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bcg.perspectivesIndonesiaBeckons,butBigPharmaMustAimCarefully

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IndonesiaBeckons,butBigPharmaMustAimCarefully
January27,2014byJohnWong,ZarifMunir,andPaulCunliffe
Categories:HealthCare,Globalization
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InThisArticle
TheIndonesiangovernmentispreparingtorolloutanationalhealthinsurancescheme,butthedetailsofcoverageandenablingmechanisms
haveyettoemerge.
Inthenear,medium,andevenlongterm,thesegmentofthehealthcaremarketfundedbyprivateinsurersandoutofpocketpayments
representsthemostcompellingopportunityformultinationalpharmacompanies.
Ratherthanaddressthepubliclyfundedsectorimmediately,pharmacompaniesshouldinvestinshapingnationalhealthcarepolicyoverthe
longterm.

Formultinationalpharmaceuticalcompanies,Indonesiaissimplyimpossibletoignore.AnemergingSoutheastAsianmarketwithnearly240million
peopleandafastgrowingmiddleclass,thearchipelagonationboastsstrongmacro
economicfundamentalsdespiteshorttermheadwindscausedby
shiftsintheglobaleconomy,ahighcurrentaccountdeficit,andrelativelyaggressiveinflation.Economicgrowthisprojectedtocontinueatroughly6
percentintothemediumterm.Andbecauseofanexpandingmiddleclass,domesticconsumptionwilllikelyaccountforabout55percentofgrowth.
ThefundamentalsofIndonesiashealthcaremarketalsomakethecountryattractivetomultinationalpharmaplayers.Thepublichasastronginterest
inbetterhealthcare:Indonesiashealthcarespendingmorethandoubledfrom2006through2011.Spendingonprescriptionpharmaceuticals,at
roughly$4billionayear,isthehighestintheASEANregionandisgrowingatmorethan10percentannually.Percapitaspendingon
pharmaceuticals,however,islowrelativetothatofotherSoutheastAsiancountries,leavingampleheadroomforgrowthaspersonalincomesand
healthcarespendingrise.Andwithashiftingdiseaseburdenthatincreasinglyresemblesthatofthedevelopedworld(oncology,forexample,isthe
countrysfastestgrowingtherapeuticarea),demandfromIndonesianpatientsandphysiciansforhigherqualitycareandmoresophisticatedtherapies
isallbutcertaintomountovertime.
Thelatestdevelopmenttocatchindustryleadersattentionisthegovernmentsplannedrolloutofanambitiousnationalhealthinsuranceschemethat
aimstocover100percentofthepopulation.Underthecurrentsystem,roughly50percentofthepopulationiscoveredbyoneofsixgovernment
insuranceprograms.Theserangefromrelativelysmallsubsidiesforthepoorandunemployed,withlargegapsincoverage,toavarietyofmore
comprehensivepoliciesforcivilservants,thepolice,andthemilitary.Theresultsofthe2014presidentialelection,however,couldsignificantlyalter
boththetimingofthenationalrolloutandthelevelofcoverageavailabletothegeneralpopulation.Andasthecurrent2019targetforfullrollout
drawsevercloser,policymakersarestilldebatingkeydetailsoftheinsurancesystemanditsenablingmechanisms.Atthisstage,itisimpossibleto
predictwhatmodelwilleventuallyemergeasthenationaltemplateandwhensuchamodelwillberealized.
Inthisclimateofuncertainty,itappearsthatmultinationalcompanieshavefewshorttermgrowthopportunitiesinthepublichealthcaremarket.By
contrast,theprivatemarkethasfarmoreimmediateappeal.Andbecauseoffavorabledemographictrendsandincomegrowth,theprivatemarket
offerslongertermbenefitsaswell.Tocapitalizeonboththelongandshorter
termopportunities,multinationalswillneedtodeveloplocalsavvy,
cultivatenewstakeholders,andattractscarcetalent.Inshort,toparticipatesuccessfullyinIndonesiasfastdevelopinghealthcaresector,bigpharma
willhavetopicktargetscarefullyanddevelopadetailedoperatingmodeltailoredtolocalconditions.
