The Indonesian economy is the largest in the Association of South East Asian Nations (ASEAN) and the world's fourth most populous country with approximately 250 million people. There is a vast potential for commercial opportunities across a broad range of industries, particularly pharmaceuticals with the countrys evolving healthcare system.

Indonesias pharmaceutical industry is growing at a tremendous rate. From 2007 to 2013 the pharma sector grew by 85%, which was largely driven by increased consumption of over-the-counter drugs (OTCs). Last year, Indonesias pharma market was valued at $6.5 billion, having enjoyed a 12.5% annual growth rate since 2007. The pharma economy is set for further rises and is projected to maintain the 12.5% growth rate through to 2018, making this a very exciting time to work within the pharma industry in Indonesia.

In 2014, with the election of President Joko Widodo Jokowi, the Government announced plans to create a universal healthcare system for the nations population. The Indonesian Government has historically bestowed minimal funds to healthcare with just 3% of total GDP spent on the sector in 2013 by comparison, Vietnam spent a total of 6.6% and the USA an eye watering 17.9%. However, Jokowi has decreed that his Government will double its current expenditure on healthcare by 2018.

This latest decision marks an acceleration of change in the Indonesian pharma industry that has gradually been reforming since the mid-1960s. During this decade, growth was propelled through an influx in capital targeted at both research and development initiatives and infrastructure investment once the market opened its doors to multinationals. As a result of this investment, today domestic companies hold 70% of the market in Indonesia, with only 30% belonging to multinationals, reversing the trend composition often seen across Asia.

Indonesia strong domestic presence can be attributed to its diversified landscape and languages - which multinationals have found difficult to navigate and the populations large consumption of Over the Counter (OTC) medicines. In 2014, almost 40% of the market was accounted for by OTCs (figure 2) an extremely high figure that is set to rise to 50% this year. Domestic companies dominate the OTC market and have thrived over recent years as OTC consumption has increased rapidly.

The composition of the manufacturing base shows that overall the country is overwhelmingly a secondary manufacturing market i.e. for finished dosage rather than Active Pharmaceutical Ingredients (API) 90% of raw materials in Indonesia are imported, primarily from China and India. In the future, CPhI postulates whether Indonesia may look to Europe (Italy, Germany and the UK) and even the US to import APIs as more advanced formulations are sought by the gentrified population, and/or start to manufacture its own APIs in the future.

Strong economic growth across Indonesia has contributed to a burgeoning, health-conscious, middle class. Each year, nearly seven million Indonesians newly achieve middle class or higher socioeconomic status and in 2014, Indonesias GDP grew by 5.1%. The economy is expected to flourish at similar rates until 2017.

Amien Sunaryadi, Partner, Fraud Investigation and Dispute Services at Ernst & Young Indonesia supports this prediction by adding;

"Purchasing power is increasing across the board for the Indonesian population. As this purchasing power increases, so will their consciousness which will have the effect of increasing demand for compliant products."

This indicates that a rise in OTC consumption trends will be maintained due to an increased health-conscious population with an increased disposable income.

As OTC demand increases to 50% of the market this year, many pharmaceutical manufacturers that previously focused solely on prescription drugs are now looking to enter the OTC market. These current changes are transforming the market, providing a gateway for both domestic and multinational companies to capitalise on.

According to Roy Sparringa, Chairman of Badan Pengawas Obat dan Makanan (BPOM; Indonesias National Agency for Drug and Food Control) " 95% of Indonesias drug volume comes from domestic companies, while the remaining 5% is multinational. Additionally, 75% of the industrys value comes from domestic companies and 25% comes from multinationals."

Domestic companies are voluminous in their drug production, suggesting that it is multinationals who are supplying the specialised, high-value drugs that produce a revenue value 5x that of low-cost drugs from domestic manufacturers.

Part of the reason for this, is the many stringent regulations that multinational manufacturers are subject to, ensuring that product quality levels are very high, as Andreas Halim Djamwari, President Director of Actavis Indonesia believes. Djamwari goes on to say "Our customers can rely on us to deliver high quality products, but we may not necessarily offer the lowest price."

