deaths in hospitals and is the root cause of 11% of deaths in Sri

Lanka, Health Ministry Additional Secretary Palitha Maheepala said in September 2010. He added that a

study on adults between the ages of 18 and 65 years has revealed that unhealthy diets, smoking and

obesity are some of the factors leading to increased risk of strokes. The study suggested that screening for

the early detection of hypertension and diabetes is the most effective prevention method for strokes.

Males account for 80% of the total number of stroke patients admitted to hospitals.

Maithripala Sirisena announced in December 2010 that the government intended to establish a

presidential task force to eliminate malnutrition over 2011. The Ministry of Health and the Ministry of

Education, Agriculture and Environment were to cooperate to tackle malnutrition, Sirisena said. While Sri

Lanka has a national average child malnutrition rate of 29%, over 50% of children in some areas of east

and north Sri Lanka are affected by it, according to the Health Ministry as cited by local publication

Colombo Page.

In June 2010, GlaxoSmithKline (GSK) said cervical cancer is the second most common cancer among

women in the country. Around 625 Sri Lankan women die of cervical cancer and 1,250 are diagnosed

with the disease annually.



In March 2010, the ministry said that around 25% of the island’s total population suffers from diabetes,

brought on by poor dietary and exercise habits and stress. In addition, type II diabetes affects between 5%

and 10% of school children, with about 15% currently in the pre-diabetes stage. The percentage of the

total population affected by diabetes is expected to rise to 50% by 2020, indicating a huge area of unmet

meet for medication.

In May 2009, New Zealand’s Fonterra launched free bone health check-ups in Sri Lanka through its

Bone Health Brand Anlene. Health checks will be provided to more than 50,000 people in the country

through the creation of the Bone Health Check Centre at Nawaloka Hospital. This initiative, in

partnership with the hospital, is to raise awareness and prevent osteoporosis in Sri Lanka.

Communicable Disease

The number of dengue cases dropped from 4,167 in August 2010 to just 458 cases in November 2010,

according to the health ministry’s epidemiology unit. In late-November 2010, the ministry announced

another dengue eradication week, for the first week of December, in order to maintain an awareness of the

disease, Sirisena said, as quoted by local publication Colombo Page. The country’s previous dengue

eradication week was held in early-October 2010. There were 230 deaths from dengue over the first 11

months of 2010, with over 33,000 reported cases.

In June 2010, it emerged that the number of deaths due to the dengue fever outbreak in Sri Lanka had

increased to 113, while the number of diagnosed patients had risen to 17,411, according to statistics from

the epidemiology unit. There were 1,943 new dengue cases reported in June 2010 (up from 1,888 new

cases in May 2010), as a consequence of floods in most parts of the country. Colombo recorded the

highest number of patients in the country. In early 2010, over 2,000 cases of dengue fever were reported

to the authorities.

Sri Lanka completed a trial project – ‘real-time bio-surveillance programme’ – in September 2010, which

allows for early detection of lethal communicable diseases through the use of mobile technology, LBO

reported, citing officials. Under the programme, mobile phones, software applications and a web interface

have helped rapidly detect and notify the authorities of potential disease outbreaks, according to Sri

Lanka-based regional information communications technology think-tank LIRNEasia. Saman Ratnayaka,

director of health services in the Wayamba province, said the new system is likely to be implemented

throughout the country to counter the spread of communicable diseases.

In February 2010, a Ministry of Healthcare and Nutrition spokesperson stated that the tuberculosis (TB)

ratio in Sri Lanka had dropped to 36-40 persons per 100,000, approaching the WHO’s 2015 target of 30

in every 100,000. Every year about 10,000 new patients in Sri Lanka are diagnosed with TB.



In the same month, the ministry relaunched a pentavalent vaccine in the country, which will be provided

to all two-, four- and six-month old infants. Deputy Director General of Health Services (public health)

Palitha Maheepala said that although the vaccine, launched in 2008, was suspended after reports of

allergic reactions, a subsequent investigation found it to be 100% safe.

In September 2009, the government announced that it had reduced the number of deaths due to rabies in

the country by 50%. A special programme was organised to control the spread of rabies in the country in

2008. The Rabies Prevention and Control Programme was drafted with the objective of eradicating the

disease from the country by 2016.

In July 2009, health officials in Sri Lanka announced that they would administer the Japanese encephalitis

vaccine to all children in the country, following the spread of mosquito-borne Japanese encephalitis cases.

Between January and July 2009, Sri Lanka reported more than 1,500 leptospirosis (rat fever) cases and

nearly 70 fatalities from the disease. Sirisena cautioned the public over the increased probability of a rat

fever outbreak as a result of the ongoing rain in the country.

In June 2009, the authorities reported concern over the rapid spread of hepatitis in the Badulla district.

Some 50 patients had been registered with the disease by that time. Around the same time, Sri Lankan

authorities were reported to be working on eradicating thalassaemia, at a cost of LKR30mn. Currently,

there are some 2,000 thalassaemia patients in the country, including around 80 babies born each year with

the condition. The annual cost of treating a single patient can be as high as LKR1.7mn.

Recent Public Health Developments

In January 2011, local press reported that people suffering with alcohol-related diseases in Sri Lanka

would not be entitled to healthcare subsidiaries from February 2011, after the government’s withdrawal of

subsidiaries in order to discourage alcohol abuse in the country. The government also announced that it

will charge for the treatment of injured drink drivers.

The government aims to reduce avoidable expenditure on the health ministry through the move. However,

the news has been criticised by doctors and their union (the All Ceylon Government Medical Officers’

Association), who claim that the measures would punish the poor twice, once due to the actual addiction

of a family member, and the second time by having to pay for the addiction treatment.

In the same month, the WHO donated 100,000 capsules of Tamiflu (oseltamivir phosphate) to Sri Lanka

for the treatment of children infected with influenza A/H1N1. The organisation has donated the antiviral

drug, worth approximately LKR14mn (US$126,115), which will last for three years, according to a health

ministry source. There were 457 confirmed influenza A/H1N1 cases and 24 confirmed deaths reported in



the country between September 20 2010 and January 04 2011, according to the health ministry’s

epidemiology unit.

Healthcare System

Like many other low and middle-income countries, Sri Lanka has established a National Commission on

Macroeconomics and Health (NCMH). This agency has three primary objectives: to develop a multi-

sector investment plan to improve health outcomes, especially among poor people; to strengthen

commitments to increased financial investments in the health plan to achieve Millennium Development

Goals (MDGs) and national goals; and to determine how to minimise non-financial constraints to the

absorption of greater investments by increasing efficiency and effectiveness.

The government meets about 80% of demand for inpatient services in the country, with hospital

treatments free of charge. Rural services need to be improved, although the government has been making

moves in this direction, for example, by providing ambulances to 13 rural hospitals in early 2010, at a

cost of LKR100mn. However, preventative healthcare services are generally seen as lacking.

The uptake of private insurance is low, with patients paying out of pocket for most of the treatments

undertaken at private facilities, although they can choose different room ‘grades’ and facilities, which

have a bearing on prices. Pharmaceutical products account for around half of the total healthcare bill at

in-patient facilities.

The healthcare system in the Northern Province of Sri Lanka is to be restored, Minister of Helath

Maithripala Sirisena said during the 64th World Assembly of the WHO in Geneva in May 2011. Sirisena

added that the government has started the restoration of the health facilities in the conflict-affected

Northern Province. He further mentioned that the ministry had implemented measures for the

establishment of 75 new healthcare institutions and the recruitment of healthcare personnel in the region.

Sirisena assured delegates that the Tamil people would not be marginalised as the government aims to

develop a healthier nation.

Hospital Sector

The total number of hospitals in Sri Lanka in both the private and public sector has dropped since 2008.

The total number of private hospitals stood at 161 in mid-2010, down from 220 in 2009 and 212 in 2008,

while public hospitals have fallen to 555 since 2009, down from 619 in 2008.

However, in April 2011, Sirisena asked Health Secretary Ravindra Ruberu to undertake the necessary

steps to reopen 98 of the country’s hospitals. The hospitals were shut down due to a shortage of doctors,

nurses, health staff, drugs and medical equipment over the last three years. Sirisena added that the closure



of the hospitals forced patients in surrounding areas to travel long distances to find hospitals and

treatment. The hospitals are reportedly scheduled to be reopened shortly.

More recently, the Government Medical Officers Association (GMOA) of Sri Lanka urged the health

ministry to immediately fill the vacant directors positions at six state hospitals, reported Colombo Page in

September 2011. Several other vacant posts are also required to be filled at the state hospitals, according

to GMOA Chief Secretary Dhammika Pathirana. Currently, there are more than 100 vacant posts for

junior medical officers (JMOs) and approximately 40 positions for senior medical officers (SMOs), which

must be filled if better healthcare services are to be provided.

The number of beds has increased in the country, according to the central bank, and the total number of

public doctors and nurses has also increased y-o-y since 2007. The number of doctors by mid-2010 stood

at 14,961, up from 13,666 at the same point in 2009, while the number of nurses stood at 26,674 by mid-

2010, compared with 25,795 in mid-2009.

In June 2009, control of a private hospital in Sri Lanka was passed to the state. The development followed

a Supreme Court order for the reversal of the privatisation of an insurance firm, which has a majority

stake in the hospital. Sri Lanka Insurance Corporation (SLIC) holds more than a 54% stake in Lanka

Hospitals Corporation, owners of Colombo’s Apollo Hospital. In July 2010, Indian private hospitals

group Apollo Group was considering re-entering Sri Lanka.

