PharmaceuticalIndustry in

Serbia

Serbia Investment andExport Promotion Agency

General Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Why Serbia? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Pharmaceutical Industry in Serbia

Serbian Drug Market . . . . . . . . . . . . . . . . . . . . . . . .6Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Legal Framework for Pharmaceuticial Manufacturing . .7People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Foreign Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Investment Possibilities in the Pharmaceutical SectorR&D in Serbian Pharmaceuticial Industry . . . . . . . . .10Environmental Medical Waste Treatment . . . . . . . . .11Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Contract Manufacturing . . . . . . . . . . . . . . . . . . . . .13Doing Business in Free Zones . . . . . . . . . . . . . . . . .14Investment Incentives . . . . . . . . . . . . . . . . . . . . . . .15

Financing Options . . . . . . . . . . . . . . . . . . . . . . . . . . .16Success Stories

Zdravlje Actavis . . . . . . . . . . . . . . . . . . . . . . . . . . .17Hemofarm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Galenika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20West Pharmaceutical . . . . . . . . . . . . . . . . . . . . . . .22

Useful Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23About SIEPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Contents

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Official NameForm of State

Legal SystemPolitical Structure

AreaPopulation (in million)

Geographic Position

Official LanguageMain ReligionLargest Cities

CurrencyExchange Rate

GDP (2004)GDP per Capita (2004)

Time ZoneInternet Domain

Republic of SerbiaRepublic, member Stateof the State Union of Serbia and MontenegroBased on the Serbian Constitution of 1989President, Unicameral Assemblywith 250 seats88,361 sq km7,498South East Europe, central part of BalkanPeninsula; borders Hungary, Bulgaria,Romania, FYR Macedonia, Albania,Bosnia and Herzegovina and CroatiaSerbianChristian OrthodoxBelgrade (capital): 1.5 million;Novi Sad: 300,000; Ni�: 250,000Dinar (CSD)1 USD = 68.8867 CSD1 EUR = 84.3242 CSD(as of 24th of August 2005)21.377 billion USD2,813 USDCentral European time zone (GMT + 01:00).yu

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The $500 billion global pharmaceutical industry is one ofthe fastest growing and most profitable sectors in theworld. It continues to experience tremendous growthfueled by innovation and advances in R&D. Competitionto create new drugs and therapies has intensified as com-panies continue to strive for the next �blockbuster� drug.In order to facilitate growth, many international pharma-ceutical firms are looking to expand through mergers andacquisitions or joint part-nerships with smaller,more dynamic companies.

More recently, genericdrugs started taking on amuch greater role in theindustry as more andmore patents on �block-buster� drugs are expiring.The growing pressure toprovide low�cost drugs toThird World countries isalso putting generic drugmanufacturing in theheadlines. The trendtowards generics has cre-ated a tremendous busi-ness opportunity for phar-maceutical companies who serve the �the bottom of thepyramid.�

The cost of healthcare is a major concern all over theworld. When coupled with the effects of an aging popula-tion, healthcare costs are creating a strain on nationaleconomies�particularly in Europe. Governments are put-

ting pressure on pharmaceutical companies to provideaffordable drugs. As a result, industry leaders continue toexplore ways to reduce manufacturing costs in order tostem the tide of rising healthcare expenses.

Serbian pharmaceutical companies have strategicallypositioned themselves to take advantage of global trendsin the sector. Companies like Hemofarm and Galenika,

who have invested substan-tial capital into development,are expanding the frontiers ofmedicine in the region. Othercompanies like ZdravljeActavis�the Icelandic�ownedActavis company who is oneof the leading manufacturersof generics in Serbia�pro-vides access to low�costdrugs to those who mightotherwise not be able toafford them. Furthermore,Serbia�s business incentives,such as tax breaks, cost�effi-cient labor, and skilledworkforce, can help compa-nies reign in costs.

Investment in the burgeoning Serbian pharmaceuticalsector is still in its infancy. Recently, pharmaceuticalgiant GlaxoSmithKline made a substantial investment inSerbian pharmaceutical company Hemofarm. Manyinvestment opportunities exist for companies looking togrow their product portfolios, expand into new markets orsimply reduce manufacturing costs.

Preface

TO MAKE YOUR BUSINESS GROW

Southeast Europe is the region with the highest growthin Europe. For companies that seek to start or expandtheir businesses in this region, Serbia is the place to be �for a number of reasons. Serbia and Montenegro is theonly country outside of the Commonwealth of Indepen-dent States (CIS) that enjoys a Free Trade Agreementwith the Russian Federation, offering customs�freeaccess to its market of 150 million people!

Furthermore, Serbia is in the middle of the South EastEurope Free Trade Area that provides duty�free access toa potential market of 55 million people. The local Serbianmarket itself is among the largest in the region (7.5 mil-lion people). The Serbian economy grew by 7.6% in2004, and is expected to sustain high growth rates,leading to a significant increase in purchasing powerand expansion of the domestic market.

TO EASILY SERVE YOUR EU CUSTOMERS

By operating in Serbia, a company can enjoy easy accessto the EU market, while benefiting from lower produc-tion costs. Bordering Hungary, Serbia is at the doorstepof the EU. It is also a gateway between South EastEurope, Western and Central Europe, and an intersectionof the two most important transportation corridorsconnecting Western Europe and the Middle East(Pan�European corridors No. 10 and No. 7).

By investing in Serbia a business could effectively serveits European and Middle�eastern customers thusenhancing its profitability.

Why Serbia?

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TO BENEFIT FROM EXCEPTIONAL HUMAN

CAPITAL AT COMPETITIVE COSTS

Every year thousands of young gradu-ates leave universities and colleges inSerbia. Highly educated people whoare receptive to new technologies,familiar with IT, and well�versed inforeign languages, represent Serbia�strue capital.

