Global Business Guide Indonesia

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Manufacturing | Overview of Indonesia’s Pharmaceutical Sector

As the world’s fourth-most populous country with a fast growing economy, Indonesia is turning into an important market for pharmaceuticals. A major expansion of public healthcare is set to lift nationwide spending on medical treatment, but the budget pressure that accompanies government procurement means benefitting from the programme will not be easy for drug companies. The local pharmaceutical industry has a long way to go in terms of quality, efficiency and innovation. Global players are drawn to Indonesia for its large potential, but they need to navigate rules and market conditions that are not always stacked in their favour.

Overview of Indonesia’s Pharmaceutical Sector
Global players are drawn to Indonesia for its large potential, but they need to navigate rules and market conditions that are not always stacked in their favour

Led by PT Kalbe Farma, PT Sanbe Farma, and the Soho Group, Indonesian companies dominate local pharmaceutical production. Numerous multinationals also maintain facilities in the country, including Pfizer, Bayer, Novartis and Merck. Regulations have been labelled protectionist for allowing imports of drugs only in limited circumstances, while generally requiring foreign drug makers to open factories in Indonesia or team up with domestic companies in order to sell to the local market.

An emerging market

Indonesia’s pharmaceutical sector has grown at 12.5% annually over the past several years expanding by 85% from 2007-2013 (Pacific Bridge Medical) and is expected to receive another boost from the rollout of general national health insurance beginning in 2014 (See Indonesia's Healthcare Sector). The Indonesian Pharmaceutical Association forecast nationwide sales to rise by at least 13% to 54 trillion in 2014 RP. Prescription drugs, over-the-counter drugs and food supplements (nutritional and vitamins) have all experienced increasing sales. Consulting firm IMS Health sees Asia’s pharmaceutical market outpacing every other region of the world with CAGR of 11.4%-14.4% in the period 2012-2017.

Healthcare spending per capita increased from $61 USD in 2008 to $108 in 2012 at average annual exchange rates, according to figures from the World Health Organization (WHO), yet remains below the Philippines ($119), Thailand ($215) and far below Malaysia ($410). Vietnam came in below Indonesia at $102 USD per capita. Indonesia’s spending on healthcare also lags behind regional peers when measured against the countries’ respective GDP. Total expenditure in Indonesia increased from 2.8% of GDP in 2008 to 3.0% in 2012, which compares to 3.9% in both Thailand and Malaysia, 4.6% in the Philippines and 6.6% in Vietnam.

Ample growth potential

The allure of Indonesia’s pharmaceutical market rests not on its current size, but on its potential size. Low current penetration leaves ample room for volume growth. The country’s expanding middle class, its growing and ageing population, and the overhaul of public health insurance all contribute to rising demand for healthcare services in general and pharmaceuticals in particular. Market research firm Frost & Sullivan in March 2013 predicted that the nation’s healthcare market would more than double from 2012 to 2018. Demand for drugs to treat lifestyle-related diseases, such as diabetes, cardiovascular illnesses and gastric conditions, is set to rise rapidly with increasing urbanization in Indonesia and in neighbouring emerging economies.

Aside from rising spending power and increasing demand for quality healthcare from Indonesia’s middle and upper class consumers, pharmaceutical companies are banking on the National Health Insurance (JKN) programme to boost sales to the tens of millions who hitherto were unable to afford modern drugs. In a country of a quarter of a billion people, universal health insurance could massively widen the market for medicaments.

National health insurance

But it is also a very ambitious undertaking, so some cautionary notes are in order. Scheduled to be rolled out across the entire archipelago within five years, JKN aims to replace limited health safety nets for civil servants, military personnel, private sector employees and the poor with a unified system. JKN will be financed by income-based premiums. The government will pay a fixed premium for the poor, but defining this group is difficult because of the large informal work sector. Hence some abuse of the system will be inevitable.

Questions have been raised with regards to funding, particularly, whether the subsidized premium for the poor will suffice to cover even basic needs. The Economist Intelligence Unit in a January 2014 analysis claimed that the proposed 19,225 RP per month was too low, considering the increasing prevalence of expensive to treat non-communicable diseases like cancer and heart conditions. The 5% premium levied on regular incomes was also considered to be on the low side. Premiums could, however, increase if there is enough political pressure. JKN, for all its flaws, should significantly improve access to healthcare in rural areas and affordability of healthcare for the poor.

