Turkey: volatility and growth

pharmafile | May 24, 2010 | Feature | Sales and Marketing |  Turkey, em 

The economic woes of Greece are currently the most worrying problem within the European Union’s single currency region the Eurozone, since a collapse in confidence in Greece could destabilise the Euro and other EU economies.            

Meanwhile its neighbour across the Aegean sea Turkey has had its own fair share of economic and political tumult.

For the pharmaceutical industry, Turkey is one of the most promising emerging markets in terms of size and growth, but such instability can make doing business in the country difficult.

Turkey has been badly hit by the global economic downturn, and this has had knock-on effects for pharmaceutical companies operating in the market in 2010. From being one of the most prosperous markets in Business Monitor International (BMI)’s Emerging Europe region, the country’s short-term market performance is expected to be hit by regulatory revisions, with pharmaceutical associations claiming that the industry will shrink by as much as 25 per cent.

Peter Thomas, senior pharmaceuticals & healthcare analyst at BMI, believes that while short-term operating conditions are negative, Turkey will remain an attractive long-term opportunity for pharmaceutical companies.

Turkey’s pharmaceutical market was valued at TRY16.1bn ($10.37bn) in 2009, making it the 14th largest market globally. Double-digit drug expenditure growth has been an undisrupted trend over the past five years, with strong economic growth and increasing government contributions key market drivers. As a result, Turkey is the second-largest market in the region behind Russia. Drug expenditure as a percentage of GDP was 1.7% in 2009, which despite increasing in light of economic contraction, is below the Emerging Europe average of 2%. Likewise, per-capita spending was also below the regional average at $144.

Price erosion

On 18 September 2009, changes listed in a ‘Decree to Amend the Decree on the Pricing of Medicinal Products for Human Use’, published in the Official Gazette, notified that price ceilings for off-patent drugs would be reduced from 80% to 60% of the price in the relevant reference country. Furthermore, additional price reductions of 13%, above the present 11% level, will be enforced for patented products against reference prices.

The government delayed the implementation of the amendments by a month amid a backlash from the industry which has threatened widespread divestment in the country and raised concerns over supply chain issues. However, the postponement also allowed further negotiations to take place.

The Association of Research-Based Pharmaceutical Companies (AíFD) denounced the changes made in September 2009. The association has proposed a number of alternative solutions to rising budget expenditure, including: reducing the number of over-the-counter (OTC) products; increasing co-payments for less critical OTCs; temporarily reducing prices while the economy is struggling; and decreasing subsidies for older treatments. The AíFD estimates innovative drugmakers would feel the brunt of any changes. A survey of member drugmakers by the association to senior executives revealed that 52% of respondents believed bringing new drugs to Turkey would be more difficult. Furthermore, 84% expected their companies not to receive new capital and manufacturing investments, while 36% believed their firms could reconsider current investments.

Pressures from the AíFD and similar bodies appeared to garner minor success through further discussion, with the new pricing scheme, implemented on 4 December 2009, providing small but beneficial outcomes for the pharmaceutical industry.

Under the finalised terms, prices of off-patent original and generic pharmaceuticals will be no more than 66% of the reference price in the five European countries with the cheapest prices. Under the initial terms this rate was set at 60%, meaning that amendments yielded a 6% improvement for drugmakers. Additional discounts from patented products – which were to be set at 13% – have been reduced to 12%, shaving a further 1% off price erosion for patented products.

BMI notes that while the industry has had some success in negotiating marginal improvements in legislation, revenues will still be negatively affected. Under the previous regime, Turkey operated a system whereby the maximum price for an originator drug was set at 100% of the cheapest ex-factory price (excluding VAT) in France, Greece, Italy, Portugal and Spain. Generic medicines had a ceiling of 80%. Patented drugs were priced at an additional 11% discount, which the new legislation will raise to 23 per cent.