Furthemore, Serbia possesses askilled and productive workforcewith a wealth of experience, both inmanagement and manufacturing. Atradition of cooperation with foreigncompanies and decades of opennesstowards Western culture and valueshave left a mark on their skill�set.

This exceptional human capital isavailable at very competitive prices.Labor costs in Serbia are among thelowest in the region, and are signifi-cantly lower than those in the EUmember countries.

TO BOOST YOUR COST EFFECTIVENESS

The tax regime in Serbia is the mostfavorable in the region. Some of itsfeatures include:

� the lowest corporate profit tax rate in Europe, set at 10%,

� tax credits for investing in fixedassets up to 80% of the investedamount,

� a 10�year tax holiday for investmentsover €7.5 million,

� subsidies for new employment,tax exemptions, and a variety ofother incentives.

GDP growth rates

2005e 4.6%2004 7.5%2003 3.1%2002 4.0%2001 5.5%

Corporate profit tax rates, 2004

Serbia 10.0%Hungary 16.0%Bulgaria 19.5%Croatia 20.0%Romania 25.0%Czech R. 28.0%

Familiarity with English language

Serbia 42%Poland 22%Czech R 22%Romania 20%Hungary 25%Bulgaria 28%

Labor costs in October 2004, in Euro

GrossSalary

EmployersContributions

Serbia 180 34Romania 196 64Czech R. 656 230Slovakia 657 232Croatia 785 135Hungary 832 295

Source: Statistical Office of the Republic of Serbia

Source: IDA, Ireland

Source: Gallup International

Source: SIEPA, National IPAs

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SERBIAN DRUG MARKET

The Serbian drug market in 2004was dominated by the three largestdrug manufacturers: HemofarmConcern, Galenika and ZdravljeActavis. After acquiring severalpharmaceutical companies (Panfarma,Zorka Pharma, and Hemomont)Hemofarm Concern became themarket leader accounting for around45% of total sales of pharmaceuticalson the Serbian market in 2004.

Leskovac�based Zdravlje wasacquired by Iceland�s Actavis in2002, and its market share has beenincreasing ever since. Galenika used

to be the leader in the Serbian phar-maceutical industry but unresolvedownership relations and a few yearsof stagnation resulted in the loss ofits market position. Overall, smallerplayers in the sector have made theirpresence felt by targeting specificareas of pharmaceutical production.

Serbia�s pharmaceutical industry ischaracterized by its efficient utilizationof available resources and high levelsof production. It has achieved relativesuccess but requires additionalcapital and investment to competeglobally�presenting an excellentinvestment opportunity for a jointbusiness venture.

Pharm

aceutical Industry in Serbia

Sector ID, 2004

Share in total Serbian industry 3.24%

Annual industrial production �308 mill.

Annual growth rate 15%

Group Hemofarm Galenika Panfama Jugoremedija ZdravljeActavis

ZorkaPharma Srbolek Hemomont

Drugs for treatment of infective and parasitic diseases 12 34 29 9 6 5 1 �

Drugs for treatment of endocrine diseases 50 26 � 15 1 6 � �

Drugs for treatment metabolism and nutrition disorders 23 54 6 2 12 1 � �

Drugs for treatment of blood diseases and blood forming organs � 70 � 1 9 � � �

Drugs for treatment of mental disorders (psycho�pharmacy) 9 45 6 � 4 30 � �

Drugs for treatment of nervous system 2 34 13 3 2 46 � �

Drugs for treatment of cardiovascular system 15 20 15 9 16 11 3 1

Drugs for treatment of respiratory tract 9 14 25 4 19 13 15 �

Drugs for treating diseases of digestive tract 11 7 13 2 58 1 � �

Drugs for treatment of skin and subcutaneous tissue diseases 5 49 6 15 4 20 � �

Blood substitutes and parenteral nutrition 66 2 � 1 15 � � 16

Market share by selected pharmacological groups in percentage of total sales, 2004

Source: Serbian Pharmaceutical Manufacturers Association

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Source: National Bank of Serbia, Solvency Bureau

LEGAL FRAMEWORK FOR PHARMACEUTICAL MANUFACTURING

Manufacturing and trade of medicines and other pharmaceu-tical products is regulated by the Law on Drugs and MedicalDevices (in effect as of August 1, 2004). This Law establishedthe Medicines and Medical Devices Agency of Serbia, whichworks to align domestic regulations with EU standards. Basedon its mandate, the Agency would be your counterpart indoing business in Serbia in many ways. The following listshows some of the activities the Agency is in charge of:

� issuing licenses for trade of medicines and medicaldevices,

� conducting laboratory control and quality inspection ofmedicines and medical devices,

� issuing licenses for clinical research of medicines andmedical devices and controlling execution of clinicalresearch,

� monitoring side effects of medicines and medicaldevices,

� issuing credentials for implementation of GoodMedical Practice (GMP) policies in clinical research ofmedicines and medical devices,

� issuing credentials needed for exports of medicines andmedical devices in accordance with recommendationsof WHO,

� approving imports of unregistered medicines andmedical devices intended for treatment of a specificpatient or group of patients, as well as imports ofmedicines and medical devices for scientific research,

� classifying of medicines and medical devices,� collecting and processing information about sales and

use of medicines and medical devices.

