Between Rocks and Hard Places: The Southeast Asian Pharmaceutical Industry at a Juncture

Across the region, many pharmaceutical companies have emerged over the past 50 years. Often springing from Chinese family businesses, the spectacular socioeconomic growth witnessed by the region has fostered a buoyant industry with hundreds of players. While some have barely taken off from the traditional medicine, remedies, and herbal tea activities, others have developed into large integrated groups, with distribution and logistics operations, fully fledged manufacturing capabilities, and in-house marketing activities. Despite the fundamental flaw of having only marginal API production in the region (unlike the compelling examples of fully vertically integrated China and India), the Southeast Asian pharmaceutical industry is a credible player that deserves to be kept in mind. Beyond market sizes, in themselves compelling enough, a wealth of entrepreneurial value, great industrial tools, cumulated know-how and expertise, and of course local knowledge is on display. The region is also at a genuine turning point of its development, and the industry is forward thinking and ready for action.

The region's industry: domination by the largest

In the meantime, local players have developed dominant positions that are hard to fight. In Indonesia, the largest market of the region, three players are leading the pack, each with different strengths.

The leader in Indonesia, Kalbe Farma is Southeast Asia's largest local pharmaceutical company when excluding Chinese and Indian players. With $267-million revenues in 2005, it is trailing the global leaders Pfizer and GlaxoSmithKline, which also hold the top positions in this region with $367 and $289 million revenues, respectively, for 2005 (source: IMS Health). Kalbe Farma is a versatile producer dominating the OTC market, the energy drinks, and the nutrition market and is number three in the Indonesian prescription market with a 9% market share.

The next Indonesian players are Dexa Medica and Sanbe Farma, both with ;$152-million revenues that benefited from truly impressive revenue growth rates of 35% and 28.6%, respectively. These companies are also strong prescription generics producers. Dexa Medica is a producer of solid and liquid forms, particularly injections. The company has expended the range of its offer notably by striking partnership agreements with some of the world's most renowned pharmaceutical players, producing and distributing their products under license throughout Indonesia. Sanbe Farma, on the other hand, is moving beyond its original core activities of human and veterinary pharmaceutical manufacturing and is financing a biotech and research center as well as managing a brand new, state-of-the-art private hospital in Bandung.

Despite an impressive presence on their home turfs, all three companies have initiated international market expansion strategies starting across the region, in Vietnam, Thailand, and Myanmar as well as Africa, Nigeria in particular. "This densely populated African nation (132 million people) is attractive to Indonesian companies as the two countries share market characteristics, from the fact that most of the population relies on a very low disposable income through to the fact that both markets are volume rather than value based.

In terms of innovation, Kalbe Farma, Dexa Medica, and Sanbe Farma are at the edge of the sector. From Sanbe's state-of-the-art new CGMP sterile injection plant and new dry forms tablet plant to Kalbe's Kalbiotech, a Singapore-based entity that will work on research coordination and licensing in Singapore and Dexa's successful in-licensing and even out-licensing deals, these leaders have adapted spectacularly well to the new conditions of production expected from any decent player today. Although the country does not request CGMP for product registration, the Indonesian manufacturers have anticipated the call and have started investing ahead of time. Sanbe pharma's two splendid new production units are ready to welcome inspections from any national drug regulatory body and take orders for export sales and contract manufacturing. The quality of the construction, equipment used, and procedures in place testify of the head start some players of the region have taken.

In Malaysia, Pharmaniaga, the state-backed listed company, is also facing its own set of challenges and its path is a valuable indication of regional trends affecting the industry. The undisputed leader in its home market, Pharmaniaga must go beyond its cozy protected position (Pharmaniaga being the exclusive concessionary for public hospitals sales) and step up its efforts to become a regional leader. Over the past few years, these efforts have become more visible as the company built a superb new small-volume injectables (SVI) plant to FDA standards and put a foot in China through a joint venture with a company that, such as Pharmaniaga, has public shareholders. The fact that the small-volume injectable factory (to be completed by Q4 2006) was built to FDA standards is no luck: Azhar Hussain, the company's managing director is confident that "the next stage will be registration and our ultimate goal will be to enter the US market with one or two products. Contract manufacturing is also a very serious possibility. We have no limitation as we are a generic player and competition is everywhere." Looking at the openness of his company to global cooperation, he adds that "one has to cooperate to compete nowadays."

Dynamism across the market

In the shadows of the regional leaders is a thriving lot. Medium-size companies are forcing through their market positions by developing their niche competencies and their flexibilities to be recognized as serious market contenders. Among them, Indonesia's SOHO, The Mensa Group, or Novell, Malaysia's Hovid and Kotra, Thailand's Siam pharmaceutical, Thai Nakorn Patana or Philippines United Laboratories are the best in class. With challenges lurking on every pharmaceutical horizon, these companies are using their flexibility and strong focus to design strategies that allow them to make the most out of the current situation.