To keep evolving, it is likely that the next phase of evolution for domestic companies will be to start climbing the value-chain and build their portfolio of value-added pharmaceuticals. An example of this would be the opportunity for domestic companies to start producing more complex prescription drugs in the medium to long- term future. However, as the demand for prescription generics increases, we are likely to see more international pharma firms buying domestic cGMP facilities in Indonesia to help navigate the landscape. An increasing number of companies within Indonesia are cGMP certified (83%) which makes them extremely appealing to overseas multinationals looking for a gateway into the Indonesian market.

CPhI concludes from its extensive research that although the OTC market is thriving in the short-term, we perceive a steadier, linear outcome in the medium to long term future - the peak in OTC demand is thought to have more or less reached its tipping point. Contrasting to western markets, a wider selection of drugs are available over the counter in Indonesia due to more relaxed regulations on drug sales. However, with Government plans to spend more on healthcare, coupled with a tightened regulatory environment, CPhI forecasts that prescription generics will make up an increased percentage of drug consumption in the longer term.

Healthcare expenditure is set to double by 2018 initially, the majority of funds will be directed at the revitalization of healthcare-specific infrastructure (i.e. hospitals), but this wave of capital will undoubtedly have a ripple effect across the pharmaceutical market changing the current drug share demand throughout the industry. For example, Jaminan Kesehatan Nasional (JKN), is an initiative focused on increasing healthcare accessibility for the entire population. Industry experts have predicted 19% of total healthcare expenditure will be attributed to pharmaceuticals once JKN is fully implemented which means there is going to be a dramatic rise in volume and value of domestic drugs produced. Enacted in 2014, this five-year scheme is expected to scale its plans to cover a forecasted population of 257.5 million by 2019.

CPhIs analysis predicts that this will lead to a steep increase in the demand for prescription generics in the medium to long term as the Government takes on the financial burden of drug sourcing. At this current time, 92% of drugs on the Indonesian Essential Drugs List are low-cost generics. The implication particularly with a more stringent regulatory environment is that there is a clear opportunity for companies that can supply high quality, low-cost generics in voluminous amounts.

Sparringa of BPOM believes there is a need to encourage the R&D of innovative products in order to bring these extra-value products to Indonesia, stating; "Indonesias business climate for pharmaceuticals is conducive to growth and BPOM is committed to ensuring that quality medicines are produced for the Indonesian people".

However, despite the increased demand for high quality, low-cost generics, many Indonesian manufactures are already operating at capacity. Sparringa adds that the BPOM welcomes investment into Indonesias pharmaceutical industry as this will be essential for existing companies to grow and match the rising drug demand. Whether from the Government or multinationals, investment is required in the Indonesian market if it is to be ensured that the demand doesnt exceed supply.

Alternatively, we may see a rise in generic imports from countries such as India whilst domestic production comes up to speed. With the manufacturing capabilities already in place, India is well equipped to produce large quantities of generics to serve the Indonesian demand. However, the difficulty Indian and other foreign suppliers will face, is navigating the Indonesian landscapes, which highlights the importance of working with regional distributers.

Distribution networks across Indonesia are key for companies looking to capitalise upon this generics demand in the medium to long-term. Multinationals will need assistance from domestic partners who have the knowledge to navigate the landscape. One such company is Anugerah Pharmindo Lestari (APL), one of Indonesias largest independent pharmaceutical distributors who have vast experience of working with multinationals for this very reason. Nyoman Sukertha, Vice President Sales, explains "The majority of our principals are multinational companies, which account for around 90% of our business -APLs distribution network spans the entire Indonesian archipelago compared to other distribution companies, the area where APL is unable to reach is very small."

Looking at the longer term, it is likely we will see multinationals and big pharma developing their own distribution networks across Indonesia, retaining internal control over all areas of the process and supply chain.

