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New Market Attractions and Restraints in the Healthcare Market

Indonesia in 2015Dr Siddharth Dutta

Industry Manager, Healthcare Frost & Sullivan

BackgroundIndonesia is the fourth most populous country in the world, with a population of approximately 248 million. With a high birth rate of 18.5 births per 1000 population and a relative low mortality rate of 6.3 per population of 1000, it is expected to reach a total population size of 267.5 million by 2020. Indonesia has shown a trend towards rapid urbanization, and this is expected to continue at an estimated CAGR of 2.5% from 2010 to 2014.

Indonesia had the lowest spending on healthcare as percentage of its GDP (3.3%) in 2013, and probably the lowest in the region when compared with neighbouring countries such as Singapore (5.8%), Malaysia (4.3%) and Thailand (4.2%). The implementation of the Universal Health coverage or JKN (Jaminan Kesehatan Nasional) in 2014 was the best thing that could have happened to the region. By 2020, the government plans to extend healthcare coverage to 240–260 million Indonesians. This would mean demand for more clinics (primary) to screen new patients and more hospital beds from 2014.

The Healthcare Industry — Private Hospital MarketIndonesia has an interesting healthcare system. The system is demarcated into public delivery system with MOH hospitals, provincial and district hospitals and primary health clinics known as ‘Puskesmas’. The private delivery system consists of general, specialty hospital and private clinics.

In 2014, the country achieved the target number of primary

care centers (called Puskesmas), which was 1 for every 30,000 persons, and essential to handle the new patient pool covered under Universal Health Coverage. The number is expected to increase, with approximately 10,500 ‘Puskesmas’, roughly 1 for every 24,000 people in Indonesia. However the real problem is not the primary screening market, but the hospital market.

Of the 2,350 hospitals in the country, only 1,710 hospitals enrolled themselves (to extend the JKN coverage) by December 2013. Although more hospitals are expected to join in 2015, still there is a major unmet need for hospital beds. So though the patients can be screened at primary level clinics, due to limited bed capacities at the secondary and tertiary levels, there is a likelihood of long queues or even refusals or referrals to other hospitals.

The country expects over 35,000 new beds by 2020 (Indonesia has one of the fastest growing Private Hospital Sector in APAC). The volume of patients started increasing in 2014 due to implementation of JKN. In fact, some of the regions such as Bandung had already reported an increase of 200% patients in clinics in the first two months. The Puskesmas are not enough to cater to the all the patient pools.

Indonesia has an estimated 760 private hospitals in 2014.

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Siloam Hospital is one of the major hospital service providers with 18 hospitals, and is expected to start 5 new hospitals by the end of 2014 to reach a total of 40 hospitals in the next three years. Siloam group anticipates an increase in patient pool which would be willing to pay upfront and out of pocket rather than waiting in long queues for medical screening in public hospitals.

A few smaller hospital groups such as Omni Hospital have been reported to replicate Siloam’s business model and are planning to build hospitals outside of concentrated areas of Java, with three facilities in the pipeline.

In anticipation of the increased patient pool, non-traditional players from pharmaceutical industries, such as the state-owned PT Kimia Farma, have started venturing into the hospital business. It has plans to build six new hospitals over the next few years. PT Kalbe (one of the largest pharmaceutical companies) entered into the hospital market by partnering with Mitra group. Mitra is the second largest private hospital operator, with 10 hospitals.

Market AttractionsIn Indonesia, the majority of hospitals are concentrated in the Java region. The country still falls short of the number of hospital beds per 1000 population when compared to neighbouring regions i.e 1.13 beds per 1000 population in 2014 as compared to Thailand (2.1), Singapore (2.0), Vietnam (2.0) and Malaysia (1.9) and this could be one of the major reasons that patients (with capacity to pay Out-of-pocket) move to other countries for healthcare services.

OpportunityAssuming the OECD’s global average 3.0 hospital beds per 1,000 patients remains valid; Indonesia is expected to continue experiencing a shortage of hospital beds till 2030. Therefore, the private hospital sector looks promising for investors from 2015 onwards.

RestraintsIn spite of good intentions by the new government, the hospitals under JKN faced the initial teething issues of delayed payments in the first quarter of 2014. However the industry expects that this would rather not dampen the tempo of the hospital service providers. Besides this, Indonesia lags behind in skilled manpower, infrastructure and delays in approval processes.

