Beyond pills and potions
Albertus Weldison Nonto
Well known as Indonesia’s largest pharmaceutical company, Kalbe Farma Group has added to its business interests with a consumer goods and distribution company which is producing sound returns amid Indonesia’s resilient economy. GlobeAsia talks to co-founder Dr. Boenjamin Setiawan.
From an operation that started in a garage in 1966, Kalbe Farma has grown to become the biggest pharmaceutical company in Indonesia. In terms of revenue, product items and market value, it’s also as large as anything of its type in South Asia. With 17,000 employees, the company’s operations are spread across more than 10 subsidiaries, with a strong footing in international markets.
With a strong hold on all categories in which it competes, Kalbe is now moving to strengthen its position throughout the country with a combination of a strong marketing strategy and a keen eye for new business opportunities.
The company intends to move forward both through organic growth and mergers and acquisitions. Last month it sealed a deal to take 100% of shares in PT Hale International, a producer of health foods and beverages, for around $10 million. Hale will serve as a vehicle for Kalbe Farma to enter that booming market, where company sources say they are aiming for 15% of the market within five or 10 years.
Even without new directions, the company is performing well: At the end of 2011 it booked Rp10.9 trillion in revenue, up from Rp10.2 trillion a year earlier. Assets stood at Rp8.5 trillion and Kalbe Farma had more than 300 product lines.
Boenjamin Setiawan – Dr. Boen to his colleagues – is unlikely to have imagined the current scale of the operation when he and his brothers and sisters founded the company 46 years ago. Looking back on the company’s growth curve, he believes Kalbe Farma’s success is a combination of many factors, including some ‘accidental’ ones.
At all times, the company has been driven by a set of simple principles: the company has to be innovative and must listen to customers and market trends. This, says Dr. Boen, is a good foundation for any company to survive. Growth, he adds, is identical with the biological processes of life.
Dr. Boen has a strong grounding in pharmacology, with a medical degree from the University of Indonesia and a doctorate from the University of California in San Francisco. That grounding helped establish the strategic directions of the company from the beginning and helped it adjust quickly to new industry trends.
He also credits his academic grounding for aiding the company’s ability to survive. The six siblings who put their cash and wits together had already failed twice to get the company going. “We have been fortunate all the brothers and sisters were able to maintain a strong relationship,” muses the man who now acts as senior advisor to the company, having retired as president commissioner in 2008. He adds that all six siblings believed in the importance of dreaming to keep them motivated.
Kalbe’s long history of mass production has produced many brands of over-the-counter (OTC) medicines which have long been popular. They include for stomach acid relief, for headache and Kalpanax for skin problems. Other products have failed to succeed for a number of reasons, sometimes because the general level of health in the community has improved. The worm medicine one time was able to compete with Bayers’ Upixon but improvements in public health have slashed demand for such medicines.
After establishing a solid growth curve over the past decade, Kalbe Farma is now embarking on what its principals believe is the next big thing: stem cell research. Dr. Boen, still fit at 77, recounts with passion the way in which research into the field has the potential to revolutionize the pharmaceutical business and human health at general.
“We are serious about the project and hopefully it will become a reality during the next decade. This is a knowledge-based industry, and the pharmaceutical industry normally spends about 15% of profits on research and development, simply because the cost to launch a new product on a molecular base has always been expensive,” says Dr. Boen.
The company has begun studies on inner cell mass (ICM) or embryo blast (pluriblas) as well as placental blood since the material is freely available. A newly-born baby has a placenta rich in millions of cells that work to cure the child should illness develop in the future. This rich source of cells requires serious study.
Five stages of growth
Dr. Boen believes that in order to grow normally a pharmaceutical company has to pass at least five stages of development. The first stage is the production of herbal-based products, followed by molecular products such as aspirin, then continuing with the production of antibiotics. The fourth phase is production of protein and last is stem cell research.
Making a business out of stem cell research is not simple. It needs a huge amount of investment, and strong support from government is crucial. Dr. Boen is continuing to fight with his team and is working closely with a number of institutions, often having to fund the work. He is the founder of the Stem Cell and Cancer Institute and currently serves as the vice chairman of the advisory board at the Indonesian Stem Cell Association.
As he sees it, to achieve progress in stem cell research, government has to get behind the endeavour. China and India, which both provide strong budgetary support for R&D, have made progress in the use of stem cells for human health.
Since Kalbe Farma began, Dr. Boen and the other members of the family have been aware of the importance of the scientific approach to growing a business. As a scientist he believes that any business can survive if it keeps growing in terms of the number of companies and value. “This is the biological side of the company; just follow the trend,” he says, adding that of course it is also important to take note of business value.
A company must provide benefit for stakeholders, whether they be government, patients, hospitals, doctors, suppliers, shareholders or, most importantly, the community. Dr. Boen appreciates that human resources development must be at the center of corporate development strategy.
The mental attitude of members of staff is an important factor in growing the company. “Staff must have the desire to be excellent, not just successful,” he says. Only people with skills, knowledge and a positive and honest attitude can help a company achieve longevity.
