Analysis of PTEI

The situation of PTEI within the overall pharmaceutical market in Indonesia and its policy environment appears to be relatively typical of Japanese pharmaceutical firms with a factory in the country. PTEI entered the market early, in the 1970s, along with other Japanese multinationals and has remained in the country ever since. The decision to set up its own factory in the country appears to have been driven by a number of factors. The size of the market was, and continues to be, attractive, perhaps even more so now given Indonesia’s growing affluence. The policy environment clearly favoured local production, as even before the 1010 Decree Indonesia made sure that preferential treatment was given to companies that established manufacturing facilities

in the country. The policy environment for local production also appears to have been bolstered by various reforms undertaken to open the economy to investment in the 1970s. Finally, Japan has had a history of good relations with Indonesia, dating back to Indonesia’s immediate post-Dutch colonial era.

The transfer of technology to PTEI follows a very typical model of such transfer between a parent multinational and a subsidiary and involves dissemination of manuals, training and frequent communication between PTEI and Eisai.

Strong efforts are made to keep the technology in-house, including making sure that conditions of employment are attractive so that staff are not tempted to take acquired knowledge to other firms. Most products manufactured by PTEI are off-patent, although a number of patented products are produced as well. The manuals and recipes followed offer little room for deviation but ensure that the quality of the products manufactured is exactly the same as if they had been made in any of its factories located in a developed country (i.e.

Japan, the United Kingdom or the United States). The experiments undertaken locally are basically to adapt to the local environment, i.e. to ensure greater heat and humidity resistance.

What perhaps distinguishes Eisai from other Japanese multinationals in the country is (i) that Eisai feels confident about its technology transfer, to the extent that it no longer feels the need for any Japanese expatriates to be stationed in Indonesia; and (ii) that, although unsuccessful, it did briefly attempt to set up an R&D facility in Indonesia for plant-based herbal medicines.

That PTEI as well as other foreign multinationals have continued to operate factories in Indonesia despite a tough operating environment is perhaps more surprising. Where multinationals once controlled 70% of the market, they now have only a 25% share. Most of the Japanese companies are working at a capacity utilization of only about 50%. The factories are thus clearly underutilized. Caps on shareholding in the industry and requirements to manufacture locally make the market even more difficult for the R&D-based pharmaceutical firms with headquarters in developed countries. The drug regulatory environment does not appear to be particularly strong either. Local companies are aggressive in their pursuit of market share. Kalbe announced in November 2009 that it will spend up to US$ 53 million on acquisitions in 2010 to accelerate growth and bring new technologies and skills to Indonesia. It is believed that such merger and acquisition activity to bring new technology to the local industry will expand in the future. Finally, there is little in the way of incentives offered for FDI in the pharmaceutical industry. The operating environment is thus a difficult one, not only for the Japanese R&D-based pharmaceuticals but also for all foreign pharmaceutical companies seeking to do business in Indonesia.

Both the surveys and face-to-face interviews indicate, however, that the large majority of Japanese pharmaceutical firms already present intend on staying in Indonesia, particularly in the lucrative branded generics market.

The pharmaceutical market in Indonesia is predicted to grow to US$ 3.9 billion by the end of 2011 (Sudharta et al., 2010), with 250 companies – 33 being

multinational companies and the rest local companies (Kulkarni, 2009). It remains to be seen what will happen with patented products that are currently manufactured abroad and imported to Indonesia, given the 1010 Decree.

Ironically, the Japanese companies have helped to spawn growth of the local industry. In terms of human resources, the local industry representative indicated that many of the local firms hired staff away from the multinationals.

When the employees moved jobs, they often took the knowledge, experience and technology with them. On the formal side, in-licensing from Japanese firms is also prevalent, and this is also a form of technology transfer. Kalbe was initially started up from inward technology from a Japanese licence.

Finally, Japan provides regular training in intellectual property to Indonesian Government stakeholders, mainly on technical subjects such as patent examination, as a part of its official development assistance.

