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Indofarma debacle bitter pill for
Jakarta
By Bill Guerin
JAKARTA - Publicly listed state-owned
pharmaceutical giant Indofarma is in the public eye over
its miraculous transformation of a reported Rp88.6
billion profit in the first three quarters of 2002 into
a net loss of more than Rp20 billion (US$2.3 million) by
the end of the year.
Though rumors had been rife
for some time that all was not well at Indonesia's
second-biggest pharmaceutical company, few had any idea
of the sheer scale of the financial irregularities that
have, to all intents and purposes, deceived the market,
potential investors and the public.
On Friday
Indofarma held a public presentation to disclose its
unaudited report after the Jakarta Stock Exchange (JSX)
decision to suspend trading of the company's shares
because it had not handed over its 2002 financial report
to the Capital Market Supervisory Agency (Bapepam) and
the JSX itself.
Indofarma president Edy Pramono
and financial director Purwo Kartiko told the press that
mistakes in the inventory during the first three
quarters and the need to dish out massive discounts to
pharmacies had contributed to more than Rp108.6 billion
in discrepancies in the fourth quarter.
Pramono
has presided over a major enterprise whose standards of
accounting and common sense can scarcely be credited. A
Rp57 billion ($6.5 million) discrepancy in the stock
inventory was hardly surprising given that Indofarma
admitted it did a full inventory only once a year.
The practice of calculating the basic cost of
goods based on prices established at the beginning of
the year and then applying them only at the end of the
year when the inventory was taken threw up the startling
gap between the net profit of Rp15.92 billion in the
first quarter of 2002 and the real figure of Rp6.61
billion after adjustment for increases in the cost of
goods sustained over the full year.
Pramono went
into even greater detail for the benefit of reporters.
The announced operating profit of Rp26.72 billion should
have read Rp12.78 billion, though sales remained
unchanged at Rp119.07 billion, he said. In the second
quarter of 2002, though sales of Rp267.73 billion were a
true figure, the net profit reported of Rp45.31 billion
was, in fact, a net loss of Rp12.62 billion, just as the
initial operating profit figure of Rp69.03 billion was
actually a net loss of Rp9.20 billion. Sales of Rp444.08
billion in the third quarter were a real figure but the
Rp88.57 billion net profit reported was, in fact, a loss
of Rp1.41 billion and operating profit of Rp134.32
billion should have read only Rp17.10 billion.
The scandal, just beginning to gather steam, is
acutely embarrassing for a government that was ready
last year to divest a majority of its 81 percent stake
in Indofarma and maintain majority control of
government-owned pharmaceutical stablemate Kimia Farma.
The government has marked Indofarma for
privatization throughout the past two years, but hit
repeated snags from unfavorable market conditions and
political interference.
Last May investor
interest had been whetted by a 56.5 percent jump in
Indofarma's net profits in the first quarter, to Rp15.92
billion. Potential buyer Dutch pharmaceutical and
health-care-products giant Nutricia International BV
wanted a cast-iron agreement from the government
allowing them to continue to produce generic medicines
for the public in the event of a deal being reached on
the majority takeover.
This was quickly followed
by an about-turn by the government, which backed a new
strategy, said to have been proposed by Health Minister
Ahmad Sujudi, that resulted in a revised decision to
divest only a minority stake in Indofarma, because of
its role as the primary supplier of cheap generic drugs
to the general public and government health-care centers
(puskesmas).
Stablemate and rival,
state-owned Kimia Farma, the largest pharmaceutical
manufacturer in the country, also withdrew from a plan
to set up a joint-venture company with the German STADA
Arzneimittel AG to sell generic drugs in Indonesia
because of uncertainty over the privatization strategy.
While all this was going on, Indofarma was
fighting off stiff competition brought on by the
relatively small market size, complex import clearance
procedures for raw materials and the intrinsic weakness
of the Indonesian rupiah against the dollar.
A
subsidiary, PT Indofarma Global Medika (IGM), which
distributes the generic medicines, caused Rp71.03
billion of the shortfall through the need for heavy
discounting of these products, according to Pramono.
Corrupt customs officials make it difficult even
for state-owned enterprises to import drugs legally and
are also responsible for the flood of illegal and fake
medicines on the market in Indonesia. The local industry
remains severely threatened by these cheaper, smuggled
and fake products, which have flooded the market since
1998. Bribes to customs officials smooth the path, and
even machinery and raw materials needed to counterfeit
medicines have been found in the country.
The
dependency of the pharmaceutical industry on imported
raw materials makes it extremely vulnerable to the
fluctuation of the rupiah against the US dollar. With so
much of their raw materials imported, and paid for in
dollars, local producers find it well nigh impossible to
reduce production costs and the price of the products.
