Indonesia
This study on Indonesia was carried out by Kiyoshi Adachi, Legal Officer and Chief of the Intellectual Property Unit at UNCTAD, and Brian Tempest, UNCTAD Consultant and Partner at Hale & Tempest. Inputs for the study were collected during a field mission to Jakarta, Indonesia from 7 to 12 March 2010. The case study report was finalized under the overall responsibility of Mr James Zhan, Director of the Division on Investment and Enterprise, and Mrs Nazha Benabbes Taarji, Officer-in-Charge, Investment Capacity-Building Branch.
Abbreviations 169 1. Background and methodology 170 2. Description of the firm, structure and range of products 171 3. PTEI’s technological capacity 173 4. The pharmaceutical market in Indonesia 174 5. The framework for local production and technology transfer 178
5.1 Drug regulation 178
5.2 Intellectual property rights 179
5.3 Foreign investment and industrial policies 180
5.4 Science and technology policies 182
5.5 Education 182
5.6 Good governance 183
5.7 Competition policy 183
6. Analysis of PTEI 183 7. Implications of local production and related technology transfer
on access to medicines 185 8. Policy-relevant findings 186 References 188 Annex: Interviewed individuals and institutions 189
Contents
Abbreviations
APL PT Anugerah Pharmindo Lestari
CAFTA China–ASEAN Free Trade Area
IMS Intercontinental Marketing Services
IPMG International Pharmaceutical Manufacturers Group PTEI PT Eisai Indonesia
1. Background and methodology
This case study was designed to investigate the high prevalence of Japanese pharmaceutical companies setting up manufacturing factories in Indonesia since the 1970s and the source of their technology, and to better understand both the reasons behind their sustainability over this period and issues that their subsidiaries currently face. Specifically, the case study examines intra-firm technology transfer in the context of a relationship between a parent research and development (R&D)-based pharmaceutical firm with headquarters in a developed country and one of its subsidiary factories based in a developing country.
UNCTAD thanks PT Eisai Indonesia (PTEI) for agreeing to be the subject firm for this case study and for the International Federation of Pharmaceutical Manufacturers Association (IFPMA) for assisting UNCTAD in facilitating the arrangement of interviews with Japanese manufacturers in Indonesia.
A case study research methodology was used in the study. Data were collected through reviews of academic literature and policy documents, and through open-ended face-to-face interviews in Indonesia. Interviewees were identified through purposive sampling. During the fact-finding mission to Jakarta from 7 to 12 March 2010, 28 people and institutions were interviewed, including 12 pharmaceutical experts (from Eisai, PTEI, PT Tanabe Indonesia, PT Ferron Par Pharmaceuticals and PT Kalbe Farma), 8 representatives of government (from the National Agency of Drug and Food Control, the Investment Coordinating Board, the State Ministry of Research and Technology, the Agency for the Assessment and Application of Technology, and the Directorate of Intellectual Property Rights), 5 members of the pharmaceutical distribution network (PT Anugerah Pharmindo Lestari (APL) and visits to 3 independent pharmacies), 2 representatives of nongovernmental organizations (NGOs; including Hilfswerk Austria and an independent logistician formerly with Médecins du Monde) and 1 investment banker (Batavia Investment Management Ltd.).1
In addition, a semi-structured questionnaire designed to capture the dynamics of firm-level activities related to production and technology transfer was administered to the firms, the results of which are included in the case study where relevant.2
This case study construes innovation as any new products, processes and organisational changes that are new to the enterprise, context and country in question, although not necessarily to the world at large (UNCTAD, 2007). In keeping with the scope of the project, technology transfer was defined as all components of technology, both codified (in terms of blueprints, hardware, machine parts and plant technologies) and tacit (know-how and skills), that are essential to enhance the capacity of the organizations in the recipient country to produce pharmaceutical products.3
1 See Annex: Interviewed individuals and institutions.
2 See Annex: Field questionnaire.
3 A uniform definition of technology transfer was used for all components of the project, including the trends survey, the regional dialogues and the stakeholder analysis.
