The prospects of Indonesia’s healthcare sector, including that of the pharmaceutical industry, are promising. The public’s growing access to healthcare services through BPJS Kesehatan’s coverage, and the increase in health awareness supported by rising incomes, are key drivers of the growth of the pharmaceutical industry.

The Central Statistics Agency has recorded that large and medium sized pharmaceutical producers, chemical products and traditional medicines grew 8.95 percent year-on-year (yoy) in the first quarter, higher than the 6.29 percent yoy in the first quarter of 2017. The Association of Indonesian Pharmaceutical Companies estimated that the national pharmaceutical market in 2017 would grow 7.4 percent to Rp 72 trillion and would see even better growth in 2018.

However, the pharmaceutical industry has faced several challenges in 2018. First, the regulation regarding environmental protection introduced by the Chinese government on the chemical industry could suppress the production of raw materials for drugs. Meanwhile, roughly 60 percent of Indonesia’s pharmaceutical raw materials are imported from China.

Second, the trend for rupiah depreciation in 2018 compared to 2017 will lead to an increase in production costs owing to rising prices of raw materials for drugs. As an illustration, 90 percent of the raw materials for Indonesia’s pharmaceutical industry are still imported, which makes the industry vulnerable to fluctuations in the value of the rupiah.

The price of raw materials, such as amoxicillin last year, remained at US$16 per kilogram, while the current price has reached $26-30 per kilogram, while the price of paracetamol has risen from $3 per kilogram to an average of $5 per kilogram. We estimate that the rupiah’s depreciation will drive increases this year as the normalization of the Federal Reserve’s monetary policy in the US triggers capital outflows.

Third, the government plans to issue regulations regarding local content (TKDN) for the pharmaceutical industry this year. The Industry Ministry said the average TKDN for domestic pharmaceutical products would be pegged at around 20 percent. This TKDN rule is expected to attract more investment to Indonesia’s pharmaceutical raw materials industry.

Fourth, competition among pharmaceutical industry players is getting tighter. In addition, the industry is highly fragmented and the pricing power of private pharmaceutical companies in the prescription drug market is limited in the era of BPJS Kesehatan.

In our opinion, there are several measures that can be taken by pharmaceutical manufacturers to minimize the production cost hike caused by the rupiah’s depreciation. First, they should develop a proper raw material management inventory. By doing so, pharmaceutical producers could increase their raw materials stocks to large quantities in order to anticipate further rupiah depreciation. But of course, this necessarily requires greater working capital.

Second, pharmaceutical players should hedge to offset the risk of any adverse price movements. Third, producers could raise the prices of over-the-counter (OTC) drugs, prescription drugs or items outside the e-catalog list of BPJS Kesehatan.

Meanwhile, we think the government should attempt to synergize the local content rule in the pharmaceutical industry with regulations such as Health Ministerial Regulation (Permenkes) No. 17/2017, which states that the pharmaceutical industry must prioritize the use of domestically produced raw materials.

This policy is also associated with the road map for raw pharmaceutical material development and the government’s efforts to attract foreign investment to the pharmaceutical raw materials industry by allowing foreign investors to hold 100 percent ownership in the industry.

In general, we agree that Indonesia’s pharmaceutical industry should lessen its dependence on imports of raw materials. However, we realize that this can only be achieved in the medium to long- term.

So, we think the implementation of the TKDN rule should be done in consideration of the readiness of the domestic pharmaceutical raw materials industry. The local content requirement should not be applied equally to all products. In this case, the government must select
products that are ready to be subject to this regulation. The local content rule should not inhibit the growth of the pharmaceutical industry owing to a lack of raw materials.

The development of the pharmaceutical raw material industry still faces several major obstacles. First, it lacks input from the domestic petrochemical industry to produce synthetic drug materials. Second, it requires a large amount of investment and is a long-term project.

Third, the development of the pharmaceutical raw materials industry is subject to price fluctuations, discouraging investors to enter the business. Fourth, it lacks synergy among academia, business and the government. Research findings on the development of pharmaceutical raw materials by Indonesian experts have still been limited to the pilot and laboratory scale and oftentimes are not commercially exploited at the industry-scale level.

Fifth, the national market for pharmaceutical raw materials is relatively small in comparison to the minimum production capacity in order to reach a low cost of production.

Commitment, coordination and synergism from various stakeholders is needed for Indonesia to realize pharmaceutical raw material self-reliance. Moreover, the development of the pharmaceutical raw material industry should prioritize materials that have potential markets both domestically and for export, mainly to the ASEAN market.

In addition, we should direct more investment toward the development of herbal and biotechnology medicines, making use of Indonesia’s biodiversity.

In conclusion, we expect the business environment this year to be conducive and thus support the growth of the pharmaceutical industry. Amid fierce competition, the right product mix is the key factor for the success of pharmaceutical companies.

Hopefully the government will issue proper local content rules on pharmaceuticals that ensure the country’s pharmaceutical industry becomes more competitive in the future.

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The writer is an industry analyst at PT Bank Mandiri

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