Indonesia: The next Pharma production hub in Asia?

A country known as the largest archipelago, with a population 2.5 times that of the Philippines (238M in 2008), the world’s most populous Muslim nation may have a significant role to play in the evolving macroeconomic and pharmaceutical landscape in Asia and in other regions as well. In the Philippines little attention is given to Indonesian Pharma companies due to the seemingly insignificant role they play in our local industry. This may however change in view of the impending impact of a more open market between ASEAN member nations and the medium term impact of regulatory transformation in Indonesia.

Fully aware of its population potential, Indonesian regulators skilfully crafted its healthcare policies and laws to avoid common pitfalls that other countries have experienced wherein Multinational companies simply exploited the market with little or no long term investments particularly in healthcare infrastructure. As a matter of policy, Indonesia requires all foreign pharmaceutical company operating in Indonesia to set up a local manufacturing facility over a prescribed timeframe.

Led by Bayer, Novartis and Pfizer, a growing number of multinational companies have already relocated and set up production facilities in Indonesia while a number of foreign companies have chosen a quicker entry by buying into local companies as in the case of our very own Unilab who now controls 92.7% of Darya-Varia Laboratoria which is now Indonesia’s third largest Pharma company. (The other top players are Kalbe Pharma, Sanbe and Dexa Medica).

Other factors that will push Indonesia into a more dominant position in Asian Pharma industry:

• Reduction in import tariff between ASEAN member nation to Zero by 2010 for the original members and by 2015 for new members (Cambodia, Laos, Myanmar and Vietnam) will further lower cost in inter-ASEAN transfer of goods and will provide added incentive for companies relocating to Indonesia.
• The economies of scale offered by Indonesia’s huge population is an important factor that foreign companies can leverage to further improve cost effectiveness in the face of increasing product validation and production cost and cheaper competition coming from India and China.
• Indonesian products are relatively well accepted (compared to Indian and Chinese products) among ASEAN countries particularly in the Philippines where there is a perception of high quality by doctors and consumers.
• At US$ 108.83 per month, labor cost in Indonesia remains among the lowest in Asia and is even lower compared to China at US$ 124.32 per month. This is less than half of the labor cost in the Philippines which is now at US$ 242.73 per month. (Click to enlarge attached comparative summary)

While we are yet to feel the full impact of these developments in our local industry, there are already signs that these may come sooner than later. In 2004 Indonesian Pharma export to the Philippines was still relatively small at only US$ 6.4M which is ranked 17^th in size among Pharma exporting countries. In terms of growth however, Indonesia ranked 4^th already way back 2004 with 26% CAGR.

It may now be a bit too late to express the perfunctory ”Salamat Datang” greetings to our Indonesian neighbour since they are already firmly in place in the Philippine market, however, there may still be time for our local players to anticipate a fiercely competitive environment looming in the horizon.

The Koreans are coming

Or are they already here?

Over the past decade the number of Korean pharmaceutical companies operating in the Philippines saw consistent growth and expansion in terms of the number of players and number of brands in the market.

However, while Korean brands are impossible to miss in the automotive, shipping and electronic industry, recalling a dominant Korean pharmaceutical product or company may prove challenging to many even to those who are into the industry.  This is despite the fact that Korea ranks among the top 10 in the pharma market worldwide. In 2008 they ranked 2nd. in Asia in biotech patent applications and outnumbered Japan and China in the number of clinical trials, recording 216 international trials and 184 domestic trials. These are huge feats for a nation with barely one half of Philippine (48 million) population and who are technically still at war with their hostile neighbor.

For better understanding we need to look at the strong support in terms of infrastructure, financing and subsidy that the Korean government provides its various industries (dominated by Chaebols) with emphasis on one specific industry at a time as growth engine of their economy. 

While the Korean Biotech industry is poised to make its presence felt in Asia and worldwide, internally, important developments are likewise adding pressure on biotech and pharmaceutical companies to seriously consider overseas market to sustain their growth trajectories:

• While generic (& branded generic) penetration in western economies is between 20-30% in terms of market share, in Korea this number is already a staggering 70%. As a result of fierce competition local prices of medicines are going down leading to thinner margins and anemic growths.
• The expected impact of the Korea-US Free Trade Agreement (FTA) on the pharmaceutical industry is a huge concern to local Korean companies. The FTA will force Korea to amend copyrights, patent and trade mark laws, giving greater protection to patent holders and further opening up the market to the Multinationals.
• Regulatory pressures and high product validation cost.