In January 2011, Sri Lanka-based diversified healthcare conglomerate Hemas Holdings Group

announced plans to open two new, 50-bed hospitals in the country – Hemas Capital Hospital and Hemas

South Colombo Hospital – in the suburbs of Colombo. The company aims to expand its presence in the

country’s healthcare sector. However, health sector CEO Murtaza Esufally said that the final decision on

financing the project has not yet been taken.

India and Sri Lanka recently discussed various issues regarding healthcare cooperation. During the

meeting, it was revealed that the construction of a 150-bed hospital at Dickoya commenced in March

2011. The hospital is part-financed by the government of India. Indian authorities are also providing

grants for the purchase of medical equipment by hospitals in Killinochchi and Mullaitivu.

Healthcare Financing

Sri Lankan authorities allocate around LKR4.5bn per annum for the treatment of heart disease, with a

similar figure (around LKR4bn) directed towards cancer treatment costs. The budget for drug purchasing

in 2008 was increased to around LKR14bn, up from LKR4bn in 2004. In 2011, it stood at LKR15bn.



In addition, the government ploughed some LKR11bn into the construction of new hospitals and clinics

and has recruited 5,500 doctors since 2004. However, around 50% of all patients are treated in the private

sector, while their medicines are dispensed by private pharmacies.

According to the chairman of the Asiri Surgical Hospital in Sri Lanka, the country’s healthcare sector

has not been affected by the recession to the same degree as other industries. The comment was made as

part of the launch of Asiri’s LKR500mn heart centre project in May 2010. The company is planning on

opening another centre at Colombo, with 270 beds, following the US$45mn investment. Asiri is

increasingly targeting the expatriates market, or rather relatives of Sri Lankans working and living abroad

who still live on the island.

In August 2011, Sirisena said patient referrals for private sector laboratory tests by government hospitals

are now prohibited. The source indicated that the relevant circular was to be issued shortly by the Director

General of Health Dr Ajith Mendis. The announcement is likely to cause a backlog in the processing of

laboratory tests within the government hospital sector, as the majority of patients will not be able to

afford private consultations.

Clinical Trials

Sri Lanka is a small pharmaceutical

market, which limits its potential as a

clinical trials destination, despite the

sizeable population numbers (of around

20.5mn). Additionally, Sri Lanka’s

proximity to other, larger Asian markets,

primarily India, will continue to

marginalise its attractiveness with regard

to conducting clinical trials.

In March 2010, clinicaltrials.gov listed

just 18 clinical studies in the country, of

which six were active. Only half of the

active studies were in the process of

recruiting patients. By December 2011, the numbers stood at 24 and 11, respectively.

In terms of regulatory requirements, prospective clinical trials in Sri Lanka that involve human

participants are registered with the Sri Lanka Clinical Trials Registry (SLCTR), which was created by the

Sri Lanka Medical Association (SLMA) in association with the Ceylon Medical Journal (CMJ). The

Clinical Trial Registrations

2006-2009

Sourced by date of initial registration. Source: ClinicalTrials.gov, BMI



facility allows for collaborative research between domestic and foreign clinical centres. The registry is

linked to the WHO’s international clinical trials platform (WHO-ICTRP).

Medical Devices

The government proposed in its 2011 budget, announced in November 2010, to exempt medical devices

and laboratory equipment from VAT and import duties. The country is heavily reliant on imports of

medical equipment, especially at the high-tech end of the scale. According to December 2010 reports by

The Sunday Leader, Sri Lanka imported some 2,294 types of surgical instruments in 2009.

In September 2009, Sri Lanka’s first digital x-ray machines were installed at the Ragama Teaching

Hospital in Colombo. The advantage of these machines over traditional film-based devices is that they

can be operated remotely, they allow image zooming and electronic transmission and only emit minimum

levels of radiation. The two units cost the government a total of LKR150mn (US$1.31mn).

In mid-2010, Sri Lanka-based pharmaceutical distribution company Hemas Pharmaceuticals and the

Rotary Club of Colombo Fort donated a Dental Unit to President’s College in Embilipitiya. The new unit

will help resolve many dental hygiene problems caused due to the high fluoride content of Embilipitiya’s

water. The director of regional health in Ratnapura recruited a doctor and a nurse to serve the school

population and the general public once every two weeks.



Industry Forecast Scenario

Pharmaceutical Market Forecast

According to BMI’s drug expenditure

forecast model, sales of pharmaceuticals in

Sri Lanka are expected to increase from

LKR49.04bn (U$444mn) in 2011, to

LKR53.79bn (US$450mn) in 2012. Over

the 2011-2016 forecast period, drug

spending will experience a compound

annual growth rate (CAGR) of 9.33% in

local currency terms and 6.31% in US

dollar terms, reaching a value of

LRK76.61bn (US$602mn) by 2016.

The Ministry of Health announced an

increase in the production of local drugs to

3,500mn tablets annually in November 2010, compared with SPMC’s previous estimate of 1,200mn,

according to a ministry spokesperson. The ministry is to spend a total of LKR1.5bn (US$13.47mn) on the

project. The spokesperson also announced the opening of a second drug factory by SPMC, worth

LKR500mn (US$4.49mn), as well as government’s countrywide plans to open ROS outlets and storage

facilities.

A booming economy is the key driver of medicine sales in the South Asian country. For 2011, w GDP

growth to have came in at 8.9%, but we also expect this to have moderated to 6.0% in 2012, .In the past,

inflation was a significant problem in Sri Lanka. The consumer price index (CPI) – which BMI uses as a

proxy for inflation – averaged 10% during 2002-2006, before jumping to 15.8% in 2007 and 22.6% in

2008, primarily as a result of the escalating civil war between the government and the LTEE) Following

the cessation of violence in May 2009, the CPI averaged 3.5% for the year. However, high prices are

projected to return, with the CPI forecast to average 5-6% over the medium term, broadly comparable to

the 6.2% for 2010 and an estimated 6.74% in 2011.

A growing and ageing population will boost demand for pharmaceuticals. According to the UN

Population Division, the number of people living in Sri Lanka will increase from 18.77mn in 2000 to

22.03mn in 2025 – a rise of nearly 20%. The percentage of the population over 60 will jump from 9.5% to

19.7%, meaning investment in healthcare facilities and treatment will be necessary.

Pharmaceutical Market Forecast

2007-2021




Table: Pharmaceutical Sales Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Pharmaceutical sales (US$bn) 0.3 0.3 0.4 0.4 0.5 0.5 0.5 0.6 0.6

Pharmaceutical sales (US$bn), % chg y-o-y 15.2 3.2 13.8 15.0 1.5 4.5 9.1 8.5 8.1

Pharmaceutical sales (LKRbn) 35.6 39.0 43.6 49.0 53.8 59.0 64.6 70.5 76.6

Pharmaceutical sales (LKRbn), % chg y-o-y 12.9 9.5 12.0 12.4 9.7 9.6 9.6 9.1 8.7

Pharmaceutical sales at constant exchange rate (US$bn) 0.3 0.4 0.4 0.4 0.5 0.5 0.6 0.6 0.7

Pharmaceutical sales, per capita (US$) 16.0 16.4 18.5 21.1 21.2 22.0 23.8 25.7 27.6

Pharmaceutical sales, % of GDP 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.7 0.7

Pharmaceutical sales, % of health expenditure 20.1 19.3 19.3 19.6 19.3 19.1 19.0 18.9 18.8

Source: BMI



Key Growth Factors – Industry

Healthcare spending in Sri Lanka is

expected to increase at a local currency

CAGR of 10.23% (or 7.18% in US

dollars), from LKR250.62bn (US$2.27bn)

in 2011, to LK407.80bn (US$3.21bn) in

2016. The key driver of growth will be a

strong economy, underpinned by newly

established political stability, although

inflation will also play a part. In

November 2010, health inflation was

12.8% above the level recorded in the

same month of the previous year. The

growth in healthcare costs from July to

November 2010 (12-13% year-on-year (y-

o-y)) was nevertheless down on a growth rate of 22% y-o-y from January to June 2010, according to the

central bank.

However, the government’s 2011 budget, outlined in November 2010 shortly after Rajapaksa was sworn

in for his second term, may have helped reduce the cost of pharmaceutical products. Pharmaceutical

products will be exempt from both import duties and VAT, the government said. The budget also

allocated as much as LKR900mn (US$8.08mn) to tackle non-communicable diseases under a three-year

plan focusing on improvements in primary healthcare. The new budget allocated a total of LKR54bn

(US$485.01mn) to both healthcare and education spending, up from LKR29.4bn (US$264.06mn) in the

2010 budget, although authorities did not provide separate figures for the sectors.

Spending on medical services accounted for 3.83% of Sri Lanka’s GDP in 2011. This is below the

regional and global averages, but above that of neighbouring India. Although healthcare expenditure is

forecast to increase in absolute terms over the next decade, spending as a percentage of national wealth

will decrease to 3.13% by 2021, down from 3.53% in 2016.

Totalling LKR134.67bn (US$1.22bn) in 2011, the private sector accounts for the majority of healthcare

spending, with out-of pocket payments representing the primary channel (as much as 80% of the total).

