One of the national industries that is heavily affected by the weak rupiah exchange rate is Indonesia's pharmaceutical industry. Considering around 90 percent of raw materials in the pharmaceutical industry need to be imported from abroad (in US dollars), production costs rise sharply in times of significant rupiah depreciation. It is estimated that materials imported from abroad account for about 75 percent of pharmaceutical companies' total production costs.
However, the bigger pharmaceutical companies in Indonesia are in a better position to weather the storm because they can limit imports of raw materials by relying on existing stocks. Obviously this strategy can only work temporarily because at a certain point existing stocks will be depleted. However, it may allow enough time for the rupiah to recover to more competitive levels before ordering new imports.
For example, the Indonesian rupiah weakened to the IDR 14,400 per US dollar level on Friday (29/06). However, after the central bank of Indonesia announced a 50 basis points (bps) rate hike (to 5.25 percent) on the same day there is room for the rupiah to rebound. Still, considering external pressures (primarily monetary tightening in the USA and simmering trade tensions) are likely to persist, there remains room for rupiah depreciation on the longer term. Therefore, pharmaceutical companies need to be on alert (or a less attractive option would be to pass costs on to the consumer by raising prices of pharmaceutical products on the Indonesian market).
So far this year the Indonesian rupiah (Bank Indonesia's benchmark Jisdor rate) has weakened 6.32 percent (although we expect some short-term appreciation in the coming week on the back of the higher benchmark interest rate). It is estimated that for every ten percent of rupiah depreciation, the cost of goods sold raises by between five to ten percent for Indonesian pharmaceutical firms, while their profit margin drops by 6.5 percent.
Ganti Winarno, Corporate Secretary of pharmaceutical company Kimia Farma, said his company's strategy (to curtail the negative impact of rupiah weakening) includes agreements with foreign suppliers for the purchase of raw materials at certain prices and for certain periods. Such agreements have been made since 2017 and means that the company can cope with (temporary) rupiah weakness. Winarno said Kimia Farma will not raise prices of its products on the Indonesian market until (at least) next year.
Meanwhile, Vidjongtius, President Director of pharmaceutical company Kalbe Farma, said his company has no plans to raise prices yet. However, Kalbe Farma is closely watching the rupiah movement. The company is now focused on cost efficiency in the production process as well as in the management of its working capital budget.
Both Kimia Farma and Kalbe Farma have recently invested in the upstream pharmaceutical industry by establishing factories that can supply raw materials. This is in line with the government's vision. To combat the big amount of raw material imports from abroad the Indonesian government has also widened room for foreign direct investment in Indonesia's upstream pharmaceutical industry.
Despite challenges, one key reason why Indonesia's pharmaceutical market has plenty of room for further growth is the government's universal health care program (in Indonesian: Jaminan Kesehatan Nasional, JKN). This program, launched in 2014, aims to provide health insurance to all Indonesians (which means covering more than 260 million people) by January 2019, a very ambitious target (that does not come without budget pressures as there have been reports of a growing mismatch between claims paid and premiums received).
The universal health care program particularly boosts demand for generic medicines. Generic medicines are cheaper (compared to ethical drugs, also known as prescription medicines) and therefore sales growth is somewhat limited. Generic drugs therefore also have a much lower profit margin (the profit margin of ethical drugs is around 60 percent, while the profit margin of generic drugs is only around 20 percent).
Other reasons why Indonesia's pharmaceutical market should rise consistently in the years ahead are the expanding middle class (that can afford medical check ups and medicines) as well as people's rising awareness of health (therefore more people do medical check ups nowadays).
Pharmaceutical Market of Indonesia:
(in trillion IDR)
Imports of Pharmaceutical Products into Indonesia:
(in million USD)