A change in direction: Pursuing exports-led growth.
Image courtesy of Centurion
Given Turkey’s large population, Turkish drug manufacturers have traditionally focused on the Turkish market alone, however, a globalization discourse is starting to take shape amongst pharmaceutical leaders who look to different markets as an answer to the challenging conditions at home: “The Turkish pharma market is facing pricing problems that will not be solved in the foreseeable future, therefore it is vital to focus on export markets as well,” said Ersan Küçük, GM of Drogsan.
Deva, one of the largest generics manufacturers, with over 600 products, has recently incorporated an exports strategy, too: “Our foundational mottos are that Turkish needs always come first, and the second is that we serve all markets with one quality,” said Philipp Haas, chairman and CEO of Deva Holding. Operating in 40 countries, the company is one of the few to have penetrated the U.S. market by successfully incorporating its affiliate, Devatis.
Last year, exports were also accelerated by the depreciation of the lira, as medicine prices suddenly dropped, boosting their adherence in world markets. Hulya Yalin, Turkey’s GM for multinational Exeltis, explained how this low-currency environment played out on the flip side: “25% of our sales come from exports, which gave us strength when the lira depreciated last year. While we lost on imports, we gained with exports. We constantly work to find the balance between imports and exports in order to reduce our currency dependency and to continue being able to deliver drugs to patients without interruption.”
Turkey’s plan to create an economy worth US$2 trillion includes hopes that US$500 billion of this value will be achieved through exports. According to the latest statistics, Turkey’s pharma exports reached US$1.7 billion in value in 2018. However, closer examination of this number reveals that while export volumes have grown, the value of exported pharmaceuticals has in fact decreased over the past decade, with the value per kilogram between 2010 and 2018 dropping by 35.9% due to lowered prices concurrent with the currency depreciation. In apprehension of this trend, Turkey’s export strategy must encompass high-value products, namely biopharmaceuticals. Cinnagen İlaç is an ambitious biopharma company waiting to receive marketing authorization to start the local production for its 12 products. Once this is received, the “globalization” of the company will commence: “My ambition is to create the biggest Turkish brand in biotechnology by competing worldwide on both quality and productivity,” said Ferhat Farsi, co-founder and CEO of Cinnagen.
Governmental incentives for exports are also indirectly targeting higher-value goods, which are also the most import-dependent. Funding under the “Strategic Investment Incentive Scheme” is available for manufacturers of products that qualify as import-dependent. The scheme offers 90% tax reduction, as well as a contribution to the total investment of up to 50%.
Defining its vantage points: Turkish drugs in selected markets
Drugs compete in global markets based on price and quality, and Turkey does well at both. Yet, this double advantage has not translated to the expected success in the export of Turkish medicines. The epithet commonly used to describe Turkey as a “bridge between the East and West” is especially pertinent to pharmaceuticals in this regard. The healthcare policy model pursued by Turkey is exemplary of a developed healthcare market, but the price system simultaneously defines Turkey’s industry as “pharmerging” – a term used to refer to markets like Brazil, China or India, which have challenged the dominance of Western pharmaceutical hubs through lower prices. With low prices and high quality cancelling each other out, Turkish pharmaceuticals do not fit neatly in either backward or forward Global Value Chains (GVCs).
In its GVC trade with Asia, the MENA region and North Africa, Turkey fares well through backward participation with low value added products and low technology content. Thanks to the rigid pricing conditions implemented in Turkey, Turkish drugs are cost competitive in neighboring countries, too. However, foreign competitors like India come to these low-value markets with a counter offer of even lower prices, which are difficult to match in Turkey. The other half of Turkey’s trade in GVC is with Europe through both backward and forward participation. In European markets, prices alone are not sufficient: “European companies are becoming more competitive in price wars because they can invest freely in automation to build bigger capacities; by contrast, Turkish manufacturers are reluctant to invest,” explained Tolga Sözen, GM of Kansuk.
Although Turkish pharma exports reach a total of 164 countries, almost half of the trade value comes from neighboring countries. Nevertheless, Turkish players are gradually shifting their focus from the traditional go-to markets of MENA and CIS countries to the developed markets of Europe and the United States. After 35 years of solely serving the Turkish market, Sanovel, a top ten pharma producer with a product basket produced 100% in-house and that is adamantly opposed to in-licensing products, opened its portfolio to exports only five years ago with an eye on the U.S. market: “Exports are very important, but that does not mean we are engaging our entire portfolio to too many countries around the world; instead, we select in a precise way, and the future promises most from the U.S. market”, said Murat Akturk, GM of Sanovel.
