Turkey: A Promise Restored?

With the allure of EU accession and an aggressive commitment to making local firms globally competitive, Turkey for the past decade has been a totemic symbol of the promise—and pitfalls—of the emerging markets. A growing middle class with health purchasing power has led to more opportunities for foreign innovative drug makers, but there is a down side too, in the form of interventionist trade and regulatory practices as well as a subtle trend toward xenophobia as the prospects for Turkish membership in the European Union fades. What's next? A new attitude more open to the industry's potential, if the right policies are followed.

Turkey is a banquet for healthcare investors. Drug multinationals started flocking to the country in the late 1990s, establishing low-cost manufacturing and production hubs to feed their businesses in Europe and the Arab region. Mature local companies such as Bilim Ilac, Dr. F Frik, and Biofarma began catching the eye of Big Pharma—acquisition and consolidation were daily buzzwords as the market reached its peak growth in 2005. By then, around 300 pharma companies were operating in Turkey, more than 50 of these were multinationals, including most of the Big Pharma top 20; in 2010, the Turkish pharma market was ranked the sixth largest in Europe and 14th in the world. With a population of 67 million, consumption rose to around $3 billion, establishing Turkey as the biggest pharma market in the Middle East and the fastest growing in the Mediterranean region.

The boom times also saw an unprecedented series of government reforms—including the introduction of a universal health insurance scheme—that reshaped Turkey's healthcare markets. The number of people covered by the public insurance system grew from 50 percent in 2000 to 86 percent in 2011, with the goal to hit 100 percent last year. Consumption soared: physician visits per capita increased from three visits in 2002 to eight in 2011, leading to increased satisfaction with the health service, which posted an 81 percent favorable rating in 2011. From 2003 to 2011, average life expectancy in Turkey increased by 2.5 years, from just under 72 to over 74 years.

Toll of progress

This nationwide effort to boost access and quality in healthcare imposed a hefty cost on the growing pharma business. With government spending on pharmaceuticals increasing from $2.3 billion to $8.7 billion between 2004 and 2011, drug price cuts were inevitable. But, having established in 2004 a cross-national reference pricing system pegged to a basket of prices that included low-price countries like Spain, Italy, Portugal, and Greece, as well as France, Turkey found itself locked in footstep with the economic crisis in Europe in a way that was out of proportion with its potential for long-term growth.

In December 2009, an across-the-board pricing decree slashed the prices of both original and generic drugs. The decree set the sale price to the wholesaler of original drugs with a similar generic on the market at a maximum of 66 percent of the reference price; similarly, generic drugs could only be sold to wholesalers at up to 66 percent of the original drug's reference price. Further price cuts were imposed in 2010 and 2011; and by that point at least two of Turkey's price referencing countries were on the verge of bankruptcy. The result was that by 2012 Turkey had the lowest per capita health expenditure amongst OECD countries, and drug prices were 30 percent to 50 percent lower than the lowest European prices.

Yet the Turkish economy was still growing at a healthy pace. Real GDP growth for 2010 to 2015 is predicted at around 4 percent, sustaining the trend between 2004 and 2009, and still way above EU rates. While cost containment and budget control are legitimate concerns, many observers interviewed by Pharm Exec believe the government overreacted. "It was going into Greece mode," said Jeff Kemprecos, Executive Director, Public Policy and Corporate Responsibility at Merck. "You could understand in 2007 and 2008, during the global economic crisis, that Turkey would want to ensure its pharma healthcare budgets weren't exploding, but by 2011 the country had been growing at a pretty good clip."

Nevertheless, by 2012, with the country's per capita drug spending far below historic norms, the Turkish pharma sector's prospects were in free fall. The drugs sector is estimated to have contracted by 25 percent in real terms since the 2009 pricing decree. Kemprecos observes that the contraction meant that international industry executives, while still interested in Turkey, "started to discount it as a major country in their portfolios." For Murat Yesildere of Egon Zehnder International, the situation led to international companies beginning to see Turkey more as a commercial sideline than a regional hub or manufacturing base where it is necessary to put down real roots. The preference right now is to "just ship their products in and get their margins without committing to a strong investment base. If they need to move out tomorrow, they can." Most of the foreign company manufacturing hubs established a decade ago, he explains, have now been abolished, divested, or closed.