Thanks to Indonesia's sheer market size, medium-size operators can have available capital to work on different approaches. The SOHO group, for instance, is completely refurbishing its production tool to bring it to the best standards in class. Tang Eng Liang, the company's president is clear about the mid-term targets: "We want to renovate our factory, to be able to export to European nations first, then, who knows, to the United States"

The quality required to achieve such results should be without any compromise, and while the emphasis is on renovating the production tool, other avenues for strengthening the business model are also sought after, as explained by SOHO Group's President Director, Andreas Djamwari: "We also have to work towards rationalizing our portfolio, by looking at consolidating therapeutic classes coverage amongst our products." As do many companies in the region, the SOHO group combines manufacturing alongside distribution activities, thus allowing the company to control its own distribution channels across Indonesia as well as to act as a distributor for any principal, local or international, willing to enter the fray. Yet, Mr. Djamwari stresses that the company is "looking for success in manufacturing instead of only distribution."

Meanwhile, external pressure cumulates on the manufacturers' shoulders across the region to comply with more stringent quality standards, face the ever-increasing bite of the international competition, notably from the dual threat of India and China, and extra difficulties are being added by local authorities and regulators. In Indonesia, a price-capping policy has been announced, although the full extent of its application is still largely unknown. Local manufacturers are willing to play the game, all the more when the future cap doesn't affect much their bottom line because they don't produce the very basic products that will see their sales prices capped off.

Roy Lembong, dynamic Director of Novell Pharmaceutical Laboratories, a versatile producer that has posted some of the best growth rates in the market, is unabated by the forthcoming price control and actually sees opportunities for some local players: "Usage of non-branded generics is low in Indonesia as there are little incentives for doctors to use them. Japan is facing the same issue but now has incentives. Doctors here still like to subscribe products from multinationals. A price capping will benefit patients, health systems as well as some players producing these type of cheap drugs."

Head of Dexa Medica, Ferry Soetikno believes that price cap will " push a rationalization of prices and increase accessibility and affordability." Expanding on the conundrum faced by the industry confronted to the future price cap he asks: "How do you link a good insurance system and good suppliers without sacrificing the sustainability of the companies? With higher accessibility, more people will go for more frequent health visits. This means more units sold, which in turn will balance the losses of price caps. The nature of the business will change and will turn even more towards volume-oriented activities."

This should favor those with large installed capacities. In the case of Novell though, the corporate strategy is to look up and aim at the top segment of the market by putting effort on the products through product development, high-end technology, and strong marketing. "We need technology, information on how to make products, how to achieve EU GMP standards and the right quality insurance system, etc."

With products ranging from oncological through to psychotic and osteoporosis treatments, the company is already positioned beyond commodity drugs and into the high-value added segments. The next stage for Novell and for Southeast Asian companies willing to stay abreast of the competitive environment and to succeed going forward will be not only to manage the changes domestically, in particular those induced by the pressure on public health systems and the transition into private health insurance but also product development and using pharmaceutical technologies available.

Climbing the value ladder

Novell's Roy Lembong adds that "Indonesian companies need to improve their product development and be able to do for instance produce slow release products with good bioequivalent data." Dexa Medica, one of the leading companies also worked on technological solutions to retain the edge. Developing its own fast-disintegrating capsules as well as sustained-release products, the company managed to license one of its products to Glaxo Indonesia. Improving delivery systems, packaging, or formulations to the point of achieving out licensing deals is a path of excellence that many in the region want to go down. These standards are meant to allow them to better compete domestically, regionally, and even beyond. Roy Lembong is for instance considering that Novell is positioning itself on a par with central and eastern European manufacturers in terms of quality ambitions, and taping developed markets such as Australia, or southern Europe.

For Mensa, a group built from an API trading and distribution company that also manufactures and distributes pharmaceutical finish forms, the challenges of the environment bring countless opportunities and it is up to the fittest to survive and thrive. "Those who cannot comply will have to look for contract manufacturing. Local GMP was the first stage of challenge for the local manufacturers, CGMP was the second, and we, in our company are already thinking about the third stage to be able to service US and European markets. There will be opportunities for those serious in this business," explains Jimmy Sudharta, President Director of Mensa Group.

Indeed, he highlights a point that many across the region like to put forward: The sector across the ASEAN region is facing radical transformation movement: the cost of compliance and the ever-increasing standards of quality throughout the life sciences industry pushes out of the game many medium to small size players who have been reacting too little or too late. And, the sector will concentrate and change its shape in the next half decade: This will also press forward for a concentration movement that is likely to affect many, and present local and foreign pharmaceutical players with acquisition opportunities.

Malaysia and Singapore: beyond PICs

Both members of the pharmaceutical inspection Cooperation scheme (PICs), Malaysia and Singapore are the only Asian representatives of the club. Therefore, they are considered like the quality heralds of the region, adopting CGMP standards ahead of the rest of Southeast Asia. For Singapore, host to mainly international original drug makers, the membership is a natural step. Singapore's pharmaceutical industry is driven by the multinationals that have brought in their seamless standards before the country even joined PICs. There are only two noticeable local generic companies that try to find a place in the sun, and the health system is meant to favor originators. With a total market of $350 million, the cake isn't as appetizing as Indonesia or Thailand, yet Big Pharma investment is very steady.