Restricting market access

The pricing revisions compounded negative alterations to the reimbursement regime. In August 2009, the government lowered the reimbursement band from 22% to 15%, meaning the maximum reimbursement level is now 15% above the reference drug, which is the cheapest drug available – often the most recently -launched generic. For example, if an original drug cost $10, its reimbursement level would be $10. The first generic entry could market its product at $8, bringing the maximum reimbursement level down to $9.20 (instead of the previous level of $9.76). If a second generic entry was to market its product at $4, the maximum reimbursement level would be reduced to $4.60 (instead of $4.88).

Through these measures the Turkish government plans to cut spending on medicines by 15%, or TRL2.6bn ($1.7bn) against previous projections for 2010. Pharmaceutical expenditure under Turkey’s Green Card (a social security system for people of low income) grew 35% in 2009, according to data from the Ministry of Finance. Consistent growth in recent years, combined with Turkey’s widened fiscal deficit as a result of the economic downturn, has caused the government to seek savings in the social security sector and in healthcare in particular. BMI believes the depth of the price cuts combined with reimbursement reductions will help to achieve this, although we also suspect that the overall positive core growth dynamics of the pharmaceutical market will mean that the government is unable to meet its target.

Another major development to limit market access for drugmakers is in relation to Good Manufacturing Practice (GMP). In response to the EU deeming Turkish Ministry of Health-issued GMP certificates invalid, the ministry has implemented reciprocal inspection requirements for all importers. This has led to a number of manufacturers’ marketing applications being rejected. The Pharmaceutical Research and Manufacturers of America (PhRMA) recommends Turkey participates in the Pharmaceutical Inspection Convention (PIC/S) or that a mutual recognition solution is found. Nevertheless, should the country fulfil either suggestion it is likely to limit opportunities for importers of pharmaceutical products.

In another potential cause for concern, Turkey’s Ministry of Finance has decided to put the country’s pharmaceutical companies under tax scrutiny in 2010. The Revenues Administration (GíB) will appoint inspectors to perform audits of the pharmaceutical companies’ tax records. The inspectors will investigate producers and importers of medicines.

In BMI’s view, pursuing negative pricing proposals will cause a number of major industry bodies to strongly reconsider expansion plans. However, we believe this will only have a limited effect on the country’s pharmaceutical production capacity in volume terms. Turkey’s production index for pharmaceutical preparations has shown a steady upward trend since 2005, rising from 100 to 145.5 for the 12 months to September 2009. The increase in production has helped reduce reliance on imports in certain areas, while also boosting the country’s export capacity. Nevertheless, with only a handful of big pharma manufacturing plants in Turkey, the proposals could have a major bearing on future revenues for larger firms and may increase the uptake of joint ventures with the domestic industry.

Long-term prospects remain healthy

As a result of changes to Turkey’s regulatory environment, BMI substantially modified its growth forecast for the industry. Projections for 2010 now show a 6.8% contraction in total pharmaceutical spending on a local currency basis, with the prescription segment dropping 8.3%. However, BMI’s Country Risk team forecasts appreciation of the lira during 2010, which should have a less significant effect on growth rates for foreign companies. On a US dollar basis, total pharmaceutical spending should actually increase by 1.7% and prescription spending by 0.1%, to $11.0bn and $9.8bn respectively.

The five-year outlook is far rosier for the industry, with BMI projecting total drug expenditure to grow to TRY23.6bn ($20.4bn) by 2014, equating to a compound annual growth rate (CAGR) of 8.0% in local currency or 13.5% in US dollar terms. Economic growth in Turkey is set to play a major role in boosting growth.

Justin Patrie, head of Country Risk & Financial Markets at BMI, notes that the Turkish economy is set to bounce back strongly after recording its worst recession in decades in 2009. A stable and well-capitalised banking sector, limited private sector leverage and a diversified economy should lift real GDP growth to 4.9% and 5.2% in 2010 and 2011 respectively. Beyond this, Turkey is forecast to be a strategic outperformer in CEE, expanding by an average 5.4% between 2012 and 2015. However, BMI cautions that the recovery process will be hampered by weak eurozone demand and a large fiscal deficit built in during the recession. The government’s failure to sign a new IMF Stand-By Arrangement raises the risk of austerity measures being backloaded until after the 2011 general election. In such a scenario, elevated government borrowing would crowd out private sector credit, mitigating private consumption and capital investment growth.

