Bill Guerin – Indonesia has some 200 pharmaceutical manufacturers and 1,600 pharmaceutical distributors. Several international pharmaceutical companies have manufacturing plants and offices in Indonesia, including Astra Zeneca, Bayer, Glaxo Wellcome and Schering. State-owned pharmaceutical giants PT Indofarma and PT Kimia dominate the domestic market. There are four state-owned pharmaceutical companies in Indonesia, but only these two are candidates for partial privatization.
State Minister for State Enterprises Laksamana Sukardi announced this week that because of the lack of bidders for the recent offer of a 46 percent stake in Indofarma, the tender process will be started all over again. Sunny Corp from China, Washington Soul Pattison Ltd from Australia and Korindo from South Korea were the only three listed consortia bidding for Indofarma out of a total of 40 who had asked for tender documents. Two of the three pulled out of the final bidding process.
Indofarma is among four state companies scheduled for sale last year as part of the privatization program, delayed because of poor market conditions and lack of investor interest. Last February Sukardi said the government would not divest a majority holding in PT Indofarma because it had a "public-service obligation" to provide generic medicines at low prices. Around the same time, Kimia Farma withdrew from an earlier plan to set up a joint-venture company with STADA Arzneimittel AG to sell generic drugs in Indonesia, citing uncertainty over Jakarta's privatization strategy.
Previously the government plan was to retain majority control of Indofarma because it was responsible for producing generic drugs for domestic consumption but, after the move by Indofarma's politically well-connected president director, Gunawan Pranoto, to take up the same baton at Kimia Farma, the government changed tack and announced it would sell a majority 51 percent stake in PT Indofarma, the No 2 pharmaceutical company, and retain majority control of the largest pharmaceutical manufacturer, PT Kimia Farma.
A month later it was announced that a majority holding in Indofarma would be offered after all, though the government would still maintain majority ownership of Kimia Farma. The government apparently now plans to sell only 39 percent of its 91 percent holding in Kimia Farma and, once the sales are complete, it will retain a 20 percent stake in Indosat, 29.7 percent of Indofarma, and 51.3 percent of Kimia Farma. The sales of PT Indofarma and PT Kimia Farma have been included in successive Letters of Intent (LoIs) signed by the International Monetary Fund and the government.
Indonesia's No 2 drug maker has 28 branches covering the whole archipelago and churns out 4 billion tablets and 500 million capsules of generic drugs every year together with patented herbal medicine products and supplementary health-care items.
Indofarma's unaudited sales in 2002 increased by 14 percent to Rp700 billion ($78.65 million) from Rp602 billion in 2001 but net profit fell by an estimated 16 percent to Rp100 billion in 2002 from Rp120 billion in 2001 due to rising production costs. The company has targeted sales of Rp800 billion for 2003 and will spend Rp50 billion on a new manufacturing unit in South Sulawesi to increase production.
Indofarma's new president director, Edy Pramono, criticized the government for dragging its feet on the Indofarma divestment, before this week's announcement that there were no buyers anyway. He said the company was eyeing total capital expenditure of Rp300 billion to increase production in future and was hopeful that net profit could increase to Rp200 billion this year. Indofarma expects the government to fix a definite schedule for the company's privatization because delays in the process over the past two years were discouraging foreign investors, he said.
Last August the cash-strapped government authorized the divestment of a maximum stake of 51 percent in Indofarma, up from its previous14 percent. Analysts had said a 14 percent stake was too small to entice investors. The government currently owns 80.73 percent of Indofarma after floating the firm in 2001. After a showbiz-style initial offer of Indofarma shares made in Surabaya, the shares lost ground to close at Rp245 from the eventual initial public offering (IPO) price of Rp250.
The company planned to offer up to 1.462 billion shares during the IPO, 906.25 billion government shares and up to 556.09 billion new shares were to be offered at a price of between Rp225 and Rp415 per share.
The onset of the Asian financial crisis in late 1997 quickly brought the Indonesian pharmaceutical sector to a grinding halt. The rupiah dropped dramatically and lost 75 percent of its value in the early stages. By 1998 it had lost nearly 80 percent of its 1997 value. Given an annual inflation rate of 10 percent at the end of that year, the rupiah's real depreciation then was one of the biggest country currency devaluations in the postwar era. Interest rates went through the roof, at one time reaching 30 percent, and to cap it all, foreign banks refused to honor letters of credit from Indonesian banks. To this day almost 95 percent of raw materials used in the production of medicines are imported, and in the worst days of the crisis local pharmaceutical producers were unable to import their basic needs.
By early 1998, the cost of producing drugs had more than doubled and retail drug prices were up by over 400 percent. World Bank surveys showed that drug prices increased by 200-300 percent between November 1997 and March 1998. A dangerously low four months of raw material stock sparked off a government subsidy program for raw materials.
By the time production had resumed, consumers had almost completely switched to using locally produced generics or herbal medicines, leaving the foreign-produced or imported brands high and dry, a situation not much different from today.
It took the government until 2001 to come up with a plan to launch branded medicines at cheaper prices, but this met widespread resistance from doctors, pharmacists, and some legislators. Both the Indonesian Doctors Association and Indonesian Pharmaceuticals Watch claimed the government was trespassing on the domain of other professions, as the Food and Drug Supervisory Board (BPOM) no longer had the authority to set drug prices.
