Indonesian pharmaceutical industry

Indonesian Pharmaceutical Industry Finds Itself at a Critical Crossroads  

  • The Indonesian pharmaceutical industry could reach a market value of USD11 billion by 2025
  • Indonesia remains reliant on imported raw materials to manufacture medicine
  • 100% foreign ownership of companies in the pharmaceutical sector is now permitted in the country

The sheer size of the Indonesian pharmaceutical industry is impressive. It is the biggest in ASEAN. Yet, high prices for select drugs and small research and development budgets, when compared to other G20 nations, have made improving the sector a government priority. Asian Insiders’ Partner in Indonesia, Primadi Soerjosoemanto, shares insights on the current situation and what opportunities may be available to foreign companies.

The Indonesian pharmaceutical industry came under scrutiny in mid-2024 when it was revealed the price of certain medicines was four times cheaper in Malaysia and lower in many neighbouring countries. While not a widespread situation, it did cause local consumers to look at importing more affordable products from overseas in some instances.

Recognising the issue, the government had relevant ministers craft strategies to improve the pharmaceutical sector’s competitiveness. While work on this remains ongoing, new President Prabowo Subianto is expected to carry on with the efforts initiated by his predecessor, Joko Widodo.

A few different reasons have been given as to why some medicines cost more in Indonesia than in other countries in ASEAN. Trade channel inefficiencies, governance issues, and an unfavourable tax policy on domestic production are obstacles that must be overcome. 

Currently, up to 90 percent of finished product ingredients needed for pharmaceuticals are imported. This has added to the price strain. So, too, has a lack of alternative drugs with the same active ingredients as original medications.

Is the Indonesian pharmaceutical industry primed for growth?

Despite issues, many experts believe the Indonesian pharmaceutical industry is a sleeping giant simply in need of reform to realise its full potential. The demand for medicines is enormous given the country’s massive population. However, there is a lot more to support the sector than this.

For starters, the national health insurance scheme, Jaminan Kesehatan Nasional (JKN), will fuel the demand for affordable drugs. Ministers have also been told to increase investment in the health sector with the production of medicines and medical devices among the areas expected to be emphasised.  

At present, Indonesian healthcare spending is very low compared to other countries in Asia. Should the country reach a similar level to Malaysia, the Indonesian Ministry of Health believes it would inject billions into the healthcare economy.

There have already been some signs that the JKN is having a positive impact on pharmaceutical demand. Drug spending by hospitals has increased steadily since the second quarter of 2022. The trend is expected to carry on as healthcare accessibility in the country grows. 

The Pharmaceutical sector’s market value was more than IDR141 billion (USD10 billion) in 2021, according to Fitch Ratings. The organization has predicted this figure to increase to IDR176 trillion (USD11 billion) by 2025. Growth should continue throughout the remainder of the decade and beyond, although it is dependent upon a few factors, including an aging population which could increase demand.

Some analysts have predicted the sector to record a compound annual growth rate of 8-9 percent between 2025 and 20235. If that were to occur, the Indonesian pharmaceutical industry market value could surpass USD27 billion over that span.

Existing challenges and forging a path forward

Despite its large size and seemingly massive potential for growth, the Indonesian pharmaceutical industry must address lingering issues and chart a path for the future. Currently, the country wants to solve a pair of major problems: expensive medicine and a dependency on imports.  

As discussed earlier, prices for certain drugs, mostly branded products, in Indonesia remain higher than elsewhere in Asia due to a reliance on imports of raw materials and final products. While this isn’t a universal problem across the sector, there is a push to correct the issue where it has become prevalent.

There are also a few secondary obstacles that may dissuade foreign companies from entering the market. First, supply chain infrastructure is very much a work in progress and will need continued government support. Second, a handful of state-owned enterprises hold an advantageous position in the pharmaceutical industry. Given the size of the sector, the latter concern is perhaps somewhat overblown.

Ultimately, how the country tackles these challenges depends upon which strategy the government opts to pursue. Indonesia could opt to become a research and technology development hub for new medicine or may look to focus efforts on producing generic drugs. Each option has pros and cons, but both require significant investment in research and development capacity.

Foreign companies can help the country

With the Indonesian pharmaceutical industry finding itself at a crossroads, foreign companies can aid the sector’s short- and long-term transformation. Interestingly, there are a few different options as it relates to market entry.

The government encourages overseas investment in the manufacturing of both raw materials and finished products through a policy that allows 100 percent foreign ownership of subsidiaries. Given the time and resources involved, larger multinational companies tend to pursue local production opportunities, although mid-sized firms shouldn’t rule it out entirely.   

Partnering with an original equipment manufacturer (OEM) in Indonesia is an intriguing way for some overseas entities to enter the market. For example, Malaysia’s Duopharma Biotech pursued the OEM strategy as it allowed them to reduce market entry time significantly. The viability of this method will depend on a few factors, such as product complexity.

Foreign firms possessing technologies and knowledge relating to the development of medicinal raw materials (BBO) or active pharmaceutical ingredients (API) may want to consider partnerships with domestic players to develop these capabilities locally. An example of this can be seen in a recent partnership between Denmark’s Novo Nordisk and Bio Farma to produce insulin locally.

This is a space where midsize firms can thrive, too. For instance, a European entity teamed up with local partners to establish what is known today as Anvita Pharma in 2018. It is Indonesia’s first privately owned API company and has become a key player domestically as well as on a regional level.

Finally, opportunities for exporting BBO and API to Indonesia remain even as the government strives for greater self-sufficiency. It will take years and potentially decades for the required capacity to be built up. Those efforts must also be balanced with the reality that demand for medicine is set to increase in the coming years. Imports will be necessary in some form or another.  

Final thoughts

The Indonesian pharmaceutical industry may be large, but its development remains nascent. Even with the government’s attempts to reduce imports by as much as 35 percent this year, becoming self-sufficient and lowering drug prices will take time, resources, and a clear strategy. 

None of these obstacles should be seen as an outright negative, however. On the contrary, the sector is still wide open. This presents foreign firms looking to invest with a breadth of opportunities. There are also several options for entering the market, including local manufacturing and OEM.

Finally, local knowledge and connections are paramount to success in the country. Even in an industry open to 100 percent foreign investment, Indonesia remains a market that can be complicated to navigate without a strong partner who understands the country’s business landscape.

For a no-obligation discussion about available pharmaceutical opportunities in Indonesia, please get in touch with Primadi Soerjosoemanto, Indonesia Partner: primadi.ws(at)asianinsiders.com or Jari Hietala, Managing Partner: jari.hietala(at)asianinsiders.com.

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