written on 17.08.2012

Interview with Hülya Yılmaz, Tax Partner, Deloitte Turkey

Can you describe the current investment climate in Turkey for pharma companies?

Turkey’s economic and political situation are very important factors to consider for foreign investors. Over the last three years especially, the economy has been growing steadily; in addition, there is today a relatively more political stability compared to the past.

Furthermore, Turkey’s population, geographic location, and age distribution present significant opportunities for pharmaceutical companies and health care providers.

Culturally, Turkey has close relations with the Middle East, the former Russian republics, such as Kazakhstan Tajikistan, Uzbekistan, etc – where there are many people who speak Turkish and are familiar with the Turkish culture -, as well as the Balkan region. Turkey has roots both in the Western world and in the Eastern world.

One of our international clients recently mentioned that they have identified two countries for future growth, these are India and Turkey. Indeed, more and more multinational pharma companies select Turkey as the regional headquarters for their operations in the Middle East; others try to acquire Turkish partners, such as Amgen with MN, and by doing so, they also aim at operating in the region from Turkey. Deloitte’s global life science and health care practice also gives importance to Turkey since Turkey is considered as one of the markets with high priority for investment. Turkey is one of the active jurisdictions in terms of life science and healthcare practices.

Recently, Deloitte has released a report prepared in collaboration with Turkey’s Investment and Promotion Agency (ISPAT). In this report, the analysis about Turkey’s potential for growth is mainly based on Turkey ultimately joining the European Union (EU). This possibility seems to never materialize, and in the meantime, Europe entered an unprecedented crisis. In this new context, what are the chances for Turkey to develop as a hub for European operations?

What we observe is that Western companies are either acquiring Turkish firms or expanding their activities here in Turkey. These companies are also tending to shift their operations to Turkey. The government’s aim is also to welcome increasingly innovative research and production activities. The Turkish Minister of Health’s major objectives include increasing production as well as the country’s export activities. Thus, authorities are welcoming production-related investments, in contrast with service-related investments.

This dynamic is also visible in the selection of companies for tax inspection. For instance, manufacturers and exporters can be said to be relatively in a much stronger position to defend themselves before the Turkish revenue authorities than companies which import and distribute. Turkey’s current account deficit is amongst its most negative indicators at the moment. The Government is open to and welcomes those investments that would increase manufacturing and consequently employment and exports. Although the consecutive price cuts have adversely affected pharma companies, on the positive side, access to health services and drugs has increased as well as the number of hospitals. However, questions are raised about the sustainability of the model applied today, where volume is increased while value is controlled, and about whether compromises on quality of health delivery would have to be made.

Indeed, how can the Turkish government on the one hand make life of the pharmaceutical companies so hard and on the other invite them to invest in Turkey?

That is a good question. In fact, we can generally say that there are four major groups of players in the life science and health care industry: 1) Pharmaceutical companies 2) health care service providers (mostly hospitals) 3) Medical and Scientific Equipment/Device Distributors and 4) Health insurance companies. Each of these sub sectors is different from one another in terms of their strengths and weaknesses as well as their needs for investment and growth. Accordingly, we believe that the development and investment potentials of each sub sector need to be evaluated separately. It is true not only in Turkey but also in other countries all over the world that the resources of Governments (i.e. the public budgets) are always limited given the potential demand for life science and health care products and services. Under this constraint, the critical issue is to develop and implement a sustainable public life science and health care expenditures financing model.

While the policies implemented until today, which are based on the unit cost control mechanisms are focusing on the pricing and reimbursement of the medicines and the setting of contribution margins, the sustainability of this system can only be achieved by supporting the control mechanisms on demand side so that all priorities of the stakeholders are being respected. The Global Budget in Turkey for 2010-2012 will be renewed this year, and accordingly, we expect certain measures to be taken. Public pharma expenditures for 2012 are forecast as TL 14.9 Billion and that the total public pharma expenditure amount, which has been determined for the Global Budget period as TL 46.8 Billion, will be realized as TL 46.1 Billion, with a surplus of TL 700 Million. It should be noted that 2012 is the last year of the Global Budget period in Turkey. It is expected that a new sustainable public pharma financing system would be designed for all stakeholders. Within this framework, it would be important that the potential reform areas be determined and the possible saving measures be designed together with the public pharma expenditures forecast for 2013, which would constitute the basis for the new period starting from 2013.
On the private side, there are also opportunities for private equity and investment funds for instance, interested in acquisitions and sales of pharmaceutical companies, or for organizations that would benefit from medical tourism, which is developing in Turkey.