The plan was to produce and distribute 20 medicines, ranging from antibiotics to analgesics, under a project run totally by Indofarma on the sound premise that more efficient production methods would be able to reduce prices of the drugs by 50-60 percent in comparison with similar patented drugs or other brands. The plan had been announced by the head of BPOM, Sampurno.
The project also meant that the government would not subsidize raw material imports and would be able to wash its hands of complaints from other producers that expensive drug prices were due to the cost of imported drugs components. Amid criticisms that this was sheer protectionism, and akin to giving a monopoly to Indofarma, the government promised similar facility would also be offered to other pharmaceutical companies, both state-owned and privately owned.
Sampurno, it should be noted, is also one of the commissioners of Indofarma, giving rise to fears that the policy was created simply to help Indofarma promote its new products.
House of Representatives member Ahmad Sanusi Tambunan from Commission VII, which supervises, among other issues, health, reminded the doctors not to allow themselves be made scapegoats for the government's failure to make drugs more affordable.
Privatization was also intended to restructure strategic state industries and enable them to perform well in the face of increased global competition. Prices are certainly in Indonesians' favor in spite of the volatility of the past few years. "Our products are the cheapest in Asia after India and China. So we will certainly be able to compete on the ASEAN market," said Indonesian Pharmaceutical Companies Association chairman Anthony Ch Sunarjo, adding that the local pharmaceutical industry had been anticipating this year's ASEAN Free Trade Association (AFTA) with some enthusiasm.
The main fear is that other Association of Southeast Asian Nations member countries would seek to bar Indonesian pharmaceutical products from entering their markets by setting up various non-tariff barriers, including imposing complicated requirements for Indonesian drug producers to register their products in their respective countries.
"I believe ASEAN member countries, which remain unprepared for AFTA, will do their utmost to create various other kinds of barriers to block the entry of our pharmaceutical products," he said. Indonesian products remain competitive in the global market and the country exports to no fewer than 59 countries.
As the fourth-most-populous nation in the world, the potential of the domestic market is enormous, though, as in almost every other sector, smuggling and counterfeiting grossly distort the market.
Low per capita medicine consumption and thus low product demand, as well as the need for a substantial research budget, have meant that local companies have historically been limited to the licensing, formulation, distribution and marketing of drugs. Many manufacturers have small operations, each producing a limited range of products. They lack the financial resources and the technical expertise for original research and, unable to create new drugs, they either manufacture under license from foreign drug companies, they produce and distribute generic medicines ("me-too drugs"), or simply copy from foreign companies.
Despite the existence of a seemingly comprehensive system of monitoring by the Department of Health, many local producers still package innocuous, harmless powder and sell it as branded medicine to unsuspecting customers. Although the fake products are usually sold at lower prices than the genuine article, they are, of course, completely ineffective. Consequently, the brand image of the legitimate holder of the brand name suffers when the fake product fails to cure a patient's illness. Long accustomed to self-medication with local herbal medicine, jamu, consumers often do the same with pharmaceutical products.
Prior to the economic downturn, the improved health and increased per capita income of Indonesians led to increased demands to provide better-quality health care and health-care products.
Indonesia's consumption of medicine was estimated at US$4 per capita in 2000. This was small compared with other ASEAN countries (the Philippines $6, Thailand $11, and Malaysia $11), but indicative of a market mismatch between the purchasing power of consumers and the high price of such products. There are still an estimated 1,500 pharmaceutical distributors in Indonesia, but only about 20 have national networks. Kimia Farma, like Indofarma, services the whole country through a network of branches and agencies, though the former, with its PT Kimia Farma Apotik, reaches out all the way to the consumer.
The sector is still very much over-regulated and bureaucratic. Distribution and storage are hampered by the sheer size of the country and its high humidity.
Research and development funds account for less than 1 percent of the total budget allocated by Indonesian pharmaceutical firms.
Under the AFTA scheme, the flows of pharmaceutical products within the region will be freed from tariff and non-tariff barriers. The total foreign investment in the pharmaceutical sectors among ASEAN countries, except for Singapore, has achieved of between $2 billion and $2.3 billion over the past 10 years.
Legislators are now saying that selling national assets in such an unfavorable investment climate is a bad move and are pressing the government to cancel the privatization program until at least after the 2004 elections. They are calling for a special law on privatization and the sale of state assets.
Minister of Health Achmad Suyudi is revamping the national health system, virtually unchanged since 1984, thus helping to provide improved quality and affordability to health services for all levels of society,
Regional autonomy and a paradigm shift in health development have increased the pressure on the government to shift to a bottom-up scheme, which would involve the participation of the buying (and voting) public and move nearer to the day when all Indonesians can expect basic health care as one of their rights. All this costs a great deal of money, and any paradigm that puts the health-care budget in a category of investment for the future, rather than a drag on the state budget, will be a long time coming.
The bottom line, succinctly put by Anthony Sunarjo, is that "as long as the people have to pay their health care alone, without a credible insurance scheme or without the elimination of value added tax on the drugs, any price is expensive".