Indonesian Pharmaceutical Market 2014 Update

Indonesia, a country of more than 6,000 inhabited islands, has a population of over 250 million people — the fourth most populous country in the world. Indonesia’s GDP grew slightly less than 6% in 2013, and is forecast to grow between 5-6% in 2014.

The Indonesian healthcare market is worth $24 billion, and this could reach $31 billion in 2016. At the same time, Indonesians are forecast to spend almost $150 per person on healthcare in 2015, up from $35 in 2005. Indonesia has almost 10,000 primary care centers and over 2,200 hospitals. Three percent of Indonesia’s GDP is spent on healthcare. But, this should increase soon.

The pharmaceutical market in Indonesia is expanding quickly; it is valued at $6.5 billion with an annual growth rate of 12.5%. This growth is expected to continue through 2018. The Indonesian drug market grew 85% over the 2007-2013 period.

Over the past several years, the Indonesian government has passed laws to upgrade its healthcare infrastructure and increase public spending on healthcare. For instance, 150 new hospitals are planned for 2014. As Indonesians grow wealthier and spend more on their healthcare, private insurance and out-of-pocket purchases will increase, offering better prospects for foreign companies. Already, large private hospital chains such as Siloam Group and the Mitra Keluarga group are expanding rapidly.

Healthcare Policy

Indonesia introduced a universal healthcare system in January 2014, administered by the National Social Security Agency (BPJS). The government plans to have complete, albeit very limited, coverage by 2019. The universal healthcare scheme aims to provide better standards, regulations, access and cost effectiveness. Though more than 1,700 hospitals have signed up to participate in the scheme, the low reimbursement rates offered by the government will likely dissuade many private facilities from joining, resulting in overcrowding of public institutions.

While the introduction of universal healthcare may seem like a prime opportunity for foreign pharmaceutical companies, it is unlikely that they will have much of a role — at least initially. The program will mostly provide coverage for generic drugs, not branded pharmaceuticals. Generics are widely accepted by Indonesians. There will also be significant government pricing and reimbursement pressure on both generic and patent-protect drugs, potentially further reducing potential opportunities.

Drug Registration in Indonesia

There are four classes of drugs in Indonesia. Applications for registration go to the National Agency of Drug and Food Control (NADFC). The Association of Southeast Asian Nations (ASEAN) Common Technical Documents (CTD) must be used, and ASEAN standards should be followed. It can take up to 3 years for a pharmaceutical product to be registered.

Generic pharmaceutical pricing is regulated by the government. Pharmaceuticals included in the Essential Drugs List — 92% of which are generic and 2.5% of which are innovator — cannot be sold for more than a 50% margin. Other generics are also subject to pricing restrictions.

Pharmaceutical Companies in Indonesia

Domestic pharmaceutical firms have 70% of the Indonesian drug market. Almost 60 foreign pharmaceutical companies control the remaining 30% of the Indonesian drug market; the largest are Bayer, Pfizer, and GlaxoSmithKline (GSK).  Foreign companies focus mostly on the 25 million Indonesians with the most advanced healthcare coverage. This pool could grow quickly starting this year, as universal healthcare is implemented.  Western diseases, such as hypertension and diabetes, are also increasingly common — meaning increased opportunities for foreign drug companies that already produce medications to treat these diseases.

Indonesia’s Kalbe Farma, founded in 1966, has a market capitalization of $7 billion and is the largest listed drug company in the Association of Southeast Asian Nations (ASEAN). The firm focuses on production of prescription drugs, nutritionals and consumer health products. In 2013, Kalbe’s sales increased by almost 20%, and it has a 2014 sales target of 15%. In anticipation of the universal healthcare scheme’s increased demands for generics, the company invested $12 million to build a new factory in West Java with a monthly capacity of 87 million tablets. In cooperation with local sub-distributors, Kalbe is able to reach over 1 million Indonesian outlets, and covers all hospitals and pharmacies in the generics and prescription drugs market, as well as the majority of doctors. Kalbe is also strong in Southeast Asia and Africa.

