Indonesia: More Than "The Third Largest Democracy"

By Louis Garguilo, Chief Editor, Outsourced Pharma

In that neighborhood of Southeast Asia, Singapore gets the “merlion” share of the news when it comes to the pharmaceutical industry and CRO/CMO activity. The Jurong Island area alone boasts a list of pharmaceutical manufacturing companies. Next door, though, Malaysia has not been shy about sounding its own trumpet to the pharma and CRO/CMO industries. The following is from a mid-2012 interview with Leonard Ariff Abdul Shatar, President, Malaysian Organisation of Pharmaceutical Industries (MOPI), as reported in PharmaBoardRoom.com:

“To sum up the (Malaysian pharmaceutical) market is open, protected by patent recognition and the Ministry of Health has an active generics policy driven primarily by the rising cost of healthcare. The main asset of Malaysia for the large MNCs (multi-national companies) is an excellent contract manufacturing environment thanks to high standards. Malaysia may not be as cheap as a facility in Indonesia or an unregulated factory in India, but the assets of local companies in Malaysia have all been audited by international authorities. Malaysia is therefore the best manufacturing centre in South East Asia if not the whole of Asia.”

No lack of confidence there. Except, perhaps, for the mention of the competition. What is interesting are the countries singled out as the main competitors even then: India…and Indonesia?

Fast-forward to the present and it appears the perception of Indonesia as a strong competitor was accurate. London-based GlobalData just came out with a report forecasting the Indonesian pharmaceutical market will climb from approximately $5 billion in 2013 to $9.9 billion by 2020, at a compound annual growth rate (CAGR) of 10.2%. The research and consulting firm says the growth will be driven by increased government healthcare spending, including the introduction of government healthcare reimbursement programs with the aim to provide universal care to all Indonesians by 2019.

For most of the world, particularly the West, if Indonesia is discussed at all it is almost always introduced with the (at times contextually meaningless) moniker, “Indonesia, the third largest democracy in the world…” However, size (and relative stability) resonates meaningfully in our discussion. According to an analysis by Ames Gross from Pacific Bridge Medical (as reported in pharmaphorum.com), Indonesia is home to 250 million people and one of the fastest growing pharmaceutical markets in all of Asia. The market is reportedly worth $5 billion today, roughly the same size as the mature pharmaceutical market in Taiwan, another player in the region. GDP growth in Indonesia is estimated at around 6 percent, and growth in the drug industry is set to reach an estimated 12 or 13 percent.

Pharmaceutical spending per capita in Indonesia is increasing rapidly, according to GlobalData. In 2010, pharmaceutical spending per capita was just $18, compared to $47 in the Philippines and $104 in Vietnam, both of which court the pharma industry and are growing in importance, respectively. But as that low starting point of per capita income goes up over the next decade, Indonesians will be spending much more on healthcare.

No location is without challenges of course, and one of Indonesia’s is the protections in place for domestic drug companies. A top example is a law mandating all drugs registered in Indonesia be locally manufactured. Another law limits foreign ownership in domestic drug companies to 75 percent. These laws have put a damper on foreign investment in the pharmaceutical industry. According to the Pacific Bridge Medical report, currently nearly 75 percent of Indonesia’s drug needs are met by domestic companies, with foreign companies making up the remaining 25 percent. Kalbe Pharma –Indonesia’s largest domestic drug manufacturer – holds 15 percent of market share. Combined, Bayer, Pfizer and GlaxoSmithKline hold 8 percent.

Another area in need of improvement is Intellectual Property (IP). According to Joshua Owide, GlobalData’s Director of Healthcare Industry, the country’s regulatory system for IP enforcement is problematic due to inadequate observation and enforcement, and the lack of an effective customs record system. “Non-efficient and non-transparent IP protection for pharmaceutical products and medical devices leaves major loopholes in Indonesia’s healthcare system. Infringement is common, and penalties include imprisonment for up to seven years and/or a significant fine, but only minor charges are imposed in practice,” Owide says.

Despite these serious but not uncommon concerns for advancing country markets, the Pacific Bridge Medical update points out that more foreign drug companies are looking to Indonesia for future profits, and counts more than 50 international pharmaceutical companies in Indonesia. Wyeth, Sanofi and Merck all have a considerable presence in the country. As early as October 2012, Merck opened a $21 million packaging plant; others are actively engaging in community outreach and education activities. For example, Novo Nordisk launched a diabetes education campaign for doctors, healthcare professionals and the public, and Novartis is running a similar program for communicable diseases.

Indonesia could potentially relax some of its industry-protecting laws in the future. This, along with a tightening of its IP protection, could allow it to become a powerhouse in that neighborhood for pharma and perhaps the outsourcing industry. As pointed out above, besides the large population and growing healthcare spend, Indonesia is very cost competitive.

If that were to happen, expect generics to lead the way. According to the GlobalData report, the “over-the-counter drug sector reached a 48% share of the pharma market in 2013”. This will, though, take some strategic moves by big pharma under the current government regulations. According to an analysis in PMLive, “local generics are so well accepted in Indonesia that there is a need for international pharmaceutical companies to re-think their marketing strategies for innovator brand awareness reinforcement. Another option, of course, is to re-invent the corporate direction.” According to Pfizer Indonesia director Widyaretna Buenastuti, that giant pharma company has expanded its generics operation arm in Indonesia. “Although the profit margin from generic drugs is low, this could be offset by the potential size of Indonesia's market,” Buenastuti is quoted as saying.

Last year saw a group of global pharma companies scramble to set up factories and find a local partner. In fact, according to the www.pmlive.com article, starting as early as 2008, PT Pfizer Indonesia, PT MSD Indonesia and PT Sanofi-Aventis Group Indonesia made strategic moves to start or expand manufacturing operations in the archipelago. Others are looking at local manufacturing firms as potential acquisition targets. One example is Singapore-based Invida Group, a leading biopharmaceutical sales company in the region. Two years prior to its acquisition by the Italian Menarini group in Dec 2012, it acquired a 70 percent stake in Indonesian pharmaceutical manufacturer MUGI. This positioned Invida to offer its partners Indonesian market access opportunities, covering both regulatory and commercialization capabilities, as reported in the same article.

At least in our industry, Indonesia is more than the size of its population and system of democracy. With the right moves, it could become more widely known as “Indonesia, a global power in the pharma and outsourcing industries…”