Moreover, if the Government opens up the market and establishes a pharma environment that endorses and encourages the development of innovative products Big Pharma will be further incentivised to invest. However, sourcing lines could be an impediment to growth, particularly if international firms wish to control their product supply chain very prescriptively as the Government currently limits the number of wholesalers allowed to sell raw materials, which means manufactures have to use APIs and excipients sourced through these avenues.

These market controls have actively contributed to the development of some local companies such as Ekacitta, a supplier of raw materials, which has experienced a six-fold increase over the last five years, with only a small number of competitors (10-15 companies).

But the Government needs to reform and open up the market to make it easier for multinationals to enter and it is clear some international players are now pushing this agenda, having identified the great opportunities within the Indonesian market.

Sanofi Group Indonesia, one of the first multinational pharmaceutical companies to set up operations in the country back in the 1950s, believe that such a pharma platform that promotes innovative medicines is necessary. Eric Ng, President Director, says"Sanofi will focus on developing innovative medicines in Indonesia, as we benefit from Sanofis global R&D network, and we believe that these products bring extra-value to the population. However, to better do this, the Government needs to establish an environment where innovative medicines are encouraged."

Sanofi want to utilise their global R&D network to the benefit of Indonesian pharma and work with the Government to create innovative solutions that would bring better long-term solutions to Indonesias healthcare system. This would undoubtedly attract more multinationals looking to meet the increased demand for higher-quality and even branded generics.

Of Indonesias 210 manufacturers, around 40-50 of these control 80% of the market; the remaining 20% belongs to medium and small-sized companies. Currently, only large- sized multinationals have a foothold in the Indonesian market. In the future, we will see the introduction of second-tier multinationals as they look to acquire domestic companies. The high proportion of cGMP certified companies in Indonesia are desirable acquisiton targets for multinationals looking to enter the market. Moreover, the BPOM is aiming for industry-wide cGMP certification, expanding on the present 83%. Within this business environment, valuations of Indonesian manufacturing companies have increased substantially in the last few years.

With multinationals making the move into Indonesia, more companies may follow the familiar partnership model propagated internationally e.g. like the one between major Indian manufacturer, Biocon, and US big pharma player, Mylan.

To enter Indonesia, multinationals must secure a number of permissions from the Minister of Health and Indonesian FDA and are subject to many regulations. Furthermore, the maximum ownership share a multinational is allowed is 75%, with the remaining 25% controlled by a domestic company. This means partnering with the right company is key to a successful enterprise, and makes for an even more attractive market for this type of innovative partnership.

Acquisitions of domestic companies are another market gateway for multinationals. The ability to navigate the rural, remote areas of Indonesia and adapt to the countrys diversity of languages is extremely important. Ekacitta, a foreign producer of raw materials, are currently looking to open a branch in the Medan region of Indonesia but their lack of understanding of the area is proving difficult, highlighting the complexity of this region even for well established companies. Nugroho says it is vital to be able to "daily communicate in local dialect hokian language to be successful in this environment."

CPhI forecasts that foreign companies will therefore look at already existing successful cGMP facilities within the Indonesian market that offer access and the ability to evolve towards becoming regional Contract Development and Manufacturing Organisations (CDMOs).

Actavis Indonesia, the first foreign pharmaceutical company to have manufacturing operations on the ground in Indonesia, is currently acting as a CDMO. Actavis serves as a contract manufacturer for many large pharmaceutical companies in Indonesia. In 2010, PT. Genero Pharmaceuticals switched its focus to become Indonesias first independent CDMO, which again, is very rare for Indonesia (although common in Western markets). Alfons Sindupranata, Managing Director explains that"Almost all of Indonesias pharmaceutical companies are cGMP certified, but none offer exclusive CDMO services to their customers".

CPhI is therefore predicting substantial growth with Indonesian manufacturers and an evolution towards CDMO services .

"This makes Generos position particularly unique, being the only full-fledged pharmaceutical CDMO. Sindupranata goes on to say that Indonesia lags behind other countries in terms of CDMO development, so opportunities are bright".

