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Economy

Indonesia's Kalbe Farma has high-tech ambitions

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A worker shows off pills produced at a Kalbe Farma plant in Cikarang, on the outskirts of Jakarta.   © Reuters

JAKARTA Indonesia's largest pharmaceutical company, Kalbe Farma, is transforming itself from a maker of generic drugs to a high-tech pharma developer. Its two-year-old cancer drug plant has begun reaping results, and Kalbe is stepping up research and development of stem cell therapy products.

Kalbe's 3,800-sq.-meter factory in East Jakarta now produces 13 drugs for chemotherapy, including 10 cancer-fighting drugs and three supplementary medications. Half can be used to treat breast cancer, the most common form of the disease in Indonesia and the one blamed for the most deaths among women.

The factory is doing well, according to Vidjongtius, a director at the company. "Sales [of cancer drugs are] growing more than 10%, better than Kalbe's other drugs," he said.

From its beginnings in a garage in Jakarta in 1966, Kalbe now has annual revenue of 17.8 trillion rupiah ($1.36 billion) and 30 subsidiaries. The group runs 11 plants -- including one in the Philippines and another in Nigeria -- and has more than 16,000 employees.

Founder Boenjamin Setiawan steered the company in a new direction in 2006 with an initial investment in stem cell research. In 2008, his niece, Irawati Setiady, took over as president. Under her leadership, Kalbe is working to become an innovation-driven drugmaker and expand across Asia.

The company's net sales for the six months ended in June rose about 10% to 9.55 trillion rupiah, with net income attributable to shareholders climbing 8% to 1.14 trillion rupiah.

Kalbe is expanding its product portfolio at the same time that Indonesian President Joko Widodo is pushing to provide better health care to every citizen. The government is gearing up its universal health care program and intends to cover the country's projected population of 270 million by 2019, a leap from the 170 million currently covered. This year for the first time, government expenditures on health care reached the legally mandated 5% of the state budget. Health care spending is expected to grow 12% every year through 2020.

On the other hand, government policy is making things difficult for generic drug companies. Government price caps hold down revenue and profit margins.

Kalbe's overall prescription drug sales grew 5.4% in the first half of this year, slower than Kalbe's three other business lines -- consumer health (over-the-counter drugs and energy drinks), nutritional supplements, and distribution and logistics.

The current half "is partially mitigated by a stronger rupiah and the introduction of higher-margin oncology products," equity analyst Elvira Tjandrawinata of Nomura Securities said in a recent report.

Even if generic prescription sales recover, however, Kalbe faces a challenge meeting its lofty goals.

There are more than 200 drugmakers in Indonesia, most of which produce only low-margin generics. While they control 95% of the market by volume, they have a combined 75% share in value terms. The few multinationals operating in the country have been able to reap more profits because of their focus on high-value products.

"Everybody can produce generics, so they do need to develop something different," Tjandrawinata said of Kalbe. "Products like the oncology drugs can be their competitive edge; not many companies here can produce something like that."

STEM CELL RESEARCH Kalbe is investing in stem cell research with a special focus on therapies for degenerative maladies.

Boenjamin Setiawan founded the Stem Cell and Cancer Institute (SCI) in 2006 with a vision of making Kalbe a leading producer of stem cell products in Asia.

"We could have chosen raw materials as our R&D focus, but we're already quite left behind in this area, mainly [by] India and also China," Irawati Setiady said in a televised speech in January. "The emerging area for research is currently stem cells. And we thought we should not be left behind anymore."

Stem cells are "mother cells" with the potential to develop into different kinds of cells in the body. They also have the ability to self-renew, thus serving as a repair system. In stem cell therapy, the idea is to implant the cells in a damaged organ so that it can heal itself.

SCI Director Sandy Qlintang told the Nikkei Asian Review that the institute has managed to produce autologous transplants, in which stem cells are harvested from patients themselves, usually from bone marrow or fat tissue. SCI has partnered with several university hospitals in Indonesia to provide this treatment for spinal cord injuries, osteoarthritis and other maladies.

SCI, though, has been trying to develop stem cells that can be mass produced by collecting them from young, healthy individuals for use in ailing patients.

"We're preparing to conduct the preclinical study on animals next year. And then we'll start clinical trials on humans in 2018," Qlintang said in a recent interview. "We're planning to market this product in Indonesia, and perhaps also a few other Southeast Asian countries."

For that, the product must pass three-phase clinical trials on humans -- a six- to seven-year process costing at least 40 billion rupiah. SCI will have to report the results to Indonesia's National Agency of Drug and Food Control before the product can be marketed.

The institute is planning to partner with other pharma companies -- perhaps from Malaysia and South Korea -- to obtain regulatory approval from drug authorities in those countries, Qlintang said.

STRATEGIC COLLABORATION For decades, Kalbe bought up smaller rivals to expand its consumer health and nutritional supplement divisions. Now, finding experienced partners to share their technology is the key to its high-value-product approach, Vidjongtius said. "We can of course try to build on our own, rely on our internal capacity, let the research and development team continue with trial and error," he said. "But that would take years."

The company is therefore on the hunt for "strategic" foreign partners that can lend expertise in specialty products -- planned lines of prescription drugs that can only be made with sophisticated technology. Like the oncology drugs, these products offer higher margins. Significantly, a lack of generic substitutes in Indonesia means no government-set price ceilings.

Companies in South Korea and China are increasingly open to collaboration, Vidjongtius said, because Kalbe offers a strong distribution network and reliable access to the pharmaceutical market of the world's fourth most populous nation. The director said Kalbe has $115 million set aside for future strategic collaborations.

Kalbe launched its strategic partnership policy with the oncology factory, which is a partnership with South Korea's Samyang Biopharmaceutical.

With operations proceeding smoothly, Kalbe last year inked an agreement with South Korean drugmaker Genexine, which has expertise in biopharmaceutical technology -- a branch of drugmaking that focuses on biological sources.

The new partnership prompted the construction of a biopharmaceutical factory on the outskirts of Jakarta. The plant is expected to begin commercial operation in 2018, with only one product planned so far: erythropoietin preparation, a hormone treatment for cases of anemia resulting from kidney failure and cancer treatment.

Kalbe and Genexine also have established a research unit tasked with developing "new, innovative biologic drugs" that will be made at the factory, the company said on its website.

Kalbe has high hopes for the partnership. "Through the formation of the joint-venture company, Kalbe is gaining access to a wide range of next-generation therapeutic proteins, access to advanced countries, such as Australia and Taiwan, and greater foothold in ... ASEAN and Indonesia," the website stated, referring to the Association of Southeast Asian Nations.

"We won't stop with the Korean partners," Vidjongtius said. "We've initiated talks with some other potential partners -- [perhaps] Korean, Japanese, Chinese or Indian."

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