Amgen Shrugs Off Turkish Price Cuts, Snatches Up Mustafa Nevzat For Broader Reach Into Emerging Markets

Despite harsh price cuts in Turkey that have taken a toll on multinationals, Amgen dives head first into the market.

A bidding war for one of the fastest growing drug makers in Turkey is now over, with Amgen Inc. stepping in as the white knight to acquire 95.6% of the shares in Mustafa Nevzat Pharmaceuticals, a privately held generic drugs maker, in an all-cash deal valued at $700 million.

The transaction, announced April 25, will “significantly expand Amgen’s presence in Turkey and the surrounding region, which are large, fast-growing priority markets for Amgen,” the company said in a statement.

A leading Turkish manufacturer of injectables with 2011 revenues of roughly $200 million, MN Pharma has grown double-digit in the last five years. The company is among seven local drug makers ranked in the top 20 pharmaceutical companies in Turkey, according to data from IMS Health.

Several multinational firms were also rumored to be bidding for a stake in MN Pharma, including Pfizer Inc., GlaxoSmithKline Inc., Merck & Co. Inc., and Eli Lilly & Co., which likely drove up the price for Amgen (Also see "Lilly Among MNCs Scouting In Turkey For Local Partners As GMP Inspection Backlog Continues" - Scrip, 12 Oct, 2011.).

When asked by an analyst if he had lost out to Amgen in a bid for MN, GSK CEO Andrew Witty said “obviously we're not going to talk about what deal we may or may not have been involved in.” Speaking on GSK’s quarterly call April 25, Witty went on to say that GSK will pursue “relatively less bolt-on activity … in the emerging markets” as it focuses on organic growth.

From Brazil To Turkey

As the market leader in the Turkish hospital segment and injectables business, MN will greatly increase Amgen’s presence in Turkey and neighboring markets, Amgen spokeswoman Mary Klem told PharmAsia News. “The acquisition of MN Pharmaceuticals fits our strategic goal of expanding in the fast-growing market,” she said.

Since establishing a presence in Turkey two years ago, Amgen is currently marketing two products, Aranesp (darbepoetin) and Mimpara (cinacalcet) (sold as Sensipar in some markets) through its affiliate in the country. More regulatory approvals for other products in Turkey are planned, disclosed the spokeswoman.

Given that only 25% of its current revenues come from outside the U.S., the California-based firm has been gearing up for international expansion, looking to license back regional rights to its own products and also planning acquisitions to gain access to local infrastructure in core markets.

In a business review in spring 2011, Amgen said it wanted to triple sales from emerging markets from $250 million in 2010 to $1 billion by 2015. The company has the resources to be aggressive. As of March 31, 2012, it reported almost $19.4 billion in cash and cash equivalents, much of it offshore (Also see "Amgen Hits Another Emerging Market Target With $700M Turkish Deal" - Pink Sheet, 25 Apr, 2012.).

Last year, Amgen acquired the privately held Brazilian firm Bergamo for roughly $215 million, and has said it was on the hunt for similar acquisitions in other key emerging markets (Also see "After Brazil Onto China? Amgen Unveils Emerging Market Strategy" - Scrip, 26 Apr, 2011.).

During a quarterly call April 24, the day before the MN Pharmaceuticals deal was announced, Amgen CEO in waiting Robert Bradway reiterated this point, noting that Amgen currently operates in roughly 54 countries, and would like to be in 75 countries by 2015.

“We're pleased with the progress that we've made in launching our own proprietary medicines following the acquisition of [Bergamo],” said Bradway, who will take over as CEO next month. “So that's the type of deal that we think makes sense. Not surprisingly, when we look at the emerging markets that we've yet to establish a big presence in, they include the BRICS, with the S being South Korea. And then we include Turkey and Mexico as two that we think are important for us to have a presence in before we get to 2015. So Brazil, Russia, India, China, South Korea, Turkey, Mexico are key markets for us.”

"The combination of MN and Amgen creates an innovation leader in Turkey with unique capabilities and scope to expand regionally and in other attractive high-growth markets” – MN CEO Levent Selamoglu

For MN Pharma, the deal marks a new chapter in the company’s evolution.

