Turkey - Eli Lilly Reportedly Targeting Mustafa Nevzat Pharmaceuticals12 Sep 2011 • by Natalie Aster
BMI View: Turkey's pharmaceutical market offers strong growth potential and will continue to be viewed as an attractive market for foreign drugmakers to move into, including the acquisition of the remaining (mainly private) domestic producers. However, when compared with other major emerging drug markets, the Turkish market suffers from considerable government involvement in all aspects of the medicine industry, including controlling and cutting drug prices and lacking a credible strategy to develop the domestic industry.
It has been reported by the Wall Street Journal that US drugmaker Eli Lilly is in talks to form a partnership with, and potentially invest in, Turkish generic drug company Mustafa Nevzat Ilac Sanayii (MN Pharmaceuticals). According to the unnamed source, the talks are at an early stage and it is possible that no deal will result. However, BMI is encouraged by the development as the strategy is in keeping with Eli Lilly's recent rhetoric regarding its new strategy to aggressively enter emerging markets, while maintaining its focus on innovative medicine development and delivery. The company has so far failed to gain traction in non-traditional markets.
The news should be moderately positively welcomed by investors when US markets open on September 2 2011. However, any company specific development will be overshadowed by the release of US non-Farm Payrolls (NFP) data; as a result a short-term call on stock movement is not possible.
It is also reported that other large global drugmakers may have an interest in the company. The current talks are focused on a minority investment, although a larger investment has not been ruled out. The private company has no fixed valuation, but according to one of the reports' sources it is worth about US$1bn. A minority stake purchased by Eli Lilly is unlikely to reach this level. As a private company, financial reporting or analysis of MN Pharmaceuticals is not available.
BMI believes the importance of the deal to Eli Lilly will be in local distribution capacity, but could also create opportunities for low cost manufacturing and further the company's domestic regulatory expertise. A non-controlling deal could also create opportunities for MN Pharmaceuticals, offering the firm Eli Lilly's considerable global reach. MN Pharmaceuticals's production focuses on injectable generic drugs rather that tablets, the company employs around 1,200 staff, and its facilities are located in Yenibosna, one of the main industrial areas of Istanbul. Eli Lilly and MN Pharmaceuticals have reportedly lined up advisers in advance of a potential deal. MN Pharmaceuticals is also considering selling a stake to a Middle Eastern sovereign wealth fund.
Despite industry challenges, interest in the Turkish pharmaceutical market from foreign drugmakers has been maintained in 2010 and 2011. Earlier in 2011 BMI voiced our view that a swiftly concluded acquisition of a local domestic drug producer - at a time when pharmaceutical companies are still recovering from weak 2010 financial results − would maximise returns for potential investors.
BMI believes investors must be prepared to price in substantial risks when purchasing a stake in Turkish pharmaceutical firms. While BMI projects Turkey's pharmaceutical market will record a relatively strong compound annual growth rate (CAGR) of 7.4% between 2010 and 2015, government price controls have hit the profitability of drugmakers operating in the market and firms must be prepared to sell products at a substantial discount compared with Europe. In 2010, the country's drug market contracted by 0.4% to TRY16.76bn (US$11.17bn). For 2011, BMI continues to project the market achieving year-on-year (y-o-y) growth of 4.0% to TRY17.44bn (US$11.68bn). For 2012, BMI forecasts growth of 7.4% y-o-y to TRY18.73bn (US$12.96bn).
Strong Growth Returns, But Medium-Term Challenges Persist
Turkish Pharmaceutical Market
Source: IMS Health, PhRMA, Association of Research Based Pharmaceutical Companies (AiFD), BMI
BMI Economic View: On the back of the central bank's decision to cut interest rates in early August and the stellar GDP print in Q111, we have been prompted to raise Turkey's growth forecast for 2011 to 7.0% from 4.3% previously. Nevertheless, with leading indicators already showing signs of moderation, we still expect to see headline growth slow over the coming quarters as a result of tighter fiscal policies, less accommodative base effects and a deteriorating global macroeconomic backdrop. As a result, we see growth falling to 4.5% in 2012.
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