The state as an overbearing buyer?

The agency to run JKN, Badan Penyelenggara Jaminan Sosial (BPJS), will take over existing public health schemes. As such, it will become the dominant buyer of pharmaceuticals. Striving to keep the programme’s costs within budget limits, BPJS will restrict medication to be covered by JKN. As a result, manufacturers will have to contend with significant price pressure as they seek to supply bulk quantities of pharmaceuticals for public procurement. It must also be noted that 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 drugs cannot be sold for more than a 50% margin.

Even though consumers might prefer patented drugs to generic ones or well-known brands to lesser-known ones, price and quantity will be the order of the day when it comes to supplying millions of new market entrants. State-owned hospitals are already required to use non-branded generic drugs whenever possible.

What might look like a threat to makers of patent-protected drugs, many of which happen to be multinational players, may not be that threatening, after all. The main effect of JKN should be to create additional demand for drugs in the lower end of the market rather than cause large-scale substitution of premium products.

Premium medical care

In the upper end of the market, many will prefer to stick with their trusted brands in a country where public healthcare is seen as a means of last resort. Also, rather than rely on what will be very basic coverage, at best, in the national scheme, Indonesians who can afford it will continue to opt for private insurers that place fewer restrictions on the choice of drugs. Finally, growing health awareness and rising personal incomes is likely to see Indonesians spend more money out of pocket on non-essential medication and food supplements.

Premium healthcare holds a lot of potential in Indonesia. Currently, hundreds of thousands of Indonesians fly overseas, especially to Singapore, for what they believe is better treatment than they can get in their home country. However, private hospitals promising world-class service are being built across Indonesia, their investors hoping to attract well-heeled patients and to reverse the medical tourism outflow. The growing premium healthcare segment will drive demand for premium pharmaceuticals in Indonesia.


A number of impediments for Indonesia’s pharmaceutical industry must not be overlooked. Due to the lack of domestic raw materials, manufacturers need to import almost all ingredients from abroad, which not only drives up input prices but also entails currency risks, as the 2012-2013 rupiah depreciation demonstrated. Another cost factor is the daunting task of distributing drugs across the country’s thousands of islands using underdeveloped infrastructure.

The local pharmaceutical industry is dominated by manufacturers of generic drugs and characterized by low spending on research and development. A shortage of qualified scientists, concerns over patent enforcement and the still low spending power of the local population are blamed for a lack of innovation. A related issue is that of counterfeiting; the International Pharmaceutical Manufacturers Group estimated the circulation of fake drugs at 15-20% of the total market.

Product registration is a further hurdle to contend with. New products must be registered with the National Agency of Drug and Food Control (NADFC) as well as comply with ASEAN Common Technical Documents; a process which can take up to three years. Indonesia also became the centre of vaccine production for the Organization of Islamic Cooperation (OIC) in 2013 which may also see the introduction of obligatory halal certification for pharmaceutical producers in the future.

Protectionist regulations have been blamed for less than ideal investment conditions. The Negative Investment List limits foreign companies to a maximum 75% stake in local pharmaceutical firms and generally excludes them from the important distribution business. A 2013 revision to the list is in progress, however, and should see the ownership cap lifted to 85% once implemented.


The outlook for Indonesia’s pharmaceutical industry is positive because the enormous growth potential of the local market outweighs regulatory, legal, logistical and capacity constraints. Despite facing competition from hundreds of local generic drug makers, foreign-based companies are clearly finding Indonesia worth investing in, as evidenced by a number of recently reported expansions. Building recognized generic brands of their own should allow foreign firms to claim their share in national healthcare.

Aside from cooperation with local drug makers and distributors, acquisitions provide a quick way into the market. Established manufacturers of generic drugs stand to benefit from technology and knowhow of global players in a cost competitive marketplace.

Currently, almost all locally produced pharmaceuticals go to the domestic market. However, sales to other ASEAN countries become an increasingly interesting proposition for higher-value brands, where the sourcing of raw materials has less impact on total costs. Turning Indonesia into a regional pharmaceutical hub, however, will depend on supportive regulations and infrastructure.

Global Business Guide Indonesia - 2014

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