Private sector spending by both non-government organisations (NGOs) and insurance plans is minimal.

Despite the government’s share of healthcare spending being forecast to decrease from 46.3% in 2011 to

44.3% in 2016, the state is committed to extending and improving the provision of medical services.

According to the Ministry of Health, the number of hospital beds per thousand people increased from

3.33 in 2008 to 3.40 in 2009.

Healthcare Expenditure Forecast

2007-2021

f = BMI forecast. Source: World Health Organization (WHO), BMI



Table: Healthcare Expenditure Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Health expenditure (US$bn) 1.63 1.75 2.00 2.27 2.34 2.46 2.70 2.94 3.21

Health expenditure (US$bn), % chg y-o-y 20.20 7.27 13.86 13.62 3.04 5.31 9.60 9.19 8.91

Health expenditure (LKRbn) 176.98 201.44 225.55 250.62 279.00 308.23 339.51 372.57 407.80

Health expenditure (LKRbn), % chg y-o-y 17.76 13.82 11.97 11.12 11.32 10.48 10.15 9.74 9.45

Health expenditure at constant exchange rate (US$bn) 1.60 1.82 2.04 2.27 2.52 2.79 3.07 3.37 3.69

Health expenditure per capita (US$) 79.78 84.78 95.64 107.71 110.05 114.97 125.06 135.60 146.70

Health expenditure (% GDP) 4.01 4.17 4.02 3.83 3.82 3.74 3.67 3.60 3.53

Source: World Health Organization (WHO), BMI

Table: Healthcare Governmental Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Government health expenditure (US$bn) 0.701 0.816 0.927 1.049 1.075 1.124 1.221 1.319 1.420

Government health expenditure (US$bn), % chg y-o-y 8.7 16.3 13.6 13.2 2.5 4.6 8.7 8.1 7.6

Government health expenditure (LKRbn) 75.983 93.790

104.762

115.945

128.362

140.808

153.755

167.005

180.642

Government health expenditure (LKRbn), % chg y-o-y 6.5 23.4 11.7 10.7 10.7 9.7 9.2 8.6 8.2

Government sector health expenditure, % of total 42.93 46.56 46.45 46.26 46.01 45.68 45.29 44.82 44.30




Table: Healthcare Private Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Private health expenditure (US$bn) 0.9 0.9 1.1 1.2 1.3 1.3 1.5 1.6 1.8

Private health expenditure (US$bn), % chg y-o-y 30.6 0.5 14.1 14.0 3.5 5.9 10.4 10.1 10.0

Private health expenditure (LKRbn) 101.0 107.6 120.8 134.7 150.6 167.4 185.8 205.6 227.2

Private health expenditure (LKRbn), % chg y-o-y 27.9 6.6 12.2 11.5 11.9 11.1 10.9 10.7 10.5

Private sector health expenditure, % of total 57.1 53.4 53.6 53.7 54.0 54.3 54.7 55.2 55.7




Key Growth Factors – Macroeconomic

Growth Correction In 2012 To Mark Start Of Rebalancing

BMI View: Given the Central Bank of Sri Lanka (CBSL)'s largely unexpected slew of policy measures to

combat overheating over the recent months, including currency devaluations and policy rate hikes, we

have cut Sri Lanka's 2012 real GDP growth forecast to 5.0% (from 6.0% previously), implying a sharper

slowdown from the 8.3% growth rate in 2011. Keeping in mind that the bank's measures were mainly in

response to the country's external imbalances, we expect this year to mark the start of the country's

'rebalancing' as its external deficits moderate.

Following the Central Bank of Sri Lanka (CBSL)'s decision to hike its reverse repo rate by 75 basis points

(bps) to 9.75% in its April monetary policy review, we noted that we would very likely revise our forecast

for real GDP growth of 6.0% in 2012 (see our online service, April 9, 'CBSL To Remain Hawkish Amidst

Stubborn Credit Growth'). Indeed, given the largely unexpected slew of policy measures the central bank

has enacted over recent months in an effort to address overheating, we have cut our forecast for 2012 real

GDP growth to 5.0%. Moreover, we have seen a massive drop in the value of the rupee. The CBSL first

devalued - by about 3% - the Sri Lankan rupee on November 22 2011, and at current levels it has fallen

by roughly 20% from its June 2011 peak. In February, the central bank reversed its three-year-long loose

stance on interest rates, hiking its reverse repo rate by 50bps. So far in 2012, the bank's policy rate has

risen by a cumulative 125bps, and we expect 100bps worth of further increments over the coming

months, taking the reverse repo rate to 10.75%.



Double Policy Dampener Sri Lanka - Exchange Rate (LKR/US$), LHS & CBSL Policy Rate (%)

Source: BMI, Central Bank of Sri Lanka

2012 Growth Downgraded To 5.0%

We have long been sceptical about the sustainability of Sri Lanka's high real GDP growth rate, constantly

reiterating the increasing risk of a potential hard landing should the authorities fail to act quickly enough

to address the country's domestic and external imbalances. Even before the devaluation and the hike in

interest rates, amid the bullishness surrounding the island nation's near-term growth prospects, we

remained cautious, pencilling in a slowdown to 6.0% real GDP growth in 2012 from the 8.0%-plus

growth rates witnessed in recent years.

The central bank's recent release of the expenditure breakdown of national accounts for 2011 shows that

all components of GDP, expect for the change in stocks, recorded a substantial growth acceleration.

Domestic demand (the sum of total consumption and investment expenditure) contributed 12.7 percentage

points (pp) to headline growth, with private consumption and fixed capital formation growing by a

staggering 15.5% and 14.6% respectively. Net exports were a considerable drag on the economy, shaving

4.5pp of 2011's headline growth figure.



A Sizeable Correction Sri Lanka - Real GDP Growth (%) & Expenditure Contribution (pp contribution)

f = BMI forecast. Source: BMI, Central Bank of Sri Lanka, Department of Census and Statistics (Sri Lanka)

In light of the recent policy measures, and our expectation for further tightening on the monetary policy

front, we have slashed our expenditure growth forecasts across the board. The rapidly rising cost of credit,

coupled with the deterioration of wealth (due to considerable rupee weakness), is expected to severely

impinge on the economy. In 2012, we expect a collapse in private consumption growth to 4.5% (from

15.5% in 2011), in fixed capital formation growth to 6.0% (from 14.6%), in export growth to 3.5% (from

11.0%), and in import growth to 4.0% (from 20.0%). As a result, annual headline real GDP growth is

expected to fall to 5.0%, from 8.3% in 2011, an outlook well below consensus expectations for 7.1% real

GDP growth.



Start Of Rebalancing Sri Lanka - Net Exports Deficit (% of GDP)

e/f = BMI estimate/forecast. Source: BMI, Central Bank of Sri Lanka

Rebalancing (And More Moderate Growth)

Bearing in mind that the recent policy measures were mainly in response to the country's external

imbalances reaching extreme and unsustainable levels (with net exports and the current account hitting -

14.6% and -7.8% of GDP respectively in 2011), we expect 2012 to mark the start of Sri Lanka's

'rebalancing' as its external deficits moderate from this year onwards (see chart). Although this policy-

induced rebalancing may well prove economically painful (especially this year), we highlight that these

painful adjustments are likely to set the country on a more stable, albeit more moderate long-term growth

trajectory. As seen in the abovementioned chart, we have tempered our long-term projections for the

country's external goods and services trade deficit. We continue to believe that, as this pressure moderates

and as real GDP growth sharply slows in response to the central bank's tightening, the bank's aggressive

measures will be met by a period of equally aggressive unwinding of policy. At the moment, we are

projecting 75bps worth of policy rate cuts in 2013.

Expenditure Breakdown



Private Consumption

We expect private consumption, which makes up the bulk of the economy (constituting 69.8% of GDP in

2011), to grow much more slowly in 2012. In fact, based on the sharp decline in contribution to headline

growth, the expected downturn in consumer activity this year is the main reason we are forecasting a

substantial slowdown in real GDP growth. Private consumption growth is expected to plunge to a three-

year low of 4.5% this year (down from 15.5% in 2011), contributing 3.1pp to the headline growth figure.

One of the key headwinds facing the Sri Lankan consumer this year is the rising cost of credit. As

previously mentioned, the CBSL has already hiked interest rates by 125bps, and we expect another

100bps worth of tightening over the next few months. Looking at commercial lending rates, the average

weighted prime lending rate has risen by 359bps to 12.71% as of April from its low last year. Secondly,

the ongoing decline of Sri Lankan financial assets - of equities and the rupee in particular - will very

likely continue to place downside pressure on consumer wealth. Finally, rising consumer price inflation is

expected to place added pressure on household budgets. Given the stubborn nature of high monetary

growth aggregates, the recent acceleration of headline inflation still has further to go. We expect CPI to

end the year at 7.0%.

Public Consumption

Given the expansionary nature of the government's 2012 budget, we expect public consumption growth to

remain robust this year. The nominal budget deficit has been allocated to rise for the second straight year,

to LKR468.8bn, with total expenditures increasing by 14.1% to LKR1,594.9bn. While the merits of

choosing to (yet again) enlarge the size of the country's fiscal deficit will continue to be up for debate –

we see it as unsustainable, further risking Sri Lanka's long-term macroeconomic stability – it is fairly

certain that the government will be able to 'produce' higher public consumption growth this year. We note

that the increase in public consumption will come directly at the expense of private consumption, as the

government crowds out the private sector. At the moment, we see public consumption growth increasing

to 5.0% from 2.4% in 2011. Its contribution to headline growth is expected to be slightly higher at 0.7pp.

