Pharmaceutical industry growth slower next year on higher costs

The Jakarta Post, Jakarta

Increasing production costs and the need to comply with global manufacturing standards will hamper sales in the coming year, an industry player warned last week.

"There are several problems the industry must address. First is the need to improve effectiveness and comply with good manufacturing practices in order to gain acceptance in the global market," said Ferry Soetikno, managing director of Dexa Medica, which is among the top pharmaceutical companies in the country.

The pharmaceutical industry is also coping with a more than 10 percent increase in production costs since October, when the government raised fuel prices by an average of 126 percent, which resulted in rising inflation.

Also weighing down the industry are increases in regional minimum wages and fluctuations in the rupiah at a time when pharmaceutical companies still import about 95 percent of their raw materials.

"The growth rate (for the industry next year) will likely fall to a single digit," Ferry said.

The industry currently has a total market value of Rp 22 trillion (about US$2.2 billion) and boasts average annual growth of 12 percent.

There are about 200 drug manufacturers in the country, 60 of which dominate about 80 percent of market share, while the other manufacturers scramble for the remaining 20 percent.

Another potential stumbling block for the industry is its market structure. There are currently some 2,200 agents and distributors in the industry, creating numerous levels of distribution before the products finally reach the end-customers.

There are more distributors in Indonesia than in India, which has more than 13,000 drug manufacturers, making it among the largest drug manufacturers in the region.

So many distributors creates inefficiency in Indonesia's pharmaceutical industry and results in higher costs for companies.

According to Kalbe Farma corporate secretary Vidjongtius, if Indonesia hopes to compete in the regional market it must improve its price competitiveness, especially when the ASEAN Free Trade Area comes into full effect in January 2008.

Within ASEAN, there are more than 600 drug manufacturers with total sales of some $6.25 billion.

Kalbe Farma currently operates six pharmaceutical manufacturing sites, producing about 400 products and controlling approximately 14 percent of the total domestic market.

Eight percent of the company's total sales come from the regional market, through its eight representative offices in the ASEAN region.

Kalbe Farma plans to merge with Enseval and Dankos Laboratories, which would make it a major player in the Southeast Asian pharmaceutical market with a capitalization of more than $1 billion.

The company has said that increasing investment in research and development is crucial to the development of the local industry.

Currently, most drug manufacturers here allocate a mere 1 percent of their total sales for R&D, compared to at least 10 percent by drug manufacturers in developed countries.

Ferry of Dexa Medica agreed, saying drug manufacturers here must begin putting more money into research.