BMI View: While the Turkish pharmaceutical industry has achieved some concessions following additional price cuts and public discounts announced in November 2011, the impact of the November decree remains negative. That aside, BMI emphasises that the number-one concern for drugmakers in 2012 should be lira weakness. BMI's Country Risk team have further revised down our expectations for the lira in 2012. With publicly purchased drug prices tied to a historic lira/euro exchange rate, there is no way drugmakers can raise prices to offset the weakness of the local currency and ensure stable repatriated revenues. This means global drugmakers in Turkey are completely exposed to lira weakness and this will add to the list of challenges already faced by the industry.
Headline Expenditure Projections
.. Pharmaceuticals: TRY17.44bn (US$10.48bn) in 2011 to TRY18.31bn (US$9.39bn) in 2012; +5.0% in local currency terms, but a contraction of 9.5% in US dollar terms. Forecast revised down from Q112 due to analyst modification and macroeconomic factors.
.. Healthcare: TRY79.24bn (US$47.16bn) in 2011 to TRY86.21bn (US$44.21bn) in 2012; +8.8% in local currency terms and a contraction of 6.3%in US dollar terms. Forecast revised down from Q112 due to analyst modifications and macroeconomic factors.
.. Medical devices: TRY3.75bn (US$2.23bn) in 2011 to TRY3.96bn (US$2.03bn) in 2012; +5.6% in local currency terms and -9.1% in US dollar terms. Forecast revised down from Q112 due to analyst modifications and macroeconomic factors.
Risk/Reward Rating: Following the new pricing and public discount decree of November 2011, followed by the moderate concessions achieved in December, BMI’s lowered outlook for growth in 2012, coupled with the weakness of the Turkish lira has translated into a weaker Risk/Reward Ratings (RRR) for our Q212 Pharmaceutical & Healthcare RRR which is down by 4.5% since Q112 at 55.7. On a global basis, Turkey is 34th out of the 95 countries surveyed by BMI.
Key Trends And Developments
.. In mid-November 2011, BMI downgraded its 2012 growth expectations for Turkey's pharmaceutical market on the back of fresh price cuts and public discounts announced by the government. In late-December, it emerged that the industry has achieved some favourable compromises. Pricing in these concessions, we now forecast 2012 growth of 5.0% year-on-year (y-o-y) in local currency terms, but warn that this is equivalent to a contraction of 9.5% in US dollars and 0.3% growth in euros.
.. In December 2011, the Social Security Institution (SGK) announced concessions that affect about 350 types of drugs and produced two lists of products that have been changed. The SGK decided to remove the additional public discount of 7.5% to a list of 125 drugs that was introduced in the November decree. The concessions applied to the first list are expected to be worth around TRY125mn (US$66mn) a year to drugmakers. In relation to the second list, new price determinations for 100 drugs have been requested from the Ministry of Health. It was decided that only one of two applications, of the public corporate discount or the price decrease, will be applied relating to another 140 drugs.
.. The continued weakness of the Turkish lira is the primary concern for multinational drugmakers operating in the country. The fact that this issue still fails to be addressed in the latest decree and subsequent compromises will be another irritation for foreign firms. When establishing longterm budgets in April 2009, the authorities used an exchange rate assumption of TRY/EUR1.9595. However, following sharp depreciation in 2011, at the start of January 2012 the exchange rate stands at around TRY/EUR2.45. As the authorities determine the prices of medicines to be purchased using a historic exchange rate, prices have dropped by around 25% when measured in euros. This has put additional pressure on foreign drugmakers.
BMI Economic View: Downside risks to the Turkish economy are becoming increasingly pronounced in light of growing domestic inflationary pressures, a precarious external position and a deteriorating global macroeconomic backdrop. Accordingly, we have revised down our 2012 real GDP growth forecast to 1.8%, from 4.5% previously. Moreover, with the Turkish central bank likely required to maintain its tightening bias to combat elevated inflation, there remains the potential for a hard landing for the domestic economy at some point in 2012.
BMI Political View: Turkey's increasingly assertive foreign policy is likely to weaken an already strained relationship with the EU. In particular, Ankara's attempts to nurture greater political and economic influence in the Middle East, and its seemingly irreconcilable relationship with Cyprus will result in periodic flashpoints. As a result, Turkey's accession to the EU looks increasingly unlikely, and even were it to eventually happen, we maintain that it would not occur before 2020 at the earliest.
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