Vincent Harijanto, Head of the Indonesian Pharmaceutical Association (GP Farmasi) business development committee, said the total pharmaceutical market of Indonesia in 2016 is estimated to be worth IDR 70 trillion (last year pharmaceutical sales in Indonesia reached IDR 62.1 trillion). Meanwhile, imports of raw materials for the manufacturing of healthcare products is worth about ten percent of that figure (the majority - around 80 percent - of these imported raw materials originate from China and India). Harijanto emphasized that import substitution industrialization in Indonesia's pharmaceutical industry cannot be developed on the short term and therefore the nation will remain dependent on the input from imported raw materials in the foreseeable future.

It is the task of the Indonesian government to make investment - both foreign and domestic direct investment - in the local pharmaceutical industry more attractive. Particularly joint ventures between foreign pharmaceutical companies and local ones will lead to the transfer of knowledge and technology. Harijanto adds that foreign investment in Indonesia's pharmaceutical industry can be encouraged by the government through the offering of fiscal incentives and by making all investment procedures easier (deregulation).

Regarding domestic investment, Harijanto said there are actually local players interested to invest in pharmaceutical factories that produce raw materials for medicines. For example, state-controlled Kalbe Farma, the market leader in Indonesia’s pharmaceutical industry, is currently developing factories that will curtail the amount of input from abroad required by the company. Generally, however, domestic players are hesitant to develop such factories because there is uncertainty whether output will be absorbed by the domestic market.

11th Economic Stimulus Package: Pharmaceutical Industry

In the 11th economic stimulus package, released by the Indonesian government on Tuesday (29/03), the government aims to boost the domestic production of medicines' raw materials, particularly for five product categories (namely biotechnology, vaccines, herbal extracts, active pharmaceutical ingredients and medical devices). Indonesian Chief Economics Minister Darmin Nasution said the government plans to issue a decree that will speed up deregulation in the domestic pharmaceutical industry.

Nasution further added that the government will encourage development through private investment, synergy between private companies with state-controlled counterparts and synergy among state-controlled pharmaceutical companies Bio Farma, Indofarma and Kimia Farma.

Previously, the government had removed the pharmaceutical industry from its negative investment list (which lists the sectors that are closed, or partially closed, for foreign ownership), implying 100 percent foreign ownership is now allowed. Nasution said other steps taken by the government - in an effort to develop the local manufacturing of medicines (including raw materials) - are the offering of a tax holiday, development of a special economic zone as well as an integrated logistics center.

Need for Import Substitution as Universal Healthcare Program is Being Developed

Dependence on imports of raw materials in Indonesia's pharmaceutical industry, which account for about 75 percent of pharmaceutical companies’ total production costs, also means that a weaker rupiah causes financial trouble for these companies or Indonesian consumers (if the pharmaceutical company decides to pass on these higher costs by raising prices). It is estimated that for every 10 percent rupiah depreciation (against the US dollar), the cost of goods sold increases by between five to ten percent for Indonesia's pharmaceutical companies, while their profit margin declines by 6.5 percent.

In 2014 the Indonesia government launched its universal healthcare program (in Indonesian: Jaminan Kesehatan Nasional, or JKN). The goal of this program is to provide health insurance to all Indonesians by January 2019. However, the JKN program is accompanied by budget pressures. A growing mismatch between claims paid and premiums received by Indonesia's Healthcare and Social Security Agency (Badan Penyelenggara Jaminan Sosial, or BPJS Kesehatan) is leading to a rising deficit.

The universal healthcare program of Indonesia is expected to have two opposite effects on the country’s pharmaceutical industry. On the one hand it may trigger lower spending on pharmaceutical products as it causes a shift from ethical drug (prescription medication) spending to the much cheaper generic drugs (the profit margin of ethical drugs is around 60 percent, while the profit margin of generic drugs is only about 20 percent). On the other hand, total sales volume is expected to rise due to the implementation of the JKN program.

Indonesia's National Health Insurance Program:

2014 2015 2016
Total Clients
(in millions)
 152  162¹ 186²
(in IDR trillion)
 1.54  4.00 9.79²

¹ per 26 February 2016
² forecast

Meanwhile, Business Monitor International (BMI) estimates that consumption of health products in Indonesia will grow by an average of 10.2 percent year-on-year (y/y) between 2014 and 2017, slightly lower than the 10.7 percentage point growth (y/y) growth pace that was recorded between the years 2010 and 2013. This forecast indicates that consumption of health products in Indonesia is only slightly affected by the country's slowing economic growth.

Indonesia is the world’s fourth-most populous nation (having a population that numbers around 255 million people). Development of public healthcare in combination with an expanding middle class (amid the nation's solid economic growth) should imply that Indonesia’s pharmaceutical sector contains ample potential for further growth. According to the World Health Organization (WHO), Indonesia’s per capita healthcare spending rose from USD $61 in 2008 to USD $108 in 2012. This is a significant jump but it remains well below per capita spending in other ASEAN members such as the Philippines (USD $119), Thailand (USD $215) and Malaysia (USD $410). Research conducted by Frost & Sullivan shows that Indonesia’s healthcare market could more than double between 2012 and 2018, supported by higher demand for medicines to treat lifestyle-related diseases (for example diabetes and cardiovascular illnesses) triggered by increasing urbanization and rising consumption (of unhealthy food products).

5th Convention on Pharmaceutical Ingredients South East Asia

Between 6-8 April 2016 the 5th Convention on Pharmaceutical Ingredients South East Asia, one of the largest pharmaceutical events in Asia, will be held in Jakarta where foreign and domestic downstream and upstream players and other stakeholders can meet, network and exchange new ideas and topics.