"This transaction represents an attractive opportunity for MN, its employees and customers," said MN CEO Levent Selamoglu in a statement. "The combination of MN and Amgen creates an innovation leader in Turkey with unique capabilities and scope to expand regionally and in other attractive high-growth markets. Amgen's focus and resources will also ensure continued investment in Turkey.”

Pricing Pressure May Be Easing Up

Despite being hailed as one of the fastest growing pharma markets, behind only the BRIC bloc (China, India, Brazil and Russia), Turkey’s pharma industry has come under significant pricing pressure in recent years following three rounds of harsh cuts imposed by the government. Overall growth in the market has declined, from the double-digits achieved in 2008-2009. However, some analysts say that the worst could be over.

Unlike many emerging markets, Turkey has a government-run insurance scheme that helps boost volumes, but it also means the market is more susceptible to government-mandated price cuts than in self-pay markets.

By implementing a “global budget” policy to cap medicine purchases, the government has repeatedly slashed prices on both innovative and generic drugs. In the last round of cuts in November 2011, the Ministry of Health capped the price of both generic drugs and branded drugs with generic versions on the Turkish market to a maximum of 60% of their reference price, down from the previous 66% ceiling (Also see "Turkey Slashes Prices Yet Again, Pharmas Prepare For Worst Case Scenario" - Scrip, 17 Nov, 2011.).

As a result of those price reductions, Turkey’s prescription drug market, which recorded 16% growth from 2006 to 2007 and again in 2008 to 2009, declined to -1% during the 2009-2010 period, IMS data show. To cope with the dismal operational environment, many drug makers resorted to layoffs and multinationals were said to be reconsidering new investments in the country (Also see "Boehringer Threatens Turkish Exit Due To Price Cuts" - Scrip, 2 May, 2011.).

Several Big Pharma companies have also singled out Turkey as a reason for declining performance in their emerging markets business on quarterly calls with analysts. GSK, for instance, revised down its estimate for emerging markets growth in 2012 to 11% to 12% from a previous target of 14%, blaming price cuts in Turkey and Russia (Also see "Sanofi Sees Strength In Regional Volatility, GSK Lowers Revenue Target After Price Cuts – Emerging Market Earnings Roundup (Part 4)" - Scrip, 14 Feb, 2012.). And a day before Amgen’s MN acquisition, on a quarterly call with analysts, Novartis AG highlighted Turkey and Poland as culprits for a relatively disappointing 5% growth rate in emerging markets during its first quarter.

To remedy the situation, the Ankara government started offering relief measures since the beginning of this year. One of those measures is to remove an extra discount applied to certain products, and to reduce value-added tax on raw pharmaceutical materials from 18% to 8%.

IMS Health estimates the market will return to growth, up to 4.1% for 2011 and an average of 8.1% for 2010-2015.

In addition to the pricing pressure, another challenge facing the industry is a difference between the Turkish lira/euro exchange rate and one used by the government to set limits for pharmaceutical purchasing. While the government uses a 1.96 ratio, the lira has since devalued to a rate of roughly 2.36 to 2.4, and the depreciation alone reduced drug prices by an additional 25%, according to the Turkish Association of Research-Based Pharmaceutical Companies (AiFD) (Also see "With December Approaching, Are More Turkish Price Cuts On The Way?" - Scrip, 1 Nov, 2011.).

“Although these (relief) measures have provided some comfort, we believe that the industry is still in need of an imminent adjustment in the parity used in drug pricing,” noted Istanbul-based Standard Bank in a note to investors April 12.

Local Manufacturing, Regional Distribution

Like many multinational peers looking to expand in Turkey, Amgen is seeking a local manufacturing base, a key requirement to obtain timely regulatory approvals in the country and a way to decrease manufacturing costs in the wake of price cuts. The acquisition also provides Amgen with a regional distribution network to tap into.

A Turkish regulation promulgated in 2010 requires drug registration applications to include a GMP certificate recognized or issued by the Ministry of Health for the drug’s manufacturing site. Due to a lack of staff, MOH has certified only a small percentage of the production sites submitted and approvals for 287 products filed by international firms had been delayed, reported AiFD.

