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Health care reform a bitter pill for
Indonesia
By Bill Guerin
Indonesia has some 200 pharmaceutical
manufacturers and 1,600 pharmaceutical distributors.
Several international pharmaceutical companies have
manufacturing plants and offices in Indonesia, including
Astra Zeneca, Bayer, Glaxo Wellcome and Schering.
State-owned pharmaceutical giants PT Indofarma and PT
Kimia dominate the domestic market. There are four
state-owned pharmaceutical companies in Indonesia, but
only these two are candidates for partial privatization.
State Minister for State Enterprises Laksamana
Sukardi announced this week that because of the lack of
bidders for the recent offer of a 46 percent stake in
Indofarma, the tender process will be started all over
again. Sunny Corp from China, Washington Soul Pattison
Ltd from Australia and Korindo from South Korea were the
only three listed consortia bidding for Indofarma out of
a total of 40 who had asked for tender documents. Two of
the three pulled out of the final bidding process.
Indofarma is among four state companies
scheduled for sale last year as part of the
privatization program, delayed because of poor market
conditions and lack of investor interest. Last February
Sukardi said the government would not divest a majority
holding in PT Indofarma because it had a "public-service
obligation" to provide generic medicines at low prices.
Around the same time, Kimia Farma withdrew from an
earlier plan to set up a joint-venture company with
STADA Arzneimittel AG to sell generic drugs in
Indonesia, citing uncertainty over Jakarta's
privatization strategy.
Previously the
government plan was to retain majority control of
Indofarma because it was responsible for producing
generic drugs for domestic consumption but, after the
move by Indofarma's politically well-connected president
director, Gunawan Pranoto, to take up the same baton at
Kimia Farma, the government changed tack and announced
it would sell a majority 51 percent stake in PT
Indofarma, the No 2 pharmaceutical company, and retain
majority control of the largest pharmaceutical
manufacturer, PT Kimia Farma.
A month later it
was announced that a majority holding in Indofarma would
be offered after all, though the government would still
maintain majority ownership of Kimia Farma. The
government apparently now plans to sell only 39 percent
of its 91 percent holding in Kimia Farma and, once the
sales are complete, it will retain a 20 percent stake in
Indosat, 29.7 percent of Indofarma, and 51.3 percent of
Kimia Farma. The sales of PT Indofarma and PT Kimia
Farma have been included in successive Letters of Intent
(LoIs) signed by the International Monetary Fund and the
government.
Indonesia's No 2 drug maker has 28
branches covering the whole archipelago and churns out 4
billion tablets and 500 million capsules of generic
drugs every year together with patented herbal medicine
products and supplementary health-care items.
Indofarma's unaudited sales in 2002 increased by
14 percent to Rp700 billion ($78.65 million) from Rp602
billion in 2001 but net profit fell by an estimated 16
percent to Rp100 billion in 2002 from Rp120 billion in
2001 due to rising production costs. The company has
targeted sales of Rp800 billion for 2003 and will spend
Rp50 billion on a new manufacturing unit in South
Sulawesi to increase production.
Indofarma's new
president director, Edy Pramono, criticized the
government for dragging its feet on the Indofarma
divestment, before this week's announcement that there
were no buyers anyway. He said the company was eyeing
total capital expenditure of Rp300 billion to increase
production in future and was hopeful that net profit
could increase to Rp200 billion this year. Indofarma
expects the government to fix a definite schedule for
the company's privatization because delays in the
process over the past two years were discouraging
foreign investors, he said.
Last August the
cash-strapped government authorized the divestment of a
maximum stake of 51 percent in Indofarma, up from its
previous14 percent. Analysts had said a 14 percent stake
was too small to entice investors. The government
currently owns 80.73 percent of Indofarma after floating
the firm in 2001. After a showbiz-style initial offer of
Indofarma shares made in Surabaya, the shares lost
ground to close at Rp245 from the eventual initial
public offering (IPO) price of Rp250.
The
company planned to offer up to 1.462 billion shares
during the IPO, 906.25 billion government shares and up
to 556.09 billion new shares were to be offered at a
price of between Rp225 and Rp415 per share.
The
onset of the Asian financial crisis in late 1997 quickly
brought the Indonesian pharmaceutical sector to a
grinding halt. The rupiah dropped dramatically and lost
75 percent of its value in the early stages. By 1998 it
had lost nearly 80 percent of its 1997 value. Given an
annual inflation rate of 10 percent at the end of that
year, the rupiah's real depreciation then was one of the
biggest country currency devaluations in the postwar
era. Interest rates went through the roof, at one time
reaching 30 percent, and to cap it all, foreign banks
refused to honor letters of credit from Indonesian
banks. To this day almost 95 percent of raw materials
used in the production of medicines are imported, and in
the worst days of the crisis local pharmaceutical
producers were unable to import their basic needs.
By early 1998, the cost of producing drugs had
more than doubled and retail drug prices were up by over
400 percent. World Bank surveys showed that drug prices
increased by 200-300 percent between November 1997 and
March 1998. A dangerously low four months of raw
material stock sparked off a government subsidy program
for raw materials.
By the time production had
resumed, consumers had almost completely switched to
using locally produced generics or herbal medicines,
leaving the foreign-produced or imported brands high and
dry, a situation not much different from today.
It took the government until 2001 to come up
with a plan to launch branded medicines at cheaper
prices, but this met widespread resistance from doctors,
pharmacists, and some legislators. Both the Indonesian
Doctors Association and Indonesian Pharmaceuticals Watch
claimed the government was trespassing on the domain of
other professions, as the Food and Drug Supervisory
Board (BPOM) no longer had the authority to set drug
prices.