7. Implications of local production and related technology transfer on access to medicines

The selection of PTEI for a case study represents one model of pharmaceutical production that takes place in developing countries. The choice of Eisai to locate and maintain a factory in Indonesia appears to have been driven by a number of factors, including the size of the market and its history. It should also be underlined that the PTEI model is a typical model of local production and technology transfer between a parent company transnational corporation (TNC) and its subsidiary, where the main driver of local production in this case is not access to medicines but is very much market-driven. Accordingly, the range of products manufactured by PTEI has little correlation with the Indonesian National Essential Medicines List.

PTEI is probably too small a player in the Indonesian market to have made a significant impact on prices or access alone. Moreover, the prices it charges are generally what the market will bear in the absence of price regulation for the bulk of its products.

This is not to say that the factories of large developed-country-based pharmaceutical TNCs have not had any impact on access to medicines in Indonesia. As the original providers of technology to Indonesia, Japanese firms were among the first to train locals and bring in quality control and assurance methodologies, and PTEI is no exception. Without this basis, the local industry would not exist. The technology transfer and local production provided by the multinationals were not, however, designed with public health/access to medicines as the primary driver. It should also be borne in mind that other developing countries with promising pharmaceutical industries, such as Bangladesh and Colombia, have followed a similar development path, with multinationals first entering the market and establishing factories, and then eventually yielding the market to local firms after a number of years.

Some of the more interesting findings from an access-to-medicines perspective stem from the policy environment in which PTEI operates. The 1010 Decree is a source of heated debate, as although it attempts to encourage technology transfer and increase health security by mandating the local production of all pharmaceuticals, its strict application could result in blocking availability by Indonesians to some high-cost, low-volume drugs manufactured abroad and could thus potentially be problematic. It remains to be seen how the country will actually implement the 1010 Decree and how it will affect firms such as PTEI, but there will be a need to reach an agreement with foreign pharmaceutical companies to guarantee access to medicines that would be difficult, for one reason or another, to manufacture in Indonesia.

The 1010 Decree should, however, also be seen in the context of the wider policy by the Indonesian Government to encourage local production of pharmaceuticals and vaccines. A number of important decisions have been taken by the Indonesian Government in this regard, including the use of Government-use licences to enable Kimia Farma to manufacture ARVs in 2006, and the decision to restrict access to avian flu pathogens to noncommercial researchers in the absence of a better-access regime for any vaccine developed from the source material. These decisions, although controversial, reflect a government that uses available means to secure lower-priced, high-quality medicaments and vaccines. In this regard, the former decision (Government-use licences) appears to have been less successful than the latter (Kimia Farma soon discontinued production as it could not cope with the high cost of imported raw materials, but Indonesia successfully negotiated important projects with donors to develop avian flu and other vaccines with BioFarma).

It should be noted, however, that there is no evidence from the interviews to point to a conscious effort to induce divestiture by foreign firms. Rather, the emphasis has been on technology transfer to build local capacity, with a view to improving security of supply at lower cost.

Finally, the resulting market structure for medicines is perhaps what one would expect from a middle-income country. Locally produced nonbranded generics, branded generics and imported pharmaceuticals (both generic and non-generic) are generally available on the market. People tend to use medicaments based on their income levels, with locally manufactured nonbranded generics being the most affordable. Access is supported by price controls on some essential medicines and on a medical insurance scheme that guarantees that the poorest people do not pay for medicaments out of pocket. The long-standing policy of the country to encourage local production has no doubt been a major factor in the development of a local pharmaceutical industry, and has certainly had an effect on how the market is structured today.

8. Policy-relevant findings

Indonesia has had a relatively successful experience in encouraging the local production of pharmaceuticals and reaping the benefits of technology

transfer. Local firms became the beneficiaries of early technology transfer by the R&D-based multinational pharmaceutical firms, who once controlled the Indonesian market. This happened when staff who worked at these subsidiaries subsequently moved to local firms that, due to a favourable policy environment that supported local pharmaceutical manufacturing, offered growth potential or commensurate salaries. It is thus not surprising that PTEI tries to offer competitive terms of employment for its staff, in order to minimize turnover. Also, local firms became more comfortable with in-licensed technology and know-how, and they were able to manufacture medicaments (mostly generic) on their own.