Structure of companies Production of pharmaceuti-cal ingredients

Production of pharmaceuti-cal preparations

Production of pharmaceuticalproducts (industry total)

Number of companies 4 45 49Number of employees 16 7,585 7,601Number of small companies 4 33 37Number of medium sized companies � 4 4Number of large companies � 8 8Number of private companies 4 30 34Number of socially owned companies � 4 4Total sector revenues �328,500 �363.6 mill �364 millNet profit �1,304 �41.6 mill �41.6 millFixed assets �275,902 �172 mill �172 mill

COMPANIES

The pharmaceutical industryin Serbia is dominated bysmall, privately owned com-panies; however, industryleaders are large companiescapable of deploying sufficientmeans for cross � borderexpansion. Serbia�s pharma-ceutical industry is eager tojoin the frontier of medicalresearch.

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Total Universitydegree Higher degree High�school

degreeElementary

school Highly skilled Skilled Semi skilled Unskiled

2002 5550 955 271 2225 706 349 716 236 1872003 5673 929 300 2242 380 379 983 262 1982005 5901 995 347 2601 274 423 808 199 254

PEOPLE

Employees in Serbia�s pharmaceuticalsector are highly qualified, holdingspecialised high school and universitydegrees.

In addition to the high educational pro-file of the workforce in the pharmaceu-tical sector, the annual number of newuniversity graduates in the field of phar-maceutical sciences in Belgrade safe-guards the quality of your potential pro-duction in Serbia or possible partnershipwith a Serbian company. In addition topharmacists, you can easily recruitlabour from other related branches of themedical sciences. Medical universities inSerbia produced 977 graduates in 2004,while 376 students graduated from theSchool of Dental Medicine in the sameyear. As for postgraduate students, allmedical universities in Serbia produced185 specialists, 195 Masters of Sciencegraduates, and 83 new PhDs in 2003.

This human capital is available atvery competitive prices as the wagesin Serbia are significantly lower thanthose in the EU: the average monthlygross salary in the sector in 2004 was€472 (€326 net) insuring high quality,low�cost production.

Current educational structure in the Serbian pharmaceutical sector (number of employees)

Source: Statistical Office of the Republic of Serbia

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Finished medicaments for sale 91,804Medicaments containing insulin 11,092Medicaments with dissipated dosage 10,685Medicaments containing antibiotics 10,339Medicaments containing hormones 9,855Medicaments mixed with other antibiotics 4,722Medicaments containing vitamins 3,990Medicaments containing alkaloids 3,352Substances and adhesives, sterilized devices 3,051Haemoglobin, blood and globulin serums 2,994

Finished medicaments 38,286Medicaments containing antibiotics 7,486Medicaments containing adreno�kort. hormones 3,329Medicaments containing penicillin 3,169Medicaments containing vitamines 2,707Vaccines for human medicine 1,110Medicaments containing hormones 336Antiserums 281Medicaments with dissipated dosage 259Medicaments dosed with other antibiotics 179

Russian Federation 31,311Bosnia and Herzegovina 17,270FRY Macedonia 5,752Romania 4,005Slovenia 3,848

Switzerland 40,577Germany 31,495Denmark 19,132France 18,423Austria 15,039

FOREIGN TRADE

The Serbian pharmaceutical industry exports around20% of its annual production and meets around 60% ofthe local market demand. The rest of the demand isbeing met by imported pharmaceuticals, mainlyoriginating from EU countries.

Decades of presence in the Russian market hasbuilt trust and loyalty toward Serbian drugs andpharmaceuticals. This loyalty on the part of Russianconsumers is due to high quality products andduty�free exports to Russia. Both factors have ledto Russia remaining Serbia's main importer ofpharmaceuticals.

Serbia enjoys a Free Trade Agreement with the RussianFederation, which encompasses a long list of drugs andmedical devices that are exempt from customs dutieswhen exported to Russia: various types of infusionsolutions, penicillines, vitamin preparations, diuretics,analgesics, antibiotics, antihistaminic preparations,antiseptics, along with many others (the complete listcan be obtained at SIEPA).

Furthermore, based on the free trade agreements Serbiahas with other countries, Serbia is entitled to free exportsof pharmaceutical products to Albania, Bulgaria, Romania,Former Yugoslav Republic of Macedonia, andBosnia and Herzegovina.

Top 10 Import Products in 000 USD

Top 5 Import Partners in 000 USD

Top 10 Export Products in 000 USD

Top 5 Export Destinations in 000 USD

Source: Statistical Office of the Republic of Serbia

Source: Statistical Office of the Republic of Serbia Source: Statistical Office of the Republic of Serbia

Source: Statistical Office of the Republic of Serbia

Investment P

ossibilities in the Pharm

aceutical Sector

R&D IN SERBIAN PHARMACEUTICAL

INDUSTRY

Research and development in Serbia�spharmaceutical industry is mostlyconcentrated and conducted under theauspices of the leaders of the industry:Galenika, Hemofarm and Zdravlje.

The Galenika a.d. R&D Institutewas founded over 30 years ago. Today,Galenika is the only pharmaceuticalcompany in Serbia and Montenegrowith an Institute registered with theMinistry of Science and EnvironmentalProtection. The Institute is a centreof knowledge and experience, with135 employees (61 with universitydegrees, including 7 PhDs, 15 MSc,and 4 specialists). The Instituteemployees are experts in variousfields: pharmacy, chemistry, medicine,chemical engineering, biology,veterinary medicine, dental medicine,physical chemistry, languages, andorganizational sciences.

Key Institute activities include: syn-thesis/biosynthesis of new pharma-ceutical active substances and generics;biomedical screening (in vitro and invivo); preclinical trials (includingpharmacology and toxicology studies);formulation development of dosageforms (solid, liquid, semi�solid, andmodified release forms); development,implementation and validation ofanalytical methods; stability studies(active substances and dosage forms);scale�up and optimization of tech-

nological procedures for synthesis /biosynthesis of substances anddosage forms; organizing and moni-toring clinical trials (Phases I � III)and pharmacokinetic studies; prepa-ration of registration dossiers, as wellas IND and NDA documentation.