TwoFundingStreams,TwoDistinctMarkets
TwomajorfundingstreamsunderpinIndonesiaspharmaceuticalsmarket.Sixdifferentpublicinsuranceprogramscoverabout50percentofthe
populationandprovidedifferingbenefitlevels.Theotherhalfofthepopulationpaysmostlyoutofpocketformedicationandtreatment,and
affordabilityremainsamajorconstraintonhealthcarespending.(SeeExhibit1.)Thehealthcareinfrastructureisunderdeveloped,witharatioof6.3
bedsper10,000citizens,wellbelowtheglobalaverageof30per10,000.Yethospitalsrunatanaverageof55to60percentofcapacity,owinglargely
toissuesofaffordability,lowconfidenceinthehealthcaresystem,andachronicshortageofphysiciansthatexists,inpart,becauseofgovernment
policiesthatbarmostforeigndoctorsfrompracticinginIndonesia.Asaresult,lowerincomeIndonesiansrelyprimarilyonoverthecounter
medicationsandtraditionalremedies,whilemoreaffluentIndonesiansoftentravelabroadformedicalcare.

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Fortheforeseeablefuture,thepubliclyfundedsegmentofthepharmaceuticalsmarketoffersfewprofitableopportunitiesforthemajorityof
multinationalpharmacompaniesthatintendtoretaintheircurrentproductportfoliosandoperatingmodels.ThegovernmenthascompiledFORNAS,a
nationalformularythatfocusesonlower
costgenerics,aswellasanecatalogpricingmechanismmeanttodrivelowestcostsourcing.Government
policiesthatcurrentlyfavorlocalgenericsproducers,whichcontrolsome70percentofthemarket,willlikelycontinue.Mostmultinationalswould
needtochangetheiroperatingmodelssignificantlytocompetesuccessfullyagainstlocalgenericsplayers.
BCGsanalysisshowsthatinthecurrentunsettledenvironment,theprivatemarketrepresentsthemoreattractiveopportunityformostmultinational
pharmacompanies.Becausepatientsandprivatepayersaccountforsuchalargeshareofoverallhealthcarespending,itmakessensetoinvestnowto
betterservetheirevolvingneeds.Becauseofdemographicandincomegrowthprojectionsthrough2020,theprivatesectorwilllikelyremainthebest
betformultinationalsinthemediumandlongtermaswell.
Bycontrast,thepublicsectorprovideslittlerationalincentivetoinvestheavilyinanticipationoftherolloutofnationalhealthinsurance.
Multinationalsshould,rather,viewnationalhealthcareasasignificantlongtermopportunityandmaketargetedinvestmentswiththatprospectin
mind.Inotherwords,companiesneedtoenterthepublicmarkettacticallyandexperimentally,gainingmarketintelligencewithpilotventuresinsome
provincesandregions.FarmoreimportantthanfirstmoveradvantageinthepublicmarketissignaladvantageBCGstermfortheabilitytosense
andshapechangesinthemarket.
Atpresent,manymultinationalpharmacompanieslackthewherewithaltoestablishsignaladvantage.Asoutsiders,theyhavedifficultynavigatingthe
countryspolicyapparatus,andwithoutthatcapability,theyhavelittlemeanstoformulateorimplementstrategiestohelpshapethenationalhealth
insurancescheme.Compoundingthedifficulty,theministryofhealthisinthemidstofarestructuringthatwillshiftresponsibilityformanyaspectsof
policy.Forthesereasons,webelievethatbeforenavigatingthehazardsofthepublicmarket,multinationalsshouldgettoknowtheoverallIndonesian
marketintimatelyandhonetheirabilitiestoshapethedirectionofhealthcarepolicyandthehealthcareinfrastructureoverthelongerterm.
FindingtheSweetSpotinthePrivateMarket
Theprivatemarketsector,supportedbyconsumersandprivateinsurers,islikelytobethemostfertilegroundformultinationalsforsometimeto
come.(SeeExhibit2.)Outofpocketexpenditurescurrentlydwarfpublicexpendituresondrugtherapies.Inaddition,therapidlyexpandingmiddle
classwantshighqualityhealthcareandisquicklyacquiringthemeanstopayforit.

