BMI View : The Turkish government is aggressively amending laws and introducing incentives to boost localisation of R&D within the country. The government is hoping to reduce the country's considerable trade deficit by establishing itself as an export base and R&D hub. Relative to other offshoring hubs such as India and China, we do not believe the pull factors for Turkey are strong enough to incentivise R&D offshoring. However, we do believe that manufacturing will continue to be localised in the country. On the whole, the ambivalent stance towards the pharmaceutical sector will continue to impede the government's vision.
The Turkish parliament is currently debating a draft law on incentivising research and development (R&D) within the country. The Turkish economy has enjoyed a decade of enviable growth, and now the Turkish parliamentarians are pushing through a bill that they hope will help the country avoid the 'middle-income trap', and attract more companies to localise R&D within Turkey.
The draft law would grant full tax exemptions (both corporate and municipal) to revenues derived from localised R&D and tax relief on all salaries of employees until 2023. Similarly, the government plans to offer a 50% discount on employer contributions to social security payments and waive VAT for land purchases and real estate duties.
R&D amongst multinational pharmaceutical companies is increasingly turning global and away from developed countries; proximity to market is no longer a factor preventing companies from offshoring their R&D. Considerations such as quality of graduates, proximity to universities and cost are now becoming prime decision points in where to invest. Similarly, R&D localisation is often paired with manufacturing to address local and proximal pharmaceutical markets. While the bulk of this R&D offshoring has landed in China, India and Singapore, emerging markets are vying to attract more value-add, and Turkey is no exception.
The Turkish population is overwhelmingly young, and the country has a large number of science, technology, engineering and mathematics (STEM) graduates, offering companies a large recruiting pool. Similarly, wages and costs in Turkey are below average compared to European peers, reflecting the lira's continued weakness, and given the government's guarantees for funding infrastructure projects, infrastructure projects are also likely to be less costly than in other European countries. However, relative to countries such as China and India, Turkey does not stand out in terms of pull factors for pharmaceutical R&D. Even though the Turkish government has promised to spend almost US$60bn by 2023 on funding R&D initiatives in the country, the response from the industry has been lukewarm to date.
Despite the positive development on the R&D tax incentive law, there has been a negative precedent that has proved worrying to multinational companies; earlier in March 2013, the Turkish parliament was debating an update to its Patent Laws that would remove marketing exclusivity extensions through the addition of secondary indications and limiting the time limit for which patents would need to be filed to 2 years.
The PhRMA, in its Special 301 submissions has highlighted the weakness of Turkey's intellectual property laws and singled out Turkey in its annual report to the US Trade Representative. Access to the latest innovative therapies is crucial in maintaining a functional healthcare system; the Turkish pharmaceutical market in 2013 experienced dire shortages of crucial medicines for treating cancers as the government's unsustainable pricing policy saw many importers and pharmaceutical companies withdraw their products from the local market.
The Turkish government must now find a reasonable balance towards rewarding companies for engaging in localised production and R&D whilst also offering a market for their goods; currently, the Turkish national insurer, the Social Security Institution (SSI) demands considerable discounts from pharmaceutical companies in exchange for granting reimbursement status, on top of the price controls that the Turkish state places on the industry. In this sense, the Turkish market is ambivalent towards the pharmaceutical industry; on one hand it welcomes their investment, but conversely it also places restrictions within the domestic pharmaceutical market that make it equally unattractive for pharmaceutical companies. The Turkish government is keen to reduce the country's trade deficit and turn its pharmaceutical trade balance into a surplus, but without offering the industry much in the way of growth and reinforcing intellectual property rights, we believe it will be very difficult to meet the state's aim of delivering a pharmaceutical trade surplus of US$1bn and exports of US$7.3bn by 2023.
|Pharmaceutical Trade Deficit Unlikely To Be Overturned|
|Pharmaceutical Trade Balance, US$bn|