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
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