Sanofi’s Indonesian subsidiary has a tiered price-volume strategy, providing different types of a drug — like insulin — to different population tiers. The company launched a diabetes training program for local doctors in partnership with the Indonesian government and the American Diabetes Association in 2012. Sanofi is focusing on expanding outside Jakarta into tier 2 and 3 Indonesian cities.

Novartis Indonesia has a 20% growth rate and concentrates on primary care and, increasingly, specialty care. The company has focused its primary care products in the diabetes and cardiovascular areas. While Novartis previously sold drugs through Indonesian third parties, the company is increasingly promoting its own pharmaceuticals in Indonesia. Novartis also runs a public affairs and communication healthcare program and collaborates with the government on various projects.

Foreign companies are also expanding their facilities in Indonesia. For example, Mitsubishi Tanabe Pharma announced in September 2013 that its Indonesian subsidiary would build a new production facility to expand capability and meet new GMP standards. Merck opened an Indonesian packaging plant in 2012. Fresenius Kabi bought a 51% share of Indonesian pharmaceutical manufacturer PT Ethica Industri Farmasi (EIP) for a reported $200 million in August 2013. Fresenius Kabi and the other stakeholder of EIP, PT Soho Global Healthcare (SGH), will together construct a $60 million IV generic drug and infusion solutions plant in Indonesia. Fresenius Kabi and SGH also plan to invest about $40 million in two new antibiotic plants.

Challenges for Drug Companies in Indonesia

Growth in Indonesia is slowing primarily due to increased inflation, a poor exchange rate and lower foreign investment. The economic outlook is also somewhat unstable because of parliamentary and presidential elections scheduled for April and July 2014. In addition to the weak currency, rising electricity prices and an increase in the minimum wage have also hurt pharmaceutical companies, both domestic and foreign. Many drug companies saw a year-on-year decline in profits in 2013.

Inflation hits the pharmaceutical industry particularly hard because up to 96% of the materials used in drug production in Indonesia are imported. For instance, domestic pharmaceutical giant PT Kalbe Farma saw a 19% increase in the costs of goods sold in the first half of 2013. Another major Indonesian drug company, PT Kimia Farma, also saw sales increase at a slower rate than its costs of goods sold.

In addition, foreign pharmaceutical companies face a variety of roadblocks in the Indonesian market. Several laws protect the local industry from foreign competition. Decree 1010 has, since 2008, required that all pharmaceuticals registered in the country be locally produced. This law was relaxed in 2010, allowing labeling and packaging to meet the definition of “local manufacturing.” Foreign drug companies have responded to Decree 1010 by partnering with domestic or other international companies or expanding their own local manufacturing capacity in Indonesia.

Another government restriction on foreign companies is the negative investment list, which limits the amount of foreign ownership possible in different key sectors of the economy. While this ownership percentage was capped at 75% for pharmaceutical companies, in December 2013 Indonesia raised the limit to 85%.

There are other issues with the Indonesian pharmaceutical market. Unethical promotional practices by domestic companies are common. Under the new universal healthcare rules, as well as under a previous law applying to public healthcare institutions, doctors will be required to prescribe generic drugs whenever possible.

Furthermore, there is precedent for the government-mandated generic licensing — in 2012 the Indonesian government gave compulsory licenses for generics of several HIV drugs, including those made by Merck, Abbott Laboratories and GSK. The government suggested in 2013 that it intended to control the prices of branded medicines and also regulated the evaluation of new drugs via a more systematic assessment to support more “rational use.” Several foreign pharmaceutical companies have indicated that they are worried about government protectionist policies.

Potential future regulation for halal-certified drugs could place further restrictions on both foreign and domestic companies. Indonesia is approximately 85% Muslim, and the Organization of Islamic Cooperation (OIC) member countries agreed in October 2013 to Indonesia’s proposal that it be the center of vaccine development and production for the group. The OIC is composed of almost 60 member states and has a collective population of about 1.7 billion.

Despite the above challenges, Indonesia still provides a significant opportunity for foreign pharmaceutical companies. The country has a comparatively high growth rate, large market, growing middle class, urbanizing population and strong demographics.