2. Description of the firm, structure and range of products
Established in 1970, PTEI is a subsidiary company of Eisai Co., Ltd (hereafter Eisai), one of Japan’s leading R&D-based pharmaceutical firms. Typical of subsidiaries of Japanese pharmaceutical firms, PTEI enjoys a very tight relationship with its parent Eisai, which holds the controlling stake of the firm’s shares. Eisai chooses the President Director of PTEI. The current President Director is Mr Philip Tan, who was formerly the Chief Executive Officer of Eisai’s subsidiary in the Philippines. Before that, the President Directors of PTEI were appointed from Eisai’s headquarters in Tokyo. All of the staff of PTEI are otherwise locally recruited. Staff at PTEI currently number 96 in manufacturing, including 18 contract workers, in addition to a number of staff involved in administrative work in the Jakarta office.
PTEI established its first factory in 1971 at Puncak. The current factory was established in 1987 in Bogor, a suburb of Jakarta, to replace the Puncak factory, and sits on a patch of land that extends over 4500 square metres. This factory has received regular upgrades and investments. Government certificates for good manufacturing practice (GMP) and analyses of environmental impacts were issued in 1994. In 2001, the packing warehouse and formulation area was expanded and renovated. In 2003, the workshops were expanded. In 2004, the quality assurance and quality control operations were expanded and renovated. The factory received the highest regulatory approval rating in 2005, at the A level, after being inspected by the National Agency of Drug and Food Control. In 2006, further renovation took place, including a rainwater-harvesting facility. In 2007, the warehouse was expanded further so that it could hold 2 months’ inventory, and in 2009 the Bogor factory received additional environmental approvals. At present, the Bogor factory is one of ten Eisai factories worldwide. The others are in China, India, Japan, Taiwan Province of China, the United Kingdom of Great Britain and Northern Ireland, and the United States of America.
The Bogor factory produces 22 products and is involved in 30 packaging operations. These include 14 products in 18 packs that are manufactured for the local market and 3 granule products that are manufactured for export to the Philippines and Thailand. At present, Eisai does not use the Bogor factory as a regional base for export to South-East Asia but instead uses its China (Province of Taiwan) factory for drug formulation product exports to Association of South-East Asian Nations (ASEAN) countries. In addition, four products in seven packs are locally packaged (but not manufactured) in Indonesia, including Eisai’s leading products Aricept (donepezil) for Alzheimer’s disease and Pariet (rabeprazole) for gastrointestinal disorders. Products manufactured by PTEI are generally outside of those contained on the National Essential Medicines List for Indonesia.
Also, Eisai has carried out contract manufacture for the Indonesian subsidiary of Takeda, another Japanese R&D-based pharmaceutical manufacturer, since 2005. In turn, Eisai has outsourced some cosmetic products to another local
factory since 2006. All active pharmaceutical ingredients (APIs) are procured from Eisai, and excipients are purchased from the same source as those used by Eisai in Japan, since recipes provided by the parent are followed precisely.
Factory capacity usage is relatively low, at 65% on a daily shift of 8 hours per day.
PTEI products are distributed in Indonesia through an exclusive distributor, APL.
In this regard, Indonesia has one of the most complicated distribution markets in the world. The difficulties begin with the country’s geography, comprising 17 508 islands, which lie between the Indian and Pacific Oceans. Indonesia is a large country, with an area reaching 1.9 million km2, and its length from west to east spanning around 5000 km and from north to south 1700 km. Indonesia has a characteristic of geographical imbalance in population distribution: 9%
of the country’s population is located on Java, which covers only 7% of the total area. There is also a tropical climate, with high humidity and blazing sunlight, which is a challenge for pharmaceutical companies. The country’s poor infrastructure complicates this difficult task further. APL is the largest independent distributor, with 28 branch offices and a national distribution centre in Jakarta. It operates in 65 cities and delivers 3–4 times a day to its customers. The company has 2400 staff and uses SAP in its management systems. It is majority owned by Zuellig Pharma, the largest distributor in Asia.
APL has also used technology to enhance its services by creating new tools such as information databases covering medical representative doctor visits.
It runs a specialized programme for delivering expensive life-saving drugs to patients and doctors 24 hours a day, 7 days a week.
In 2009, PTEI had a turnover of 108 billion Indonesian rupiah (Rp) (about US$
12 million), and it is expected to have a turnover of about 95 billion Rp in 2010.
Although some of the firm’s profits are repatriated in the form of purchase transactions for inputs and final products, PTEI generates its own revenue as well with, for example, its toll manufacturing for Takeda. PTEI is subject to corporate income taxes under Indonesian law.
