Industry Trend Analysis - Political Risks To Dampen Turkey's Attractiveness For Drug Production - NOV 2017

BMI View: Investment in domestic drug production will continue to accelerate across the CEE region, driven by government policies. However, we note that the considerable political instability in Turkey will prevent the market from realising its ambitious goals. On the other hand, investment into Russia's pharmaceutical industry by multinational pharmaceutical firms will continue.

An overarching theme within the Central and Eastern Europe (CEE) pharmaceutical market, and more pertinently in Eastern Europe, is the implementation of policy to boost domestic medicine production. This theme has gathered pace in recent years, particularly as countries heavily reliant on revenues from commodities have suffered through the downturn and sluggish recovery of prices. Governments have sought to boost (or create) their domestic pharmaceutical manufacturing industry to reduce the reliance on imported drugs, which can be highly sensitive to currency fluctuation, and to diversify their economies. The acceleration of this trend has been exacerbated by drugmakers seeking to exploit emerging market growth as developed markets stall.

Governments across the region have sought to incentivise firms towards investing in manufacturing bases, predominantly through the creation of free economic zones, introducing exemptions for VAT and/or trade tariffs or guaranteeing preferential access to state medicine tenders. We note that there are two major markets within the region that have most aggressively sought to drive this trend; namely Turkey and Russia. However, the success of their policies has differed considerably, highlighting the multitude of factors that drive drugmaker investments.

Russia: Domestic Production Ramps Up

We have written extensively on the wide-scale changes to Russia's pharmaceutical market that have been brought about by the Kremlin's Pharma 2020 vision ( see ' Domestic Pharmaceutical Industry To Continue To Expand ' , January 6). When the program was launched by Vladimir Putin (at the time Prime Minister), he targeted that domestic production would account for 50% of all medicines consumed in Russia and 90% of medicines on the list of Vital and Essential medicines by 2020. This initiative has already clearly had an impact on domestic production growth, with production reportedly increasing by 23.7% in value terms in 2016 compared to 2015, resulting in locally-manufactured medicines accounting for a reported 30% of the total market by value (54% by volume) by the end of 2016. Moreover, according to the Minister for Industry and Trade Denis Manturov in February 2017, 81% of the drugs on the Vital and Essential list were Russian-made.

Regulations introduced have limited the ability for foreign-made medicines to access state drug tenders and have resulted in a significant uptick in multinational investment, either through partnership agreements for the localisation of production with domestic players or with direct investment into new/expanded production facilities. The huge potential within the Russian pharmaceutical market, already the largest by far in the region despite limited access to medicines, will continue to drive investment into domestic production ( see ' Growth Potential Will Drive Continued Investment Into Localised Drug Production ' , June 30). Indeed, emerging Europe's pharmaceutical market is forecast to expand from USD62.2bn in 2016 to USD90.7bn by 2021; of this growth, Russia will account for 42% (USD12.1bn).

Russia The Dominant Market
LHS: Emerging Europe Pharmaceutical Sales Forecast (USDbn); RHS: Contribution To 2016-2021 Sales Growth
Source: BMI

We note that the market for innovative medicines in Russia will remain minimal due to a combination of a lack of affordability as well as the weak intellectual property protection afforded by the judiciary; focus on drug production will remain almost exclusively in the generic drug and non-prescription medicine sectors.

Turkey: Political Risks Reduce Investment Appetite

Turkey's ambitious Vision 2023 plan aims to reverse the country's pharmaceutical trade deficit by 2023. However, it is our view that unlike Russia's plan this will not be realised. This is primarily due to the challenges faced by the political environment rather than a lack of sales potential. Indeed, we are highly positive about the growth prospects for medicine sales over the coming years in Turkey due to the heavy state investment in expanding healthcare coverage, the high burden of disease and the rapidly growing and ageing demographic profile ( see ' Pharmaceutical Market Growth To Outperform Neighbouring Markets ' , June 7).

The July 2016 coup d'etat focussed the attention on the authoritarian rule of President Recep Erdogan, and the proposal in July 2017 to extend the ongoing state of emergency suggest that Erdogan's move towards an increasingly authoritarian direction will not abate. This creates a highly unfavourable and uncertain environment for foreign direct investment ( see Multitude Of Risks To Deter Innovative Drugmaker Investment', August 18) and as such we have noted that the volume of investments into Turkey's pharmaceutical sector is far inferior to that of Russia.

Risks More Prominent In Turkey
BMI's Country Risk Index
Source: BMI