Gross Fixed Capital Formation

Perhaps more so than private consumption, the rising cost of credit is expected to dampen investment

activity this year. We reiterate that the long period of loose monetary policy is certainly over, and we do

not expect a continuation of the extreme levels of investment expenditure witnessed last year. That said,

we remain cognisant of the government's ambitious infrastructure development plans. According to the

2012 budget, spending on infrastructure development has been budgeted to increase the most, growing by

a staggering 29.5% this year to LKR452.1bn - nearly a third of total expenditure. Taking these factors



into account, we expect gross fixed capital formation growth to fall to 6.0% from 14.6% in 2011,

contributing 1.7pp to headline real GDP growth

Net Exports

In terms of external demand, Sri Lanka is unlikely to find any respite this year, as we expect global

economic growth to slow for the second straight year (to 2.6% from 3.1% in 2011). Therefore, we expect

net exports to continue to be a drag on economic growth, with the component projected to shave 0.7pp off

the headline growth figure. Crucially, the export sector is fully exposed to Europe's ongoing economic

woes, as the continent remains Sri Lanka's largest export market. More than a third of the country's export

earnings originate from the EU, which we expect to dip into a mild recession this year. This will likely

undermine any gains made from exports to the US - Sri Lanka's second largest export market, importing

roughly 20% of total exports - which is undergoing a comparatively stable (albeit uninspiring) economic

recovery.

Table: Sri lanka - Economic Activity

2011 2012 2013 2014 2015 2016

Nominal GDP, LKRbn 2 6,542.7 7,305.0 8,240.2 9,251.3 10,337.8 11,552.5

Nominal GDP, US$bn 2 59.2 61.2 65.8 73.5 81.7 90.8

Real GDP growth, % change y-o-y 2 8.3 5.0 5.9 6.4 6.4 6.4

GDP per capita, US$ 2 2,812 2,881 3,074 3,408 3,762 4,156

Population, mn 3 21.0 21.2 21.4 21.6 21.7 21.9

Industrial production index, % y-o-y, ave 1,4 4.5 5.0 5.9 6.4 6.4 6.4

Unemployment, % of labour force, eop 2 4.2 4.8 5.0 5.0 5.0 5.0

Notes: e BMI estimates. f BMI forecasts. 1 Private Sector Industrial Production Index; Sources: 2 Department of Census and Statistics/BMI. 3 World Bank/UN/BMI; 4 Central Bank of Sri Lanka/BMI.



Prescription Drug Market Forecast

The distinction between prescription and over-the-counter (OTC) medicines is obscured because there is

no strict enforcement of dispensing guidelines. Given low incomes and the relatively undeveloped

primary care network, much of the population relies on hospitals as primary healthcare provision points.

BMI estimates Sri Lanka’s patented drug market to be worth US$55-60mn, or in the region of 15-20% of

the total pharmaceutical market, which we define as combined sales of OTC medicines, generic drugs and

patented drugs. Patented drugs are estimated to account for less than half of the prescription market.

The demand for patented drugs will, on the one hand, be stimulated by the strengthening private sector,

but, on the other, depressed by the government’s focus on increasing the use and prescription of generic

drugs. Additionally, the high contribution of out-of-pocket spending to healthcare expenditure will

continue to focus patients’ attention on cheaper products and on the non-traditional segment, despite the

government’s warnings that 30,000 ‘quacks’ are known to practice Western medicines, homeophathy and

Ayurveda traditional medicine in the country.



Medical Device Market Forecast

Medical device spending accounts for

around 4.5% of total healthcare

expenditure in Sri Lanka, in comparison to

19.5% of spending being on medicines.

As a share of GDP, medical devices

represent a virtually negligible 0.17%,

with this percentage unlikely to improve

in the coming years.

Having been worth just LKR11.20bn

(US$101mn) in 2011, spending on

medical devices is forecast to reach a still

very modest (by global standards)

LKR15.20bn (US$119mn) in 2016.Key

drivers of the sector’s growth will be

volume-based, as new medical facilities are opened in the country. However, risks to the forecasts remain

to the downside, given the high out-of-pocket contribution to healthcare spending. This means high

inflation and the negative impact of flooding, among other factors, will translate into lower spending on

non-essentials, including a range of medical diagnostic services.

Medical Device Market Forecast

2007-2021




Table: Medical Devices Sales Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Medical device sales (US$bn) 0.08 0.08 0.09 0.10 0.10 0.10 0.11 0.11 0.12

Medical device sales (US$bn), % chg y-o-y 13.51 3.58 13.03 11.99 -1.34 1.47 6.29 5.59 4.95

Medical device sales (LKRbn) 8.37 9.20 10.10 11.20 11.94 12.71 13.58 14.41 15.20

Medical device sales (LKRbn), % chg y-o-y 11.20 9.90 9.77 10.91 6.59 6.45 6.82 6.12 5.47

Medical device sales at constant exchange rate (US$bn) 0.08 0.08 0.09 0.10 0.11 0.11 0.12 0.13 0.14

Medical device sales, % of GDP 0.19 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13

Medical device sales, % of total healthcare sales 4.73 4.57 4.53 4.47 4.28 4.12 4.00 3.87 3.73

Source: BMI



Pharmaceutical Trade Forecast

Sri Lanka’s negative pharmaceutical trade

balance is expected to widen over the next

five years, from -LKR26.58bn (-

US$240mn) in 2011, to –LKR41.32bn (-

US$325mn) in 2016. In an attempt to

reduce medical costs, the government said

in its 2011 budget that pharmaceutical

products will be exempt from the Port and

Airport Levy, with the changes relating to

drugs, medical devices and equipment.

Although domestic manufacturing will

struggle to compete with cheap medicines

from India, we expect local producers to

increase capacity considerably over the

medium term.

Top Pharmaceutical Importers

2010 (US$mn)

Source: BMI

Pharmaceutical Trade Forecast (US$mn)

2007-2016f

f = BMI forecast. Source: United Nations Comtrade Database DESA/UNSD, BMI



Combined exports of finished products and combination therapies are projected to increase from

LKR216mn (US$2.0mn) in 2011 to LKR351mn (US$2.8mn) in 2016. Due to the strengthening rupee,

this equates to 10.19% CAGR in local currency terms and a 7.14% CAGR in US dollar terms. Exports

may grow faster than forecast, depending on the government’s programme to boost such trade through the

planned increase in local production, designed to reduce reliance on imports.

According to UN Comtrade data, Sri Lanka does not produce biologics or vaccines for export. In 2010,

the main destination for medicines made in Sri Lanka was Japan (US$495,281, or 24.9% of the total by

value), followed by Maldives (US$424,347), the Netherlands (US$172,795), India (US$161,148) and

Singapore (US$151,943).

Combined imports of finished products, combination therapies, biologics and vaccines are projected to

increase from LKR26.80bn (US$242mn) in 2011 to LKR41.67bn (US$328mn) in 2016. This equates to a

9.2% CAGR in local currency terms and a 6.2% CAGR in US dollar terms. The sector’s development

will also depend on the authorities’ policy on imports. In September 2011, Minister of Health Maithripala

Sirisena suggested the new drug policy will help the government streamline drug imports in the country.

Sri Lanka imports 10,000 varieties of drugs annually, while only 3,000 varieties of drugs are required

every year, said Sirisena. The ministry spends about LKR12bn (US$108.99mn) every year on drug

imports and plans to increase this to approximately LKR15bn (US$136.23mn) from 2012.

The vast majority of imported medicines come from neighbouring India. In 2010, the top-five import

partners were India (US$106.57mn, 58.2% of the total by value), followed by Pakistan (US$8.54mn),

Ireland (US$8.13mn), Switzerland (US$5.80mn) and Singapore (US$5.59mn). However, a number of

Indian companies have been found to be breaching regulations and have been denied trading rights, which

will affect the level of imports from the country.

Table: Exports and Imports Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

Pharmaceutical exports (US$mn) 1.6 1.7 1.8 2.0 2.1 2.3 2.4 2.6 2.8

Pharmaceutical exports (US$mn), % chg y-o-y 0.4 11.9 5.3 6.4 7.4 7.3 7.1 7.0 6.9

Pharmaceutical exports (LKRmn) 169.3 201.0 208.1 216.4 251.0 282.5 304.1 327.2 351.5

Pharmaceutical exports (LKRmn), % chg y-o-y -1.7 18.7 3.5 4.0 16.0 12.5 7.7 7.6 7.5

Pharmaceutical imports (US$mn) 170.4 185.5 211.0 242.4 245.8 256.7 279.7 303.3 327.6

Pharmaceutical imports 15.2 8.9 13.7 14.8 1.4 4.4 9.0 8.4 8.0



Table: Exports and Imports Indicators 2008-2016

2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f

(US$mn), % chg y-o-y

Pharmaceutical imports (LKRmn)

18,457.9

21,330.3

23,858.6

26,798.2

29,365.5

32,165.7

35,219.9

38,386.9

41,671.9

Pharmaceutical imports (LKRmn), % chg y-o-y 12.9 15.6 11.9 12.3 9.6 9.5 9.5 9.0 8.6

Pharmaceutical trade balance (US$mn) -168.8 -183.8 -209.2 -240.4 -243.7 -254.4 -277.2 -300.7 -324.8

Pharmaceutical trade balance (LKRmn)

-18,288.

