Image courtesy of Recordati

Over 80% of Turkey’s drugs are made in-country; however, these products tend to be below-value generics. Monopolized by foreign companies, the high-value originator market brought US$3.5 billion in sales in 2018 while the generics market of local companies accumulated only US$1.5 billion, despite producing more than double the volume. Multinationals are backed by offshore production facilities and large product baskets, which allows them to accommodate to the latest trends in demand in Turkey more easily, at a time when local companies need to make careful decisions about what and how much of a product should be manufactured. Foreign companies are able to better control the cost of the original drugs, as well as recoup costs from operations in higher-margin countries. In order to rebalance the dynamic between local and foreign companies, Turkish authorities resorted to a localization measure that would force multinationals to bear more of the risks of production.

The localization policy, launched in 2016, demanded that all drugs reaching the domestic market and that can be feasibly produced in Turkey must be produced in Turkey. This is known as the “localization requirement,” and it entails a ban on imported drugs and an implicit request for technology transfer. Should the localization requirement not be fulfilled, Turkish authorities retain the right to reject the drugs from the reimbursement scheme, effectively driving the drugs out of the market. Multinationals are thus forced either to invest in a local manufacturing plant or to outsource to local manufacturers. Özdemir Şengören worked most of his life for multinationals, before taking a general manager role at local producer Farmatek a year and a half ago. Having sat at both sides of the table, he believes Turkey needs both the originator and generics drugs to achieve balance: “In a 100% reimbursed market, everyone has to make sacrifices for the market to remain sustainable,” he said.

Local pharma must encourage the presence of multinationals whose original drugs are the very reason of existence for the generics (manufactured by local companies); international companies, on the other hand, are expected to comply. The policy has drawn the attention of the EU, which made a formal complaint against Turkey to the WTO in April 2019. Opening an active dispute called “Certain measures concerning production, importation and marketing of pharmaceutical products,” the EU alleges that the localization policy is inconsistent with the GATT 1994 Article III, in that the localization requirement, together with the technology transfer requirement and the import ban on localized products, treats imported drugs less favorably than products of national origin. Moreover, the EU argues that Turkey has failed to publish terms and conditions of application of the localization measure, which impedes governments and traders to respond to it adequately. The consultations were joined by the United States, and a panel was established in September 2019 involving Brazil, Canada, China, India, Indonesia, Japan, the Russian Federation, Switzerland and Ukraine as third parties. Until a decision is taken, the localization drive remains uncertain.

Even if the localization project passes this legal challenge, the policy risks being seen as a forceful, protectionist exercise that will cause the country to lose its attractiveness in the eyes of the international community. “In my opinion, the localization project is a badly applied good idea,” said Deniz Demir, general manager of Dem İlaç. “The MOH should be more lenient if the goals of the localization policy are to be accomplished without being seen as too autocratic. The localization policy should be carried out in a way that speaks positively of Turkey and makes the country more attractive for investors and multinationals alike,” he concluded.

Turkey is not the only country to have decreed localization efforts. Russia, Brazil and even the United States have over the years adopted policies aimed at bolstering local production over imported goods. Pointing at the United State’s long-waged tariffs battle with China, countries around the world see a precedent to protect domestic production at the risk of being accused of protectionism.

In the meantime, multinationals operating in Turkey have few options but to support the policy. “We believe that localization is an important initiative for local pharma industry producers and the country’s economy. Today, 90 of every 100 boxes of Daiichi Sankyo’s products that reach patients in Turkey are manufactured in our country,” shared Fatih Yedikardeş, general manager of Daiichi-Sankyo, a Japanese global pharma innovator with a competitive edge in oncology. Sanofi, which has invested over US$1 billion in Turkey, does not relate its investment to the localization policy: “Irrespective of the policy, we have put our faith in Turkey”, said Cem Öztürk, GM of Sanofi Turkey.

While the policy may be seen to pin local companies against multinationals, Ayça Sezer, business development director at Santa Pharma, believes the policy has brought the market closer together indirectly: “In the past, collaborations with foreign players were not easy, but today the industry is more united,” she said. Before this policy was enacted, multinationals had few reasons to partner with a local player, but the new measure makes local manufacturers indispensable in helping multinationals “localize” their products, thus increasing the traffic of partnerships. For example, Daiichi-Sankyo produces 90% of its Turkish products domestically through local manufacturer Abdi Ibrahim. However, Abdi also outsources some of its products to French multinational Sanofi. In turn, Sanofi works with Birgi Mefar, a local contract manufacturer, for its parenteral line. Connecting Turkey to even further links, Sanofi also produces the full portfolio of German big pharma Bayer.