In 1998, the cost of producing drugs more than
doubled and retail drug prices were up by more than 400
percent. The rupiah lost nearly 80 percent of its 1997
value, precipitating a crisis in the health system. The
government was forced to give subsidies on
pharmaceutical raw materials. By 2001 Sampurno, head of
the powerful Food and Drug Supervisory Board (BPOM) that
approves licenses for medicines and foodstuffs, and one
of Indofarma's commissioners, tried but failed to get a
protectionist deal for Indofarma that would allow it to
produce and distribute no fewer than 20 medicines.
The rationale was that efficient production
methods would be able to reduce prices of the drugs by
50-60 percent, but other pharmaceutical companies, both
state-owned and privately owned, lobbied for the
withdrawal of the plan.
Only three months ago
Pramono had pleaded with the government to allow it to
raise the prices of its generic medicines, the prices of
which are set by the government for the official market,
as the company had been hit by rising production costs.
He said an alternative would be to exempt the company
from paying 10 percent value-added tax (VAT).
Neither request was granted, and yet barely a
mile as the crow flies from Indofarma's administrative
headquarters in Central Jakarta is the Pramuka market,
where all manner of branded and generic drugs as well as
hospital consumables and prescription drugs are sold at
very competitive prices.
Indofarma's hospital
and pharmacy customers have no need to pay Indofarma
prices, at least those who have businesses in
metropolitan Jakarta. Neither do they need to hold
substantial stocks as, with the exception of a few
imported drugs that are scarce on the market, Pramuka
merchants hold wholesale levels of stocks themselves.
Sales tax on Indofarma's products leaped from 27
percent to 43 percent last year, causing a Rp16.60
billion loss in terms of net sales on their sales mix of
roughly 80 percent generic drugs and 20 percent
brand-name drugs.
Indonesia's No 2 drug maker is
a massive operation with 28 branches across Indonesia.
It produces about 4.5 billion generic tablets every year
together with supplementary health-care products and
patented herbal medicine potions. It is against this
background that Indofarma's need, and ability, to turn a
profit needs to be seen and the pressures generated on
staff and management, who are not the industry's best,
understood.
Anthony Sunarjo, chairman of the
Indonesian Pharmaceutical Federation (GPFI), says there
are currently some 160 pharmaceutical companies
operating in Indonesia, 38 of which are owned by foreign
companies, and none of which have a market share of
above 10 percent. An estimated 1,500 distributors, 6,500
dispensaries and 5,000 drugstores form the
infrastructure that gets the medicines to the public.
Indofarma and Kimia Farma cover the whole country
through a branch network, though the latter has the edge
with its ability to sell directly to the consumer
through its chain of pharmacies.
GPFI estimates
there are also upwards of 100,000 traders operating
illegally in a market whose value is essentially the
same as Thailand and the Philippines, about $1.5 billion
a year.
The rub is that Indonesia has the lowest
consumption of drugs per head of the three countries. In
2002 Indonesia, with a population of 210 million, spent
only $7.10 a head, up from US$4 in 2000, as against
Thailand's $23.80 a head with a population of 63 million
and the Philippines consumption of $19.20 per head in a
population of 78 million.
The fallen star will
now be placed under a special restructuring program,
according to the Ministry of State Owned Enterprises,
which controls the privatization program. A similar fate
awaits Kimia Farma.
Pramono succeeded Gunawan
Pranoto as president director. The latter has
substantial political clout, and the health minister
himself appointed Pranoto to head up Kimia Farma. The
two pharmaceutical giants were among four state
companies scheduled for sale last year as part of the
privatization program. The selloffs, together with those
of Bank Mandiri, the country's largest bank, and Angkasa
Pura II, which controls Jakarta's international airport,
were moved back to this year because of various
technical problems.
The sales of Indofarma and
Kimia Farma were included in successive Letters of
Intent (LoIs) signed by the International Monetary Fund
and the government, though this is no longer a
constraint given Indonesia's intention to pull out of
the IMF support program.
In March, when pleading
for special help for the company, Pramono also
criticized the government for dragging its feet on the
divestment, and said Indofarma expected the government
to fix a definite schedule for the privatization because
if it continued to postpone the program, it would
discourage foreign investors.
"I have met
several officials from the Ministry of State Enterprises
and I have urged them to give us an assurance on the
divestment plan. The uncertainty would surely have a
negative impact on our investment climate," said
Pramono.
Though Pramono this week said he was
ready to be replaced should any "error" on the part of
management be identified, the fact that these gross
irregularities took place under his watch, and in effect
scuttled the chances of even a remote interest from
investors, will haunt him for years to come.
Possible sanctions against the management and
more independent audits of the company's books seem
likely, and some local brokers say they are getting
ready to ditch Indofarma stocks in the light of the
inevitable public scrutiny.
The Indofarma
debacle will have strengthened the arm of those
legislators pressing for the privatization program to be
deferred until at least after next year's elections,
arguing that selling national assets in such an
unfavorable investment climate would be folly.
(©2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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