7

-21,129.

3

-23,650.

6

-26,581.

8

-29,114.

4

-31,883.

3

-34,915.

8

-38,059.

7

-41,320.

4

Source: United Nations Comtrade Database DESA/UNSD, BMI



Other Healthcare Data

There has been unrest among the workforce in the public healthcare sector. For example, one-day strike

action was taken in May 2009 in protest against the new degree scheme for paramedical and nursing

services. According to the professionals, the programme is disruptive to the everyday running of medical

services. Constraints on government finances, despite the promised budgetary contributions to healthcare,

will remain in play in regards to labour force issues in the sector.

Key Risks To Forecasts

After heavy monsoon rains in January 2011, Sri Lanka suffered from severe floods that killed many and

displaced roughly a million citizens. In addition to the human cost of the floods, inflationary pressures

(which were already substantial) were building up due to the losses in agricultural output. The floods put

the 2011 stellar GDP target at risk. Early estimates of the total cost of damages range from LKR30.0bn

(US$271mn) to LKR50.0bn (an estimated 0.9% of GDP in 2010).

While we do not expect major political shifts over the short term as presidential and parliamentary

elections will not be held until 2016, wide-scale social unrest is possible over the coming months. Any

such developments would clearly have an impact on healthcare provision and delivery, thus posing

downside risks to our forecasts.

Given that a number of Indian companies have been banned from bidding for tenders in recent months,

the government has moved to acquire the required products from elsewhere. However, constraints on

available finances are set to prioritise purchases from low-cost locations.

The government is in the process of establishing an exclusive manufacturing zone for pharmaceutical

industry investors. The zone, which will be located in Kurunegala in the North Western Province of Sri

Lanka, is likely to improve domestic output of medicines. While we do not believe the project will attract

dramatic FDI inflows, the zone could improve export forecasts beyond the currently expected levels.

On the political front, the ramifications of the proposed expropriation bill are wide-ranging. Should it be

passed, it would be a significant step backwards for the country’s economic development. We believe that

passage of the intrusive legislation would lead to a downturn in investment activity as prospective

investors hold back their capital, fearing the risk of state takeovers. Such a situation would also impact

potential investors in the healthcare and infrastructure sectors, indirectly also shaping trade flows.

We share the concerns of the main opposition United National Party that, even though the bill (in its

current state) appears to apply only to the assets of local citizens, with a simple amendment in the future

or a looser interpretation of the seemingly vague criteria of ‘underperforming’ and ‘underutilised’, the

government would be able to take control of any institution. Similarly, the former head of one of the



country’s largest business chambers, Chandra Jayaratne, has voiced unease about the potential for the bill

to spook present and potential investors. Underscoring the gravity of the situation, even Sri Lanka’s

Marxist political party Janatha Vimukthi Peramuna, opposes the government’s plan.



Competitive Landscape

Pharmaceutical Industry

Domestic manufacturers account for just 10% of the country’s pharmaceutical market and Sri Lanka’s

reliance on imported drugs is a concern. Fluctuations in the prices of active pharmaceutical ingredients –

as seen in 2008, when the price of crude oil reached record highs and then dropped – cause the cost of

finished medicines to fluctuate wildly. By stimulating local production, a steadier supply of medicines

will be achieved, which is of great importance to the state, prescribers and patients.

Health minister Maithripala Sirisena announced a special drug manufacturing programme would start in

the week ending December 10 2011. The programme was to include the production of the drugs that are

important for the country and was to be initiated according to proposals for the 2012 budget, Sirisena

said. The JICA and Sri Lanka’s state-owned SPMC have signed a deal to manufacture new types of

medicines and increase local manufacturing capacity.

In fact, in order to improve the operational standards of local drugmakers, a Chamber of the Small-Scale

Pharmaceutical Industry (CSSPI) was established in April 2009. Its main goals are to educate firms on

best practices and encourage registration with the Drugs Regulatory Authority. Secretary of the CSSPI,

Mahinda Fernando, said the government was losing significant revenues due to unlicensed players in the

market. The authorities are also working on promoting pharmaceutical exports from the country, although

their efforts are likely to have more medium- to long-term results.

In September 2011, President Rajapaksa was seeking to increase the local production of drugs in a bid to

lower the number of pharmaceutical items imported from foreign countries, reported Daily News. During

a discussion held to obtain the observations of Health and Indigenous Medicine Ministries for the

preparation of 2012 budget proposals, Rajapaksa emphasised the significance of offering better and more

efficient health services to the public. During the discussion, officials of the Health and Indigenous

Medicine Ministries provided information on the strategies, which were implemented in order to meet

MDGs concerning health services in Sri Lanka.

In line with the above, an exclusive manufacturing zone for pharmaceutical industry investors was

established in Kurunegala in the North Western province of Sri Lanka. According to the Minister of

Industry and Commerce, Rishard Badiuddin, Sri Lanka is ready for strategic international partnerships

with cross border investors. However, despite the creation of the manufacturing zone, BMI believes

multinational drugmakers may be reluctant to invest funds to set up facilities in Sri Lanka. While the

country stands to benefit from a favourable geographic location, well educated workforce and an

investment boom on the back of reconstruction – per-capita pharmaceutical and healthcare spending is



low, the South Asian country remains beset by bureaucracy and Sri Lanka’s business environment

continues to be plagued by corruption. We believe the manufacturing zone is more beneficial to Sri

Lanka’s domestic company needs than the needs of multinational drugmakers.

Generally speaking, however, it must be noted that the government’s policy is broadly supportive of

foreign investment, and the country has been open to FDI for longer than most of its South Asian

neighbours. As of 2002, the government has welcomed foreign investment into the financial services

sector, construction, water supply, mass transportation, telecommunications and the energy sector,

including oil and electricity. In recent years, FDI has been most prevalent in manufacturing (notably

textiles), telecoms, the power sector and ports and financial services, and among leading sources of FDI

are India, the US, the UK, Australia, Germany and Japan.

Pharmaceutical Industry Developments

In April 2011, Sri Lanka-based drugmaker Akbar Pharmaceuticals opened the fully equipped LINA

Respiratory Research Centre and Manufacturing Facility for respiratory care in Ratmalana, the

country’s first such centre for research and formulation. The LINA facility contains extensive research

and testing equipment, including an artificial lung used to test the penetration of inhalers and other

delivery devices in lungs during medication. It is hoped the facility will manufacture pharmaceuticals,

meeting the highest international standards and lowering the cost burden on patients.

In March 2011, UK- GlaxoSmithKline (GSK)’s Sri Lankan subsidiary GlaxoSmithKline Consumer

Healthcare – Sri Lanka inaugurated the construction of a local Panadol (paracetamol) production

plant in Moratuwa. The company is making an investment of LKR200mn (US$1.82mn) in the plant.

The 1.8bn tablets per annum capacity manufacturing facility is scheduled to be completed by early-

2012. According to GSK consumer healthcare managing director Sachi Thomas, the new facility will

enable the country to secure a source of essential drugs.

In February 2011, Indian generic pharmaceutical manufacturer SOHM received a purchase order for

10 different private-label generic pharmaceuticals for distribution to the Sri Lankan market. The order

was for antihistamines, anti-hypertensives, antibiotics, antacids and proton pump inhibitors. The 2mn

drugs will be delivered in the form of tablets and capsules.

Pharmaceutical Distribution and Retail

The Medical Supplies Division (MSD), a unit of the Ministry of Health, is responsible for the supply of

drugs to public institutions. It sources the supplies from the State Pharmaceutical Corporation (SPC),

offering 20 of some 100 products manufactured by SPMC, the manufacturing arm of the SPC.



Public hospitals have their own Institutional Drug Therapeutic Committees, which act to determine

supply requirements, although improvements in this area should be a priority. For example, in March

2010, it was reported by local press that the MSD had in storage some 1.15mn units of pharmaceuticals,

worth around LKR2.45mn, which will have to be wasted as their expiration dates have passed.

From the beginning of 2008, all private pharmacies in Sri Lanka were banned from supplying an

expensive medicine should a cheaper equivalent be available. For example, GSK’s Zantac (ranitidine) is

likely to be substituted by generic ranitidine. This will essentially result in doctors prescribing by

international non-proprietary name (INN), which is becoming an increasing global trend as governments

look to reduce healthcare spending.

In July 2010, the Sri Lankan Health Ministry was reported to be poised to raid pharmacies failing to

comply with rules, regulations and ethics. According to a Ministry of Health spokesperson, Maithripala

Sirisena asked the NDA to conduct inspections to streamline 8,500 private pharmacies operating in the

country. The instructions come after school children in Gampaha were affected after using tri-

fluoroferacine and tramadol. Private pharmacies will lose their licences if they are found to have sold

dangerous drugs to school children.

In April 2011, the Ministry of Health issued a statement indicating that pharmacists dispensing

prescription medicines without proper documentation would be fined to the tune of LKR300,000, or face

a one-year jail term. The same will apply to pharmacists who dispense unprescribed medicines at higher

prices. The rules are incorporated into the existing CDDA. The authorities are aiming to reduce the

practice of dispensing prescription drugs over the counter, which is seen as severely risking patients’

health and also as having a negative impact on the wider pharmaceutical market and patients’ own

finances.