Special attention is devoted to intel-lectual property protection. Todaythe company has numerous valuablepatents and trademarks: domestictrademarks � 396; WIPO trademarks� 37; trademarks registered abroad(Bosnia/Macedonia/Russia) � 96/30/20;patents � 20; patent applications � 26.

The Research and Development Cen-tre of Hemofarm Group is engaged indeveloping new products, performingresearch and providing registrationsin the country and abroad. The workof the Research and DevelopmentCentre is based on its own potentials,but the experience of renownedexperts and researchers from numerousscientific institutes in the countryand abroad is involved.

The process of transforming ideasinto a finished products consists ofseveral stages and requires a diversepool of talent and expertise. Therefore,experts from different fields includingmedicine, technology, biology,chemistry, along with many others,are working in the Research andDevelopment Centre. About 100employees are involved in masteringand exploring new technologies.

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As Zdravlje Actavis manufactures generic medicines, theresearch and development process within the company issignificantly lower than that of Hemofarm and Galenika.It mostly pertains to marginal development of alreadyexisting generic medicines in terms of dosage and forms,and mostly relies on the R&D capacities in its parentcompany Actavis.

Along with research and development capacities withinthe pharmaceutical companies, there is an array ofresearch institutions � think tanks that can easily bedeployed in order to achieve the best results. Namely,research laboratories within the mentioned companieshave an ongoing relationship with the following institutes:Institute for Chemistry, Technology and Metallurgy,Scientific Institute Vinča, Institute for Medical Researchof the Military Medical Academy, Institute of Pharmacology,faculties (Medical, Pharmaceutical, Dental, etc.), andclinics (Clinical Center of Serbia).

The level of R&D activity in the Serbian pharmaceuticalindustry is evident in the number of newly registered drugsand forms of drugs. In just the last three years, Hemofarmregistered the following number of pharmaceutical prod-ucts and proved its position as a market leader:

Zdravlje Actavis has approximatly 180 registered phar-maceutical preparations in more than 200 forms. In2004 alone, it registered nine new pharmaceutical forms.

Galenika, the company with the longest history of R&D,registered the following number of new medical productsin the last three years:

ENVIRONMENTAL PROTECTION � MEDICAL WASTE TREATMENT

Medical waste treatment in Serbia is regulated by theLaw on Environmental Protection and Law on IntegralPrevention and Control of Pollution (in effect as ofDecember 2004). The mentioned laws are in full compli-ance with the EU regulations on this matter. Unfortunately,at the present time, there is no adequate facility for prop-er medical waste treatment in Serbia; therefore, leadingcompanies in the sector export waste to certified institu-tions in Switzerland and Austria in order to keep theirproduction and the surrounding environment clean.

Zdravlje Actavis has one of the best storage facilities formedical waste in the country and plans to introduce anISO 14001 quality system. Hemofarm acquired the ISO14001 certificate in 2004 and treats its medical waste inAustria. Galenika partially uses its own facilities fordestroying waste, but also outsources waste treatmentservices abroad.

According to some estimates, Serbian pharmaceuticalcompanies create some 15 to 18 tons of medical wasteannually. Zdravlje Actavis exported almost 100 tons ofmedical waste in 2004 and plans to destroy almost 200tons of waste deposited over the course of last threedecades by mid 2005. Hemofarm exported some 18 tonsof waste in 2004 resulting from its production process,research, quality control and storages, while Galenikahas an additional 50 tons to waste.

Some estimates say that there is additional 120 tons ofmedical waste deposited with wholesalers of drugs, phar-macies and medical centres, waiting to be destroyed. Thelack of adequate facilities for medical waste treatment byall means implies there is a great niche for investment insuch facilities in Serbia. In addition, such investmentwould be highly beneficial for environmental protectionand, therefore, would draw interest of both the financialinstitutions and donor community.

Year 2002 2003 2004

Number of products 23 6 23

Year 2002 2003 2004

Number of products 7 21 26

MANUFACTURING

If you are considering manufacturing in Serbia, below is asnapshot of production inputs you can source locally andthose you must import.

Since there is no production of Active PharmaceuticalIngredients (API) in the country, except for Galenikawhich produces certain pharmaceutical raw materialsbased on synthesis and biotechnology, these ingredientsmust be imported. Additional pharmaceutical ingredientssuch as vitamins, alcohol and corn starch can be sourcedlocally, but the rest must be also imported. In addition tocustoms duties levied on import of such items at the rateof 1%, they are subject to an 18% VAT. Packaging mate-rials such as cardboard, foil for blisters, plastic and rubberpackaging materials can be obtained from local suppliers.Glass packaging, bottles and ampoules, which meet EUstandards, need to be imported.

Production within Free Zones is free from customs and VAT.

PRIVATISATION

Although private companies dominate the ownershipstructure, there are companies within the sector that arestill awaiting privatisation. The following table shows alist of companies awaiting privatisation.

In brief, there are three methods of privatisation in Serbia:tender privatisation (used for large enterprises), auctionprivatisation (for small companies) and acquisitionthrough stock exchange (for joint stock companies). Theentire process of privatization in Serbia is handled by theSerbian Agency for Privatization (www.priv.yu).