In the Philippines one of the dominant Korean pharma company is Korea United Pharmaceuticals (KUPI). KUPI rely largely on marketing collaboration with local companies such as Qualimed for its Oncology lines and recently with One Pharma who markets its NSAID brand Clanza (launched in 2008). Incidentally, KUPI does not even register in the top 20 domestic pharma companies in Korea which indicates that once the big players decide to join the fun, the Philippine pharmaceutical landscape will see major changes and everyone will finally take notice. 

Among the top Korean companies that we can expect to come knocking at our doors are:

                            2009 Ethical Market 

Company              Sales (Million US$)               Rank                                                                                                                             

Daewoong                 468.1                                 1

Dong-a                      449.1                                 2

Hanmi                       431.8                                 3

Handok                     348.1                                 4

Yuhan                       334.3                                 7

Chong Kun Dang         289.1                                 9

Choongwae               288.3                                10

CJ                            274.5                                11

Ildong                       206.0                                14

Shin Poong                179.9                                17

Evaluating your overseas suppliers

Local players of the pharmaceutical industry in the Philippines are often faced with the dilemma of choosing the source or manufacturer of their products. One of the factor that is given much emphasis in the decision making is price competitiveness. Experience however shows that ignoring other equally important factors is like choosing your bride simply for her looks which sadly many leads to divorce.

On many occasions I have dealt with clients who complained about suppliers who would without prior notice increase the minimum order quantity, raise prices and in some instances simply disappears . This has led to disruptions in on-going marketing programs, losses in revenue that threatened the operational viability of some companies and tarnished company image.

It is therefore prudent not to rush into marriage with any supplier without giving careful scrutiny and due diligence. Below are some of the recommended requirements that you may consider before signing-up.

• Ask your target supplier to provide you with the names, addresses and contact numbers of at least three of their overseas clients. Carefully verify these information and ask questions related to quality, consistency and reliability.
• If you can afford it, personally visit their facilities or request your supplier to be audited and accredited by the Philippine Chamber of Pharmaceutical Industry (PCPI)
• Require your supplier to comply with the requirements of the ASEAN Common Technical Dossier (ACTD) and ask them if they can comply with specific packaging requirements demanded your local clients such as Mercury Drug who requires products to be stamped with the expiry date corresponding each tablet. Give preference to suppliers who can provide in-vivo BE studies.
• you may check your supplier's membership in respected organizations, listing in the stock exchange or years in business in the country where they operate.

Impact Analysis of RA 9502 "Cheaper Medicine Bill"

The recent implementation of Republic Act (RA) 9502, otherwise known as the Cheaper Medicine Bill, initially covering 22 pharmaceutical products, has created much confusion, fear, resistance and uncertainty over a large swat of the healthcare industry in the Philippines.

The multinationals who were the primary target of the law reacted in a mixed manner with some companies fully complying and even expanding the list to include other products while other companies partially complying and even challenging the law. One valid argument that these companies offer is that the law is irrelevant since even before its implementation there are already alternative (me-too) products in the market that are priced way below the Maximum Retail Prices (MRP) making this law selective and arbitrary.

Hospitals may be hit hard since the bulk of the revenue that sustains its operation are coming from sales of medicines. To recover lost revenues, hospitals may be compelled to increase other hospital fees such as room and laboratory fees. In effect in-patients will not feel the benefit of this law since whatever savings they will get from medicines will simply be offset by increase in other hospital fees.

Local pharmaceutical players (Dealers and distributors) may have to reassess their pricing structure since they cannot leverage anymore on the huge price disparity that their products previously enjoy versus the innovator brands. On the upside however these companies will welcome provisions in this law that allows registration of products before the expiration of patents of innovator brands.

Other expected outcome:

• Affected products are expected to suffer lower revenues but are likely to generate higher unit sales
• To lower cost & cover up expected revenue short fall, affected companies will be compelled to realign A&P priorities, fast tract product launches & initiate cost cutting measures
• Production of affected products will most likely be outsourced & marketed by third party marketing companies to minimize cost
• Competing Generics & branded generics will be adversely affected in terms of lower volume & thinner margins which may force many local companies to by pass importers/traders & directly source from manufacturers
• Importers and traders will be forced to diversify product sources to get the lowest price and/or go into direct marketing since passing on their products to dealers may not be competitive any more.
• Collateral impact will likewise be felt by products not included in the list but sharing similar indications, therapeutic class or spectrum of activity in the case of antibiotics. For example, Augmentin may exert competitive pressure on cephalosphorins which may lead to lower prices of cephalosporin brands.
• The bill which also allows early registration of generic me-too products before patent expiration of innovator brands will lead to quicker market penetration of competition.