Company Profiles

Local Companies

State Pharmaceuticals Corporation (SPC)

Strengths The leading producer in the country, backed by the government.

Wide-ranging product portfolio.

With a 30% share of the private market, the leading player in this market.

Weaknesses Upcoming patent expires for leading products.

A decline in the number of new products reaching the market.

Limited export activity.

Need to import raw materials for pharmaceutical manufacturing.


Potential for exports increasing with enlarged manufacturing capacity.

Government commitment to healthcare services improvement.

Establishment of a dedicated pharmaceutical manufacturing zone in the country.

Threats Rival multinational firms with similar products.

Downward pressure on pharmaceutical pricing.

Imports of low-cost generic drugs from India.

Company Overview Sri Lanka’s State Pharmaceuticals Corporation (SPC) was established in 1971 under the State

Industrial Corporations Act Number 49 of 1957. The corporation was formed during the

administration of the centre-left Sri Lanka Freedom Party (SLFP), which has been the

predominant party in government on a number of subsequent occasions.

Outside of hospitals, medicines made by the SPC’s manufacturing arm, State Pharmaceuticals

Manufacturing Corporation (SMPC), are sold in retail outlets known as Rajya Osu Salas (ROS, 21

of these shops at the end of 2008 and 18 currently). The company offers 5% discounts to

pregnant women, children under the age of five and the elderly (over-60s).

SPC’s pharmaceuticals are also handled by 48 distributors and 36 franchised ROS, the latter

number having dropped from 117 over the past few years. Domestically, there are 20 SPC-

authorised retailers. SPC’s portfolio contains over 2,000 products, including around 100

manufactured by its pharmaceuticals production arm, SMPC.

The SMPC produces tablets, capsules and dry syrups for government-owned clinics and

hospitals. Annually, the firm is now able to manufacture 550mn units of tables/capsules and

60,000 litres of dry syrup, having spent some LKR72bn on a recently inaugurated building

complex in Ratmalana as well as LKR600mn on new equipment.



Strategy The government is aiming to increase the SPC’s present capacity of 1,500mn tablets. The

corporation currently exports to Papua New Guinea and Fiji, but is aiming to increase its exports

capacities in the future.

According to information published on the SMPC website, 20 of the 59 items presently

manufactured are supplied to the Medical Supplies Division (MSD) of the Ministry of Health for

distribution to government hospitals in Sri Lanka. However, the MSD’s annual requirement is

around 1,862mn units – demand that the SPMC is not in a position to supply due to the

insufficient production capacity at the manufacturing plants.

The SPC has a virtual monopoly on all medicines, surgical consumables and laboratory

chemicals purchased by the government. It holds a 30% share of the private market. The Ministry

is, however, probing what has been termed ‘an artificial drug shortage’ caused by an arm within

the SPC and has handed over the investigation to the Bribery and Corruption Commission.

The SPC seeks to adhere to the guidance of Professor Senaka Bibile, who advocated that

doctors employed by the state prescribe by generic names rather than the brand of a commercial

enterprise. This rational approach to the administration of medicines was a profound

breakthrough and greatly improved the lives of Sri Lankans as more drugs could be distributed for

less money. Many other developing countries have emulated this approach and developed their

own national pharmaceutical policies.

Developments In November 2011, the cabinet approved the merger of the SPC and the SPMC. Sirisena

proposed the merger to try to offer better services. The National Medicinal Drug policy

recommended that the merged company should be owned and managed by the state. The

government has not yet decided the name of the merged entity.

In March 2010, SPMC announced that it would supply all of the country’s required thyroxine from

April 1 2010. The decision was made due to frequent shortages of foreign-supplied thyroxine

experienced over the past years, with most of the available stock from the few available

producers used to meet large-scale orders instead.

In February 2010, the Ministry of Health was reportedly in discussions to establish a ‘drug

capacity forecasting unit’ within the SPC. The new unit would work to ensure adequate supplies

of medicines to public hospitals and other medical institutions. The department would be

expected to receive information on stocks of medicines from the institutions in order to assess

their availability at a given time. The cost of the system is in the region of LKR500mn.

At the 12th Suppliers Convention of the SPC, held in Ahungalla during June 2009, concerns arose

over the viability of the SPC. Anecdotal reports by doctors urging patients to purchase branded

medicines rather than SPC drugs were discussed. BMI believes this prescribing behaviour is

influenced by privately-held pharmaceutical firms detailing their products to doctors. This is an

activity seen in developed countries and will only increase as Sri Lanka’s economy grows.

Financial

Performance

SPMC revenue was LRK1.38bn in 2010, an increase from LRK1.15bn in 2009. Exports

represented less than 1% of total revenues, down from 2.9% in 2009. Hospital sales accounted

for around two-thirds of total revenues, with this percentage being similar in the previous year.



Sales to distributors rose by 15% y-o-y, to LKR439.6mn.

Net profit after tax rose from LKR91.6mn in 2009 to LRK179mn in 2010. The number of company

employees stood at an unchanged 209. In 2008, the company employed 195 staff.

SPMC registered a 23.54% growth in profit to LKR220.5mn in 2009, compared with LKR139.9mn

in 2008. It was the company’s highest profit in four years. SPMC also posted an increase in

employees, along with an increase in machinery capacity.

Contact Details State Pharmaceuticals Corporation

Address: State Pharmaceuticals Corporation of Sri Lanka

75, Sir Baron Jayatillake Mawatha, Colombo 01, Sri Lanka

Tel: +94 (0)11 23203569

Email: [email protected]

Website: www.spc.lk

State Pharmaceuticals Manufacturing Corporation

Address: State Pharmaceuticals Manufacturing Corporation of Sri Lanka

11, Sir John Kotelawala Mawatha, Kandawala Estate, Ratmalana, Sri Lanka

Tel: +94 11 2635353, 2637574


Website: www.spmclanka.com



Hemas Holdings

Strengths Hemas is a diversified conglomerate, with strong presence in healthcare.

Hemas Pharmaceuticals holds around 16% of the country’s pharmaceuticals market, in

distribution terms, with the largest sales network in the country.

Product portfolio includes prescription and OTC medicines and medical devices made by

foreign majors.

Strong brand loyalty from consumers.

Weaknesses Dominance of SPC.

No pharmaceutical manufacturing facilities.

A decline in the number of new products reaching the market, which can negatively impact

revenues.


Rising demand for medical devices, with Hemas offering modern equipment and services

at its hospitals.

Establishment of a dedicated pharmaceutical manufacturing zone in the country.




Company Overview Sri Lanka’s Hemas Holdings plc has over 20 subsidiaries, which include business in healthcare

(Hemas Pharmaceuticals) and fast-moving consumer goods. The parent company, originally

established in 1948 as a pharmaceuticals and trading firm, is present on the Colombo Stock

Exchange. Currently, Hemas distributes medicines and diagnostic products made by 33

pharmaceutical companies, including Ranbaxy, AstraZeneca and Leo Pharma.

Strategy Hemas is a diversified conglomerate, which insulates the company from the underperformance of

a single division. Its wide-ranging reach and involvement in the logistics segment are

complementary to its healthcare business. The conglomerate has been expanding strongly over

the past decade, currently representing one of the leading businesses in the country.

In terms of its pharmaceuticals and healthcare arm, Hemas offers high-quality storage facilities,

and the ability to deliver products to any part of Sri Lanka within the 6-8 hour window. Its clients

include some 2,000 pharmacies, which are serviced through 24 distribution channels. Hemas

employs around 200 sales representatives.

The conglomerate has also diversified into hospitals, with the second hospital opened in March

2009. In early 2011, Hemas reported that it would open two new, 50-bed hospitals in the country

– Hemas Capital Hospital and Hemas South Colombo Hospital – in the suburbs of Colombo.



Developments Hemas Holding’s portfolio was recently enhanced by two products manufactured by US major

Pfizer, namely innovative cancer drug Sutent (sunitinib) and Medrol (methylprednisolone), the

latter of which is indicated for the treatment of inflammatory diseases. The drugs are supplied

through Pfizer’s Indian subsidiary, which has plans to further expand its Sri Lankan portfolio.

In February 2011, Hemas Hospital became the first domestic private hospital to provide capsule

endoscopy services, which are used in the detection of small bowel disease. At the time of the

announcement, Hemas also reaffirmed its commitment to providing modern healthcare

technologies to its patients.

In June 2011, Hemas’ hospitals located in Wattala and Galle received international accreditation

certificates from the Australian Council of Healthcare Standard International (ACHSI), thus

becoming the first domestic healthcare facilities with such certificates. The announcement was

made following the successful audit of Hemas hospitals in March 2011.

Financial

Performance

While its pharmaceuticals division performed well during 2008/09 financial year, Hemas posted a

31% y-o-y drop in profits, to LKR775mn. The decrease was attributed to start-up costs and

investments. Group revenue rose to LKR15.3bn, up by 8.3% y-o-y.

In FY09/10, the company posted LKR15.221bn (US$134mn) in revenues. Its profits were in the

region of LKR935mn (US$8mn). Hemas’ performance was attributed to improvements in its

gains from its transportation, power and healthcare businesses during the year. In the quarter

ended December 2010, Hemas Holdings posted a 26% increase in net profits to LKR311mn

(US$2.8mn). The company’s healthcare division rose to LKR64mn (US$577,596), compared with

LKR27mn (US$243,673) in the quarter ended December 2009. The revenues and profits for the

company’s healthcare division surged as a result of high growth in the pharmaceuticals business,

with 26% growth in both the top-line and the bottom line.