Company Base Activity Method ofPrivatisation

Medifarm BelgradeWholesale ofpharmaceuticalproducts

Auction

Bureau for Disin-fections and Der-atisation

BelgradeProduction ofpharmaceuticalproducts

TBD

Galenika BelgradeProduction ofpharmaceuticalproducts

TBD

Jugoremedija ZrenjaninProduction ofpharmaceuticalproducts

Stock Exchange

Vetprom Novi SadWholesale ofpharmaceuticalproducts

Stock Exchange

Srbolek BelgradeWholesale ofpharmaceuticalproducts

Stock Exchange

CONTRACT MANUFACTURING

If you are short of in�house manufacturing capacities,want to outsource small�batch production, reducemanufacturing costs, or delay/avoid capital investmentsin manufacturing, you should consider contractmanufacturing in Serbia.

Leading companies in the Serbian pharmaceutical industryhave modern technological solutions that enable them toproduce over 95% of current galenical forms.

Production in a large number of companies is in compli-ance with modern standards and specific requirements ofthe pharmaceutical industry. In Serbia you can findfacilities for production of: penicillines, cephalosporins,hormones, sterile block products, cytostatics, mix�o�vials,drugs in various dosage forms (coated, slow release, effer-vescent tablets, pellets, powder sachets, hard capsules,oral liquid syrups, ear/eye drops, injectable solutions �LVPs and SVPs, powder for injections, lyophilisates forinjection, cream, gel, suppositories, solutions forinhalers), and antibiotic sterile gauze.

Commitment to quality Production in Hemofarm is conducted in compliancewith MHRA�UK, PIC GMP, ANM�Romania, NAF-DAC�Nigeria, CE, ISO 9001:2000, ISO 13485:2000.Preparation for acquisition of EU GMP is well underway.

A system of quality assurance in Galenika a.d. is accom-plished at the level of management, processes and prod-ucts. The concept of quality assurance is based on validworld requirements and national legal regulations:

� good manufacturing practice (GMP),� good laboratory practice (GLP),� good clinical practice (GCP),� ISO 9000 series standards (Introduction of environmental

protection system according to ISO 14000 series standardsis in the process).

Zdravlje�Actavis has introduced ISO 14001, while mostof other Serbian drug manufactures comply with the ISO9000 quality system.

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Within a Free Zone Outside a Free Zone

Importers who are users of a free trade zone aren't liable for VAT on importedgoods.

VAT is assessed on all imported goods at the rate of 18%, except for certaingoods identified by VAT law, which are taxed at 8%.

Imports and exports of goods and services into and out of a zone are unlimited. Imports and exports of goods and services are unlimited outside of the free tradezones; however, the government is legally authorized to impose quotas and otherrestrictions on certain types of goods in order to protect the domestic market.

Raw materials used for finished goods that are meant for export can be importedduty�free.

All goods (except for humanitarian supplies) imported outside of the free tradezones are liable for payment of duties at tariff rates currently in force.

Fixed assets, machines, and construction materials can be imported duty�free. Fixed assets, machines, and construction materials are liable for payment ofduties. If they are part of a foreign investment, they are only liable for a nominalcustoms fee of 0.5%.

Zone users can freely make use of foreign currency earned through operationswithin the zones.

According to the Foreign Investment Law, foreign investors have total controlover profits they earn.

Imports of all types of goods into the zones are duty�free. Goods from the zonescan be distributed on the domestic market after customs duties have been paid.If goods distributed on the Serbian market are produced in a free trade zonefrom domestic and imported components, customs duties are only paid on theimported components.

All goods (except for humanitarian supplies) imported outside of the free tradezones are liable for payment of duties at tariff rates currently in force.

Imports into the zones and exports from the zones are unlimited. They aren'tsubject to quotas, permits, licenses, or other foreign trade restrictions. Goodsthat are imported from the zones into the domestic market are subject to stan-dard customs procedures, however, if the goods are produced out of at least50% domestic components, they are considered to be domestic goods.

Imports and exports of goods and services are unlimited outside of the free tradezones; however, the government is legally authorized to impose quotas and oth-er restrictions on certain types of goods in order to protect the domestic market.

Goods can be temporarily transferred from the zones to the domestic marketand vice versa in order to add value through activities such as processing,installation, repairs, quality control, and marketing activities, among others.This creates many opportunities for cooperation with domestic industries.

According to the current Foreign Trade Law, the Ministry of InternationalEconomic Relations determines which types of goods may be temporarilyimported or exported.

Zone users can lease, buy, or build manufacturing facilities, warehouses, orcommercial buildings.

Outside of the free trade zones, it is also possible to lease, buy, or build buildings,but the process is more complicated.

DOING BUSINESS IN FREE ZONES

There are 12 free zones in Serbia evenly distributed onthe territory of the Republic, mostly located in the nearvicinity of transportation corridors, providing excellentlogistic opportunities. The following table shows keybenefits of having production within the free zone asopposed to having it outside this designated area.

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INVESTMENT INCENTIVES

If you invest in fixed assets� Taxpayers investing in fixed assets are entitled to a tax

credit of up to 20% of the value of the investment made in that year. The tax credit is limited to 50% of assessed tax in the year of the investment. The unused portion of the tax credit can be carried forward for up to 10 years.

� Taxpayers classified as small companies are entitled to a tax credit of up to 40% of the value of their invest-ments in fixed assets in the year of investment. In thiscase, the credit is limited to 70% of assessed tax in theyear of the investment. The unused portion of anysuch credit can be carried forward for up to 10 years.

� Certain industries including production of medical instruments are entitled to receive a tax credit of up to80% of investments made in purchasing fixed assetswith their own financing. The unused portion of anysuch credit can be carried forward for up to 10 years.

If you employ new workersTaxpayers who employ new workers are entitled to a taxcredit equal to their new employees' gross salaries plusrelated social security contributions paid by the employer.

