Despite the immense size of the Indonesian market, low labour costs and the potential of the ASEAN as a whole for pharmaceutical sales; investors are still weary of the country. Recent changes in regulations have been viewed as protectionist and largely in favour of existing local companies which already dominate the market. The sector is in need of a major boost in order to best serve the population, particularly the poorest stratum that is being priced out of the market due to the myriad of taxes and duties that keep Indonesia’s pharmaceutical prices among the highest in Asia, while being the least innovative.
One of the major weaknesses in the sector is the lack of locally available raw materials that leaves producers at the mercy of fluctuating global prices. High oil prices will maintain the country’s high drug costs that already stand at 25-30% above average world prices, according to the Health Research and Development Agency. Like many of the industries that make up the manufacturing sector, pharmaceutical producers were hit hard by the industry electricity tariff increase in 2010 that raised prices by 18%. In addition, the import tax of 5% imposed on raw materials under Minister of Finance Regulation 240/2010 heavily impacts drug producers. It is estimated that between 90-98% of all pharmaceutical raw materials have to be imported mainly from China, and to a much smaller extent from America and India. The expensive price of drugs in the country is therefore easily explained considering that on average, raw materials and energy make up 35% of the total selling price for drug companies.
The Ministry of Industry has requested a removal of tariffs for 20 of the raw materials covered under the regulation while the pharmaceutical manufacturers through The Business Players Association request that 80 should be exempted. As of the beginning of 2011, the amendments to the regulation, No. 41/2010 have not been signed into law by the Ministry of Finance thus import duties still stand and some prices of generic medicines have gone up. The Ministry of Health is under pressure to keep drug prices low in the generic market (over which it has jurisdiction) and in line with the purchasing power of the country to provide greater access to pharmaceuticals, but manufacturers must react to the rising prices of materials for their bottom line. At the beginning of 2011, the 15 major drug producers put their prices up by 10-15% and then brought them down again at the end of the first quarter encouraged by the Ministry of Health and helped by a strengthened Rupiah. In order to keep prices low, the requested tariff removals are the first step in the short term but for the long term, action must be taken to ensure the local supply of the raw materials.
Source: Economist Intelligence Unit 2010
Research and Development has been largely neglected as part of local company practice and has led to a dependence on copying generic drugs in particular, but also prescription drugs and vitamin supplements. The high production costs and low selling prices of the Indonesian market squeeze profits, leaving very little for R&D. Bio Farma spends 10% of total revenues on R&D while Kalbe Pharma spent only 2.4% according to their Q1 2011 financial report with less than 2% as an average for the industry as a whole. This pales in comparison to the average of 20% of spending by companies throughout the world. Local players therefore act as retailers of generic products as opposed to innovators with spending concentrated on promotion and branding. This misses out on a great opportunity to make products tailored to Indonesia’s diverse market and unique consumer profile that seeks a balance between the benefits of inorganic medicines and herbal remedies. A huge and unlikely shift in the attitude of the industry would have to take place for this to change and government incentives would be the only route to such a possibility. More likely, it will continue to be mulitnational pharmaceutical companies that carry out the research for the development of patented drugs, yet current regulations are not making Indonesia a country of choice as a research and production base.
As of 2008, foreign companies were required to open domestic manufacturing bases for pharmaceuticals in order to sell their products to the Indonesian market. This impacted 13 of the 29 foreign companies present in the country that did not have production facilities in Indonesia in 2008. Ministry of Health Decree N0.1010/2008 provided a 2 year grace period for companies to comply or else have their drug approval licenses from the National Agency for Drug and Food Control, revoked. This has been a less than attractive proposition for foreign investors considering the dependence on imports for materials, weak infrastructure and lack of intellectual property protection. Further regulations limit the amount of spending on promotions that is eligible for tax deductions to 2% of total sales. For new entrants into the market and indeed the launch of any new drugs, branding and promotional spending are essential to reach out to the population as a whole to educate on the benefits of the drug as well as justify the premium on branded drugs. Therefore, such measures have had a negative impact on investment with a compounded decline of 24% a year 2005-2010 (IFT estimate).
Under the Negative Investment List of 2010 (see Understanding the Negative Investment List), foreign investors may own up to 75% of equity in pharmaceutical manufacturing and are therefore faced with the challenge of finding a local partner for the remaining 25% who can put up the necessary funds for such an investment. This was widely anticipated to be revised to 100% after the Minister of Health, Endang Rahayu Sedyaningsih voiced her support of the idea at the beginning of 2010. It is estimated by the Director General of Development of Pharmaceutical and Health Equipment under the Ministry of Health, that allowing 100% ownership could increase investment in the sector by 60% up to $800 million USD. More production facilities would have the welcome effect of bringing down the cost of drugs for the wider population.
The merits of the Indonesian market are hard to ignore as the largest economy in the ASEAN, the scope of future consumption and as a base for the ASEAN market. The government, through the Ministry of Health, is actively trying to create a level playing field for local and foreign companies to create a beneficial environment for both investors and the Indonesian public, which is currently underserved in all aspects of health care. It is widely anticipated that future revisions to the Negative Investment List will allow 100% foreign ownership as part of the gradual liberalisation of the health care sector that most recently loosened the restrictions on foreign capital for hospitals. The decline in investment may well be reversed in the short term as further changes in policy are expected and will return confidence in the market.
Extract of Negative Investment List 2010
Global Business Guide Indonesia - 2012
Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.
Overview of the Manufacturing Sector
Overview of Fibre, Textiles & Garments
Challenges in Indonesia’s FTG Industry
Overview of the Pharmaceutical Sector
Automotive Industry: Driving Manufacturing
Overview of the Food & Beverage Sector
Addressing the Brain Drain in Indonesia
Cooperating with Industry on Education & Research
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