Recently, GlaxoSmithKline announced the development of a $190-million vaccine plant, the company's largest investment of this kind in Asia. "Most companies have set up not only their manufacturing units here but also their distribution centers. This place is a hub for the industry and this has attracted many foreign talents here," explains Fok Tai Hung, Executive Director of the Singapore Association of Pharmaceutical Industries (SAPI). "Singapore is the place to be if you want to develop products" he adds. Though Singapore previously only had Hong Kong as a direct competitive threat, it finds itself unchallenged today, as Hong Kong lost a large part of its appeal when it joined the Chinese realm back in 1997.

Malaysia presents a different picture: the largest market, it is also structured in a radically different way than state-backed company, Pharmaniaga. This company is leading the sector and creates a very strong vacuum around it: exclusive concessionaire for hospital supplies. The company is enjoying the benefits of a captive market while making its presence strongly felt on the rest of the market. While most players are rather critical of this monopolistic competitor, they also have benefited from its quality leadership and have had to eliminate all forms of complacency to survive in such an extra challenging environment.

Some companies like Hovid (one of the top 3 players on the market) have spread their market risk widely. Exporting to 35 countries, the company generates 60% of its turnover outside of Malaysia and expects that figure to grow. It is also working on niche products such as tocotrienols and other vitamin E derivatives. With a large number of products pending registration abroad and a strong R&D culture, the company displays one type of strategy for Malaysian companies. Simply illustrated by Managing Director David Ho: "If we were depending only on the Malaysian market, the picture would be gloomy."

Meanwhile, others are trying their ways in the shadows of Pharmaniaga: while companies like Duopharma may very soon feel the blow of Pharmaniaga's investments in manufacturing capabilities and face an onslaught of similar products, like small-volume injectable, others choose a nondirect confrontation and work on their niche strengths. Kotra pharma is focusing on developing its dietary supplements in parallel to its prescription drugs and is putting emphasis on brand-building in the region.

Apex Healthcare has sold it historical retail business to two of the region's leading retail outlet chains in Singapore and Malaysia and has undertaken a thorough strategic reshuffling. The boldest move is the company's venturing into China through Apex's equity participation in a regional pharmaceutical company in the Fujian province that has recently added a manufacturing component to its existing distribution and retail business across the Fujian region.

For Dr. Kee Kirk Chin, the company's Managing Director, "focusing purely on manufacturing issues is a wrong calculation, despite the fact that there will always be a niche for contract manufacturing here." In this case, new markets exit and stepping up in the big Chinese game are the keystones of the company's strategy. Others are trying to develop foreign cooperations alongside different lines.

For example, the Antah Healthcare Group has in-licensed nanotechnology products from US companies and is very confident about the future of these cutting-edge products on the regional markets. YSP Industries, a Malaysian company with a sister company in Taiwan has for its part chosen the path of regional development. Following the 1997 financial crisis, the company established local marketing outlets working to register its products across the Southeast Asian region. Also benefiting from factories in Malaysia, Taiwan, China and the United States, the company displays a versatility that allows it to be confident despite the piling challenges.

Strength in adversity

Thailand's very specific market organization, here again dominated by a state-controlled entity, has helped create a sector that has resilience and a strong fighting spirit. With ever-increasing pressure on the health system, and the pressure being in part vented out over the manufacturers, local players have learned to control costs and look for product opportunities. Their hunger for new innovative technology is genuine and the market has the capacity to absorb it. The real challenge will be for local manufacturers to pass through this testing time with their eyes cast abroad.

In the Philippines, too, reform is on the way and the business conditions are evolving fast. As a local medium-size player, you stand a chance to gain benefits from these reshufflings, as your local knowledge will always prime. Indeed, companies like United Laboratories, a leader in the Philippines, have grown from modest players to giants with increasingly global outlooks. And, all these companies conserve the benefits of market recognition and local knowledge that are indispensable to succeed in challenging markets such as Southeast Asia's.

The changing shape and business conditions in the Southeast Asian pharmaceutical industry should in turn open avenues of cooperation between US or European companies and Asian players. Amongst similar companies by size and profiles, there are plenty of synergies to be developed. With local companies often being able to tap into consumer pools ranging from 25 to 220 million people for one country, and up to potentially 520 million consumers across the region, market prospects are appealing, even when considering the low disposable-income levels. Should a western company be the holder of an innovative technology that can be easily transposed in Asia, and many success stories could blossom and thrive. The ethos and business abilities of local players, from the leaders through to the challengers, are very convincing. Their faith in the market is genuine and their will to succeed is fundamental. Like-minded business people from across the world always find subjects of common interests. At the time of over-focus on China and India, it is well worth to step back, take some prospective, and see the opportunities waiting to be realized in Indonesia, Malaysia, Thailand, the Philippines, and Singapore.

This report was prepared by Executive Country Reviews. Authors are Gilles Valentin gilles@ecreviews.com Emmanuelle Berthemet emma@ecreviews.com Marco Parigi marco@ecreviews.com Amicie de Bodinat amicie@ecreviews.com and Yaz Yazicioglu yaz@ecreviews.com