Nonetheless, these collaborations do not mean that all players are equally advantaged. Pharma companies without manufacturing facilities are concerned by the policy. Platin Kimya, a family-owned company that imports APIs and formulations, almost closed its pharma business when the policy was enacted: “At that point, we could have left the industry, but we decided to stay in the business and appeal to local CMOs of high quality,” said Esra Saraçoğlu. Importers and distributors already act as a third party in the supply of medicines, but with the introduction of the localization requirement, they will need to involve a fourth player in the form of a CMO.

In fact, the undeniable winners of the situation are the CMOs, as the best positioned to profit from demand in toll manufacturing. Faik Somer, CEO of Birgi Mefar, the oldest and largest contract manufacturer for parenteral solutions, explained the advantages brought by the policy: “With a successful marriage between local players and multinationals, more doors are opened to use our facility for different purposes. For instance, in our partnership with Sanofi, we started with the local business, but the partnership created more opportunities in other businesses too.”

The CMO business is expected to be so successful that some fear the localization measure will make Turkey a hub for contract manufacturing, which would impede its ability to innovate and add value. As ownership of a manufacturing plant becomes less attractive due to the large bills incurred, CMOs have the ability to keep costs to a minimum by optimizing processes and streamlining production; moreover, with the growing demand in specialized drugs such as injectables, it becomes inefficient for companies to continue specific lines alongside other products when they can be produced in bulk by CMOs.

Taking note of the growing opportunities in this segment, new generic entrants like Pharmactive are dedicating large portions of the business to toll manufacturing. The localization measure is likely to play an important role in the diversification of business models, as the interests of multiple players intersect and local producers seek to fill their capacities. Producers will be more inclined to complement their manufactured drugs with in-licensed, locally produced drugs through partnerships with global players while hoping that the closer partnerships will also result in more out-licensing agreements. Farmatek, a former drugs importer that recently opened a manufacturing facility, incorporated a hybrid business model, including the offer of CDMO services in order to maximize the utility of its lab.

Perhaps the greatest advantage of the localization policy is not reflected in corporate balance sheets or in balancing the trade deficit, but rather in the technology transfer that will bring much needed expertise into the Turkish market. Multinationals have agreed to produce a higher proportion of their products in Turkey: Recordati produces 96% of its portfolio in the country while Sanofi produces about 86% locally. However, the remaining fraction is produced outside of Turkey because the technology is still unavailable in the country. The vague instructions on when and how the technology transfer should be realized leaves room for interpretation. Fatih Yedikardeş, general manager of Daiichi-Sankyo, dares to believe that localizing R&D could be the next relevant step in localization efforts: “It is the right time for global players to move their R&D facilities to Turkey,” said Yedikardeş.

Given the newly forged collaborations created in manufacturing, it is not implausible that similar partnerships may migrate to the R&D front – not only in transferring knowledge, but also in joining forces to develop the next generations of medicines. However, for partnerships to progress into R&D projects requires time for trust between local and global partners to further mature.

By its name, the localization measure is a reaction to the globalization processes that have shaped world economies. More than the anti-globalising message that its name conveys, the localisation policy could turn into a precursor for Turkish manufacturers to reach global circles: “The localization decision was a great opportunity for companies to prepare themselves for the global arena. Through this policy, contractors increased the knowhow of high technology manufacturing processes, invested in new manufacturing lines for high technology products and increased manufacturing capabilities; it provided the chance to see the culture and approaches of global companies in GMP and GLP,” said Mehmet Asri, general manager of Polifarma.

The localization policy has left its marks on the broader value chain, including local companies. Currently in phase two, the policy is being piloted before more details are clarified, which leaves both indigenous and foreign pharma companies unsettled. If successful, the localization measure could set the market on a course for greater consolidation. Acquisitions of local companies have been the entry point for multinationals into the country, like Exeltis buying 100% shares of local Embil. The latest acquisition occurred when local chemicals distributor Ekin Kimya was bought out by multinational Azelis, a transaction approved in December 2019 by the competition authorities. If local manufacturing becomes an absolute requirement, it would make sense for large international players to take proprietorship over local production. However, many questions remain, including whether the localization measure will bring the intended advantages, and, more crucially, whether there will be any unintended consequences to address?