Moreover, the government strives to promote research and development (R&D) activities, by incentivizing this sector, especially through 100% exemption of R&D expenditures from corporate tax base for those companies which establish R&D centres in Turkey and satisfy certain conditions. Nevertheless, the R&D incentive regime needs to be reviewed for pharmaceutical researchers considering the specific needs of this particular industry. Indeed, under the current regulations, at least 50 researchers are required in order to establish a centre; in the pharma sector, often, only a few people are needed to run a centre.

As you rightly mentioned, M&A activity has increased exponentially over the last five years. What is Deloitte’s added value to the industry, to the buyers and the sellers?

We help our clients both on an individual basis and as a group.

We help companies structure their acquisition through financial, tax, legal and commercial due diligence services and also help them in post-merger / acquisition stage so as to ensure smooth transition process and improve the efficiency of their operations after acquisition. Management of costs is very important for pharma sector which is operating under heavy price pressures. We help our clients develop strategies to manage their costs.

In addition, over the last two years, we have worked a lot with the civil associations, including the Association of Foreign Investors (YASED) and Turkey’s Investment and Promotion Agency (ISPAT), as well as other organizations aiming to strengthen the life science and health care sector in Turkey by making all the parties aware of the development needs of the sector.
What is the relative importance of Turkey’s major industries for Deloitte’s revenue here?

Considering the particular dynamics of Turkey (increasing population, composition of population, the needs for consumption for all kinds of products and services, the climate, geography, culture, hospitality etc.) we would say that all the industries are equally important for our firm, given the very high potential demands and opportunities available in Turkey almost in all industries including consumer, manufacturing, life science and health care, energy and resources, technology, media and telecommunication, financial services and the public sector. We have significant resources and expertise in all these industries and expect further growth in each of these industries in the near future.

Given the high potential demand for health care services and consequently pharma products and future prospects in this respect, I would say that the life sciences industry can be considered as an iceberg: at the moment, we only see a small part of what can be done in Turkey. For instance, public private partnerships (PPP) projects are also developing, and the Government will be expecting certain services to be performed by the private sector in terms of provision of medical equipment, providing mobile health services etc. Large multinational firms operating in Turkey and having health care business units are already interested in the PPP projects. Once these PPP projects start to be realized, Deloitte would be ready to support the participants of these projects with its local and global know-how about strategy development and implementation.

The relationship between the big 4 is different in each market. Can you describe it here, and how does Deloitte position itself with regard to competition?

Our major focus is on the needs of the companies and the industry so as to offer integrated and industry specific solutions covering all the relevant functional knowledge and experience. Accordingly, we give importance to the industry based specialization and our clients’ specific needs in this respect. Our missions include serving for public interest, providing distinctive, high quality services that are client and industry focused.

Our client may have a tax issue at the beginning, however it might turn out to be a consulting issue; or vice versa, it can come up as a consulting query, and can be treated as a tax issue in the end. As Deloitte, we are able to detect what our client needs considering the industry in which they are operating, and pull together the relevant teams to solve each case based on its particular circumstances.

Social responsibility is also very important. Deloitte aims to give to the society as well, and does not function only commercially. This is why we work actively with the civil organizations and associations.

What advice would you give to pharma and healthcare companies looking at entering the Turkish market today?

Turkey is a “rising star”. Pharma companies should enter the market, provided that they have the correct policies and the right business partner, who knows the dynamics of the country very well.

If the communication with the public authorities is managed wisely, companies would understand the situation and provide a relevant feedback to improve it. The awareness of the public sector about certain problems would increase and there would be much more support for foreign investors. In the end, it all comes down to a communication issue. Most of the time, communication problems come from each party’s misleading perception that they are losing in the agreement. As Deloitte, it is also our duty to make both parties realize and understand that win-win outcomes are always possible through development and implementation of the correct strategies and solutions.

Turkey is as important as the BRIC countries in terms of its vast potentials. In fact, I believe it has more potential given its underlying cultural and historical links with the surrounding countries. That is why it is a rising star which needs to be discovered!

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