CPhI is therefore predicting substantial growth with Indonesian manufacturers and an evolution towards CDMO services. The huge expected growth gives an indication of how the Indonesian pharma market is still evolving and potentially highlights the gateway for CDMOs to enter the market. Indonesian labour costs are suitably low, a further incentive for CDMO multinationals to leverage market conditions to their advantage. With increased investment from incoming multinationals a change of ownership structure will be witnessed. Manufacturers across Indonesia will likely increase in size, as foreign money drives development across the country, and CDMOs will acquire and modernise facilities of regional manufacturers. As more and more domestic companies are acquired by multinationals the ones that are left may need to consolidate in order to compete and even become CDMOs themselves further accelerating change.

Conclusion
In the short term, demand for OTCs will continue to rise, but CPhI forecasts that this will become progressively more linear as Government initiatives begin to alter the dynamics of the market with a steep increase in the consumption of prescription generics likely over the medium term.

With Indonesias rapidly gentrifying population and strong economy, continuing growth in demand for pharmaceuticals is certain. However, the major question is how this growth will be supplied will it be through increased imports, growth in the manufacturing base of domestic companies or via foreign investment?

One key caveat to Indonesian expansion is the ability of manufacturers to develop and cater for a rapid rise in demand particularly as new, more advanced formulations are required by the population. With many Indonesian manufacturers already operating at capacity, it may prove challenging for some to cater for the increased demand as well as attempting to move up the value chain. Therefore, it is imperative that the market responds to this future demand by evolving its manufacturing base so that it is able to keep pace with the change in demand across the country.

Ultimately, CPhI believes greater investment is required from multinationals, domestic companies and/or the Government increased expenditure within the industry is necessary to help sustain growth in the market and with this investment in place we will see huge opportunities for double-digit growth. Moreover, the high proportion of cGMP facilities in Indonesia makes it an extremely appealing market for multinationals to gain a foothold in through acquisitions and partnerships, as exemplified by the rapidly rising value of Indonesian firms. However, overseas investors cannot acquire 100% of an Indonesian firm; their maximum ownership stake is limited to 75%, meaning we are likely to see more innovative forms of collaboration moving forwards.

From a domestic manufacturers standpoint, the influx of foreign companies will provide opportunities to progress alongside the international industry. Existing domestic companies can look to partner with multinationals and move their businesses towards operating as regional CDMOs. Moving forward, domestic manufacturers could even partner with foreign manufactures under equal ownership models, or partial ownership models, where more of the risk is shared. Such innovative partnerships could accelerate the development of the industry locally and also increase the exposure of Western firms in the region. Foreign companies will nearly always require a substantial domestic partner (due to the diverse nature of the region geographically, linguistically and culturally) for market entry and Indonesian companies will increasingly look to modernise their offering. If innovative partnerships prevail, a thriving, growing pharma economy will be established between multinationals and the existing manufacturing base, which should help move the Country towards becoming a major international drugs exporter in the region.

Currently, the Indonesian pharma market is very contained with little opportunity for exporting into international territories. However, Sparringa of BPOM believes the natural progression for Indonesian manufacturers is to eventually branch out to serve other areas of ASEAN, such as the Philippines and Papua New Guinea, who could benefit from Indonesias manufacturing services. We are less likely to see exportation to the more advanced neighbouring countries i.e. Thailand and Malaysia as these fast-developing economies already have a strong pharma supply chain in place. Another key point, will be how the expanded cGMP production base adapts and maintains control over its supply chain, and whether these companies will also need to expand their sourcing of raw ingredients (APIs, intermediates and excipients). As we seen in even Western markets, tighter controls over the international supply chain will be invaluable to maintaining product quality.

With sustained growth, Indonesia could become ASEANs manufacturing hub and drive economic growth across the entire region, although this is currently inhibited due to differing regulatory requirements in each country. Sparringa suggests that 5 years-on, once regulations are established and standardised, there will be a better chance for the opportunity of market integration. It appears all the market conditions are now ripe for a regional manufacturing boom and with market capitalisations and company values rising, Indonesias pharma potential will not remain an undiscovered secret much longer.