Identifier
Created
Classification
Origin
09ANKARA1693
2009-11-25 05:25:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

TURKEY: AS PRICING DEADLINE NEARS, PHARMA INDUSTRY

Tags:  ECON EINV ETRD EFIN TU 
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RR RUEHWEB

DE RUEHAK #1693/01 3290525
ZNY CCCCC ZZH
R 250525Z NOV 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1319
INFO RUEHIT/AMCONSUL ISTANBUL 6571
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHAAA/NSC WASHDC
C O N F I D E N T I A L ANKARA 001693 

SIPDIS

DEPT FOR E, EEB/BTA/TPP, EUR/SE
DEPT PLEASE PASS USTR FOR MARK MOWREY
COMMERCE FOR ITA/MAC CHERIE RUSNAK, HILLEARY SMITH

E.O. 12958: DECL: 11/23/2019
TAGS: ECON EINV ETRD EFIN TU
SUBJECT: TURKEY: AS PRICING DEADLINE NEARS, PHARMA INDUSTRY
GIVES NEW PROPOSAL

REF: A. ANKARA 1352

B. ANKARA 1503

Classified By: Acting Economic Counselor Jeffrey Borenstein for reason
1.4(d).

C O N F I D E N T I A L ANKARA 001693

SIPDIS

DEPT FOR E, EEB/BTA/TPP, EUR/SE
DEPT PLEASE PASS USTR FOR MARK MOWREY
COMMERCE FOR ITA/MAC CHERIE RUSNAK, HILLEARY SMITH

E.O. 12958: DECL: 11/23/2019
TAGS: ECON EINV ETRD EFIN TU
SUBJECT: TURKEY: AS PRICING DEADLINE NEARS, PHARMA INDUSTRY
GIVES NEW PROPOSAL

REF: A. ANKARA 1352

B. ANKARA 1503

Classified By: Acting Economic Counselor Jeffrey Borenstein for reason
1.4(d).


1. (C) Summary. Following the GOT's rejection of
pharmaceutical industry proposals to close the health care
budget gap (described in reftels),the sector has been forced
back to the drawing board with little time left before the
December 4 implementation deadline. The GOT indicated that
it was dissatisfied with the level of savings in the industry
proposal (TL 2.5 billion vice TL 3.5 billion under the GOT
plan) and also wanted a plan that covered the next three
years instead of just 2010. On November 20, both local and
foreign producers agreed to a unified proposal that attempts
to meet these concerns. The new proposal, which would cover
the period through 2012, does not fully meet the GOT's
savings goals, but does include a new mechanism for gradually
adjusting the discount rates if there are budget overruns.
Adding a new wrinkle, the pharmacists' union is threatening
to simply return the entire production of over 4000 drugs to
the manufacturers rather than sell the drugs at unsustainably
low levels, which could have widespread public health
implications. Both U.S. and European firms are also planning
to wash their hands of Turkey after this experience, shutting
down local production entirely and moving to more
investment-friendly climes. End summary.


2. (SBU) As described ref B, the pharmaceutical industry as a
whole made a proposal to the Ministry of Health (MOH) to help
close Turkey's growing health care budget gap in a way that
minimized but did not avoid damage to the industry and its
viability. In various informal conversations over the week
of November 16, Deputy Prime Minister Ali Babacan informed
industry representatives that the proposal was insufficient
and that the GOT would be sticking to its original plan as
laid out in the Septemebr 18 pricing decree, due to take
effect on December 4. Babacan specifically cited as problems

the lower level of savings in the industry proposal (TL 2.5
billion vice TL 3.5 billion in the GOT plan) and the one-year
timeframe of the industry proposal, stating that the GOT
needs budgetary predictability at least through 2012.


3. (C) Faced with the looming December 4 deadline,
representatives of the local and foreign manufacturers met
and on the evening of November 20 agreed on a new three-year
proposal, which the MOH is currently evaluating. The new
proposal calls for:

-- The price for original drugs with a generic version and
generics would be capped at 70 percent of the lowest
reference price (vice 60 percent in the decree);

-- Products older than 20 years with a retail price above 10
TL would be brought down to the reference price (due to a
quirk of the law, older products were excluded from the
reference pricing system);

-- The additional discount on original drugs without a
generic version would be set at 10 percent, for a total
discount of 21 percent (vice an additional discount of 13
percent and total discount of 24 percent in the decree); and,

-- If the GOT exceeds its budget for the years 2010-2012, the
excess costs would first be addressed by a reduction to 69
percent of the reference price for products with a generic
version and generics. If that is not sufficient, a gradual
increase of one percent increments in the discount on
original drugs would be applied. If still further measures
are needed, the 69 percent reference price would be reduced
in one percentage point increments until it reaches 60
percent.

In exchange for these discounts and the sharing of risk on
budget overruns, the GOT would be expected to agree to a
moratorium on new adjustments to the pricing mechanism
through 2012. Although the projected level of savings is
still in the TL 2.5 billion range, raising the risk of
another rejection, the industry is hopeful that the
risk-sharing aspect and the longer-term commitment will be
attractive to the GOT. The total pharmaceutical market in
Turkey is around TL 15 billion per year.


4. (C) Jeffrey Kemprecos, Government Relations Manager at

Merck, Sharpe & Dohme, noted to us that this is actually a
terrible deal for the private sector, and especially for the
foreign firms who will continue to bear upward of 75 percent
of the cost. The GOT budget targets for 2010 and 2011 are
already below the amount that they have actually spent in
2009, so the industry is shouldering considerable risk by
agreeing to defray overruns. Kemprecos also worried that the
plan provides disincentives for the MOH to approve new drugs
(which would carry a lower discount) and also creates a
substantial moral hazard by removing any reason to spend more
efficiently. He admitted that the deal has gotten so bad
that several companies' front offices are worried about the
precedent it might set for other countries, but felt that it
is still a better option than the GOT's system, which would
make it nearly impossible to operate profitably in Turkey.


5. (SBU) Further complicating matters is a threat by the
pharmacists' unions to send back stocks of over 4000 types of
drugs to the manufacturers rather than sell them at
unsustainably low prices. Nurten Saydan, President of the
Union of Pharmacist Employers (TEIS),told the press that
Turkey's 23,000 pharmacists (many of them extremely small
businesses) anticipate losses of over TL 200 million from the
decree as written. Saydan suggested that unless the
manufacturers reimburse the pharmacists for these losses, a
large portion of the distribution chain will simply cease to
function. (Note: Estimates of the number of failures range as
high as 7000 pharmacies, although this is probably
exaggerated. End Note.) If the pharmacists carry through on
their threat, many vital drugs - including cancer and
diabetes treatments - will effectively cease to be available
in Turkey. Products flowing backward through the supply
chain will also complicate delivery of those drugs still
being brought to the market. Kemprecos observed that the
pharmacists have become the wild card in the equation, but
that he hoped the specter of a public relations disaster
might make the GOT more amenable to compromise.


6. (C) Comment: Regardless of whether or not the GOT agrees
to this new deal, the government's intransigence on this
issue has convinced several firms that continued investment
in Turkey may be too risky to justify. At least one American
firm and one European firm have already confirmed plans to
shut down local production of drugs entirely no matter what
the GOT decides, citing a lack of predictability as their key
concern. Other firms have cancelled planned investments and
scaled back substantially on existing operations. This is
especially discouraging in a sector that at the start of the
year was one of Turkey's most promising investment
opportunities. End comment.

JEFFREY

"Visit Ankara's Classified Web Site at http://www.intelink.s
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