Intercontinental Marketing Services (IMS), a global pharmaceutical intelligence company, valued the Indonesian pharmaceutical industry in the retail sector at the end of 2009 at 6205 billion Rp, growing at 5.8%, and in the hospital sector at 4581 billion Rp, growing at 10.4%. In the retail sector, the local companies are strong, with Sanbe ranked first, Kalbe second and Dexa Medica fourth. The strongest foreign companies are Pfizer (third) and Sanofi Aventis (fifth). By comparison, the subsidiaries of Japanese companies are ranked 25th (Takeda), 33rd (Otsuka), 37th (Tanabe) and 38th (Eisai). Meiji (62nd) and Astellas (63rd) are much smaller. In the hospital sector, the local companies rank first (Kalbe), second (Sanbe), third (Dexa Medica) and fifth (Dankos). The strongest foreign company in this category is Japanese (Otsuka, which is strong in intravenous fluids). In this category, the other Japanese companies rank 21st (Takeda), 43rd (Tanabe), 45th (Eisai) and joint 52nd (Meiji and Astellas).
3. PTEI’s technological capacity
The state-of-the-art facilities in Bogor are appropriate for the formulation of a wide range of pharmaceutical products. The PTEI staff with whom the fact-finding mission had discussions all appeared to be well-trained professionals and technicians. Discussions with the management of PTEI revealed that they had relatively few problems in recruiting competent pharmacists, chemists and engineers locally (other firms did, however, mention a problem with a lack of PhD scientists and pharmacists, as well as a shortage of doctors in the country). Efforts are made by management to offer attractive conditions of work as a means to avoid staff turnover.
Technology transfer takes place at PTEI along a single axis, i.e. from the parent Eisai to its subsidiary PTEI. The entire Bogor plant was built to detailed specifications of Eisai. Quality assurance and quality control procedures, and manufacturing recipes, are carried out in accordance with instructions and standards spelt out in volumes of manuals supplied by Eisai, and regularly updated through communications from Eisai. Some aspects of GMP in Eisai’s Indonesian factory are stricter than those often seen in plants in Japan and the United States. Standard operating procedures such as those related to hygiene are established by Eisai and are strictly adhered to by PTEI. From time to time, Indonesian staff visit Japan for training. Also, Japanese-based experts from Eisai visit Indonesia to advise the workforce on new technology. According to the semi-structured survey responses, staff of both the parent company and the subsidiary consider technology transfer projects to have been completed successfully.
Apart from the contract manufacturing arrangement with Takeda’s Indonesian subsidiary, all products manufactured by PTEI are Eisai products. At present, no independent R&D activity takes place at PTEI. Eisai’s R&D activity for new chemical entities (NCEs) generally takes place in its laboratories in Japan, the United Kingdom and the United States, and in India since 2009, while clinical trials for NCEs take place in Eisai’s target markets.
Previously, Eisai had invested in an R&D facility in Indonesia dedicated to developing local tropical plant-based medicines. Difficulties in commercializing products led to the decision by Eisai to close this facility in 2006. All samples collected by the laboratory were given to the Indonesian government at the time of closure.
A limited number of adaptive activities take place at PTEI. Basic facilities exist at the Bogor factory to undertake tests to ensure that various local requirements are met, such as tests on the heat stability of their pharmaceutical products given the hot and humid climate in Indonesia. Extra hygiene measures at the factory were adapted, for instance in light of the threat of avian flu as and the threat of insect contamination given the factory’s tropical location.
4. The pharmaceutical market in Indonesia
Indonesia is the fourth most populous country in the world. The Indonesian Government has said that it aims to offer universal health coverage by 2012, although this may be delayed. Indonesia has 0.66 hospital beds per 1000 population, the lowest rate among the ASEAN countries. There are 16 physicians, 50 nurses and 26 midwives per 100 000 population. Both traditional and modern health practices are employed. Human immunodeficiency virus (HIV) has posed a major public health threat since the early 1990s; in terms of the prevalence of HIV, Indonesia ranks behind Myanmar and Thailand among the ASEAN countries. Other health hazards facing Indonesia are dengue fever, malaria, haemorrhagic fever and avian flu.