In addition to positive economic indicators, including strong GDP growth and increases in government expenditure, core drivers for healthcare spending include a growing and ageing population, a wider choice of available treatments and improved general access to healthcare. At the beginning of 2007, roughly one-third of citizens were thought to lack any form of health insurance, a figure which fell to around 20% in 2009 and is expected to improve further in the coming years. The introduction of universal healthcare should provide the biggest boost for the industry over the medium term, with insurance bringing significant increases in per-capita spending.

Epidemiology to lead sales trends

From a prescription drug perspective, sales of anti-infectives still account for a considerably higher share of the total market than in many developed states. Sales of antibiotics in Turkey looked certain to surpass $1bn in 2009, marking a fifth consecutive year during which average annual consumption has exceeded this level. Data released by the Turkish Pharmacists Union (TEB) show that Turkey consumed 172.9m packs of antibiotics, worth TRL1.46bn ($0.99bn) during the first 10 months of 2009.

While providing benefits to antibiotic-focused drugmakers, BMI believes that Turkey needs to address its overly-high propensity to prescribe and consume antibiotics for both health and cost-saving purposes.

While the over-prescribing of antibiotics may be an issue, Turkey’s epidemiological profile lends itself to high sales of anti-infectives, a factor affirmed by BMI’s Burden of Disease Database (BoDD). The tool, which covers 123 diseases and injuries in 187 countries, measures the impact of disease in disability-adjusted life years (DALYs), which determine the sum of the years of life lost due to premature mortality (YLL) in the population and the years lost due to disability (YLD) for each incidence of a particular health condition. The BoDD highlights that communicable diseases accounted for 23.5% of Turkey’s total disease burden in 2009. In the UK this figure is just 6.1%, highlighting the variable therapeutic opportunities available to drugmakers in Turkey.

As Turkey develops, its epidemiological profile is beginning to more closely resemble that of more mature markets. Through to 2030, the burden of communicable diseases will fall to just 13.6% of the total disease burden. Consequently, over the forecast period, BMI expects the importance of antibiotics to wane, although they will still remain large sellers. Turkey – with its tradition of over-consuming antibiotics – is consequently victim to widespread bacterial resistance.

Cardiovascular drug sales are also set to grow rapidly. As Turkey becomes more affluent, ‘diseases of excess’ such as obesity – which are contributory factors to type II diabetes and heart disease – are becoming more common. Also, with life expectancy rising, the incidence of heart problems is growing, along with other conditions associated with ageing such as cancer and dementia.

Multinationals will stay

Turkey’s rising drug expenditure, combined with its transitional epidemiological profile, will present considerable opportunities for drugmakers. There are over 300 pharmaceutical companies operating in Turkey, including around 50 multinationals, which have progressively entered since the mid-1980s. Employment in the industry totals over 23,000, a number which is growing as Turkey attracts investment in both manufacturing and research activities. The top 25 companies hold a market share of 80% in sales terms, as well as employing around 80% of the sales representatives operating in Turkey.

The Turkish drug sector has a strong industrial base, a large number of manufacturers (albeit mostly Turkish firms) and well-qualified human resources.

Unfortunately, the Turkish pharma industry still lacks capital investment and consequently engages in minimal research and development, although the government is aiming to address this issue with new R&D legislation and the liberalisation of requirements for overseas companies.

Among other incentives, foreign investors are free to repatriate their profits outside Turkey, subject to certain limited restrictions, and also to acquire immovable property or rights in Turkey. Over the next five years, BMI expects Western multinationals to continue to target Turkey with patented products in core therapeutic areas such as cardiovascular, oncology and dementia, which will help drive market value growth.  Multinational corporations will continue to view the country as one of the key emerging markets globally, based on macroeconomic factors as well as the recent performance of the health sector.

As long as market access negativities do not persist, a number of majors may also choose to make Turkey a pharmaceutical production base for the Middle East, Asia and Eastern Europe, especially with the possibility of EU accession on the cards in the medium term.

Peter Thomas is a senior analyst at Business Monitor International and can be contacted through visiting their website found at: www.businessmonitor.com