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Allthesame,Indonesiasprivatehealthcaremarketisverymuchthatofastilldevelopingeconomicpower.Anestimated70millionIndonesianswill
jointhemiddleclassandaffluentconsumerpopulationbetween2014and2020.Thesehouseholdswillhavediscretionaryspendingbudgetsof$220
ormorepermonth(in2013dollars),andtheyhavealreadydemonstratedawillingnesstotradeuptoimprovefamilyhealth.Privateprovidershave
beguntargetingtheseconsumerswithcareoffersfordifferentincomelevels.Yetbecauseconsumerincomeswillremainlowrelativetothoseof
developedeconomies,affordabilityissueswillcontinuetoconstrainhealthcarespending.Mostmembersoftheemergingmiddleclasswillhave
particulardifficultywithoutofpocketcostsforspecialistcaresuchasnewercancertreatments.
Multinationalpharmacompanieswillneedtotailortheirofferingstothemarket,payingparticularattentiontomeetingpatientneedsaffordably.Some
companiesmayconsidercollaboratingwithlocalhealthcareproviders,privatepayers,andmanufacturerstoimproveaffordabilityandaccesstocare,
althoughmultinationalswillneedexpertadvicetomanagetherisksinherentincomplyingwiththerulesofanevolvinghealthcaresystem.
Physicianswillplayavitalroleincommunicatingtopatientsthebenefitsoftradingupfromstandardgenericofferings.MoreaffluentIndonesiansare
willingtopayupforhealthcare,butpharmaleaderswillneedtomakeaconvincingcasethattheirproductsoffersignificantlyhigherqualityata
competitiveprice.BecausephysiciansarecrucialtothiseffortandofferthebestimmediatepointofentrytotheIndonesianmarket,multinationals
needtodevelopstrongrelationshipswithprivatehealthcareproviders.Pharmaleaderswillalsoneedtobuildnewskillsintheirfieldforcesto
demonstratethevalueoftheirproductstophysicians.
Bycultivatingcloserelationshipswithprivateproviderorganizationsandpayers,multinationalshaveanopportunitytoshapedrugformulariesand
scoreearlywinsthatwilllaythefoundationforneartomediumtermgrowth.Asthepowerofprivateprovidersincreasesinachangingcompetitive
landscape,however,thesecompanieswillneedtomanagetheirkeyaccountrelationshipstobalanceconversationsaboutpricingwithconversations
aboutthevaluethatcompaniescanofferproviders.Byhelpingwithphysiciantraining,sharinginformation,collaboratingoncommonchallenges,and
bundlingproductsandsolutions,multinationalscanemphasizetheircommitmenttoservingprovidersneedsandimprovinghealthcare.
Pharmaleadersshouldbeaware,however,thatachronicshortageofdoctorscouldhinderthegrowthofprivatehospitals.Currentregulationsbar
virtuallyallforeignphysiciansfrompracticinginIndonesia,leavingmanyprivateprovidersundestaffedandunderskilledandspurringmoreaffluent
Indonesianstoseekcareoverseas.Privateprovidersandmultinationalsshareaninterestinimprovingthequalityandaccessibilityoflocalhealthcare,
andtheyshouldthereforebenaturalalliesintheefforttoimprovethequantityandqualityofthecountryshealthpractitioners.
Finally,multinationalsneedtobearinmindthatthelocalgenericscompetitorbaseisalreadyaggressivelymovingupthevaluechainintoboththe
provisionandpharmacychannels,whicharerapidlyprofessionalizing.Genericscompaniesareexpandingproprietaryproviderfootprints,cooperating
withotherproviders,andexpandingtheirpresenceinretailpharmacies.Thesemaneuverscompoundthechallengeandcomplexitythatmultinationals
willencounterintheIndonesianmarketandcarryclearimplicationsforthosecompaniesstrategicresponses.
HowtoThinkAbouttheIndonesianOpportunity
Indonesiarepresentsacriticalemergingmarketopportunityformultinationalpharmacompanies.Atthesametime,itbristleswithstrategicand
operationalchallengesthatwilllikelynarrowtherangeofshorttomediumtermtargets.Nonetheless,itsimportantthatmultinationalsmovequickly
toestablishapresenceinthecountryinordertogainindepthlocalknowledgeandlauncheffortstoattractindemandhighleveltalent.
