Local pharmaceutical firms struggle hard to survive

Rendi A. Witular The Jakarta Post Jakarta

During the last five years, from the start of the economic crisis in 1997 until 2001, 25 local pharmaceutical manufacturers went bankrupt, leaving more than 12,500 employees jobless.

Strict competition due to a small market size, complicated import clearance and the slump of the Indonesian rupiah against the U.S. dollar, which until now has yet to be stable, are the bitter pills for the local industry to swallow.

Most of the bankrupt companies have shifted their business to produce food supplements or medicinal herbs which have less crowded markets.

Chairman of the Indonesian Pharmaceutical Federation (GPFI), Anthony Ch. Sunarjo, said that currently there were 198 pharmaceutical producers operating in the country from 223 in early 1997.

"The country's overall drug market size grows by around 20 percent every year, but the value is still small. This year's market value is estimated to stand around Rp 15.2 trillion (US$1.5 billion)," said Anthony.

If compared to other South East Asian countries the Indonesian market value is the same as the Philippines and Thailand, around $1.5 billion.

However, if compared to the average consumption of drugs per person, Indonesia is the lowest.

With a population of 210 million the country's consumption of drugs only reached $7.1 per person, while the Philippines was $19.2 with its population of 78 million and Thailand $23.8 with a population of 63 million.

GPFI predicted that this year, the market size would grow only by 25 percent or two percentage points below the 27 percent growth rate booked last year.

GPFI said that around 70 percent of the market volume was controlled by 35 foreign manufacturers including the world's giants Pfizer, Roche, Aventis, Novartis and Mead Johnson.

Anthony feared that more local pharmaceutical companies, especially small- and medium-sized operations, would be forced to close due to their inability to compete.

Local manufacturers are currently unable to compete with foreign companies due to the lack of investment and research resources for inventing new medicine. Local companies can only copy the foreign companies and sell at lower prices.

"All drugs made by local manufacturers are copies of those owned by foreign manufacturers in which the patent had expired. Local companies buy the formula and change the name of the drugs," said Anthony.

To invent one new product, a multinational manufacturer can spend between $350 to $400 million. The annual budget allocated for research can reach $2.5 billion, which is higher than the Indonesian market value.

Local manufactures are a bit lifted in sales by their ability to export the cheap, copied drugs to other poor or developing countries such as Myanmar, Vietnam, Laos, Cambodia in Asia, and Nigeria and Uganda in Africa.

However, the value is still small, around $80 million per year, and mostly non-prescription drugs.

According to GPFI, the country's five biggest pharmaceutical manufacturers in terms of market share were Kalbefarma, Sanbefarma, Dexamedika, Kimiafarma and Indofarma. The last two companies are owned by the state.

Currently, local industries have also been seriously hurt by corrupt customs officials that make it difficult to legally import drugs as well as allowing many illegal drugs to flood the country after bribes are paid.

Around 95 percent of raw material for the industry are imported, which makes the timing of import clearance very important for an company to run efficiently and compete with others, foreign or domestic.

Moreover, the local industry is also threatened by cheaper, smuggled and fake products which have continued to pour into the country since 1998, usually aided and abetted by paid off officials.

Anthony explained that many of the fake products were being manufactured locally as the manufacturers had been able to illegally ship in the machinery and raw materials required to produce them.

Due to the plight, GPFI had earlier urged the government to immediately reapply the pre-shipment import inspection (PSI) system to eliminate such practices.

The dependency of the pharmaceutical industry on imported raw materials, has made them vulnerable to the fluctuation of country's currency against the U.S. dollar.

"With so much of our material imported, all bought in dollars, the local firms find it difficult to reduce production costs and the price of the products," said Anthony.

Pharmaceutical prices in Indonesia have increased by 200 percent since late 1997, far lower than the 500 percent increase in operating costs during the same period.

Faced with such challenges, many companies have opted to squeeze out some profit by cutting costs as much as possible in a bid to be more efficient and productive.

GPFI members, to this point, only include firms with legal operating licenses, comprising 198 manufacturers, 2,500 distributors, 6,500 dispensaries and 5,000 drug stores.

While those operating illegally are estimated to have reached 100,000.

Eyebox

Indonesian market value (in billion rupiah)

1998 1999 2000 2001 *2002

Audited Dispensaries 2,038 2,571 2,966 3,339 3,961 Drugs stores 1,028 1,510 1,831 1,974 2,275 Hospitals 800 1,021 1,180 1,495 1,852 Total 3,866 5,102 5,977 6,808 8,088

Non-audited Tenders 642 1,335 2,069 2,833 3,545 Other stores 509 1,123 1,898 2,988 3,597 (non-licensed) Total 1,151 2,458 3,967 5,821 7,142

Overall total 5,017 7,560 9,944 12,629 15,230

* Projection

Source: the Indonesian Pharmaceutical Federation