The plan was to produce and distribute
20 medicines, ranging from antibiotics to analgesics,
under a project run totally by Indofarma on the sound
premise that more efficient production methods would be
able to reduce prices of the drugs by 50-60 percent in
comparison with similar patented drugs or other brands.
The plan had been announced by the head of BPOM,
Sampurno.
The project also meant that the
government would not subsidize raw material imports and
would be able to wash its hands of complaints from other
producers that expensive drug prices were due to the
cost of imported drugs components. Amid criticisms that
this was sheer protectionism, and akin to giving a
monopoly to Indofarma, the government promised similar
facility would also be offered to other pharmaceutical
companies, both state-owned and privately owned.
Sampurno, it should be noted, is also one of the
commissioners of Indofarma, giving rise to fears that
the policy was created simply to help Indofarma promote
its new products.
House of Representatives
member Ahmad Sanusi Tambunan from Commission VII, which
supervises, among other issues, health, reminded the
doctors not to allow themselves be made scapegoats for
the government's failure to make drugs more affordable.
Privatization was also intended to restructure
strategic state industries and enable them to perform
well in the face of increased global competition. Prices
are certainly in Indonesians' favor in spite of the
volatility of the past few years. "Our products are the
cheapest in Asia after India and China. So we will
certainly be able to compete on the ASEAN market," said
Indonesian Pharmaceutical Companies Association chairman
Anthony Ch Sunarjo, adding that the local pharmaceutical
industry had been anticipating this year's ASEAN Free
Trade Association (AFTA) with some enthusiasm.
The main fear is that other Association of
Southeast Asian Nations member countries would seek to
bar Indonesian pharmaceutical products from entering
their markets by setting up various non-tariff barriers,
including imposing complicated requirements for
Indonesian drug producers to register their products in
their respective countries.
"I believe ASEAN
member countries, which remain unprepared for AFTA, will
do their utmost to create various other kinds of
barriers to block the entry of our pharmaceutical
products," he said. Indonesian products remain
competitive in the global market and the country exports
to no fewer than 59 countries.
As the
fourth-most-populous nation in the world, the potential
of the domestic market is enormous, though, as in almost
every other sector, smuggling and counterfeiting grossly
distort the market.
Low per capita medicine
consumption and thus low product demand, as well as the
need for a substantial research budget, have meant that
local companies have historically been limited to the
licensing, formulation, distribution and marketing of
drugs. Many manufacturers have small operations, each
producing a limited range of products. They lack the
financial resources and the technical expertise for
original research and, unable to create new drugs, they
either manufacture under license from foreign drug
companies, they produce and distribute generic medicines
("me-too drugs"), or simply copy from foreign companies.
Despite the existence of a seemingly
comprehensive system of monitoring by the Department of
Health, many local producers still package innocuous,
harmless powder and sell it as branded medicine to
unsuspecting customers. Although the fake products are
usually sold at lower prices than the genuine article,
they are, of course, completely ineffective.
Consequently, the brand image of the legitimate holder
of the brand name suffers when the fake product fails to
cure a patient's illness. Long accustomed to
self-medication with local herbal medicine, jamu,
consumers often do the same with pharmaceutical
products.
Prior to the economic downturn, the
improved health and increased per capita income of
Indonesians led to increased demands to provide
better-quality health care and health-care products.
Indonesia's consumption of medicine was
estimated at US$4 per capita in 2000. This was small
compared with other ASEAN countries (the Philippines $6,
Thailand $11, and Malaysia $11), but indicative of a
market mismatch between the purchasing power of
consumers and the high price of such products. There are
still an estimated 1,500 pharmaceutical distributors in
Indonesia, but only about 20 have national networks.
Kimia Farma, like Indofarma, services the whole country
through a network of branches and agencies, though the
former, with its PT Kimia Farma Apotik, reaches out all
the way to the consumer.
The sector is still
very much over-regulated and bureaucratic. Distribution
and storage are hampered by the sheer size of the
country and its high humidity.
Research and
development funds account for less than 1 percent of the
total budget allocated by Indonesian pharmaceutical
firms.
Under the AFTA scheme, the flows of
pharmaceutical products within the region will be freed
from tariff and non-tariff barriers. The total foreign
investment in the pharmaceutical sectors among ASEAN
countries, except for Singapore, has achieved of between
$2 billion and $2.3 billion over the past 10 years.
Legislators are now saying that selling national
assets in such an unfavorable investment climate is a
bad move and are pressing the government to cancel the
privatization program until at least after the 2004
elections. They are calling for a special law on
privatization and the sale of state assets.
Minister of Health Achmad Suyudi is revamping
the national health system, virtually unchanged since
1984, thus helping to provide improved quality and
affordability to health services for all levels of
society,
Regional autonomy and a paradigm shift
in health development have increased the pressure on the
government to shift to a bottom-up scheme, which would
involve the participation of the buying (and voting)
public and move nearer to the day when all Indonesians
can expect basic health care as one of their rights. All
this costs a great deal of money, and any paradigm that
puts the health-care budget in a category of investment
for the future, rather than a drag on the state budget,
will be a long time coming.
The bottom line,
succinctly put by Anthony Sunarjo, is that "as long as
the people have to pay their health care alone, without
a credible insurance scheme or without the elimination
of value added tax on the drugs, any price is
expensive".
(©2003 Asia Times Online Co, Ltd.
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