Outside of regulated markets, pharmaceutical leaders are also becoming more selective to reduce risks. Bilim İlaç, which has one of the widest global footprints with 60 countries in the basket, is narrowing its focus to fewer markets: “If a market does not exceed a certain threshold, we will re-evaluate our exports there, otherwise we are faced with huge workloads and many high hidden costs.”
These hidden costs reveal themselves to companies around the world: Drogsan’s operations in SE Asia and Azerbaijan have been hindered by bureaucratic and economic issues; Santa Farma felt the challenges of political instability in Latin America; Dem İlaç also shared how distributing in countries like Libya requires constant monitoring of daily developments.
In challenging markets, working directly with distributors is less effective, so the best option has been to find the right partnership. Sanovel partnered with Abbott Laboratories in 2018 to enter Russia, an attractive market by size but one that is not easy to navigate. Partnerships are especially crucial for small companies with global aspirations. Tibo, an acronym for “Trends in Innovative Biotech Organisation,” is a start-up founded in 2005 by Professor Tanil Kocagöz, who is known for having developed a fast diagnosis kit for tuberculosis. However, running the kits in global markets has not been possible due to competition from multinationals. “While we produce US$500,000 worth of product a year, global competitors produce US$4 billion equivalent,” he said.
The problems presented by the price-quality paradigm extend into the discussion about export markets as well. Turkey offers the lowest priced medications in Europe while adhering to the same standards of quality. However, Turkey’s acceptance is eclipsed by its reputation. “From a regulatory perspective, Turkey is possibly one of the toughest markets because the country does not have its own regulation system and it mirrors the regulations of the FDA, Europe and other countries,” explained Zafer Toksöz, CEO of biotech start-up Arven.
Turkey’s GMP regulations came into effect in 1983, harmonizing the market with European standards. The TiTCK (Turkish Medicines and Medical Devices Agency) is the official agency overseeing quality compliance for pharma. Established in 2011, the agency’s mandate has evolved from a purely regulatory role to a multi-purpose stakeholder in both increasing access to healthcare and supporting the pharma industry. Having completed the first phase of strategic planning between 2013 and 2017, the regulatory body has entered a second stage expected to run until 2022. During this new mandate, the agency is continuing to align its procedures to their foreign counterparts to improve quality compliance and credibility for the industry.
Turkey has not only emulated strict guidelines, but it has also promoted quality at a grassroots level. For example, Dr. Seyfullah Dağistanli dedicated much of his professional life to improving pharmacovigilance (PV) in Turkey: “In early 2000s, the PV system in Turkey was too big and with many shortcomings because it was simply taking after the European guidelines, but copying a pre-given system is not enough as we needed to create a culture of quality”, he explained.
Having worked as the head of department for the MoH in 2000, Seyfullah established both the Pharmacovigilance Association and the private firm, Delta PV, through which he is looking to educate the market and instill an industrial culture that places quality above all else.
Although its quality standards are comparable to the rest of Europe, Turkey’s pharma industry does not enjoy the same recognition as its more popular European peers for a variety of reasons. Firstly, export markets are less acquainted with Turkish drugs, which have only started to appear globally relatively recently; the more quality, made-in-Turkey drugs that reach international markets, the stronger the Turkish brand will become. Unlike European companies that have created popular global brands, few Turkish firms have developed a prominent enough name to represent the country’s qualities. On the contrary, the negative projection of Turkey on the global stage has tainted the industry, impacting the receptiveness of Turkish drugs. “Making people trust that products can be efficiently developed in Turkey is still a hard task. We need to build brand appetite not only for FloraBio, but for Turkey as well,” said Cem Erdem, GM of FloraBio, a start-up involved in cell line development.
Acknowledging the need to create brand equity for Turkey and Turkish products, the government is running a program called Turquality, designed to turn local players into global names. Successfully enrolled companies receive subsidies for the costs of launching in new markets. Nobel, accepted in the Turquality program in 2015, is the only pharma business without a foreign trade deficit, and it also boasts one of the fastest growth rates. The program has also been extended to service providers, including Ekol Logistics, a Turkish logistics company the size of a multinational and that employs over 8,000 people.
