TURKEY SQUEEZES PHARMA SECTOR TO EASE HEALTH

C O N F I D E N T I A L ANKARA 001352

SIPDIS

DEPT PLEASE PASS USTR FOR MMOWREY
COMMERCE FOR CRUSNAK, KNAJDI, AND BWOODS

E.O. 12958: DECL: 09/13/2019
TAGS: ECON ETRD PGOV EFIN TU
SUBJECT: TURKEY SQUEEZES PHARMA SECTOR TO EASE HEALTH
BUDGET DEFICIT

Classified By: Economic Counselor Dale Eppler for reason 1.4(d)


1. (C) Summary. Faced with a TL 1 billion deficit in its
health care spending for 2009 and significant additional
deficits in years to come, the GOT is scrambling for ways to
close the gap. According to pharmaceutical sector
representatives, a large part of the GOT strategy appears to
be to lay the financial burden on both local and foreign
pharmaceutical firms, with a demand that up to 85 percent of
the cost overrun be paid by the private sector. This would
result in losses to U.S. firms of around USD 500 million this
year alone, or roughly 7-8 percent of total sales, and could
potentially devastate the local generics producers. The
sector has told us that they are willing to work with the GOT
on sharing the load until the economic crisis has passed, but
GOT proposals to date are based on unrealistic expectations
and would create a massive, ongoing moral hazard and
unacceptable level of risk for any firm operating in Turkey.
End summary.


2. (SBU) Charge met with representatives of the Local
American Working Group of the Pharmaceutical Research and
Manufacturers of America (PhRMA),who provided a briefing on
recent discussions between the GOT and the pharmaceutical
sector on how to bridge the growing deficit in healthcare
spending on pharmaceuticals. Attending the meeting were Rob
Smith, Managing Director of Eli Lilly Turkey, Huzur
Devletsah, Corporate Affairs Director at Eli Lilly, Jeffrey
Kemprecos, Government Relations Director at Merck, Sharp &
Dohme and Chris Stijnen, General Manager of Bristol-Myers
Squibb Turkey.

Turkish Health Care Trends
--------------


3. (U) A key part of the AKP's political platform has been
the extension of universal health care. In the period
between 2004 and 2008, this raised the number of covered
persons from 49 million to 63 million. The average number of
doctor visits per person also increased from 2.6 per year to
6.2 per year. In addition, in 2005 the GOT changed the rules
to allow patients to obtain their drugs from any pharmacy
rather than relying on state hospital dispensaries. The
state's share of pharmaceutical costs is also the highest in
the OECD, with the public purse paying for roughly 80 percent
of drug purchases (compared to 30% in the U.S. or barely 10%
in Mexico).


4. (U) All these (laudable) changes put increased pressure on
state health care spending, and in particular on
pharmaceutical spending. More visits meant more
prescriptions, and easier access to pharmacies meant more
people filled their prescriptions. On top of this, the
Turkish social security system covers over the counter drugs
and vitamins the same as prescriptions, and has very low
co-payments. As a result, spending on drugs rose from a
little over TL 4 billion in 2002 to TL 13 billion in 2008,
but because of Turkey's strong economic growth over the
period these increases were manageable. Indeed, Turkey's per
capita spending on health care and its spending on
pharmaceuticals remain the lowest in the OECD. The share of
health care spending as a percentage of GDP also puts Turkey
in the lower end of the OECD.

What Happens When the Money Dries Up
--------------


5. (SBU) As a result of the economic crisis, Turkey faced
declining revenues at the same time that demand for
pharmaceuticals continued to rise as previously underserved
people entered the health care system. The budget for 2009
planned to spend TL 14.6 billion on pharmaceuticals, but the
actual total is estimated to be at least TL 15.6 billion.
Health Minister Akdag, confronted with this deficit and years
of future gaps to come, came up with the idea of a Global
Health Budget that would cap all spending and require
cost-sharing by the private sector to meet any cost overruns.



