Feb 1, 2009: In the last quarter of 2008, the government in Indonesia introduced new rules designed to encourage multinational pharmaceutical companies to transfer technologies and boost investment to create jobs in the country. Under the new rules, the companies have a two-year grace period in which they can set up production facilities.

Quoting Dr Siti Fadilah Supari, Health Minister of Indonesia, the newswire Dow Jones reported that the Minister believes Indonesia’s big drugs market—worth around $2 billion annually, would persuade big pharma companies to build production facilities. And those who fail to do so would be banned from selling their products or distributing them through companies that do have plants in Indonesia.

“If they want to get licenses (to sell their products) they have to invest here as well, and not just take advantage of the Indonesian market. They can’t just operate like a retailer here, with an office size that’s three-by-three meters and make billions of rupiah. That is not fair,” he stated.

Maintaining that India and China had already enforced such requirements, Dr Supari was quoted stating: “If they want to go away, they can go. The new rules will give ‘fair treatment’ to pharmaceutical companies that have already invested in drug production facilities in Indonesia.”

Currently, 28 multinational players are marketing pharmaceutical products in Indonesia, with a total market share of 25 percent. The decree, which has drawn protests from the US Chamber of Commerce, will affect 13 international drug makers that currently sell their drugs in Indonesia but do not have production facilities in Indonesia.

Reacting to this, Mr Akihiro Nagaoka, President & Director, PT Astellas Pharma Indonesia, who is also the executive committee member of the International Pharmaceutical Manufacturer Group (IPMG) that represents multinational pharmaceutical companies in Indonesia said, “We hope that something positive will emerge for multinational companies as negotiations are still on with the government to amend the ministerial decree. At the same time we don’t see any issues as we have been working with local partners.”

Sharing his thoughts on the development Mr Simranjit Singh, Associate Director, Healthcare Practice, and Frost & Sullivan Asia Pacific, Singapore elaborates: Once the announcement was made there was a flurry of activity. The MNC companies were scouting for local companies in Indonesia that could do manufacturing for these MNCs. These companies are evaluating different options while they continue to lobby with the government to amend the rules. They are trying to get flexibility on the new legislation. Considering the current situation and economic crisis, these companies are keen on operating via partnerships with the local companies. At the same time these companies are in discussion with the local big generic companies so that the latter can develop drugs for the local market and develop Indonesia as a manufacturing hub for the region in near future.

Mr Singh further noted that at Bayer used Indonesia as a manufacturing and supply hub for South East Asia. For them it will not be an area of concern. But other companies that use Indonesia as a hub for South East Asia for manufacturing it might not be realistic now. Reason: the capabilities of the many generic companies are still driven towards specific product portfolio. When these companies look for joint ventures with them, the local companies are looking at specific product development for local market.

“As short term approach the MNCs would be looking towards partnering with the local companies for the local market. But I would not discount the option of using Indonesia as a hub for manufacturing for the region. Because going forward from this legislation, the government might extend and create supporting legislation to help these manufacturers to develop and create hubs for themselves for the South East Asia region. That would be the next step. Once these companies start accelerating the manufacturing activities the government might support them with more incentives—though not in the near term. The companies will, of course, take the lobbying option first and try to get out of the situation. Only if that doesn’t work they will work with local partners, build expertise for the local market and then expand the market. It would take at least five years, says Mr Singh.

Reacting to the impact of the decree on smaller companies, Mr Singh elaborated, “It will definitely hit the smaller companies. The four state-owned generic players will do very well. They will get the partnership. Besides, there are about five-seven big local private ventures in Indonesia. Put together there will be a critical mass of about 10-15 companies having a market share of close to 80 percent in terms of volume. They will be having exciting opportunities. At the same time consolidation of smaller companies—who can’t compete in the market—is likely to take place in near future.”

Current pharmaceutical market

A look at the pharma market in Indonesia showcases how important and attractive the market is for multinationals.

The Indonesian pharmaceutical market was estimated at $2.6 billion in 2006, in terms of value. At present there are more than 250 companies engaged in the pharmaceutical sector in Indonesia. The pharmaceutical manufacturers consist of the four state-owned companies, 33 multinational companies and a large number of local private companies.

According to market research firm Frost and Sullivan, by the end of 2011, the market is expected to reach nearly $3.9 billion at consumer prices. It is expected to continue increasing by some 15-18 percent a year within the next five years. The factors contributing for this optimistic expectation include—stability of Rupiah—growing healthcare awareness among the people and rise in the per capita consumption of pharmaceuticals in the country (about $7 a year) though it is still among the lowest in Asia.

Currently, the four state-owned pharmaceutical companies control 70 percent of the procurement of generic medicine in the country. The demand for generic medicine will continue to increase because of the weak purchasing power of the people. Among 80 private companies licensed to take part in the market section, an estimated 10 percent are active in producing generic medicines. The total sales of generic drugs in Indonesia constitute only 14 percent of the total sales of the pharmaceutical products. The local pharmaceutical industry is mainly formulation industry not research-based industry. The expenditure on R&D is relatively low approximately two percent of the revenue as compared to 15-16 percent of the MNCs.

The local pharmaceutical manufacturing is strong and the country has become an attractive base for many multinational producers to operate. This is largely because of the cost-effective labor force and generally low production cost.

Even though there are many opportunities for local and foreign players, the industry is still facing the few challenges that restraints its growth in Indonesia. Regulatory enforcements are weak. Counterfeits and dubious marketing practices are among the most obvious negatives, but efforts are underway to put corrective measures in place for these.

The United States Trade Representative claims that counterfeit drugs account for approximately 30-40 percent of Indonesia’s market and that there are serious concerns over fake pharmaceuticals entering Indonesia from other countries. The government has undertaken a print campaign to warn over the threat of counterfeits, but progress is likely to be slow, as large sections of the population remain reliant on low-cost drugs.

Although the local pharma players are bigger than the multinationals, the MNCs continue to penetrate the Indonesia market due to huge domestic market and rapid growth of the industry. The multinational companies are targeting the middle and top end of the market i.e., prescription market. Out of the total number of industry participants, approximately around 60 manufacturers have 80 percent of the total market share. The rest are struggling for a fraction of the remaining share. The pharmaceutical companies depend on the sales of prescription drugs, as the profit margins are higher in the segment.

With its large population and growing economy, Indonesia is an attractive market for pharmaceutical companies, but very low per-capita spending highlights the main obstacle to strong sales. It is estimated that about 90 percent of the total volume of this industry were marketed domestically. The main markets are hospitals and drug stores, especially for prescription drugs.