Global Business Guide Indonesia

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Manufacturing | Overview of the Pharmaceutical Sector

Indonesia’s pharmaceutical sector has been growing steadily with double digit compound growth since 2009 and projections of 14% growth for 2011 according to the Indonesian Pharmaceutical Association. The high growth figures are a reflection of the rising disposable incomes of the population, but placed into context the value of the market itself is very small for a country of 240 million people. The lack of healthcare coverage, low quality of services on offer and the high cost of drugs relative to average wages has given rise to trends such as self medication and going abroad for treatment for those who can afford it. Considering the size of the market and changes in lifestyle, the sector is poised for considerable growth but manufacturers face a challenge in lack of local raw material supply, increased competition in the generic drugs market, regulatory barriers holding back international investment and a lack of innovation that has marred the sector.

Indonesia is a highly attractive market for the pharmaceutical industry given its large population as the fourth most populous country in the world, but spending on healthcare is very low in comparison to neighbouring countries of similar GDP. Indonesians spend on average $17 USD per capita on pharmaceuticals; 25% below that of the Philippines while total spending on healthcare is $52 USD a year, compared to $300 in Malaysia, according to the World Economic Forum (2010). In terms of consumer preferences, sales for over the counter drugs are growing faster than that of prescription drugs with growth at 17.3% and 9.9% respectively for 2010, but the latter has the dominant market share at $2.4 billion USD or 54.5% of total consumption for 2010 (Statistics Indonesia). Vitamin and nutritional supplements are also growing in popularity among more health conscious consumers. Total sales reached $4.4 billion USD at the end of 2010 (out of $700 billion globally), an increase of 11% from 2009. Yet more dramatic growth is expected with the increased awareness of the need for healthcare and eventual introduction of the National Social Security System that is scheduled to be implemented in 2015 under Law 40/2010.

The sector is highly competitive and heavily fragmented among more than 200 companies, 35 of which are foreign owned including the world’s largest producers such as Pfizer and GSK. The local producers are dominant in the market, making up 79% of total market share. Of the top ten companies, 7 of them are local companies with Kalbe Pharma leading the pack at 14% of the market. The top three global drug producers namely Pfizer, Bayer and GSK collectively hold only 8% of the market. The sector is heavily concentrated among the top companies with around 20 companies accountable for 80% of total production and locally produced drugs making up 75% of total consumption. State Owned Enterprises play a key role in generics and vaccine production through Kimia Pharma, Indofarma and Bio Farma and the prospect of a merger in the future has been discussed to increase competitiveness in distribution and expertise.

The market illustrates an unusual trend in the small market share taken up by the multinationals. This is mainly due to the high cost associated with branded drugs that only the middle and upper income markets can afford. As awareness of health develops and incomes rise, consumers will begin to demand the guarantees of quality and innovation that local drug companies have been slow to offer. The introduction of Good Manufacturing Practices (a set of policies from the World Health Organisation) as well as the ASEAN Common Technical Dossier and Requirements will also squeeze out local companies that are not meeting quality standards. Quality assurance in pharmaceuticals will therefore play an increasingly large role in the marketing strategies and consumer habits of Indonesians as pharmaceutical sales increase. The wide availability of counterfeit drugs is a major problem in Indonesia with the total amount in circulation estimated at 15-20% of the total drugs on the market according to the International Pharmaceutical Manufacturers Group. Poor regulation in the industry and lack of enforcement of intellectual property laws keep the industry rife with poor quality from the smaller producers.

The Indonesian Pharmaceutical Association states that 95% of locally produced drugs are being consumed domestically, with the remaining 5% exported. Yet, exports of Indonesia’s pharmaceutical products have been growing over the past five years by an average of 15% from 2005-2010. State owned Bio Farma produces the world’s cheapest polio vaccine and has recently seen a surge in exports, mainly to India where animal based vaccines cannot be produced due to religious reasons. Kalbe Pharma has been present in Africa for 15 years, beginning with Nigeria and since expanding into Zimbabwe, Mozambique and Ghana with production facilities in Nigeria from 2005. Overall, Indonesia’s main pharmaceutical export destinations are South Korea, Japan and Thailand for generic drugs. Future export potential lies in the ASEAN market under the AFTA in which Indonesia can compete effectively if given the correct regulatory measures to encourage investment and expand production.

The outlook for the pharmaceutical sector is positive in terms of steady (albeit unremarkable) sales growth to 2014-15. The young demographics of the country, increasing life expectancy with improved living standards and rising incomes are all positive conditions for growth. The real impact on the industry will come with the eventual introduction of a national social security system that will grant coverage to an estimated 50% of the population that is currently uninsured. However, boosting the competitiveness of the pharmaceutical manufacturing sector is a necessity to keep drug prices down and within reach of the general population to avoid local producers losing out to imports from India and China.

Global Business Guide Indonesia - 2012

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