Global Business Guide Indonesia

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Manufacturing | Indonesia’s Pharmaceutical Industry is in Rude Health

Historically, Indonesia’s pharmaceutical drug utilisation has been the lowest in the region compared to neighbouring markets; however, with its trend of significant and sustained population growth, the country is seeing increasing demand for access to safe, effective medications and healthcare services. In particular, Indonesia’s changing epidemiology of chronic illnesses such as diabetes, obesity, cardiovascular diseases, and other similar conditions has revealed a rise in related incidence as well as unmet healthcare needs.

Indonesia’s Pharmaceutical Industry is in Rude Health
As the BPJS programme matures and grows, opportunities may develop for branded pharmaceuticals to achieve coverage and reimbursement under the programme

BPJS and population growth

The pharmaceutical market in Indonesia more than doubled from just under $3 billion USD in 2008 to reach approximately $7 billion USD in 2015 and is anticipated to increase further to $12.6 billion USD by 2020, driven primarily by the Indonesian government’s economic and healthcare initiatives, according to research and consulting firm GlobalData. The company’s latest report states that Indonesia’s pharmaceutical sector will be boosted by the establishment of a universal healthcare scheme, known as the Jaminan Kesehatan Nasional. This was launched in January 2014 with the aim of providing health insurance to 250 million Indonesian citizens by 2019, which would make it the world’s largest social health insurance programme (See Health Insurance in Indonesia: Public Coverage No Threat to Private Sector).

Many challenges exist for this new programme, as coverage premium rates, premium collection processes, and other administrative necessities have not been well-defined or implemented. There are also still questions around the healthcare infrastructure’s ability to support an influx of new patients into the system. Thus, since funding remains an issue, the programme will initially focus on providing generic drugs to patients. However, as the programme matures and grows, opportunities may develop for branded pharmaceuticals to achieve coverage and reimbursement under the programme.

In 2015, the sector saw a challenging period due to lower economic growth and higher inflation. Depreciation of the rupiah, higher electricity tariffs and higher minimum wages also led to an erosion in the profitability margins of pharmaceutical manufacturers during the year. However, the implementation of the National Health Insurance (JKN) programme by the Social Security Agency (BPJS) helped to revive the sector. The growth was backed majorly by the generics segment. The JKN programme has made Indonesia one of the fastest growing pharmaceuticals markets in the region. Both domestic and foreign companies are expanding their production capacities to meet the expected demand growth over the next few years thanks to the programme.

Renewed government support

Going forward, the sector is expected to be back on a double-digit growth path, backed by government support and various macro growth drivers, including the rise in per capita income, the rise in health insurance penetration, proliferation of healthcare services across the remote areas, an increase in foreign investment and increase in government as well as private expenditure on health (See Indonesia’s Healthcare Industry; Showing Strong Vital Signs). However, frequent policy changes and rising prices of raw materials may act as deterrents for the growth of this sector.

On the other hand, in the 11th economic stimulus package, released by the Indonesian government in March 2016, the government aims to boost the domestic production of raw materials for medicines. This is particularly true for five product categories – namely, biotechnology, vaccines, herbal extracts (See From Plants to Products: Turning Indonesia's Botanical Extracts into Consumer Goods), active pharmaceutical ingredients and medical devices.

Previously, the government had removed the pharmaceutical industry from its negative investment list (which lists the sectors that are closed, or partially closed, for foreign ownership), implying 100% foreign ownership is now allowed. Businesses involved in raw materials for medicines can now be 100% owned by foreigners, an increase from the previous 85% maximum ownership threshold under Presidential Decree No. 39/2014. The Indonesian government is hoping that the new ownership limitation policy will attract more investment to the local industry for pharmaceutical raw materials so as to reduce dependence on imports and, in turn, bring down pharmaceutical prices across Indonesia.

Raw materials account for 60% to 80% of production costs in the pharmaceutical industry, while 90% to 95% of the raw material is still imported from China, India, Europe and the US. The strong reliance on imported content makes the industry sensitive to exchange rate fluctuations, while at the same time the industry has a domestic market orientation.

Healthy trajectory

Indonesia's pharmaceutical market still holds future potential, given the country's large population and the fact that medicine is a basic need. The local pharmaceutical market value has grown by 11% for the past five years and reached a value of 69 trillion IDR in 2015. Prescription medicines make up 59% of the market, while over-the-counter (OTC) drugs account for 41%.

Mr Michael Wanandi
Combiphar
Mr Michael Wanandi
Generic Drugs & Consumer Health Products
The country has a very young population and this explains why spending on health here is still relatively low. As the substantial youth subset of the population gets older we expect to see a marked rise in the consumption of products geared towards healthy lifestyles.
See Interview

Indonesia's large market has driven investment in the pharmaceutical sector. In 2015, the combined chemicals and pharmaceutical investment amounted to 45.2 trillion IDR, or 8.3% of Indonesia's total investment. Of the total, 54% was foreign investment. Realised domestic investment in the pharmaceutical sector grew by 44.7% per year over the 2010-2015 period, much higher than foreign investment, which grew by an average annual rate of 19.8%. Recently, the Investment Coordinating Board (BKPM) recorded investment interest from India, Japan, South Korea and China, and several foreign companies proposing joint ventures with Indonesian counterparts.

To promote the development of the pharmaceutical raw material industry, the government has issued Health Ministry Regulation No. 87/2013 on the development of medicinal raw materials. Several pharmaceutical companies are pioneering the development of raw materials in Indonesia. For example, Kimia Farma has built a plant for pharmaceutical salt (scheduled for completion in 2016) and will build another for atorvastatin, simvastatin, rosuvastatin, clopidogrel, and pantoprazol. Pharmaceutical salt is a common raw material for intravenous liquids, tablets, vaccines, syrup, oral rehydration salt (ORS), haemodialysis liquids and health drinks, among others.

However, the development of the medicinal raw materials industry still faces major problems. First, it lacks supplies from domestic petrochemical industries to produce synthetic medicines, resulting in higher production costs, because those supplies need to be imported. Second, it requires a large amount of investment and is a long-term process that needs an excellent and supportive business environment. Third, the development of the medicine industry and its derivatives is subject to price fluctuations, discouraging investors to enter the business.

Fourth, the national market for medicinal raw materials is relatively small in comparison to the minimum production capacity in order to achieve low production costs. To date, domestically produced raw materials have not yet reached an optimal production scale, rendering them uncompetitive with materials from foreign suppliers.

With its growing population and rising medical needs coupled with the relaxation of foreign ownership and drug distribution policies, Indonesia’s current healthcare market dynamics has provided pharmaceutical manufacturers with a strategic opening to expand both drug operations and commercialisation within a market that has previously been exceedingly difficult to access. Although market entry is still complex and difficult, global pharmaceutical manufacturers may now choose to consider the drug registration, evaluation, and health technology assessments (HTA) review requirements specified by BPOM and allocate appropriate resources toward addressing these requirements, including establishing relationships with these agencies and seeking guidance from professionals who are familiar with this market situation. At this juncture, manufacturers planning entry into the Indonesian market should begin development of pre-market evaluations and HTA submissions, which will be even more critical for successfully marketing a product in this increasingly important global market.

Global Business Guide Indonesia - 2016

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Indonesia Manufacturing Snapshot

Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 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.