A development that is hoped to raise Turkey’s profile as a pharma hub is the country’s joining the PIC (S) on 1st of January, 2018. The PIC- Pharma Inspection Co-Operation Agreement is a non-binding co-operative agreement between the different regulatory authorities in the field of GMP. By becoming part of a league of 50 countries that abide by the same universal standards, Turkey sits on equal footing with others countries from all continents. Created by the European Free Trade Association (EFTA), the ultimate goal of the PIC (S) is to remove non-tariff barriers. The agreement exists today both in the form of a formal treaty between European countries (PIC) and an informal arrangement with non-EU countries without legal status (PIC/S).
It is hoped that this milestone will validate Turkey in the eyes of other markets. However, beyond the symbolism of the new label, limited practical change is expected from this official status, at least in the short term. “Turkey entering the PIC is a valuable achievement, but this is not enough. Turkey must achieve bilateral agreements with the different countries that are members, which would unequivocally boost Turkish exports to double-digit growth,” commented Ersin Erfa, GM at Centurion, a company whose new biotech facility was the first to have been inspected by the TiTCK since Turkey joined the PIC.
Complicated relationships and a bad reputation
“Many speak about the advantages of Turkey’s location as a bridge between civilizations,” said Ismail Yormaz, managing director at Recordati. “Without denying this asset,” he continued, “Turkey’s proximity to Russia, the Middle-East, Europe and Africa also creates tensions that surpass the pharmaceutical discussion, but which nevertheless impact the industry.
As Yormaz points out, Turkey’s greatest advantage in advancing trade is its privileged geographic position, which allows access to three continents. However, recent developments in Turkey’s foreign policy have eroded the relationships with its main partners. Far from being a passive bystander, Turkey has actively instigated tensions that have hurt its global standing on the world stage. Relationships have also cooled between Turkey and its largest trade partner: the EU. Since 1964, Turkey has been close to the EU, later signing the Customs Union and then formally gaining the status of a candidate country in 1999. Relations were interrupted in 2018 when the EU flagged issues with Turkey’s rule of law, the judiciary and the obstruction of fundamental rights as matters of serious concern.
Dialogue between the EU and Turkey remains in place, and Kemal Baheci, foreign trade manager of Meksmar Natural and Health Products, highlighted the importance of this fragile dynamic: “Being a member of the Customs Union clears the way for a close engagement with European markets. More than aligning to European regulations, Turkey is also close to Europe culturally. By these criteria, African and Asian countries are accepting Turkey as European.”
However, Ahmet Musul, chairman of Ekol Logistics, which operates in a network of 14 countries offering freight services to pharma companies exporting to Europe, believes trade with the EU is not as efficient as it could be: “Restrictions on vehicles and driver checks in a market with supposedly free movement of goods create disappointing and costly outcomes for the company. Our drivers spend too much time and effort to get a visa to only be allowed to work abroad for six months a year.”
The uptake of Turkish medicines on world markets ties in with Turkey’s ability to create – and repair – its brand equity. The less-visible, yet equally serious repercussion of Turkey’s recent domestic and foreign policies is symbolic: it deteriorates Turkey’s image in the world. If Turkey remembers the year of 2018 for the economic crisis, 2019 will stay in the collective memory for the intervention into North-East Syria.
In the wake of Turkey’s recent intervention into Syria, Professor Fazilet Vardar Sukan, director of the research centre Sunum, said she finds it difficult to establish long-term partnerships with international companies and academic institutions: “In the last two weeks, I had five cancellations of commitments, and this is not due to the success or failure of this centre, but it does reflect on us. I strongly believe that politics should be kept separate from science and technology, but unfortunately this is not the case.”
Questions of image and trust are fundamental to the decision-making process when buyers look at the source for their pharma products. Looking ahead to the future, Turkish pharma companies are largely aiming at an exports-led strategy in which foreign markets are not only peripheral but central for growth. Santa Farma, for instance, saw a 55% growth in exports in the past year, a rate that it hopes to maintain in the following years by entering European markets. Abdi Ibrahim, the largest pharma company in Turkey, aims to double its exports revenues by 2025, which now account for 20% of sales.
Today, the current account deficit has shrunk to a 16 years low, falling to US$2.4 billion in May 2019, from US$57.9 billion the year before, helped by the rise in exports and tourism. “Exports are a popular issue here in Turkey,” said Ahmet Kuskonmaz, the associate in charge of exports for Dem İlaç, one of the fastest growing companies in Turkey according to IMS. Increasingly targeting the regulated markets, Kuskonmaz expects exports to become the main driver of growth in the future, while five years ago the company did not have an exports department. This shift illustrates the broader perspective taken by many players in the field. “The Turkish market is no longer our main focus”, concluded Kuskonmaz.