As for the domestic companies that had big growth plans, the cuts depressed their values and left them vulnerable to takeover. A lot of the Turkish players—Mustafa Nevzat, Dr F Frik Ýlaç, Yeni Ýlaç, Cenovapharma—have been bought up by foreign companies. Turkey's Association of Research Based Pharmaceutical Companies (AIFD) predicted in 2008 that the sector would achieve annual inward investment of $1 billion from foreign companies by 2015. Last year, the actual investment was below $50 million. "The situation is not sustainable for our industry," AIFD told Pharm Exec late last year. The focus should be on structural reforms and making savings in areas of healthcare other than drugs, such as hospital treatment. After all, AIFD added, "there is not much left to cut in pharmaceuticals."

Following EU precedent

There are also continuing problems with Turkey's recognition and enforcement of intellectual property. According to Kemprecos, industry executives view Turkey as seriously behind the rest of Europe in protecting commercially sensitive data. Turkey currently only offers six years' of data exclusivity, and that is dated from the registration of the product in Europe. "This has acted as a drag on investment in the innovative medicines sector," Kemprecos adds, "because it is perceived as yet another important policy area where Turkey is not fully harmonized nor globally competitive."

The issue has long been a bone of contention with regard to Turkey's plans for EU accession, negotiations on which began in 2004. But by 2012 the issue of accession itself looked like something of a damp squib. That's not altogether surprising, given the spreading eurozone crisis and the European Union's less-than-inspiring handling of the fiscal and debt crisis in Ireland, Portugal, and Greece. As Murat Yesildere points out, the reason Turkey wanted to join the European Union in the first place was for prosperity, jobs, money—"but that is now wavering." Candan Karabagli, CEO of Turkey's leading pharma company Abdi Ibrahim, adds that the country is resigned to the fact that the rest of Europe doesn't want it to join. Either way, it certainly seems unlikely now that accession will happen before 2020.

Pharmaceutical exports from Turkey have steadily risen since 2000

Still, there is a consensus that the detailed, chapter by chapter preparations for accession—whether it happens or not—have been good for Turkey. Says Karabagli, the country has been required to "upgrade its democracy, upgrade its human rights, upgrade its regulations." For pharma, the negotiations have meant a strengthening of regulatory infrastructure to protect IP and to conform to international norms on drug safety and manufacturing. In the last decade Turkey has set up more than 20 civil and criminal IPR courts and established an EU-Turkey Working Group on IPR; starting in 2005/2006 Turkish pharma companies began adopting the Common Technical Document (CTD) format for registration, and in 2009 the country adopted the EU directive on good clinical practice (GCP).

Turkey still has a lot of work to do to satisfy the European Union, however. AIFD research last year revealed that the regulatory approval procedure in Turkey—with an average waiting time for drug approval of 772 days—is still a long way behind Europe; the mandated EU timeframe for regulatory approval is set at a maximum 210 days. Accession, says AIFD, would bring things up to EU standards "in terms of openness and accountability of public policies, as well as increasing access to pharmaceutical products."

But Kemprecos believes that the country needn't take the accession route in order to become a global player. Turkey "could adopt or even improve on the best standards in Europe today as part of its competitiveness agenda for the innovative biotechnology and research-based industry," he says. He points to Switzerland, which, like Turkey, isn't a member of the European Union but which has "taken on board the best of Europe in terms of standards, particularly in the regulatory area." As an accession candidate country, Turkey is not tethered to Brussels' agenda or the woes in Europe. "While the country is obligated to implement certain standards, we believe that Ankara retains the kind of policy-making flexibility where Turkey could put in place reforms that could give it a leg up on the global competition."

The problem of the last few years has been a lack of cohesive, holistic thinking around the industry. This was not due to bad intentions, says Kemprecos; rather, a lot of the time governments fail to appreciate the complicated nature of the industry. "The health ministry doesn't necessarily inform the views of the finance ministry, and the finance ministry doesn't appreciate the special taxation concerns of R&D-intensive industries such as the life sciences industry." Candan Karabagli echoes the sense of frustration: "It's a Catch 22; you need to reduce the burden as well as ensure the industry is sustainable. The government listens to us, but the number of things they can do for us is limited."