6. (C) As part of this plan, a series of meetings under the
auspices of Deputy PM Babacan laid out GOT proposals to the
private sector associations (both foreign and local) on how
the gap would be bridged. The GOT proposals were presented
as a fait accompli: If a company does not agree to the
proposals, the implicit but clear threat was that their
products will be delisted. The most shocking proposal was a
demand that the private sector cover 85 percent of any costs
beyond the budgeted amount (and a strange argument that the

TL 14.6 billion budget for 2009 should be further reduced to
a base of TL 13.3 billion because of the difficult fiscal
situation). This policy would be continued over the next
several years, creating a massive moral hazard where health
agencies would have no incentive to rationalize their
spending because the private sector would subsidize whatever
they spend beyond a budget that they themselves determine.


7. (C) In addition, the GOT wants to expand the reference
pricing system to include additional (cheaper) countries -
Turkey's system already differs from most in that it requires
the lowest price in any reference country to be used for
Turkey rather than an average of the reference countries.
Prices for products whose data exclusivity (DE) protection
has expired would also be immediately cut 30 percent. This
change is inspired by a Greek model, but ignores that the DE
period in Greece is ten years and that the six-year statutory
Turkish DE period is already extremely short in practice
because marketing authorizations take 2-3 years to approve,
reducing the effective DE period in Turkey to just 3-4 years.
A final decision on these proposals is expected by the end
of September, so that the overall budget proposal can be
finalized in October.

Killing the Goose that Lays the Golden Eggs
--------------


8. (C) According to the firms at the meeting, the estimated
cost of these proposals for U.S. firms would be USD 500
million in 2009 alone, equivalent to roughly 7-8 percent of
their total sales in Turkey, and an additional USD 700
million next year. As painful as that would be for the
foreign firms, the cost share that would fall on the local
generics producers would be devastating, as they lack the
international cushion and economies of scale that
multinational firms have. All firms agreed that it would
make it extremely difficult to do business profitably in
Turkey, and would likely lead to fewer new drugs being
introduced into the Turkish market and a greatly reduced
level of pharmaceutical investment. Stijnen of Bristol-Myers
Squibb noted that his company had identified Turkey as one of
five priority countries for investment but that several
planned projects now have been put on hold because of the
regulatory uncertainty. The firms also observed that the
sector already made two substantial concessions to the GOT
this year because of the crisis: first, accepting a demand
for an additional seven percent discount on new drugs and
second, foregoing foreign exchange rate adjustments of 22
percent that were contractually due to them.


9. (C) All the firms noted that they could live with the idea
of a budget cap with cost-sharing of overruns as long as the
budget itself is prepared realistically, includes reasonable
assumptions about growth, and equitably shares additional
costs between the government and the private sector. They
felt that the current figures were being pulled out of thin
air, however, and did not reflect the reality that the
growing demand for pharmaceuticals is not being driven by
Turkey's economic growth per se, but rather by the inclusion
of previously unmet need. In addition, the moral hazard
created by placing 85 percent of the burden on the private
sector would give the government no incentive to look at
areas where cost savings could be achieved. As Smith of Eli
Lilly remarked, "The GOT is using a crisis mentality to
develop a long-term model. We understand that 2009 has been
a difficult year that no one - including ourselves -
expected, and we are willing to do our share to mitigate
those problems. But continuing
these policies for years to come instead of budgeting more
realistically is simply irrational."


10. (C) In terms of savings, the firms pointed out that the
GOT pays an inordinately high share of pharmaceutical costs
for its citizens. Increasing co-pays would have an immediate
beneficial effect on the budget, although it would likely
prove unpopular. In addition, the range of covered drugs is
extremely generous and includes OTC medications like aspirin
and even vitamins. Restricting the use of these "comfort
drugs" or increasing the co-pay for them would also pay
immediate dividends (and again, be unpopular).

Comment
--------------


11. (C) The GOT has a genuine budget problem, but seems
unwilling to accept that its political commitment to provide
universal health care comes with a financial price tag. If
the proposals go through in their current form, they will

kill the prospects for investment and growth in
pharmaceutical production for years to come, which is
especially frustrating as the pharmaceutical sector is an
area where Turkey has very high potential. Post will
continue to press our GOT interlocutors to work with
companies to arrive at a more equitable, realistic solution
to this problem. We encouraged the U.S. firms to work with
Turkish generic manufacturers to present joint alternatives
so as to avoid turning this into a foreign-versus-domestic
issue. We also suggested that they raise the issue with the
IMF as it continues its discussions with the GOT on
developing a long-term, sustainable budget.

JEFFREY

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