Coping with the Pharma Market Squeeze

The Philippine pharmaceutical market is indeed getting increasingly competitive and challenging both from the sales/marketing perspective and from the regulatory aspect of the business. Among the significant developments in our sector are:

• Implementation of RA 9502 (check my blog on impact analysis on RA9502) otherwise known as the Cheaper Medicine Bill which dramatically changed the pharmaceutical landscape due to its direct impact on the products affected (which will be expanded soon) and collateral impact on other products sharing similar therapeutic indications, not to mention its implications in Intellectual Property laws.
• Consolidation of the Phil. regulatory agency (from BFAD to FDA) and imminent implementation of stricter and regionally harmonized registration guidelines (ACTD) that will eventually result in higher cost of product registration and more stringent requirements such as in vivo BE studies etc.
• Now fully aware of the increasing threats of generics and branded generics, Multinationals are now focused to meet the challenge head-on through innovative marketing programs, aggressive pricing strategies, operational consolidations and mergers and through direct marketing of generic and generic priced products either through outsourced marketing outfit or their own generic divisions.
• The market is increasingly getting crowded. Based on the latest count, there are now over 448 Traders and 4,165 distributors (as of March 2009) operating nationwide and this does not include informal and unregistered outfits that also compete in the market. The number of registered pharmaceutical brands have likewise breached over 16,450.

It may therefore be prudent that at a certain point we have to assess the vulnerability and sustainability of our operation by taking these developments into serious consideration. A time tested approach is to look thoroughly into the 4 P's (Product, Program, People & Processes) of your operation and assess your strengths and vulnerabilities ( a SWOT analysis may also help). A subjective but useful assessment tool is the 4 parameters "Stability Web Chart" below.

PRODUCT: (Using the following question guides, rate your Products from 0 to 10 with 10 as highest rating)

• Are your products growing above industry growth rate?
• Are the products that substantially contributes to your revenue affected by RA 9502?
• Does your product portfolio includes "bridge" products or products with unique properties (not 'me-to'), unique delivery system or products that competes in less crowded therapeutic segment?
• Can all your products (or its manufacturers) comply with ACTD (Asian Common Technical Dossier) requirements upon its full implementation which is expected this 2010?
• Does your products encounter rejection or non-inclusion in hospital pharmacies due to issues of quality?
• Do you have products that are not dependent on cash rebates or contract selling to generate revenue?
• Have you diversified the sources (and the country of origin) of your products?
• Do you have a pipeline (new products for launching) of products in place

PROGRAM (Using the following question guides, rate your Programs from 0 to 10 with 10 as highest rating)

• Are you mainly leveraging on price competitiveness to move your products?
• Have you invested in relationship building and brand building programs?
• If you have a marketing program, is it focused on a specific therapeutic category or indication?
• Do you have an assessment process to gauge the effectiveness of your programs?
• Are you still relying on traditional marketing programs (vs. guerrilla marketing etc.)?

PEOPLE (Using the following question guides, rate your People from 0 to 10 with 10 as highest rating)

• Is the average tenure (add the months or years of service of all employees divided by the number of employees) of your sales force increasing or decreasing every year?
• Does your employee undergo a comprehensive training program or are your Medical Representatives accredited by MRAP (Medical Representative Accreditation Program by PHAP)?
• Is your compensation package above or below industry standard?
• Do you have an attractive incentive program?

PROCESSES (Using the following question guides, rate your Processes from 0 to 10 with 10 as highest rating)

• Do you have an efficient accounting (Sales, Collection & Inventory) system?
• Is your company ISO certified?
• Does your company have an efficient Customer Service System?
• Do you have an efficient reporting system?
• Have you adopted hardware & software technologies to enhance your efficiency?

Plot your ratings in the STABILITY WEB CHART below. The bigger the footprint (Area) the more stable your operation. You may also expand the parameters (to 5,6 or more) to give you a more comprehensive picture.