TURKEY: PHARMA INDUSTRY GIVES COUNTERPROPOSAL TO

C O N F I D E N T I A L ANKARA 001503 SIPDIS DEPT FOR E, EEB/TPP/BTA, EUR/SE DEPT PLEASE PASS USTR FOR CWILSON, MMOWREY COMMERCE FOR CRUSNACK, KNAJDI E.O. 12958: DECL: 10/18/2019 TAGS: ECON ETRD EINV EFIN TU SUBJECT: TURKEY: PHARMA INDUSTRY GIVES COUNTERPROPOSAL TO GOT REF: ANKARA 1352 Classified By: DCM Doug Silliman for reasons 1.4 (b) and (d). ¶1. (C) Summary. On September 18, the GOT published two decrees relating to pharmaceutical pricing in an effort to close the 2 billion TL Social Security budget gap described in reftel. U.S. firms have told us these decrees, with 70 percent of the cost expected to fall on foreign firms, will kill any hope for future investment in the sector and lead to the loss of thousands of manufacturing jobs as foreign firms scale back operations in Turkey. U/S Hormats, EEB/CBA Special Representative Hariton and Post have urged the GOT to meet with the sector and discuss the industry's alternative proposal to meet the budget gap. On October 6, the Ministry of Health met with sector representatives, who proposed a 2.5 billion TL package of savings that will see the GOT through the current fiscal crisis, allow for a more realistic budgeting process in the future, and preserve the medium-term prospects for investment. The industry is cautiously optimistic that the GOT is taking these proposals seriously and that they may reach a compromise agreement. Even if the GOT accepts industry's latest proposal, however, it may be too late to salvage the significant investment and job creation that the industry had planned to make in Turkey over the next few years. End Summary. Budget Repair Fix Via Price Controls Hits Pharma Sector -------------- -------------- ¶2. (SBU) Faced with a mounting deficit approaching 2 billion TL in its health care spending, the GOT issued two decrees on September 18 imposing controls on pharmaceutical prices. It appears that the intent of these decrees was to achieve the same amount of savings while avoiding the moral hazard of the direct cost-sharing model described in reftel. The price controls include: -- the reference price for drugs purchased via the Social Security system (essentially all drugs) will be the lowest price of an expanded list of 10 European reference countries; -- there will be a new mandatory 13 percent discount on original drugs without a generic version, on top of the existing 11 percent mandatory discount; and, -- generics and original drugs with generic versions will be priced at 60 percent of the lowest reference price (the current structure limits original drugs to 100 percent of the reference price and generics to 80 percent of the reference price). U.S. firms have estimated that the impact of this would be equivalent to a 20 percent drop in their sales. Industry estimates that 70 percent of the total cost of the decrees would fall on the foreign firms as local Turkish manufacturers only produce generic drugs. If no new agreement is reached, the regulations will take effect at the end of October. ¶3. (SBU) A survey of foreign firms conducted by the Association of Research-Based Pharmaceutical Firms (AIFD) revealed that almost all are planning to scale back or eliminate manufacturing operations in Turkey, abandon plans to bring new drugs into the Turkish market, and remove some existing drugs from the market. No firm is seriously contemplating additional investment into the sector at this time, citing the inability to predict regulatory behavior. This is in sharp contrast to just three months ago, when foreign pharmaceutical companies had targeted Turkey for large new investments as one of their best growth markets worldwide. Urging the GOT Back to the Table -------------- ¶4. (C) In repeated interactions with our GOT interlocutors, we have urged them to sit down again with the pharmaceutical sector - Turkish and foreign - and work with it to develop a budget solution that preserves the sector's growth potential. ¶5. (C) During a meeting with Investment Support and Promotion Agency of Turkey (ISPAT) President Alpaslan Korkmaz, Ambassador Jeffrey stressed the importance of the pharmaceutical sector as a source of foreign investment and well-paying employment. Korkmaz emphasized that there is a division within the government on whether this is the best way to deal with the budget problem, with the agencies that are more open to the world (ISPAT itself, the Foreign Trade Undersecretariat, etc.) arguing against a knee-jerk reaction to a short-term crisis that will devastate the sector for years. He acknowledged that, so far, the more traditional, inward-focused agencies like the Ministries of Health, Labor and Finance have dominated the debate. However, he said that he is preparing a report for Prime Minister Erdogan and trying to arrange for a meeting between the PM and sector representatives. ¶6. (C) As described septel, U/S Hormats raised the issue with DPM Babacan in a bilateral meeting on October 6 and asked that he consider meeting again with the industry. Babacan indicated that he was willing to consider such a meeting, but that he had already done so several times with no productive result. He argued that the industry would need to settle its own infighting and present a unified bargaining partner. ¶7. (C) As if in direct response to Babacan's challenge, a delegation from both the foreign and local firms (including pharmacists and wholesalers) met with the Ministry of Health (MOH) on the same day to present a package of cost-cutting measures that would lead to 2.53 billion TL in annual savings. These included: -- generics and original products with generics would be priced at 73 percent of the reference price (vice 60 percent in the government proposal),resulting in 1.02 billion TL in savings; -- products over 20 years old that cost more than 10 TL will be sold at the reference price, resulting in savings of 1.06 billion TL; and -- all products costing more than 10 TL (except those over 20 years old) would have an across the board 4 percent discount, saving an additional 400 million TL. Interestingly, the impact of these discounts would fall even more disproportionately on the foreign firms (75 percent), but they agreed because they feel that the overall package is more acceptable. Jeff Kemprecos, Government Relations Manager at Merck, Sharpe & Dohme, told us that the MOH officials seemed surprised at the scope of the proposals and asked for more time to study them. He later reported that the Social Security Administration (SGK) had invited industry representatives to sit down on October 16 to crunch the numbers with them, which Kemprecos took as a positive sign that they are seriously considering the industry counterproposal. ¶8. (C) On October 15, EEB/CBA Special Representative Lorraine Hariton met with DPM Babacan and noted that the pricing decrees sent a mixed signal at a time when the U.S. and Turkey are looking at ways to expand trade and investment, and requested that he give serious consideration to the industry's proposals. DCM Silliman added that various U.S. firms had developed plans to use Turkey as a base for regional production and export, but that these plans will not come to fruition if the sector feels that the GOT is not interested in working with them. Comment: Worst May Have Been Avoided, But Damage Already Done -------------- -------------- ¶9. (C) Industry representatives are cautiously optimistic this week that the GOT will respond positively to their package, noting that SGK would not waste its time if it was not at least intrigued by the offer. Even if they achieve this "positive" result, however, the industry is still facing years of painful adjustments, smaller-scale operations, and stagnant investment. So while the brinksmanship evident in the GOT's fiat approach may actually result in a savings proposal that resolves their short-term budget problem, the damage to short- and medium-term investment may have already been done. If the GOT expects to see any interest from the sector in years to come, it will need to devise a Social Security budget based on realistic assumptions about future growth in expenditures, a point we have made to DPM Babacan. The industry's hope is that the GOT will learn from the current mess and be more consultative in the future. However, there is a risk that some in the GOT will instead view the experience as a "success" in wringing concessions from the industry - and especially from foreign companies. JEFFREY "Visit Ankara's Classified Web Site at http://www.intelink.s gov.gov/wiki/Portal:Turkey"