Pharmaceutical Industry Indonesia: Plagued by Weak Rupiah

The dependence of Indonesia’s pharmaceutical industry on imports of raw materials becomes clear when realizing that about 90 percent of raw materials used in the pharmaceutical industry are imported materials. Moreover, these imported materials account for about 75 percent of pharmaceutical firms’ total production costs. As such, it is clear that rupiah depreciation has a severe negative impact on either Indonesian pharmaceutical companies or Indonesian consumers (if the pharmaceutical company decides to pass on higher costs to consumers by raising prices). For every ten percent rupiah depreciation, the cost of goods sold raises by between five to ten percent, while the profit margin declines by 6.5 percent.

Sharp rupiah depreciation forms a larger problem to Indonesian pharmaceutical companies than the country’s economic slowdown. Although purchasing power of Indonesians has indeed weakened amid continued slowing economic growth, most people who are in need of medicines will still buy these products in order to improve their health. Business Monitor International (BMI) expects that consumption of health products will grow by an average of 10.2 percent (y/y) between 2014 and 2017, slightly lower than the 10.7 percentage point growth (y/y) that was recorded between 2010 and 2013. This indicates that consumption is only slightly affected by the country's slowing economic growth.

Below, the eleven pharmaceutical companies that are listed on the Indonesia Stock Exchange (IDX) are presented in the table. Shares of only one company, Darya-Varia Laboratoria, managed to rise this year so far.

Last Update: 29 Mar 2021

Pharmaceutical Companies listed on the Indonesia Stock Exchange

Company	P: 29 Mar 2021	P: 28 Mar 2021	Gain/Loss	P/E ttm	Yield %	Gain/Loss YTD
Kalbe FarmaKLBF	1,540	1,580	-2.53%	N/A	0.00%	-2.84%
Kimia FarmaKAEF	2,790	2,890	-3.46%	N/A	0.00%	-43.18%
Tempo Scan Pacific Tbk.TSPC	1,460	1,460	0.00%	N/A	0.00%	-4.89%
Darya-Varia LaboratoriaDVLA	2,370	2,390	-0.84%	N/A	0.00%	-4.82%
IndofarmaINAF	2,700	2,730	-1.10%	N/A	0.00%	-45.01%
Merck TbkMERK	3,190	3,200	-0.31%	N/A	0.00%	-4.78%
Pyridam Farma TbkPYFA	920	920	0.00%	N/A	0.00%	-11.96%
Schering Plough Indonesia TbkSCPI	29,000	29,000	0.00%	N/A	0.00%	0.00%
Industri Jamu dan Farmasi Sido MunculSIDO	780	780	0.00%	N/A	0.00%	1.96%
Combined Total	44,750	44,950	-0.44%			-9.76%

Green colour indicates upward movement Red colour indicates downward movement P = price; E = earnings; D = dividend; Yield = D/P "N/A" indicates P/E < 0 (negative earnings) "-" indicates E,D,P or YTD is not available

In 2014 Indonesia launched its universal health care program, known as Jaminan Kesehatan Nasional (JKN). The goal of this program is to provide health insurance to all Indonesians (more than 250 million people) by January 2019. The JKN program is accompanied by budget pressures for the government and therefore 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.

The market leader in Indonesia’s pharmaceutical industry, Kalbe Farma, is preparing several strategies to combat the negative influence of the weak rupiah. Firstly, it aims to boost sales by promoting a selection of nutrition and health products. Secondly, it is currently constructing a biosimilar factory in West Java, which (once operational later this year) should curtail the company’s raw material imports. Kalbe Farma also aims to raise its exports to other ASEAN countries in order to hedge against the currency risk. As the company is not engaged in the production and distribution of generic medicines, its corporate performance will probably be negatively impacted by the government’s JKN program.

State-controlled Kimia Farma is also busy establishing factories (one for pharmaceutical salt and one for unspecified medicines) in an effort to curtail future imports of raw material, while it also aims to boost exports in order to hedge against the volatile rupiah. Kimia Farma has already raised sales prices of several products in order to limit narrowing profit margins.

Meanwhile, Tempo Scan Pacific said the company’s lower profit is not so much caused by the weak rupiah (because only about 55 percent of raw materials are imported) but by the company’s higher promotional costs and employee salaries. The company is also not expected to be severely negatively affected by the JKN program as it has been focusing on ‘over the counter’ medicines (sold directly to the consumer without a prescription).

Forecast Corporate Earnings 3 Major Indonesian Pharmaceutical Firms:

	Forecast Net Profit 2015	Forecast Net Revenue 2015
Kalbe Farma	IDR 2.25 trillion	IDR 18.5 trillion
Kimia Farma	IDR 257 billion	IDR 5.2 trillion
Tempo Scan Pacific	IDR 627 billion	IDR 8.2 trillion

^{Source: Kontan}

Being the world’s fourth-most populous nation (with more than 250 million people), seeing the expansion of public healthcare, while solid economic growth gives rise to an expanding middle class, Indonesia’s pharmaceutical sector contains ample potential for growth. Indonesia’s healthcare spending per capita grew from USD $61 in 2008 to USD $108 in 2012 according to the World Health Organization (WHO), remaining below other regional ASEAN members such as the Philippines (USD $119), Thailand (USD $215) and Malaysia (USD $410). Research conducted by Frost & Sullivan claims that Indonesia’s healthcare market will 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).

Given the country’s protectionist regulations in this sector, most medicines are not allowed to be exported to Indonesia and therefore multinationals need to develop facilities in the country or team up with local companies to tap the local market.

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