During Q210, Hemas posted a 61% y-o-y growth in net income to LKR291mn (US$2.6mn), which

was attributed to healthy performances by its power and pharmaceuticals businesses, along with

a reduction of losses at hospitals. Consolidated revenues stood at LKR4.3bn (US$38.4mn), up

14% y-o-y, during the same period.

In FY10/11, the group’s consolidated revenues stood at LKR18.07mn (US$164bn). Profits also

rose to LKR1.3bmn (US$12mn).

Contact Details Address: Hemas Holdings plc, 36 Bristol Street, Hemas Building, Colombo 01, Sri Lanka

Tel: +94 (0) 11 473 1731


Website: www.hemas.com



Multinational Companies

GlaxoSmithKline

Strengths A well-respected brand.

Local manufacturing capabilities.

A product portfolio of both acute and chronic care therapeutics.

Weaknesses Upcoming patent expires for leading products.

Need to import most raw materials for pharmaceutical production.

A decline in the number of new products reaching the market.


Exports to neighbouring countries.

Expansion of local manufacturing facilities.




Company Overview GSK and its predecessors have been present in Sri Lanka since the 1930s. The company opened

a manufacturing plant in the late 1950s. GSK imports a range of pharmaceuticals, while its local

factory produces pharmaceuticals in liquid form.

Strategy GSK is committed to Sri Lanka. Following the 2004 Indian Ocean earthquake, the company spent

LKR29mn (US$253,000) to help restore healthcare infrastructure in affected regions. In May

2009, it donated medicines – including anti-infectives, supplements, asthma medications and

dermatologicals – to individuals displaced by the civil war.

Most recently, in June 2009, GSK committed LKR39mn (US$340,000) to a new project to

empower disabled people in southern Sri Lanka. The company has also provided funds for the

refurbishment of wards at the Welisara Chest Hospital and at the Lunawa District Hospital.

GSK is also investing in the expansion of its manufacturing facilities in the country. In March

2011, its local consumer healthcare subsidiary inaugurated the construction of a local Panadol

(paracetamol) production plant in Moratuwa. The company is making an investment of

LKR200mn (US$1.82mn) in the plant. The 1.8bn tablets per annum capacity manufacturing

facility is scheduled to be completed by early-2012.

Developments In February 2011, the government received a consignment of essential drugs worth LRK2mn

(US$18,000) from the local GSK subsidiary. The company donated drugs such as antibiotics,

respiratory products and vitamins, to flood victims. The donation is separate from GSK’s

LRK39mn commitment to its three-year support programme for patients with disabilities, which it



carries out in partnership with the Leonard Cheshire Disability Resource Centre (LCDRC).

In August 2010, a ‘Child Resistance Cap’ (CRC) for Panadol (paracetamol) liquid preparation,

marketed by GlaxoSmithKline Consumer Healthcare was introduced to prevent children in Sri

Lanka receiving overdoses of the medicine, reported the Sunday Times. Panadol for children is a

sugar- and alcohol-free formulation which was introduced in Sri Lanka in the 1980s.

In June 2010, GSK launched the first cervical cancer vaccine, Cervarix, in Sri Lanka after

registering it with the Drugs Regulatory Authority.

In May 2010, GSK launched the injectable antithrombotic drug Arixtra (fondaparinux sodium) for

the treatment of acute coronary syndrome and deep vein thrombosis (DVT) in Sri Lanka. The

drug is available in the form of a pre-filled, single-dose, disposable syringe, making it safe from

contamination.

In April 2010, GSK unveiled a patient-completed instrument in Sri Lanka for the assessment of

patients suffering from chronic obstructive pulmonary disease (COPD). The COPD Assessment

Test (CAT) includes eight questions and a scoring methodology that will enable both patient and

doctor to assess the progress and management of COPD.

In March 2010, GSK completed the acquisition of Stiefel in Sri Lanka. The purchase gave GSK a

23% share of the dermatology market in the South Asian country.

In September 2009, GSK introduced Tykerb (lapatinib) to the country for the treatment of

advanced breast cancer. It was first approved by the US FDA in March 2007, which suggests that

the ‘drug lag’ in Sri Lanka is reasonable for a low-middle income country. As of September 2009,

Tykerb was also available in the EU, Australia, Bahrain, Israel, Kuwait, Venezuela, Brazil, New

Zealand, South Korea and Switzerland.

In June 2009, GSK provided LKR39mn to a project providing support for patients with disabilities

in Sri Lanka. The three-year programme, carried out in partnership with the Leonard Cheshire

Disability Resource Centre (LCDRC), initially intends to assist 700 patients.

Contact Details GSK

Address: GlaxoSmithKline Pharmaceuticals Ltd, 121 Galle Road, Kaldemulla, Moratuwa,

Sri Lanka

Tel: +94 11 2636341 / 2

Website: www,gsk.com

GMS Factory

Tel: +94 11 2636341 / 2

GSK Consumer Healthcare

Address: GlaxoSmithKline Consumer, World Trade Centre, 34th Floor, West Tower,

Colombo 01, Sri Lanka

Tel: +94 11 4790400



Demographic Outlook

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only

is the total population of a country a key variable in consumer demand, but an understanding of the

demographic profile is key to understanding issues ranging from future population trends to productivity

growth and government spending requirements.

The accompanying charts detail Sri Lanka's population pyramid for 2011, the change in the structure of

the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life

expectancy. The tables show key datapoints from all of these charts, in addition to important metrics

including the dependency ratio and the urban/rural split.

Source: World Bank, UN, BMI



Sri Lanka's Population By Age Group, 1990-2020 ('000)

1990 1995 2000 2005 2010 2012f 2015f 2020f

Total 17,337 18,229 18,745 19,843 20,860 21,224 21,709 22,344

0-4 years 1,763 1,700 1,583 1,765 1,893 1,869 1,782 1,634

5-9 years 1,913 1,745 1,649 1,569 1,742 1,817 1,873 1,761

10-14 years 1,861 1,895 1,721 1,641 1,554 1,603 1,729 1,858

15-19 years 1,702 1,837 1,859 1,708 1,619 1,568 1,535 1,709

20-24 years 1,646 1,655 1,732 1,827 1,655 1,610 1,569 1,484

25-29 years 1,494 1,579 1,507 1,688 1,749 1,699 1,581 1,496

30-34 years 1,370 1,428 1,481 1,474 1,627 1,680 1,689 1,523

35-39 years 1,114 1,316 1,386 1,459 1,437 1,488 1,591 1,654

40-44 years 991 1,074 1,286 1,365 1,431 1,421 1,412 1,565

45-49 years 791 955 1,064 1,264 1,343 1,375 1,410 1,394

50-54 years 669 758 948 1,040 1,239 1,279 1,317 1,386

55-59 years 569 634 736 913 1,005 1,078 1,199 1,279

60-64 years 485 527 591 693 862 894 951 1,140

65-69 years 382 430 452 536 630 691 788 876

70-74 years 268 314 333 386 461 487 546 690

75+ years 319 385 419 514 612 663 737 894

f = BMI forecast. Source: World Bank, UN, BMI

Sri Lanka's Population By Age Group, 1990-2020 (% of total)

1990 1995 2000 2005 2010 2012f 2015f 2020f

0-4 years 10.17 9.33 8.44 8.89 9.07 8.81 8.21 7.32

5-9 years 11.03 9.57 8.80 7.91 8.35 8.56 8.63 7.88

10-14 years 10.74 10.40 9.18 8.27 7.45 7.55 7.97 8.32

15-19 years 9.81 10.08 9.92 8.61 7.76 7.39 7.07 7.65

20-24 years 9.50 9.08 9.24 9.21 7.93 7.59 7.23 6.64

25-29 years 8.62 8.66 8.04 8.51 8.39 8.01 7.28 6.70

30-34 years 7.90 7.83 7.90 7.43 7.80 7.92 7.78 6.82

35-39 years 6.42 7.22 7.39 7.35 6.89 7.01 7.33 7.40

40-44 years 5.71 5.89 6.86 6.88 6.86 6.70 6.50 7.01



45-49 years 4.56 5.24 5.68 6.37 6.44 6.48 6.50 6.24

50-54 years 3.86 4.16 5.05 5.24 5.94 6.03 6.07 6.21

55-59 years 3.28 3.48 3.93 4.60 4.82 5.08 5.52 5.72

60-64 years 2.80 2.89 3.15 3.49 4.13 4.21 4.38 5.10

65-69 years 2.20 2.36 2.41 2.70 3.02 3.26 3.63 3.92

70-74 years 1.55 1.72 1.78 1.95 2.21 2.30 2.52 3.09

75+ years 1.84 2.11 2.24 2.59 2.93 3.12 3.40 4.00

f = BMI forecast. Source: World Bank, UN, BMI

Sri Lanka's Key Population Ratios, 1990-2020

1990 1995 2000 2005 2010 2012f 2015f 2020f

Dependent ratio, % of total working age 1 60.1 55.0 48.9 47.7 49.3 50.6 52.3 52.7

Dependent population, total, '000 2 6,506 6,469 6,157 6,411 6,892 7,131 7,455 7,714

Active population, % of total 3 62.5 64.5 67.2 67.7 67.0 66.4 65.7 65.5

Active population, total, '000 4 10,831 11,761 12,588 13,432 13,968 14,093 14,254 14,630

Youth population, % of total working age 5 51.1 45.4 39.3 37.0 37.1 37.5 37.8 35.9

Youth population, total, '000 6 5,537 5,341 4,953 4,974 5,189 5,290 5,384 5,254

Pensionable population, % of total working age 7 8.9 9.6 9.6 10.7 12.2 13.1 14.5 16.8

Pensionable population, '000 8 969 1,128 1,205 1,436 1,703 1,841 2,071 2,460

f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of total population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+. Source: World Bank, UN, BMI



Sri Lanka's Rural And Urban Population, 1990-2020

1990 1995 2000 2005 2010 2012 2015 2020

Urban population, % of total 17.2 16.4 15.7 15.1 15.0 15.1 15.3 16.1

Rural population, % of total 82.8 83.6 84.3 84.9 85.0 84.9 84.7 83.9

Urban population, '000 2,943.5 2,965.2 2,938.1 2,969.9 3,120.6 3,202.2 3,317.2 3,588.4

Rural population, '000 14,170.0 15,115.1 15,775.7 16,698.1 17,739.3 18,021.3 18,392.0 18,755.2

Source: World Bank, UN, BMI



Glossary

Pharmaceuticals, medicines, drugs: synonym terms used interchangeably.

