Entry Strategy for Pharmaceutical Companies in Indonesia

As of the latest available information, foreign ownership in the pharmaceutical manufacturing sector is capped at 85%. This implies that foreign entities must collaborate with local partners, as 100% foreign ownership is not permitted.

In addition to ownership restrictions, Indonesia has been moving towards implementing local content requirements in the pharmaceutical sector. The Ministry of Industry has planned regulations mandating that certain percentages of pharmaceutical products be sourced or produced locally. For instance, the local content requirement for raw materials is expected to be a minimum of 30%, with active ingredients comprising 70% of that figure. Similarly, for the production process, the overall local content is anticipated to be at least 35%.

These regulations aim to reduce dependence on imported materials and bolster the domestic pharmaceutical industry. Consequently, foreign firms are encouraged to establish local manufacturing facilities or collaborate with existing local manufacturers to comply with these requirements. While the primary approach involves setting up local production, specific exemptions or alternative compliance methods, such as technology transfers or licensing agreements, may be considered on a case-by-case basis. However, detailed provisions regarding such exemptions are not explicitly outlined in the available regulations.

Entry Strategy for Pharmaceutical Companies in Indonesia

1. Overview of Indonesia's Pharmaceutical Market

Indonesia's pharmaceutical market is one of the largest in Southeast Asia, valued at approximately $8.6 billion in 2021 and projected to grow significantly due to the country’s large population and expanding healthcare programs. The market is bolstered by the BPJS (Indonesia’s National Health Insurance), which has driven demand for affordable and essential medicines. However, regulatory challenges and local manufacturing priorities present hurdles for foreign companies entering the market.

2. Opportunities

a. Market Potential

• Large Population: Indonesia, with over 270 million people, offers a huge consumer base for medicines, including generic drugs, biosimilars, and specialized formulations.

• Rising Healthcare Spending: Government investments in healthcare and increasing out-of-pocket expenditure provide opportunities for growth.

b. Government Support for Local Production

The Indonesian government encourages foreign investment in local manufacturing to reduce dependency on imports. Companies that align with this vision, especially by investing in small-scale API facilities, could gain regulatory benefits.

c. Gaps in Supply Chain

• There are still unmet demands for specialized drugs, orphan drugs, and advanced biosimilars.

• Companies offering significant cost advantages can fulfill these gaps, especially under BPJS.

d. ASEAN Free Trade Opportunities

Being part of ASEAN provides access to regional markets, particularly if Free Trade Agreements (FTAs) offer reduced tariffs for exports from Indonesia to neighboring countries.

3. Challenges

a. Regulatory Environment

• Local Manufacturing Requirement: Regulations mandate foreign companies to manufacture their products locally within five years of entering the market, except for patented drugs.

• TKDN (Local Content Requirement): Products must meet specific local content thresholds to gain inclusion in BPJS. Imported finished formulations (FDFs) often struggle with these requirements.

• Complex Licensing: Setting up operations involves navigating BPOM (Indonesia’s regulatory authority for pharmaceuticals), which can be time-consuming.

b. Competition

• Local pharmaceutical companies have begun producing biosimilars and other advanced drugs, making it harder for foreign companies to compete unless they bring innovation or significant price advantages.

• Multinational companies operating locally (e.g., MERCK) already face challenges from "me-too" drugs and price wars.

c. Cost Disadvantage Without FTA

• Exporting from Indonesia might only be viable if there are FTAs or trade incentives, as production costs in India are lower due to economies of scale.

d. BPJS Constraints

• Products not meeting BPJS criteria (such as price and local content) face limited market access.

4. Weaknesses for Indian Companies

• Lack of Immediate Local Infrastructure: Many Indian pharmaceutical companies do not have local facilities, making them reliant on imports, which are restricted.

• Dependency on Scale: Without large-scale manufacturing facilities in Indonesia, Indian companies may struggle to match the competitive prices of local players.

• Limited Biosimilar Capabilities: Indian companies entering the biosimilar segment will face competition from well-established local and multinational firms.

