Kalbe Farma's corporate health formula: Specialization

Publicly listed pharmaceutical company PT Kalbe Farma was named by Forbes magazine in October as one of the best 200 global companies outside the U.S. with annual sales of under US$1 billion. This is the second time the company has been included in the Best Under a Billion list of the prestigious magazine. The Jakarta Post's Sari P. Setiogi interviewed corporate secretary to the director Vidjongtius of Kalbe to discuss the company's business strategy and plans for the future.

The following is an excerpt from the interview.

Question: Your company has managed to survive the country's economic crisis of the late 1990s and has obtained international recognition for its successes. What is your strategy? Answer: The secret is in (product) specialization and a change in our business paradigm during the past four years.

To be honest, the changes came after the crisis. Before the crisis, the business environment was very stable and supportive.

Industries, including Kalbe Farma, just took everything for granted, no big changes nor big innovations. But after the crisis, there was pressure from the weakening currency and the lower purchasing power of customers. As a company, we were forced to do something to deal with the crisis.

During the 1998-1999 period, we were fully concentrating on how to survive. It was like we were in survival mode. However, after two years, we have become more stable.

We thought then that Kalbe Farma should take advantage of the crisis to become stronger. Kalbe Farma should be more focused and concentrate on pharmaceuticals and health-related products.

Before the crisis we were less focused; we were more like a supermarket. There was food and other products, which were actually not part of our core business.

We believe that specialization is much better than being too general (in our products).

How important is it to be specialized in the pharmaceutical industry?

It is extremely important, because the pharmaceutical industry comprises a very wide range of products and we should map our strength.

For example, in over-the-counter (OTC) products there are medicines and consumer health products, such as food supplements. And in ethical or prescription medicines, there is an even wider range of products.

Before the crisis, the ratio between OTC and prescription medicines was 50:50. However, after the crisis, the ratio became 60:40 as people's buying power changed. They preferred to use OTC medication before going to the doctor, so we concentrated on OTC products.

For example, our subsidiary PT Bintang Toedjoe is producing OTC retail health products for the middle-lower market in single dose packages.

What does Kalbe gain from the strategy?

Our market has continued to grow above the industry average. So far, we are highly satisfied with the results. Every year, we are able to produce new products. Many companies have often asked us how we were able to achieve this.

Well, we have a solid, well-managed research and development department, as well as a strong business development department.

Does Kalbe plan to produce specific ethical products in the future?

Competition in ethical products is narrower, small in margin, but also greater in terms of pressure. We have to make more advancements in science, research and development. We think we will move from the crowded market to the less crowded market in future.

Kalbe wants to be a few step ahead, and is not easily satisfied with the status quo.

However, to increase sales, we should focus on the larger market (OTC). We will not leave this market (OTC) of course, but in the future we should move to specialized ethical products.

How much do you spend on research and development?

At the moment, we are the highest spender in research and development in the pharmaceutical industry -- about Rp 15 billion (US$1.67 million), or 0.5 percent of total sales. Within the next two years, we are planning to increase our investment toward research and development Rp 100 billion, or 2 percent of total sales.

How do you see next year's prospects for the pharmaceutical industry?

The industry will continue to grow because, in the end, people need medicine. Market growth will be about the same as this year, between 10 percent and 12 percent, assuming that the country's macroeconomic situation improves and the population increases.

Prices might increase a bit, but not much.

In general, the year 2004 will not be gloomy, despite the upcoming general elections.

How is your export performance?

We export mostly to Southeast Asian countries, Africa and several countries in Central Asia and the Middle East. In total, we export to about 20 countries.

We mostly export OTC products of Indonesian brands. The OTC segment is easier to enter in overseas markets.

We chose ASEAN countries and several African countries as our target market for their characteristics. The markets in ASEAN countries are similar to that in Indonesia.

Our export contribution to total sales is not that big -- about 7 percent to 8 percent. But in the future, I believe this will increase.

As of today, the our export growth is 10 percent higher than domestic sales growth. In one to two years, export may contribute 10 percent of total sales.

We are also anticipating the opening up of markets. Toward this end, we have established several representative offices in Malaysia, Myanmar, Vietnam, the Philippines, Sri Lanka and South Africa.

What is your debt load?

We have asked our creditors -- about 30 banks -- for a debt rescheduling facility for debts maturing between 2005 and 2010.

Our debt balance is US$84 million. About 65 percent of our initial debt of $184 million was repaid this year, and we did not ask for a haircut (debt reduction). We have a very good record with our creditors.

We asked for the rescheduling facility so we could expand our health foods division, build new plants and develop our biotechnology division. These projects might cost about Rp 450 billion over a period of five years and to finance them, we will rely on internal cash flow, not a new debt.

We have promised our creditors that our remaining debt will be paid in full, with no haircut.

Our creditors agree with the planned projects, but we are still negotiating project costs. They have asked us to scale down costs to between Rp 250 billion to Rp 300 billion.