For your large investmentsTaxpayers who invest over CSD 600 million (around€7.4 mill) in fixed assets and employ at least 100 newworkers are not liable for corporate income tax for up toten years, provided that those assets are used for theactivities for which the taxpayer is registered.

Other incentives� Import of equipment and other assets as well as

construction materials representing a foreign entity'sinvestment are exempt from customs duties.

� Import of raw materials, semi�finished and component parts carried out for the purpose of realization of along�term production contract in cooperation with a foreignproducer are exempt from customs and other import duties.

European Bank for Reconstruction and Development

EBRD was formed in 1991 to foster the shift to a marketeconomy in transition countries. EBRD operates in 28countries and is the single biggest investor in the region withcommitments of over €24 billion in over 1,000 projects.

What has been done in Serbia so far?Since the Bank started its operations in Serbia andMontenegro in 2001, it has committed €644 million, ofwhich €425 million for public sector projects and €219million for private sector projects (excluding the tradefacilitation program). The Bank's clients in the corporatesector include Ball Packaging Europe, Fresh&Co, Frikom,Grand Prom, GTC, Hemofarm, Lura, Marbo, Progas and SBB.

What's in it for you?EBRD develops tailor made products that are designed tosatisfy the needs of the client and the project. The prod-uct range includes long�term loans, working capital,equity, quasi�equity instruments, and guarantees. Typi-cally the Bank directly finances long�term loans between€5�250 million and equity investments of €2�100 mil-lion (with exit usually within 4�8 years).

The Bank finances a portion of the project costs (usuallyup to 35% of the total project costs), with the remainder tobe provided by the client, sponsor or other financiers. TheEBRD's clients are required to comply with high standards onintegrity, transparency and fairness, as well as the local andinternational environmental, health and safety regulations.

The Internationa Finance Corporation

IFC is the largest multilateral source of loan and equity financingfor private sector projects in the developing world. As a memberof the World Bank Group, IFC shares the primary objectiveof World Bank Group institutions: to improve the qualityof the lives of people in its developing member countries.

How to Apply for IFC Financing IFC provides a range of products and services for clients,including loans, equity, quasi�equity, structured finance,and risk management products that are funded throughIFC's own financial resources. In order to be eligible forIFC funding, a project must meet a number of IFC crite-ria. It must: be located in Serbia and Montenegro, be inthe private sector, be technically sound, have goodprospects of being profitable, benefit the local economyand be environmentally and socially sound.

The Local Banking Sector

Extensive reforms in the financial sector, widely praised asthe leading process in the Serbian transition, have produceda sound and efficient banking system. The results are bestseen in the rapid growth of total domestic and foreign cur-rency savings, currently standing at €1.6 billion, almost 50times the amount in 2000. Significant foreign investmenthas been made resulting in the improved quality of goodsand services offered. In March 2005 there were 10 foreignbanks, most of which started operations in Serbia over thepast four years, which set high�quality standards for bankingservices: Raiffeisenbank, Hypo�Alpe�Adria Bank, SocieteGenerale, HVB, ProCredit, National Bank of Greece, LHB,Volksbank, EFG Eurobank, and Alpha Bank. Since then,another five banks have come to Serbia: French Credit Agricole� the largest European bank, Austrian Erste bank � the lead-ing private bank, Slovenian Nova ljubljanska banka, as wellas Italian Banca Intesa and Findomestic. With furtherprivatization of the domestic banking sector, the number offoreign banks is expected to increase in the coming months.

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Financing Options

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Success Stories

BackgroundZdravlje is a leading manufacturer of drugs for gastroen-terology and cardiology and one of the largest drug manu-facturers in Serbia. It was established some five decadesago and, after being acquired by Actavis Group in 2002,became part of this Iceland based pharmaceuticalmultinational company.

PeopleThe company is based in Leskovac in Southern Serbia, andcurrently employs around 1,300 highly educated personnel.

ManufacturingIn addition to manufacturing products for variouswell�known European pharmaceutical companies, Zdravljeproduces more than 100 registered drugs and preparationsin the form of tablets, capsules and ampoules. As a resultof the recently embarked upon expansion programme,

Zdravlje will be a fully EU�compliant solid dosage andpackaging facility by January 2007.

Manufacturing in Zdravlje complies with environmentalstandards for medical waste treatment. Medical waste isplaced in suitable packages for transportation and is destroyedin authorized institutions in Switzerland and Austria. Theintroduction of ISO 14001 and training of employees inthis regard started last year and is continuing in 2005.

Plans for the Future After taking over Zdravlje, Actavis has invested some€6.9 million in 2004 and plans to invest another €5.7million in 2005, mostly in reconstruction of the pharma-ceutical sector, GMP standards, logistics and education ofits workforce. By the year 2007, Actavis will invest a totalof €20 million in Zdravlje.

While holding a strong position on the Serbian market,the company continues to develop its sales presence in anumber of neighbouring countries. In 2005 it has plannedto considerably increase exports to over €5 million.

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BackgroundHemofarm is a company with four decades of experience indrug production. Over the course of the last decade, Hemofarmexperienced large levels of expansion. Today, it is a Groupmade up of the parent company and 21 subsidiaries, of which12 are in Serbia and Montenegro, and the others are abroad.The parent company is organized according to the divisionprinciple. The seat of the parent company is in Vr�ac. In thelast four years, Hemofarm invested €92.5 million in newproduction capacities. An infusion solution plant was recon-structed and a freeze�dried forms (injectables) and ampoulesfactory was constructed and equipped. These investmentsamounted to €25 million, of which €18 million were securedthrough a loan arrangement made with the European Bank forReconstruction and Development. Investing in state�of�the�arttechnology has made Hemofarm the only pharmaceuticalcompany in this part of Europe that currently manufac-tures the three most sophisticated drug forms � efferves-cences, Mix�O�Vial freeze�dried injections and pellets.