Despite sustaining double-digit economic growth in recent years, Indonesia’s pharmaceutical industry is relatively modest in size, at approximately US$
2.5 billion in a country with a population of over 240 million people. The pharmaceutical industry in Indonesia has undergone a series of transformations in its history since its formation in the late 1960s, when the R&D-based multinational firms began to enter the market, including the Japanese pharmaceutical manufacturers. Six R&D-based Japanese pharmaceutical companies have operations in Indonesia, which include Astellas, Eisai, Meiji, Otsuka, Takeda and Tanabe, indicating a relatively large presence of Japanese firms compared with the size of the market. Of these, only Astellas has no local factory. Most of these companies entered the Indonesian market in the late 1960s, apparently driven by a combination of a history of Japanese presence in Indonesia since the immediate post-Dutch colonial period, the potential size of the market and the regulatory environment (see below).
By 1991, multinationals controlled over 70% of the total market share for pharmaceuticals in Indonesia.
In the early 1990s, however, the Indonesian Government started to support the local companies, which began chipping away at the dominance of the multinational firms, so that today the local companies have over 70% of total market share and the multinationals hold only 25%. The results of field interviews tend to show that this is a result of local industry moving rapidly along the learning curve, improving manufacturing in tandem with weak multinational NCE pipelines, along with flanking policies that support local industry.
At present, the retail market is composed of the top earners in the middle class and the wealthy. The rest of the population relies on the Indonesian Government-subsidized nonbranded generics from the state-owned pharmaceutical companies and from the local private industry. The four state companies are Kimia Farma, Indofarma, Biofarma and Phapros, which are run as profit-seeking enterprises and can be deployed as instruments of Indonesian Government policy when necessary. In 2009, two of the Indonesian Government companies agreed to merge. In 2008, Indofarma had a loss of US$ 1.5 million and Kimia Farma had a loss of US$ 0.4 million due to high costs associated with the import of raw materials. The plan was that these
companies would enter the API market and the market of pharmaceutical manufacturing equipment. However, in March 2010 the merger was delayed.
Further merge and acquisition activity is likely in this generic pharmaceutical sector in Indonesia in the search for greater efficiencies.
The Indonesian Government runs a public medical insurance programme for the poorest people, who live on less than US$ 1 a day. The insurance scheme was restructured in 2008 under the name jamkesmas and comprises 15% of Indonesia’s health expenses, covering an estimated 76 million people. The poorest part of the population (who live on less than US$ 1 a day) has shrunk significantly in recent years, leaving 70% of health expenses coming directly from the pocket of patients and the rest from corporate health insurance paid by employers.
In recent times, some of the multinationals have tried to regain their position in the local market. Interviews confirmed that these multinationals appear to be attracted by the new wealth of some Indonesians and the potential size of the Indonesian market if the country continues to become more prosperous (the Jakarta stock market grew by 150% in 2009 and appears minimally affected by the economic downturn). Pfizer leads this effort and has recently offered an “E-card”, which enables medicines to be bought at a discount; it now has 25 000 patients signed up. Some companies are focusing on over-the-counter (OTC) drugs, such as Bayer, and others are using Indonesia as a central hub for regional manufacturing because of the low cost of labour. Of the Japanese firms, only Otsuka has made inroads into the top ten firms in the country in the hospital market, because of its strength in intravenous fluids. Tanabe uses its subsidiary as a hub for exporting its products across South-East Asia.
The most vibrant segment of the pharmaceutical market in Indonesia appears to be that for branded generics. Branded generics refer to off-patent pharmaceutical products that carry the trademark of a known pharmaceutical manufacturer. The branded generic market can generate significant mark-ups on pharmaceutical products, which is attractive for the local companies involved in this business.
To take an example, the fact-finding mission visited three pharmacies and asked for the same product over the counter – a strip of ciprofloxacin 500 mg (Figure 1). The same products varied in price from pharmacy to pharmacy:
3500 Rp, 5000 Rp and 143 250 Rp. The first two products were nonbranded generics and were supplied by independent pharmacies. The product that cost 5000 Rp displayed the price “4000 Rp” on the strip, indicating an overcharge of 1000 Rp compared with the regulated price set by the Indonesian Government. However, the prices of the nonbranded generics are estimated to be at the likely cost of manufacture of the strip. The expensive strip was branded Baquinor Forte from the local company Sanbe and was supplied by the Century chain of pharmacies; it carried a price on the strip of 145 750 Rp, representing a slight undercharge compared with the regulated price set by the Indonesian Government, albeit at a price 40 times that of the unbranded versions. The mission received the product each time with no request for a doctor’s prescription.