The Jakarta Post
The government issued the tenth economic stimulus package last week, opening up several commercial sectors to foreign investors. One of the sectors is that of raw materials for medicine, where businesses can now be 100 percent owned by foreigners, an increase from the previous 85 percent maximum ownership under Presidential Decree No. 39/2014. The government is hoping that the new ownership policy will attract more investment to the industry of pharmaceutical raw materials, reduce dependence on imports and, in turn, bring down medicine prices.
Raw materials account for 60 percent to 80 percent of production costs in the pharmaceutical industry, while 90 percent to 95 percent 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.
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 percent for the past five years and reached an estimated value of Rp 69 trillion this year. Prescription medicines make up 59 percent of the market, while over-the-counter (OTC) drugs account for 41 percent.
There are some important drivers for growth in the local pharmaceutical industry. First, Indonesia is currently increasing its residents' access to health services with the implementation of general insurance through BPJS Kesehatan. Second, there is rising health awareness, backed by rising per-capita income and improving economic conditions.
Indonesia's large market has driven investment in the pharmaceutical sector. In 2015, the combined chemicals and pharmaceutical investment amounted to Rp 45.2 trillion, or 8.3 percent of Indonesia's total investment. Of the total, 54 percent was foreign investment. Realized domestic investment in the pharmaceutical sector grew by 44.7 percent per year over the 2010-2015 period, much higher than foreign investment, which grew by an average annual rate of 19.8 percent. Recently, the Investment Coordinating Board (BKPM) recorded investment interest from India, Japan, South Korea and China, and several foreign companies proposed joint ventures with Indonesian ones.
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 (the construction started in 2015 and is scheduled to be completed in 2016) and will build another for atorvastatin, simvastatin, rosuvastatin, clopidogrel, and pantoprazol this year. Pharmaceutical salt is a common raw material for intravenous liquids, tablets, vaccines, syrup, oral rehydration salt (ORS), hemodialysis 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, there is a lack of synergy among academia, private businesses and the government. Research on the development of pharmaceutical raw materials by Indonesian experts is still limited to pilot and laboratory-scale projects and rarely commercially exploited at an industrial level. Fifth, 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.
Will the foreign ownership in the industry have a significant impact on Indonesia's pharmaceutical industry? We assert that the policy is supportive for the development of the domestic pharmaceutical industry, though its impact can only be materialized in the medium or long term. Furthermore, we believe that the new foreign ownership policy should be synergized with other policies to develop the raw material industry for medicines, for example, tax incentives for companies that are able to produce raw materials at their own production facilities. In addition, any import taxes for supplies that are needed by the medicinal raw material industry should be removed.
Moreover, the development of the pharmaceutical raw material industry should prioritize materials that have potential in both the domestic and export markets ' mainly ASEAN ' such as paracetamol, penicillin and pharmaceutical salt. Accordingly, we can expect its production capacity to meet a minimum production scale in order to achieve low-cost production.
The ASEAN market has great potential, especially in the context of the ASEAN Economic Community. The Indonesian Pharmaceutical Association estimates that nine to 11 pharmaceutical companies in Indonesia have exported their products to ASEAN countries. In 2013, Indonesia commanded 30 percent of the ASEAN pharmaceutical market share, the biggest among ASEAN countries.
In addition to the chemical synthetic approach, we should invest more in the development herbal and biotechnological medicine to exploit Indonesia's biodiversity. Finally, we should also redouble efforts to strengthen synergies among academia, businesses and the government through working groups and national research centers to help develop the pharmaceutical raw material industry.
The writer is an industry analyst at PT Bank Mandiri
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