Pharmaceutical market/sales: the sum of revenues generated by generic, patented, and over-the-

counter (OTC) drugs through hospitals, retail pharmacies and other channels. Unless otherwise stated,

market value is reported at final consumer price including mark-ups, taxes, etc.

Prescription drugs: patented and generic drugs regulated by legislation that requires a physician’s

prescription before they can be sold to a patient.

Patented drug: an innovative medicine granted intellectual property protection by the patent and

trademark office. The patent may encompass a wide range of claims – such as active ingredient,

formulation, mode of action, etc. – giving the patent holder the sole right to sell the drug while the

patent is in effect.

Generic drug: a bioequivalent medicine that contains the same active ingredient as an originator drug.

The originator drug is an innovative medicine that no longer has intellectual property protection due to

patent expiry.

OTC drug: a medicine that does not require a prescription to be sold to patients. Also known as non-

prescription medicines.

Counterfeit drugs: unregistered and illegal medicines which have not been subject to regulatory

assessments to ensure quality, safety, efficacy and manufacturing standards.

Similares: non-bioequivalent alternatives to either an originator patented drug or a generic drug. While

similares and the originator/generic drug have a common indication, similares do not always contain

the same active ingredient as an originator and invariably have a different pharmacokinetic and

pharmacodynamic profile. Prevalent in select South American countries, similares are legal. BMI does

not include their sales in total pharmaceutical market values.

Health expenditure: the sum of the funds mobilised by government and private systems for the

operation of a healthcare system, according to the WHO. It includes the purchase of healthcare services

and goods by public entities such as ministries and social security institutions; or by private entities

such as non-profit institutions, commercial insurances and households acting as complementary

funders to the previously cited institutions or unilaterally disbursing health commodities. The revenue

base of these entities varies by country and comprises multiple sources. The inclusion of this in BMI



forecasts necessitates taking into account the essential attributes of country-specific health accounting

such as comprehensiveness, consistency, standardisation and timeliness.

Government health expenditure: the sum of outlays for health maintenance, restoration or

enhancement paid by government entities such as a Ministry of Health, other ministries, parastatal

organisations and social security agencies, including transfer payments to households to offset medical

care costs and extra-budgetary funds to finance healthcare provision.

Private health expenditure: the sum of outlays for health by private entities such as commercial or

mutual health insurance, households, non-profit institutions serving households, resident corporations

and quasi-corporations not controlled by governments – according to the WHO.

Medical devices: products used for diagnosis or therapy in patients. Whereas pharmaceuticals achieve

their principal action by pharmacological, metabolic or immunological means, medical devices act by

physical or mechanical means. Medical devices include a wide range of products, including syringes,

thermometers, blood-sugar tests, prosthetic limbs, ultrasound scans and X-ray machines, among others.

Burden of Disease Database (BoDD): BMI’s disease database incorporates WHO, World Bank, IMF

and BMI’s own data to create a proprietary dataset. BoDD data are quantified as the sum of disability-

adjusted life years (DALYs) lost to a disease in a particular country.

Disability-Adjusted Life Years: the sum of the years of life lost (YLL) due to premature mortality in

a population and the years lost due to disability (YLD) for incident cases of the health condition. The

DALY is a health gap measure that extends the concept of potential years of life lost due to premature

death (PYLL) to include equivalent years of ‘healthy’ life lost in states of less than full health (broadly

termed ‘disability’). One DALY represents the loss of one year of equivalent full health.



BMI Methodology

How We Generate Our Pharmaceutical Industry Forecasts

Pharmaceutical sub-sector forecasts are generated using a top-down approach from BMI’s Drug

Expenditure Forecast Model. The semi-automated tool incorporates historic trends, macroeconomic

variables, epidemiological forecasts and analyst input, which are weighted by relevance to each market.

The following elements are fed into the model:

BMI’s historic pharmaceutical market data, which has been collected from a range of sources

including:

– regulatory agencies;

– pharmaceutical trade associations;

– company press releases and annual reports;

– subscription information providers;

– local news sources;

– information from market research firms that is in the public domain.

Data that has been validated by BMI’s pharmaceutical and healthcare analysts using a composite

approach, which scores data sources by reliability in order to ensure accuracy and consistency of

historic data.

Five key macroeconomic and demographic variables, which have been demonstrated, through

regression analysis, to have the greatest influence on the pharmaceutical market. These have been

forecast by BMI’s Country Risk analysts using an in-house econometric model.

The burden of disease in a country. This is forecast in DALYs using BMI’s BoDD, which is based on

the WO’s burden of disease projections and incorporates World Bank and IMF data.

Subjective input and validation by BMI’s pharmaceutical and healthcare analysts to take into account

key events that have affected the pharmaceutical market in the recent past or that are expected to have

an impact on the country’s pharmaceutical market over the next five years. These may include

policy/reimbursement decisions, new product launches or increased competition from generic drugs.



Pharmaceuticals Risk/Reward Ratings Methodology

BMI’s approach in assessing the risk/reward balance for Pharmaceutical & Healthcare Industry investors

globally is fourfold. First, we identify factors (in terms of current industry/country trends and forecast

industry/country growth) representing opportunities to would-be investors. Second, we identify country

and industry-specific traits which pose or could pose operational risks to would-be investors. Third, we

attempt, where possible, to identify objective indicators that may serve as proxies for issues/trends to

avoid subjectivity. Finally, we use BMI’s proprietary Country Risk Ratings (CRR), ensuring that only the

aspects most relevant to the Pharmaceutical & Healthcare Industry are incorporated. Overall, the system

offers an industry-leading, comparative insight into the opportunities and risks for companies across the

globe.

Ratings Overview

Ratings System

Conceptually, the ratings system divides into two distinct areas:

Rewards: Evaluation of the sector’s size and growth potential in each state, as well as broader

industry/state characteristics that may inhibit its development.

Risks: Evaluation of industry-specific dangers and those emanating from a state’s political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period.

Indicators The following indicators have been used. Overall, the ratings use three subjectively measured indicators

and 41 separate indicators/datasets.



Table: Pharmaceutical Business Environment Indicators

Indicator Rationale

Rewards

Industry Rewards

Market expenditure, US$bn Denotes breadth of pharmaceutical market. Large markets score higher than smaller ones

Market expenditure per capita, US$ Denotes depth of pharmaceutical market. High value markets score better than low value ones

Sector value growth, % y-o-y Denotes sector dynamism. Scores based on annual average growth over five-year forecast period

Country Rewards

Urban-rural split Urbanisation is used as a proxy for development of medical facilities. Predominantly rural states score lower

Pensionable population, % of total Proportion of the population over 65. States with ageing populations tend to have higher per capita expenditure

Population growth, 2003-2016 Fast-growing states suggest better long-term trend growth for all industries

Overall score for Country Structure is also affected by the coverage of the power transmission network across the state

Risks

Industry Risks

Intellectual property (IP) laws Markets with fair and enforced IP regulations score higher than those with endemic counterfeiting

Policy/reimbursements Markets with full and equitable access to modern medicines score higher than those with minimal state support

Approvals process High scores awarded to markets with a swift appraisal system. Those that are weighted in favour of local industry or are corrupt score lower

Country Risks

Economic structure Rating from CRR evaluates the structural balance of the economy, noting issues such as reliance on single sectors for exports/growth, and past economic volatility

Policy continuity Rating from CRR evaluates the risk of a sharp change in the broad direction of government policy

Bureaucracy Rating from CRR denotes ease of conducting business in the state

Legal framework Rating from CRR denotes the strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets

Corruption Rating from CRR denotes the risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete

Source: BMI



Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal

weight. Consequently, the following weight has been adopted.

Table: Weighting Of Components

Component Weighting

Rewards 60%

– Industry Rewards – 75%

– Country Rewards – 25%

Risks 40%

– Industry Risks – 60%

– Country Risks – 40%

Source: BMI

Sources

Sources used include national industry associations, government ministries, global health organisations,

officially released pharmaceutical company results and international and national news agencies.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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