Thepublicandprivatefundingstreamsrepresenttwodistinctopportunities,eachwithitsowntimeframeandmagnitude.Theprivatemarketismost
relevantformultinationalsbecauseitofferstheopportunitytodemonstratetheeffectivenessandaffordabilityofproductlineupsandcultivatebrand
awarenessintheshorttomediumterm,andverylikelythelongertermaswell.Thepublicmarketisevolving,anditsfinalshapeisasunclearasthe
ultimatetimetableforitsimplementation.Itisthereforeimperativethatmultinationalsdeterminewheretofocustheirinvestmentandenergyandfully
aligntheirstrategyandoperatingmodelsbehindtheirchosentargets.
Webelievemultinationalsshouldfollowseveralcriticalpreceptstodefinetheirapproachtothiscomplexandfastchangingmarket.Theseprecepts
callforpharmacompaniestodothefollowing:
Ensureclarityoffocus.Clearlyidentifythecompanysfocusareasacrosstheprivateandpublicsectorsandarticulatethesupportingrationale.
Understandthefactorsforsuccessineachmarket.
Educate.Raiseawarenessofrelevantdiseaseareasamongpatientsandphysiciansandimproveunderstandingoftherapiesandvariationsin
therapeuticquality.
Tailortheportfolio.Ensurethattheproductportfolioisappropriateforthetargetedcustomersegments.Experimentwithtieredpricing,second
brands,andothermeanstoimproveaccessandaffordability.
Establishandcultivatekeyrelationships.Asthemarketevolves,thecastofcriticalstakeholdersforaccessandprocurementwillundergo
continuouschanges.Focusonidentifyingandunderstandingtheagendasofcriticalpatientpopulations,providers,physicians,payers,and
policymakers.Inthecaseofproviders,forexample,multinationalsshouldidentifythechainsthatrepresentthemostcompellingandrelevant
opportunitiesandworkwiththemtodefinecommoninterestsandcrafteffectivevaluepropositions.Mapthemaindecisionmakersand
influencerswithineachkeyaccountanddefineaclearprogramaswellasinitiativestoengagethem.Tailorvaluepropositionstomanagechain
bargainingpowerandcounterthelocalcompetition.
Buildsignaladvantage.Inanuncertainandpotentiallymalleableenvironment,companiesmusthavestrongcapabilitiesinregulatoryaffairs
andmarketaccess.Investinthemaccordingly.
Focusoncommercialexcellence.Useanalyticstobuildonmarketdata,limitedthoughthedatamaybe.Focusonsegmentationandtargeting,
territoryplanning,andcallqualityascleardifferentiators.Onewaytodothiswouldbetoidentifyrelevantgrowthterritoriesearly,assesstheir
potentialevolution,andinvesttobuildrelevantlocalpresence.
Considerlocalization.Assesshowlocalandregionaleconomictrendsmightevolvebeforesteppingupcommitment.Likewise,an
understandingoftherequirementsforlocalmanufacturingandinformedjudgmentontheirpotentialevolutionisanessentialprerequisitefor
gaugingtheupsidesoflocalproduction.
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Leveragepartnerships.Toincreaseaccessandmarketshare,carefullyassessthepotentialformutuallybeneficialpartnershipswithboth
governmentandlocalstakeholders.
Defineatalentstrategy.Developaclearplantosecurekeyleadershipandmanagerialtalent,blendinglocalandglobalexperience.Builda
sustainableapproachtoaddressatighttalentpipelineandmitigatestaffturnoveratalllevels.
Indonesiasrapidgrowthandtheacceleratingdevelopmentofitshealthcaresectormakeitatemptingtargetformultinationalpharmaceutical
companies.ButitiscrucialtounderstandthatIndonesiaisnotasingletarget,andtheopportunitiesformulti
nationalsareunevenlydistributedacross
thehealthcarelandscape.Aboveall,multinationalsmustbeawarethatsuccesswillnotarriveovernight.Ahealthcaremarketasmultifaceted,
complex,andrapidlyevolvingasIndonesiastakestimetolearn,andmultinationalsmustdeveloptheinternalcapabilities,productpipelines,and
managementtalenttheyneedtosucceedthere.Fortunewillfavorthepatient,thewellinformed,andthewellprepared.

ToContacttheAuthors
AsiaPacific
JohnWong
SeniorPartner&ManagingDirector
HongKong
ZarifMunir
Partner&ManagingDirector
KualaLumpur
PaulCunliffe
Principal
HongKong
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