5. Strategic Recommendations

a. Set Up Small API Facilities

• Establishing small-scale API production units will demonstrate a commitment to Indonesia’s local manufacturing goals.

• This can also serve as a bargaining chip to negotiate limited import permissions for FDFs during the setup phase.

b. Focus on Significant Price Advantages

• Indian companies should emphasize their ability to offer medicines at significantly lower costs compared to local players. This is critical for securing BPJS inclusion.

• Products with strong price competitiveness will have a higher chance of gaining regulatory approval and widespread adoption.

c. Target Specific Segments

• Orphan Drugs and Biosimilars: Focus on specialized medicines not widely produced locally.

• Generic Drugs: Leverage India's cost advantages to provide affordable generics that can meet BPJS price requirements.

d. Leverage Strategic Partnerships

• Partner with local pharmaceutical companies to meet regulatory requirements and tap into existing distribution networks.

• Collaborate with Indonesian companies to address TKDN compliance while reducing initial investment risks.

e. Invest in Regulatory Expertise

• Build a local team with strong regulatory expertise to navigate BPOM requirements efficiently.

• Engage in discussions with the government to advocate for policy changes, such as granting import permissions for products not manufactured locally.

6. Regulatory Issues

a. Import Restrictions

• Finished formulations can be imported only if there is proof of plans to manufacture locally or if there is no local equivalent.

• Companies must demonstrate compliance with the five-year manufacturing mandate and local content requirements to secure long-term market access.

b. BPJS Pricing Criteria

• Products with high prices or low local content face difficulties in securing inclusion in BPJS. Indian companies need to align their pricing and production strategies with BPJS expectations.

c. Intellectual Property (IP) Transfer

• Foreign companies are sometimes required to transfer IP to local firms if they do not establish their own manufacturing facilities, a potential risk for innovation-driven businesses.

7. Strategic Benefits of FTA and Local Investment

a. Free Trade Agreements (FTAs)

• If FTAs are negotiated between Indonesia and the destination country, Indian companies could benefit from reduced tariffs for exports from Indonesia.

• Companies should actively explore ASEAN and bilateral trade agreements to identify opportunities for market expansion.

b. Incentives for Local Manufacturing

• The government may offer tax breaks or incentives for companies that invest in local production.

• Indian companies can leverage such benefits to reduce operational costs in the initial years.

8. Case for Temporary Import Flexibility

Allowing companies that are setting up manufacturing facilities to temporarily import FDFs could benefit both the Indonesian government and foreign investors. This flexibility can fill immediate gaps in the market while ensuring long-term alignment with local production goals.

9. Long-Term Vision

a. Build Trust with the Government

• Indian companies should focus on building a reputation for reliability and commitment to Indonesia’s healthcare ecosystem.

• This includes investing in infrastructure, training local talent, and supporting public health initiatives.

b. Explore Joint Ventures

• Joint ventures with established Indonesian companies could ease market entry and regulatory approvals.

c. Address Gaps in BPJS Coverage

• By focusing on areas where BPJS coverage is weak (e.g., cancer treatment), Indian companies can align with government healthcare priorities and gain market share.

Indonesia presents a lucrative but challenging market for Indian pharmaceutical companies. Success requires a mix of strategic investment, cost competitiveness, and regulatory compliance. By focusing on building local manufacturing capabilities, offering significant price benefits, and aligning with Indonesia’s healthcare goals, Indian companies can establish a strong presence in this rapidly growing market.

References:

1. Indonesia's Pharmaceutical Serialization Regulations: An Overview

2. New Local Content Regulation for Pharmaceutical Products in Indonesia

3. Indonesia: Pharma Serialization Regulations

4. Indonesia Strengthening Domestic Drug Manufacturing

5. Indonesia Strengthening Domestic Drug Manufacturing

6. Indonesia to Issue Local Content Regulation for Pharmaceutical Sector

7. Another Boon to Indonesia's Pharmaceutical Industry

8. Indonesian Pharmaceutical Industry as a Strategic Industry