ManufacturingExisting manufacturing plants, as well as those under construc-tion, are in compliance with the GMP regulations. Hemofarmis also the only company in the country that has been grantedMCA approval, which secures export of our products to theEuropean Union. Preparation of the Validation Master Plan, incompliance with the American Food and Drug Administrationguidelines is in process and will be applied in the new sterileforms plant and then transferred to other plants.

PeopleOver 3,000 people are employed in the Group, with periodicalfluctuations of part�time workers. The average age of employ-ees is forty and each fifth person holds a university degree.

InternationalThe strategy of the Group is directed towards a powerful pen-etration into foreign markets. Apart from classical export,Hemofarm realizes different types of cooperation and invest-ment in establishing local production in other countries.

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Below is a brief overview of Hemo-farm�s international operations.

Hemofarm�s first enterprise abroadwas founded in mid�1991 in Frank-furt. Hemofarm GmbH deals inexport�import operations and hasspecialized in the trade of pharma-ceutical raw materials. It has built astrong financial and marketingoperation. Its subsidiary companyHemopharm USA, Corp. was offi-cially established on June 23, 2003.

A Yugoslav�Chinese mixed enterprisewas established between Hemofarm,as the majority owner, and the localpharmaceutical company Jinan YongningPharmaceutical. As of May 2000,infusion solutions in glass and plasticbottles are being produced in China.

PartnershipsZanniniZannini Hemofarm is a mixedenterprise comprising Hemofarmfrom Vr�ac and Grafica Zanninifrom Pisa, which invested €3.1 mil-lion in its construction.

GSKA cooperation agreement with Glax-oSmithKline has been signed withthe aim of increasing Hemofarm'scapacity to win over foreign mar-kets. The cooperation pertains to 13exclusive products in 15 forms forhospital usage, belonging to thegroup of anesthetics, cytostatics,antivirals and immunosuppressants.

BackgroundGalenika a.d. has been producing drugs, other pharma-ceutical products and raw materials for 60 years. Establishedin 1945, Galenika became the fourth company in the worldto produce penicillin. In 1991, after a joint venture wasformed with the US company SPI Pharmaceuticals, thecompany was named ICN Galenika, and later ICN Jugoslavija.Since March 1999, the company once again operates underits traditional and renowned name � Galenika a.d.

Currently, Galenika has a 30% share of the domesticpharmaceutical market, and a well�trained marketingdepartment. The company also has the necessary expert-ise, R&D and technologies to take advantage of bothdomestic and foreign markets. This includes licensingagreements and technology transfer based on long�termcooperation with international companies.

In terms of exports, the most interesting export marketsfor the company are the former USSR, Baltic States andex�Yugoslav republics. Also, Africa and the Middle Eastpresent opportunities for a large transfer of knowledge.

PeopleToday, Galenika a.d. has 2816 employees, 1108 men and 1708 women.

Employee qualification structure (as of April 30, 2005)

Over the years, Galenika has developed products based on licensecooperation with world renowned companies, and also on theirown expertise, inovations, and discoveries from its own Institute.

ManufacturingModern technological solutions enable Galenika a.d. toproduce over 95% of current galenical forms. Manufacturing isorganized according to modern standards and specific require-ments of the industry. There are four programs: Human Drugs,Dental, Veterinary, and OTC products, and six departmentsbased on pharmaceutical forms.

Tablet and coated tablet departmentLargest share in the overall company production. Manufacturestablets, film and sugar coated tablets. With completion of additionalnew facilities and modern equipment installed, the annual outputof the Department, based on two shifts, will be 3 billion tablets.

Pharmaceutical raw materialsThis production forms an important segment of company opera-tions. It is based on synthesis and biotechnology. Overall, owingto a modern manufacturing concept, Galenika a.d. remains a com-petitive drug supplier both in the domestic and foreign markets.

University graduates 557PhDs 8MSc 28Specialists 26Two year post secondary education 94Secondary school 999Elementary school 223Highly skilled 192Skilled 574Semi skilled 177TOTAL 2,816

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Ampoules and solutions departmentProduces preparations in ampoules, in vials for parenter-al use, eye drops and infusions.Annual output: 45,000,000 ampoules and 4,000,000vials, in two shifts.

Syrups departmentProduces syrups in solution and suspension form, andoral gels in sachets.Annual output: 30,000,000 units.

Ointments and aerosols departmentManufactures medical creams and ointments indosage forms from 3.5g to 100g, suppositories andvaginal suppositories, aerosols, and a wide range ofcosmetic products.Annual output: 25,000,000 units.

Antibiotics departmentManufactures preparations for parenteral use.Annual output: 50,000,000 vials.

Dry suspension preparations.Annual capacity: 4,000,000 vials.

Capsules departmentProduces finished drugs in capsule form.Annual output: 220,000,000 capsules.

Investment projects in progressTo enable Galenika's full potential, in both domesticand foreign markets, several investment projects wereinitiated to modernize facilities, upgrade and harmonizestandards to meet world requirements. These changeswere made to facilitate exports to all world markets.All of these newly planned buildings will be construct-ed on vacant plots of the 55 hectares of land at theGalenika a.d. site in Zemun, 15 km from the center ofBelgrade. The following projects are currently invarious phases:

NEW SOLID FORMS FACTORYBasic PlanBuilding of a factory (extended preliminary design � finished).