Yesildere believes, however, that opportunities can arise from the constraints. The recent pricing pressures have "motivated most of the players to be more creative," he says. There are an increased number of new commercial models being implemented. "Companies are exploring different ways of approaching customers, doctors, and key opinion leaders, through digital networks, for example." He cites Abdi Ibrahim as a prime example of a local company that is "eager to go its own way" and launch new initiatives—"not government-led initiatives, but projects supporting their own ambitions."

Indeed, having accepted that growth is difficult in the domestic market, two years ago Abdi Ibrahim established Vision 2021, an initiative aimed at sustaining its leadership in the Turkish market, by, Karabagli says, "adapting and being ahead of the innovation curve." Also key was a new strategy to foster globalization. Karabagli adds: "We would like to be a regional player. We've chosen the immediate area surrounding Turkey, the Middle East, North Africa, and have been developing more business in these countries in order to spread the risk." And in 2010 and 2011 Abdi began exporting to 20 new countries, including Poland, Portugal, France, Italy, Germany, Netherlands, Greece, Korea, and the United Kingdom. While conceding that the price deflation at home is "very challenging and happening a little too quickly for us to keep up with," Karabagli is firm in noting "we have to make our own destiny."

Turning the corner?

In early 2012, with the industry in the doldrums, AIFD and the government looked to be at an impasse on key strategic policy issues. But after AIFD publicly accused the government of not doing enough to encourage investment and focusing too much on cutting drug prices, it seems that the government may have finally taken notice. An early public indication of this was at the BIO International Convention in Boston in June last year, when AIFD Vice Chairman Kadir Tepebasi announced that AIFD was "very happy and excited" that the government and the research-based industry now appear to have the "same long-term targets and approaches." When, in September, the AIFD report "Turkey's Pharmaceutical Sector: Vision 2023" called on the government to "implement the necessary structural changes" to enable the country to become a major pharma competitor at the global level, it wasn't so much agit prop as mutual agreement—the report followed recent AIFD talks with the government aimed at establish ways to make Turkey a regional production center for pharmaceuticals serving Europe, Central Asia, and the Middle East.

AIFD's report provides a roadmap for the industry, outlining goals to strengthen the sector's "infrastructure" and "ecosystem" to enable the country to receive more international investment, increase production and export, make a positive contribution to the foreign trade balance, and offer patients high-quality service at international standards. It recommends the adoption of a central research policy on life sciences, a roadmap for life science clusters, implementation of clinical research regulations, increase of access to R&D financing resources, and the strengthening of the collaboration between universities and the pharma industry. It also calls for tax incentives for "international life sciences executives," more promotion of Turkey as an attractive investment option, and new regulations to effectively and adequately protect intellectual property rights. Should such measures be adopted, the report concludes that, by 2023, "a Turkish pharmaceutical sector with production exceeding $23 billion and exports of more than $8 million, and a foreign trade surplus and R&D investments of about $1.7 billion per annum, is not just a dream."

Next stop BIO

In conjunction with AIFD's roadmap, in late 2012 the government issued a consultation on a new "strategy and vision" for the innovative medicines sector from 2013–2016. For Kemprecos, this consultation provided an encouraging signal that policymakers now appear to be "committed to a rebalancing to accommodate growth and encourage innovation". This April, Turkish Health Minister Recep Akdag will announce the final details of the 2013–2016 strategy—including the promise of further R&D assistance, investment in human resources, and more backing for drugs exports—at the BIO annual meeting in Chicago.

While Kemprecos has long believed that both local and international companies will continue to grow in Turkey, he counters that this would not be at the same rates as the larger, fast-growing markets and, for many companies, not at a rate that would justify significant new investment. But in light of the events of the last few months, he adds: "This all could change very quickly if the government moves ahead with conviction to execute its new strategy." So, after a decade of troubles, it seems at least that the dialogue between industry and government has entered a positive new phase. How quickly the government acts on its new "strategy and vision" remains to be seen, of course. But Kemprecos, for one, is more optimistic than he was a year ago. In recent months, he says, pharmaceutical executives have been hearing the term "holistic approach" much more frequently in Ankara. Perhaps, for pharma, Turkey is on its way back to its formerly exalted position as the land of Eastern promise.

Julian Upton is Pharm Exec's European Editor. He can be reached at jupton@advanstar.com.