The Healthcare Industry — Pharmaceutical MarketIndonesia has more than 18,000 pharmacies and registered outlets for the sale of pharmaceuticals products and dominated by sales of generics. There are many privately owned local apotik (pharmacies) in Indonesia e.g Apotik Melawai (headquartered in Jakarta). The rural

clinics usually have their own pharmacies, but with limited supply as compared to city chemists. PT Enseval Putera Megatrading Tbk is one of the largest pharmaceutical distributors in Indonesia and specialises in the distribution and supply of pharmaceutical products, consumer products, devices, etc. Over 40% of pharmaceutical drugs sold in the county are over-the counter, indicating that Indonesians favour self-medication. Due to high occurrence of communicable diseases and epidemics, drugs are in demand as a counter-measure.

Market AttractionsAfter the demand for hospital beds, the market anticipates a demand in affordable medicines. Due to JKN, the industry can anticipate a chain reaction of events in 2015. In anticipation, State-owned pharmaceutical companies such as PT Kimia Farma and PT Indofarma had increased their production capacity to 123% and 200%, respectively in 2013. Further in December 2014, the government announced the mergers of PT Indofarma Tbk and PT Kimia Farma Tbk and further consolidated their positions.

With the sudden increase in demand for affordable medicines, the market can expect increase of malpractices, irregularities in supply chain, sale of forfeited medicines and even price increases. Through their state owned drug manufacturing agencies, the new government is expected to control this activity and step up the supply of affordable drugs in the market. The state-owned PT Kimia Farma already operates one of the largest pharmacy networks in Indonesia, with over 500 outlets in 2013 which is expected to reach 560 in 2014–2015. With the merger, the government can control both supply and demand chains in the pharmaceutical market.

One of the largest pharmaceutical companies of Indonesia, PT Kalbe group, invested US$12 million to build a new factory in West Java with a monthly capacity of 87 million tablets. The company also plans to introduce 20 new products in the market. The market is mostly dominated by domestic players.

OpportunityThe Indonesian pharmaceutical market is largely driven by generics and OTC drugs. The local companies have a higher market share compared to MNCs like PT Pfizer. Indonesia pharmaceutical market is also dominated by distributors and most of the MNC operate in the market through them. Zuellig Pharma is another large distributor for pharmaceutical products in Indonesia. Besides Zuellig, Enseval (distributors of Kalbe), Lautan and Millenium Pharmacon are the other major players.

RestraintsAt present, the regulatory irregularities have created challenges for lot of foreign companies. The Government is making efforts to cut short the approval process, curb the factors responsible for delay and make the system transparent. Drug manufacturers are expected to set up facilities in the countries.

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Dr. Siddharth Dutta is an Industry Manager with the Healthcare Practice at Frost & Sullivan, Asia Pacific. His background in healthcare covers the emerging markets for the Pharmaceutical, Biotechnology and Diagnostic Industry.

Although he has completed several research studies and consulting projects in areas such as diagnostic markets, stem cell and immunosuppressant markets in Asia, his key area of focus is the value based healthcare model in the pharmaceutical industry.

Prior to joining Frost and Sullivan, Dr. Dutta was a senior project manager and head of Business Intelligence at OSI Systems, India where he handled large scale project management, data analysis & reporting and business intelligence. He also worked with the Government of India on policy making and setting up of the

Biotechnology Industry Research Assistance Council.Dr. Dutta has received much acclaim for his research through articles and quotes published in International Journal of Dermatology

(USA), ISHAM (France), IAMM (India) and conference papers in India and USA.He holds a PhD and a Master’s of Science from the University of Allahabad, India, a Master’s of Science in Clinical Residency

from SMU India, a PGEM (eMBA) from IMT Ghaziabad, India and a Six Sigma Green Belt from ISI, India.

About the Author

However, foreign pharmaceutical companies often face tough competition from local manufacturers of low-cost generics. The domestic manufacturers are also supported by the government via various schemes like ASKES, etc. Most of the foreign companies enter the market through distributors.

ConclusionFrost and Sullivan has been tracking the market in 2014 and expects significant growth in private hospitals, medical devices and pharmaceutical markets. In a recent report on Indonesia, Frost and Sullivan has studied the market in terms of opportunity by segments, sectors, regulations and ease of entry for a foreign investor in 2015. The report covered the major healthcare segments, competitors who dominate these segments and forecasted growth for the next 5 years.

Indonesia is definitely growing in 2015. Whether it can become an alternative market after China remains to be seen. At this point the domestic consumption is high and there is demand for private hospital beds, generic medicines, medical devices and diagnostics. Manufacturers from South Korea, Japan and other SEA countries have already started considering Indonesia as a potential market. Global companies like GSK and Fresenius Kabi AG have already increased their shares in 2014. The year 2015 is expected to stand out as an important chapter for Indonesia and investors who are looking at the attractions of the healthcare market.