Multinationals with local partners, however, have been able to move their applications along more quickly (Also see "GSK Reportedly Bidding For Turkish Biofarma, Local Manufacturing Key To Market Registration" - Scrip, 14 Apr, 2011.).

The acquisition by Amgen could provide an additional “seal of approval” for MN products bound for international markets.

In addition to being a local leader, MN also operates an extensive sales network, exporting products to 20-plus countries in the Middle East, Eastern Europe, Asia and Africa.

Importantly, the acquisition by Amgen could provide an additional “seal of approval” for MN products bound for international markets, Murat Yesildere, a consultant with Istanbul-based Egon Zehnder International told PharmAsia News.

One of the oldest drug makers in Turkey, MN was established in 1923 by its founder Mustafa Nevzat Pisak. Since then, MN has grown to 1,200 employees and manufactures both active ingredients and finished products. Venturing outside its traditional antibiotics business, the firm opened an injectables manufacturing plant in 2009, producing both liquid and frozen dry powder vials for the oncology market.

The plant has since obtained approvals from both U.S. FDA and the European Medicines Agency. In 2010, MN exported its first oncology product to the U.S. and has expanded its U.S. portfolio to six products. Registrations for more products are ongoing, according to the company’s website.

To export products to the U.S. market, MN factories have cleared multiple audits conducted by FDA, Yesildere added.

The company’s heavy emphasis on product quality could have helped seal the deal, convincing Amgen to outbid others with a hefty valuation for MN Pharma, suggested the consultant.

Indeed, drug quality has become a persistent headache in emerging markets, and counterfeit drugs are a particularly pertinent issue in the Middle East, where World Health Organization data show that as much as 35% of all drugs in the region are counterfeit, compared to less than 1% in the U.S. and Western Europe.

Earlier this year, in fact, counterfeits from the region made their way to American shores. In February, one batch of cancer drug Avastin (bevacizumab) was found to be counterfeit in the U.S. In March, Turkey was identified as the original source of the ingredients of the fake version of Roche’s widely prescribed cancer drug.

With MN Pharma’s proven quality record, Amgen believes its product reach will expand in Turkey and beyond. “Together with MN’s staff and management team, we plan to grow our business with high-quality and innovative medicines in Turkey and the surrounding region,” said Amgen’s Bradway in a statement.

Hot M&A Market; Fewer Targets To Pursue

Turkish companies with a smaller armamentarium than multinationals have been hit particularly hard by price cuts, and many are looking to cash out.

Turkish generics maker Biofarma, the tenth ranked local drug maker, went on sale in early 2011. Its private equity and venture investors sought a deal worth up to $700 million. UK major GSK was reportedly among the final three bidders. Turkey is the second-largest emerging market for GSK, which saw sales increase 3% year-on-year in 2010, reaching $420 million (Also see "GSK Reportedly Bidding For Turkish Biofarma, Local Manufacturing Key To Market Registration" - Scrip, 14 Apr, 2011.).

Turkey’s second largest pharma Bilim Ilac also attracted several European private equity firms eyeing the company, and a deal could be worth about $1 billion, according to Hurriyet News, a local paper.

Even the largest Turkish drug maker Abdi Ibrahim Ilac has been reported to be in talks with Pfizer.

One deal that did go through involved Italy's Recordati Industria Chimica & Farmaceutica SPA buying Frik Ilac, one of the country's fastest-growing drug makers, for $130 million (Also see "What Pricing Pressure? Recordati Continues Push Into Turkey With Latest Acquisition" - Scrip, 13 Jul, 2011.).

Even so, several buy-out candidates have withdrawn or were forced out of the M&A game. Abdi Ibrahim has changed its strategy, and instead of looking for a buyer is now pursuing its own international expansion plans, according to Yesildere of Egon Zenhder.

Bilim has also terminated its tender process due to disputes among its holding family and shareholders. And fourth ranked Sanovel saw its chairman and major shareholder die in recent months, and an immediate sale seems to be off the table.

With Mustafa Nuvezet snatched up by Amgen, there are fewer targets left for others in Turkey, meaning valuations will likely go up.