This examination of PTEI presents a case study on local production of pharmaceuticals and related technology transfer between a parent and its subsidiary. At PTEI, technology transfer occurs on a north–south axis; some positive points from a development perspective include that Eisai was confident early on about the ability of Indonesia to produce high-quality medicaments, that Eisai continues to be committed to regularly upgrading its facilities for manufacture in Indonesia to very high standards, and that no Japanese expatriate staff are seen as needed to run its operations in the country, which is still uncommon for many Japanese pharmaceutical companies.

Generalized to the wider industry, the early presence of multinationals appears to have had a positive impact on improving the quality control and quality assurance required to support a robust pharmaceutical industry, and to upgrade the skills of the pharmaceutical sector. The approach of Eisai is, nonetheless, very top-down, with Eisai senior management determining the product range for PTEI and trying to ensure that the transferred technology remains in-house. The benefits from a technology transfer perspective therefore derive mainly from spillover effects, such as when staff decide to change firms, and are difficult to quantify.

There do not appear to have been many obstacles to technology transfer between Eisai and PTEI. The technology and know-how transferred to PTEI were systematically reduced to detailed manuals developed by Eisai, which continue to be consistently updated through briefs from headquarters in Japan. Eisai diligently supported the transfer process, making available its staff as necessary. Although there is room for improvement in the local education system, management at Eisai and PTEI considered local universities sufficient to attract qualified pharmacists, chemists, engineers and other professionals.

That Eisai, along with other multinationals from Japan and elsewhere, continues to operate in Indonesia despite having lost significant market share since the early 1990s and a difficult operating environment for foreign firms is perhaps more a reflection about the market prospects of the country than anything else. For the most part, Indonesia never offered the types of incentive that typically form part of a coherent investment promotion strategy, such as tax holidays. The size of the market also appears to have contributed to preventing established investors from becoming “footloose”.

In this case study, it was found that of all the strengths of the Japanese pharmaceutical companies, the most outstanding example of good practice was by PT Mitsubishi Tanabe Indonesia, which used its operations in Indonesia as a regional base for ASEAN markets. In the Eisai group, the choice appears to have been to deploy its Taiwan Province of China facility to reach ASEAN markets. Also, one Japanese company has an API facility and is exporting API to other ASEAN countries. From the non-Japanese multinationals, Bayer locates its regional manufacturing hub for South-East Asia in Indonesia. From the generic companies, Actavis has also located its manufacturing hub for South-East Asia in Indonesia.

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Annex: Interviewed individuals and institutions

Pharmaceutical experts

Estiyasa H, Manager, QC Department, Production Division, PT Eisai Indonesia Harjono, Manager, Manufacturing Department, Production Division, PT Eisai Indonesia

Rosalina Haryadi, Deputy Director, QA, PT Kalbe Farma, Indonesia Tita Miawati, QA Manager, QA Department, Production Division, PT Eisai Indonesia

Iwan Agung Pribadi, Manager, Administration Department, Production Division, PT Eisai Indonesia

Sudjati Prihartono, Vice Director, Production Division, PT Eisai Indonesia Karta Sadana, Deputy Director, Medical and Business Development, PT Kalbe Farma, Indonesia

Djoko Sujono, Managing Director, PT Ferron Par Pharmaceuticals; Member, Dexa Medica Group, Indonesia; Head, Pharmaceutical Affairs and Regulatory Committee, National Board Indonesian Pharmaceutical Association, GP Farmasi Indonesia

Toshifumi Tada, Director, Corporate Planning Division, PT Tanabe Indonesia Toru Takekawa, Executive Director, Demand Chain Coordination Department, Demand Chain Headquarters, Eisai Co. Ltd, Tokyo

Philip Tan, President Director, PT Eisai Indonesia

Mimi Yosiani, Regulatory Manager, PT Kalbe Farma, Indonesia