TURKEY: COMPROMISE DEAL REACHED ON PHARMA, BUT

UNCLAS SECTION 01 OF 02 ANKARA 001740

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E.O. 12958: N/A
TAGS: EINV ECON ETRD EFIN TU
SUBJECT: TURKEY: COMPROMISE DEAL REACHED ON PHARMA, BUT
INDUSTRY, PHARMACISTS STILL ANGRY

REF: A) ANKARA 1352, B) ANKARA 1503, C) ANKARA 1516, D) ANKARA
1693

This cable is sensitive but unclassified. Please protect
accordingly.


1. (SBU) Summary. The long negotiations between the GOT and
the pharmaceutical industry on how to close the health care
budget gap ended in a "compromise" deal on December 2. Under
the terms of the deal, the GOT moved only marginally from its
initial negotiating stance, and reserved the right to modify
the terms of the deal if economic conditions change. The GOT
also moved ahead with implementation immediately despite
having agreed to a five business day delay. Industry analyst
appraisals of the deal have ranged from "ruinous" to
"disastrous," but all agreed that even the minor improvements
were better than no deal at all. U.S. firms continue to
reevaluate their local presence, and are also conducting drug-
by-drug analysis of profitability - the likely result is that
many drugs will be removed from the market. With their demands
still unsatisfied, pharmacists throughout Turkey conducted a
general strike on December 4 to protest the effects of the
pricing cuts on their bottom line. Additional actions may
come out of the annual pharmacists' union meeting,
coincidentally scheduled for December 11. Analysts predict
that nearly a third of Turkey's 23,000 pharmacies may close
their doors. End Summary.

Negotiations Successful, but a Pyrrhic Victory
-------------- -


2. (U) After months of negotiation (see reftels),on the
evening of December 2 the GOT and pharmaceutical industry
finally came to a "compromise" deal on closing the growing
health care budget gap. Looking at the original plan set out
by the GOT in its September 18 decree, the industry managed to
extract very little in the way of concessions. Under the
compromise deal, the following pricing structure will be put
in place:

-- The mandatory discount for original drugs with no generic
version (or for which no approved generic version is actually
on the market) will be set at 12% vice 13% in the original
proposal, bringing the total mandatory discount to 23%;
-- Both original drugs with a generic version on the market
and generic drugs will be priced at 66% of the lowest
reference price among five European countries, vice 60% in the
original proposal;
-- The new 12% mandatory discount for original drugs will not
be applied during the first year a drug is on the market;
-- The GOT will hold quarterly reviews of health care
expenditures and if expenses are higher than anticipated will
increase the mandatory discounts appropriately. (Note: In
theory, if spending is less than anticipated, the discount
will be reduced but this is unlikely to happen. End note.);
and,
-- Products older than 20 years that are currently sold above
the reference price will be sold at 100% of the reference
price as of January 1, 2010 (a quirk of the law excluded these
products from the reference price system).

This new plan is expected to save the GOT approximately TL 3.1
billion (USD 2.06 billion) per year. Industry analysts
estimated that 70-75% of this burden will fall on foreign
firms, and that U.S. firms' share will be roughly USD 650-700
million per year.


3. (SBU) All industry contacts agree that the plan is a
disaster both in its actual terms and in the precedent it sets
for other countries, but felt that it was the best deal that
could be achieved. Several contacts also noted that the GOT
had committed to three years of pricing predictability, which
they felt was a positive development. (Comment: As the GOT
built in a mechanism to increase discounts whenever savings
are less than anticipated, this commitment seems a bit weak.
End comment). Murat Asik, Healthcare Policy and Market Access
Manager at Merck, Sharp & Dohme, noted that as part of the
deal, the Social Security Administration agreed to allow five
business days before implementation so that firms could get
approval from their home offices. In violation of this
agreement, the new prices were implemented immediately on
December 4, which Asik observed did not inspire much
confidence in the GOT's reliability. In addition to planned
layoffs described in reftels, all pharmaceutical firms we have

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talked to indicated that they are doing a drug-by-drug
profitability analysis in light of the new discounts, and that
many drugs may be pulled from the market as a result.

Pharmacists Strike Back
--------------


4. (U) Angered by apparent GOT indifference to the effect of
the decree on their bottom line, pharmacists throughout Turkey
engaged in a general strike on December 4, shutting down all
of Turkey's 23,000 pharmacies except for a handful of duty
pharmacies, where lines were long and service was slow. Many
pharmacists also participated in a march in downtown Istanbul
to highlight the issue.


5. (U) The pharmacists' problems are twofold. First, they
purchased many of their drug stocks at the prevailing price
several months ago, but are now required to sell them at a
greatly reduced price. The pharmaceutical companies have
agreed to compensate them for this disparity, but only for
drugs purchased within the last 45 days. So many pharmacies
will take a significant loss on older stocks. Other
pharmacies simply refused to take on any new stock while the
issue was being decided, with the result that they are now
operating with only minimal supplies of drugs.


6. (U) The longer-term problem facing pharmacists is that
their profit margin is set by law at a certain percentage of
the drug price. While the percentage will not change, the
actual profit will fall proportionally with any discount. So
with a hypothetical profit margin of 20%, a drug that
previously sold for 10 lira and generated 2 lira in profit
would now be sold for 6.6 lira and generate only 1.3 lira in
profit. In practice, the formula for determining prices is
complicated and opaque (partly because the GOT uses its own
fictional exchange rate in determining reference prices),with
the result that many discounts will actually exceed 34% of the
genuine price, further affecting retail profits.


7. (SBU) Based on data from the Turkish Pharmacists' Union,
the fall in pharmaceutical prices will lead to a contraction
of 30% in profits and will cause the annual revenues of over
12,000 pharmacies to drop below TL 40,000 ($27,000) and of
those, 7,000 are expected to close their doors. Murat
Salihoglu, Secretary General of the Pharmaceutical Industry
Employers' Union (IEIS),noted that the closures may not be an
entirely bad thing, as there are probably already too many
pharmacies in Turkey and 500 new ones are added to the market
each year. This trend has been sustained in part because
profit margins were relatively generous in recent years,
making it attractive to open new but unnecessary stores. Some
correction may be beneficial, he argued, but the dislocation
caused by mass closures would severely impact the availability
of drugs at a time when the GOT is trying to expand access to
health care services.


8. (U) While the pharmacists succeeded in attracting headlines
for their strike, the GOT seems less impressed. Labor
Minister Dincer told the press that the pharmacists would not
lose a penny from the price changes and, while he acknowledged
that their profit margins will decrease, said that they had
benefited from years of artificially high prices and now would
have to live with more realistic margins. There has been no
indication that the GOT plans to back down from its current
stance. In response, the pharmacists have threatened to
escalate the situation, and will be discussing possible
strategies later this week at their December 11 annual
conference (which had been scheduled before the pricing
decrees). These could include further stoppages or
restrictions on which drugs they will agree to sell.


9. (SBU) Comment: While the GOT seems happy with the
compromise deal, no one else is. And since the GOT has
already violated the terms of the agreement with regard to the
implementation date, there is little reason for the
pharmaceutical industry to trust assurances that there will
not be further arbitrary adjustments to come. Investment in
pharmaceutical production in Turkey and accessibility to the
latest innovative drugs is likely to suffer as a result, with
companies leery of putting any more money at risk in an
unpredictable environment. End comment.