Economic Update

Published 27 May 2020

As the Covid-19 pandemic fractures international supply chains and exposes vulnerabilities in the health care systems of emerging markets, Indonesia is looking to strengthen its pharmaceuticals industry through reforms and overseas investments.

In early April – shortly before the capital Jakarta entered a lockdown period to limit community transmission of the virus – the Indonesian Food and Drugs Supervisory Agency (BPOM) announced it would accelerate the registration process for any drugs that could be used to treat Covid-19.  

Under normal circumstances, it might take months or years for a new drug to navigate Indonesia’s multi-layered bureaucratic procedures, but the pandemic has highlighted the need for coordinated and efficient actions at all levels of government to aid the health care response.

In addition to the fast-track registration through the emergency use authorisation platform, BPOM announced it would reduce the time needed to complete the importation process for raw materials used in drugs to treat Covid-19, from one business day to two hours. Similarly, it pledged that eligible manufacturing facilities producing drugs to treat Covid-19 would receive their Good Manufacturing Practice certification within five business days instead of 10.

Prior to the coronavirus outbreak, Indonesia was already the largest pharmaceuticals market in South-east Asia, with Fitch Solutions predicting it would have one of the fastest growth rates in the region over the next decade.  

However, the pressures created by the pandemic – which had resulted in 23,165 cases and 1,418 fatalities in Indonesia as of May 26 – have highlighted the need to increase and diversify manufacturing capacity even further, in order to meet the country’s immediate needs and also hedge against future health care emergencies.

Supply chain diversification

Speaking in February, health minister Terawan Agus Putranto said the outbreak had created an opportunity to boost local production of pharmaceuticals and expand the use of local inputs in the manufacturing process.

Around 90% of the raw ingredients used by pharmaceuticals companies in Indonesia are imported, with China supplying approximately 60% of that figure.  

In light of this, the Indonesia Chamber of Commerce and Industry estimated that the country’s pharmaceutical firms were operating at an average of 55-60% capacity in May due to disruptions to supply chains as a result of the pandemic.

With this in mind, manufacturers across a broad range of sectors have been considering diversifying their supply chains away from China – with South-east Asia a popular alternative.

According to Indonesian media reports in mid-May, the state-owned Kawasan Industri Wijayakusuma industrial park in Brebes, Central Java, was preparing to house a US pharmaceutical firm planning to relocate from China.

Although the name of the company and the size of investment had not been disclosed at the time of writing, the decision to relocate was reportedly the result of discussions between Indonesian President Joko Widodo and US President Donald Trump in April.

The project was reported to be in regional spatial planning stage, and it could be six to 12 months before construction starts.

Evolution of the industry

Indonesia’s pharmaceuticals market has evolved significantly since 2014, when the government began to roll out its universal health insurance scheme (known by its local acronym JKN) to cover the population of over 260m.

Although the JKN scheme has suffered from financial deficits – explored in more detail in the Health chapter of OBG’s comprehensive 2020 report on Indonesia, which will be published in early June – it has also made great strides towards extending health care coverage to even the poorest and most remote communities of Indonesia’s sprawling archipelago.

The JKN disrupted the pharmaceuticals industry considerably, simultaneously expanding the size of the market, as more citizens had access to health care and treatments, and also introducing strict pricing measures for drugs accepted into the JKN system, which are then made available to eligible citizens free of charge at the point of use.   

Initially the JKN market expanded rapidly for pharmaceuticals firms while the out-of-pocket market stagnated, but gradually more consumers have begun to migrate back to out-of-pocket treatments for certain conditions, in order to avoid long waiting times in the public system.

In this regard, the pharmaceuticals companies that were best positioned to withstand sudden shocks to the market – such as Covid-19 – were those with diversified portfolios, which meant they were not reliant on a small number of specialist drugs for rare conditions or non-essential procedures. This is particularly important as certain procedures – such as those related to dentistry – have been almost entirely suspended during the pandemic.

Jorge Wagner, country president of Novartis Indonesia, noted that there had been a significant decrease in patients visiting hospitals and receiving treatments for acute or chronic conditions during the pandemic, so companies with portfolios that included, for example, vitamins, supplements and other out-of-pocket treatments, may have been particularly resilient in the current climate.

 “As a result of Covid-19, there is pressure to reduce the number of patients visiting or admitted into hospitals, so any product that can prevent or reduce hospitalisation for any condition will be preferable,” Wagner told OBG.

Looking ahead, Wagner did not feel that the Covid-19 outbreak would have a major impact on Novartis Indonesia’s strategy, although he recognised that some business practices would be modified in the long term, especially in the promotional model as the market adapts and innovations like telemedicine become more prevalent.