We expect the value of the total pharmaceutical market to increase from US$2.5bn in 2008 to US$4.2bn by 2013, representing a compound annual growth rate (CAGR) of 10.8% in US dollar terms and 8.6% in local currency. Per-capita spending on medicines will reach 81.6% by this time while only 0.89% of GDP will be spent on pharmaceuticals. Indian drugmaker Aurobindo’s latest foray into South Africa has led to an unexpected change in tone from the country’s government. In July 2009 the state procurement authorities preferentially rejected Aurobindo’s tendered price for antiretrovirals (ARVs), despite it being around 40% cheaper than those offered by domestic pharmaceutical firms. Aurobindo is now suing the South African Treasury, which in our view, highlights the barriers to entry for Indian drugmakers into the country. The contract for supplying ARVs to South Africa is worth around US$400mn. The bulk of the contract has been awarded to domestic drugmakers Aspen and Adcock Ingram, with the rest going to smaller undisclosed drugmakers. The South Africa treasury maintain that its action is in line with the state’s industrial policy of developing and supporting its domestic pharmaceutical sector. According to this legislation, selecting ARV tenders that favour local firms is permitted and encouraged. Aurobindo has therefore been left in a difficult position. The firm’s 2006 sales reveal that regions excluding the US and Europe were worth US$11.8mn, highlighting that its strategy to reach into more emerging markets has been dealt an unexpected blow by the rejected contract with South Africa. The Health Minister of South Africa revealed that the country is in a favourable position to develop its medical tourism industry. However, BMI believes that it faces serious underlying issues with respect to the management of its public healthcare system, and that the expansion of the private sector through tourism is a diversion from core concerns that deter foreign direct investment (FDI). We caution that the continued shift of higher spending in the private healthcare sector does not necessarily bode well for the industry. The government has been dealt some serious blows in the last quarter, chiefly by ongoing strikes by doctors and nurses in the public sector. Generics will account for 30% of the total drug market, and 36% of the total prescription market. Growth is likely to be driven by domestic drug manufacture, particularly in ARVs. The government is keen to attract FDI and encourage local medicine production and with a high disease burden in HIV/AIDs and other opportunistic and communicable diseases like tuberculosis, the most welcome drugmakers will be producers of low-cost generic pharmaceuticals.