Total project value: €40,000,000.Extended Plan (optional)Building of an additional R&D, Quality Control, andQuality Assurance premises, new warehouse for rawmaterials and packaging material, and reconstruction ofthe finished drugs warehouse (with planned conditionsfor GMP and FDA approval inspection).

Designed capacity:� Tablets (2 billion);� Capsules (15 million).

Total project value: €75,000,000.Production predominantly based on imported rawmaterials (90%) purchased at global market prices.

DENTAL PRODUCTSOption 1New dental products factory (conditions for CE approvalprovided)

Total project value: €12,000,000.Option 2Reconstruction of the existing factory. Located in thecentre of Belgrade (value: €100,000).

Investments for new equipment/products:� Acrylic teeth (value: €450,000);� Dental alloys (value: €130,000).

Total project value: €680,000.Production predominantly based on imported rawmaterials (70%) purchased at world market prices.

MEDICINAL BAND AID FACTORYReconstruction of the existing facilities (all neededequipment already acquired). Planned to meet productionneeds for the domestic and foreign market (conditions forCE approval provided according to EU Directive 93/42).

Total project value: €1,000,000Production predominantly based on imported rawmaterials (70%) purchased at world market prices.

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BackgroundWest Pharmacutical Services Beograd d.o.o. Kovin is adynamic and developing company based in Serbia andMontenegro, with an extensive presence in the localmarket. It is a subsidiary of US�based West InternationalGroup and its activities are focused in the pharmaceuticalpackaging materials sector. West Pharmacutical ServicesBeograd d.o.o. Kovin is a legal successor of the formerPharma Gummi � Beograd Kovin, which was founded in 1978.

ManufacturingThe company produces rubber stoppers for vials contain-ing penicillin and other antibiotics, IV platelets andplungers for pre�filled and disposable 3�piece syringes.The company is a holder of the DIN EN ISO 9001:2000

QA certificate. The production facility is based in Kovin,while sales and administration are located in Belgrade.

PeopleCurrently, the company has 140 employees.

Plans for the futureThe company decided to extend its production capacityand invest nearly €10 million in coming years. The firstphase started in November 2004 with the construction ofa new production building.

The operations will primarily be focused on export. Theinvestment will generate new jobs in the local area andnew export within the first year.

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GALENIKAPhone: +381 11 190 902Fax: +381 11 616�30611080 Zemun, Batajnički drum b.bkabinet@galenika.co.yuwww.galenika.co.yu

HEMOFARMPhone: +381 11 344 26 63Fax: +381 11 344 17 8711000 Beograd, Prote Mateje 70dstanisavljevic@hemofarm.co.yu www.hemofarm.co.yu

JUGOREMEDIJAPhone: +381 23 522 430, 544 556Fax: +381 23 541 61523000 Zrenjanin, Pančevačka b.b.jugoremedija@jugoremedija.co.yu

PANFARMAPhone: +381 11 627�257, 32 83 052Fax: +381 11 632�55511000 Beograd, Strahinjića Bana 32rstanojevic@bg.hemofarm.co.yu

SRBOLEKPhone: +381 11 2646 199Fax: +381 11 646�62211000 Beograd, Sarajevska 84srbolek@eunet.yu

ZDRAVLJE ActavisPhone: +381 16 242�414, 2455339Fax: +381 16 50�51116000 Leskovac, Vlajkova b.b.mtodorovic@zdravlje.co.yuwww.zdravlje.co.yu

ZORKA PHARMAPhone: +381 15 368�500Fax: +381 15 368�44415000 �abac, Narodnih heroja b.b.ljsesic@hemofarm.co.yu

Medicines and Medical Devices Agency of SerbiaPhone: +381 11 246 83 22, +381 11 460 250Fax: +381 11 397 43 401152 Belgrade, Vojvode Stepe 458 hygia@alims.sr.gov.yuwww.alims.sr.gov.yu

EBRD, Belgrade ROPhone: +381 11 311 2921 Fax: +381 11 311 4571 11000 Beograd, Bulevar Avnoja 64awww.ebrd.com

Internationa Finance CorporationPhone: +381 11 30 23 760Fax: +381 11 30 23 73311000 Beograd, Kneginje Zorke 96ralbisetti@ifc.orgwww.ifc.org

Useful C

ontacts

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Serbia Investment and Export Promotion Agency(SIEPA) is a government agency established in 2001 tofacilitate and support foreign direct investments andpromote Serbian exports.

The list of services that SIEPA provides to foreigninvestors:

� analyzing Serbia�s business environment and providingcritical information regarding the process ofsetting�up a company in Serbia,

� preparing sector analyses and studies that give athorough overview of the state of particular sectorsof the Serbian economy,

� providing help in identification and acquisition of attractive Greenfield and Brownfield sites,

� assistance in obtaining necessary permits and licenses,thus speeding up the completion of investment projects,

� helping in finding partners and suppliers amongSerbian companies.

Only by effectively networking with public and privatesector bodies, SIEPA can best respond to the needs offoreign investors. In particular, SIEPA works in closecooperation with the following institutions:

� all government ministries and other governmental bodies,� municipal authorities and local self�government,� Building Directorate of Serbia and Agency for Building

Land and Construction of Belgrade,� tax and customs authorities,� statistical bureaus,� chambers of commerce,� National Bank of Serbia,

and all other institutions related to the process ofestablishment and successful pursuit of businessventures in Serbia.

Serbia Investment andExport Promotion Agency

Vlajkovićeva 311000 Belgrade

tel.: +381 11 3398 550+381 11 3398 653+381 11 3398 772

fax: +381 11 3398 814office@siepa.sr.gov.yuwww.siepa.sr.gov.yu

Supported by United NationsDevelopment Programme

Funded by the Government of theNetherlands

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