The new rules were introduced in an effort to close the technological gap between Indonesia and more developed countries by requiring foreign companies to transfer production facilities to the country in order to sell their products. Job creation, investment and domestic spending are clear targets of the government as the country seeks to reinforce its position as the largest pharmaceutical market in the Association of Southeast Asian Nations (ASEAN).
According to a number of figures from various sources, the Indonesian pharmaceutical market oscillates between an estimated $1.6 and $2.6bn in terms of value, and is forecast to reach nearly $3.9bn at consumer prices by the end of 2011.
According to the Ministry of Health, many foreign companies have been reaping enormous benefits from the Indonesian market, while the country itself has seen little of the tremendous windfall generated by foreign operators.
"If they want to get licences (to sell their products) they have to invest here also, not just take advantage of the Indonesian market", Minister of Health Siti Fadilah Supari was reported as saying. "They can't just operate like a retailer here, with an office size that is three metres by three and make billions of rupiah. That is not fair," she added.
The move has naturally raised eyebrows amongst the international players, and Thomas Donahue, the US Chamber of Commerce's chief executive, has already written a formal letter to Present Susilo Bambang Yudhoyono urging him to consider a possible revision of the decree.
Indonesia has a staggering 208 pharmaceutical companies - 29 of which are foreign operators and hold a market share of 25%. Of these 29 foreign companies, 13 currently do not comply with the new regulation, including US-based Wyeth, Eli Lilly and Merck & Co., as well as Switwerland-based Roche, France's Servier, Anglo-Swedish AstraZeneca, Novo Nordisk from Denmark, and Astellas from Japan.
Under the new rules, international drug makers who have yet to establish production facilities in the country will be given a two-year window of leniency.
The local pharmaceutical industry is characterised by a large number of small firms that tend to produce drugs that do no meet international standards. Counterfeits and dubious marketing practices are among the most obvious deficiencies, but the new legislation is a step in the right direction towards improving the situation. One of the long-term benefits of the new law is that it offers foreign firms the opportunity to partner with some of the established local firms who already have manufacturing facilities and distribution networks in place.
"By requiring pharmaceutical firms to meet international standards, the government will effectively weed out some of the poorer quality players in the market, but there is still much more that could be done to consolidate," Jimmy Sudharta, chairman and CEO of Mensa Group, a major domestic pharmaceutical company, told OBG.
One year after Indonesia and its ASEAN counterparts signed a pact to create a single market - the ASEAN Economic Community - by 2015, improving standards has become essential for not only compliance in the application of new drugs but competitiveness too.
Still, some analysts reckon that the new rules could adversely impact the pharmaceutical industry, arguing that requiring foreign companies to set up shop and invest in Indonesia does not make sense in the current financial situation. Some foreign companies may now find the Indonesian market less attractive and decide to leave the country.
But with its large population and growing economy, Indonesia should remain an attractive market. The country's total population, which is the world's 4th largest and is expected to grow to over 250m by 2015, means it is a market most foreign companies cannot ignore. Besides, very low per-capita spending in pharmaceuticals, estimated at $7, highlights this is a market with major growth potential. With the help of effective marketing, companies stand to make serious inroads into penetrating the market.
Should the new legislation be fully rolled out, foreign pharmaceutical companies should see beyond the current financial haze and consider the long-term potential of setting up production facilities in a fast-developing nation.