Just in time for Christmas, the Turkish government has announced another round of price cuts for pharmaceuticals. As of this month, the maximum prices of generics and off-patent brands will be set at 60% of the originator price pre-patent expiry, vs 66% previously. In addition, originator products that are more than 20 years old but that have no generic competition will have their prices restricted to 80% of the reference price (calculated as the lowest price in a basket of five countries). On top of that, mandatory discounts for the national health insurance fund will rise from 20.5% to 28% for generics and off-patent brands and from 32.5% to 41% for patented products.
Given that the Turkish companies are already suffering from adverse foreign exchange rate movements, which in theory should actually allow them to put prices up, the latest revisions are particularly harsh. Not surprisingly, they are responding by cutting costs, but the challenge is to do this in a way that does not affect their businesses too badly. In the short term, by far the easiest savings that companies can make are in their sales forces, which are generally very large, reflecting the size of the country and the number of doctors that need to be visited. However, as Turkey remains a branded generic market, a reduced sales effort is likely to result in fewer prescriptions being written for a given company’s products, implying that a greater effort will be needed at pharmacy level to ensure that those prescriptions actually translate into dispensed products.
Unfortunately, this is not going to be easy. Despite the branded nature of the market, manufacturers have traditionally given large numbers of free packs to pharmacists, not simply to incentivise them but to make their businesses viable. Pharmacies are all independent in Turkey and there are no restrictions on opening new ones, so the market is over-supplied and many outlets are financially fragile. In markets such as Ireland, which was historically a branded market with a tradition of bonusing, every official price cut was matched by an equivalent reduction in the discounts given to the pharmacies, thus maintaining manufacturer margins. In Turkey, prior to the latest price cuts, this has not been the case. In fact, after the government first reduced the price of off-patent brands to the generic price in 2010, the result was actually increased discounts, as big pharma companies started to follow the generic practice of offering free packs to boost volume sales. Now, we believe that manufacturers are finally being forced to scale back pharmacy incentives, as it is becoming impossible to maintain them in the face of such major cuts to retail prices. It can be argued that weaning pharmacies off discounts is long overdue, but there are bound to be painful consequences. Reports are already emerging of pharmacies on the brink of bankruptcy and it seems inevitable that considerable numbers of them will go under as they adjust to an environment in which they have to live off their dispensing fees. This will pose challenges to the Turkish wholesalers and also to any manufacturers who have been particularly active in pushing stock into the distribution chain.
Price cuts are not good for anyone in the industry, but the current shifts in the structure of the market will hurt some companies more than others. Firms that have traditionally relied mainly on a ‘push’ model into pharmacies, rather than ‘pull’ from doctors prescriptions, are going to find it harder to cut their operating costs than those that are still maintaining hundreds of sales reps, particularly as a smaller detailing force won’t necessarily create a competitive disadvantage provided that competitor sales teams are shrinking at the same rate. Similarly, larger firms with good brand awareness should increase their market share vs smaller companies, other than in specialist product areas. Even so, manufacturers must be wondering where the government’s increasingly aggressive approach to pricing is going to stop.
Posted on 29th November 2011