“All people in the company have to be tough in their efforts to grow the company,” says Dr. Boen, adding that he is grateful to the many employees who have utilized the right attitude to help the company grow.
The founder members of Kalbe Farma needed only two years to formulate their corporate values. “Since the beginning we had defined our corporate values and we embrace similar values right up until this day,” says Dr. Boen, adding that the values of the company are formulated in the “Panca Srada” principles.
Kalbe Farma president director Bernadette R. Irawati Setiady says the five values of the company reflect five ideas: trust in each other, whether it be shareholders, management or employees; awareness of a clear goal behind every activity; continuous innovation to maintain the life of the company; search for excellence; and build synergies with other operations. These are all important factors in guaranteeing success, she says.
Kalbe Farma was also able to succeed because it had strong fundamentals. Dr. Boen possessed expertise in medicine and pharmacology and his brother F. Bing Aryanto had a sound education in business and management.
“The pharmaceutical sector is a knowledge-based business, so the need for qualified people and strong research and development is an essential for growth,” says Dr. Boen. “At the beginning a scientist can invent something, but then you need professionals to manage it,” he adds.
Marketing a critical factor
Kalbe Farma has seen growth of between 7-10% a year over the past decade. The six founders – Khouw Lip Tjoen, Khouw Lip Hiang, Khouw Lip Swan, Boenjamin Setiawan, Maria Karmila (mother of the current CEO) and F. Bing Aryanto – hold a combined 60% of the company while the remainder is owned by the public.
While the ‘traditional’ business lines such as prescription and OTC products continue to expand, the main contributor of growth is the distribution business, operated by subsidiary PT Enseval Mega Trading, which for the past three years has contributed close to 40% of revenue.
Finance director Vijongtius believes that the Kalbe Farma marketing strategy has been a critical factor in helping achieve sales records. Dr. Boen adds that pharmaceutical companies must focus on their marketing strategy, especially above-the-line campaigns. “In the pharmaceutical business, it is important to have good product quality if you want to be a leader, but strong campaigns through a variety of advertising are important, with word-of-mouth promotion the final factor,” he stresses.
Hopes for new sales records in 2012 have been boosted by strong first-quarter results. Consolidated revenue came in at Rp3 trillion, with Rp780 billion contributed by the prescription division. “Our product range targets all market segments, helping to boost sales,” says Vijongtius.
The health division contributes about 15% of total sales, booking revenue of about Rp464 billion in the quarter, driven by sales of supplement foods and drinks and OTC products. The company also expects to see increased revenue from Tipco, its newly acquired health drink product from the acquisition of Hale.
Kalbe’s nutritional and consumer health division, which produces milk and food items, also turned in a good performance in the first quarter, contributing 22% of sales with revenue of about Rp650 billion.
Crossing business boundaries
There are few Indonesians who don’t know the trade name Extra Joss. The energy drink is also making inroads into overseas markets but the biggest share of revenue for this product comes from its distribution networks. This turned in a 55% boost in performance in the first quarter at Rp1.1 trillion.
One industry analyst wonders whether this means Kalbe Farma has left the pharmaceutical sector behind it, and whether its core business is now logistics. Another industry source says the result merely recognizes Kalbe’s strong experience in the distribution business, and the understanding that it can be a profit center.
Driven by solid growth in demand, Kalbe Farma has moved to expand its traditional lines. Early this year the company inaugurated the factory expansion of subsidiary PT Hexpharm Jaya, which specializes in generic products. The expansion was in preparation for the implementation of the National Health Care System (SJSN), which in 2014 will begin to provide health cover for all Indonesians.
Commenting on the expenditure, Dr. Boen says it is an essential step to maintain future prospects. “We understand that this may squeeze company revenue in the short term but the volume is large and we are positive about the program, which is an international trend,” he says, adding that SJSN could represent both a threat as well as an opportunity for the pharmaceutical industry.
While they may have succeeded in building the country’s largest pharmaceutical business, Dr. Boen and other founder members aren’t prepared to relax. “The foundations have been strong for more than 20 years but we have to be stronger because this company has to be keep growing in the future and create benefit for all stakeholders,” says Dr. Boen.
Kalbe intends to maintain its position as market leader, pushing even international players into second rank. According to research company IMS Health Prescription Pharmaceuticals YTD, in 2012 Kalbe Farme controlled about 12% of the market for prescription and health medications out of more than 200 pharmaceutical companies operating in Indonesia. In second place was Dexa Group with 7%, then Sanbe with 6%.
Dr. Boen agrees that modern business principles are the basis of continuous improvement and a key factor in growth. Also critical, he says, is maintaining a strong spirit to succeed. Management holds regular meetings to discuss and nurture innovative ideas as part of the process of maintaining competitive spirit.
As president director, Irawati is optimistic about the future growth of the company. According to data from the Health Ministry, total spending on health care in Indonesia in 2009 was about 2% of GDP, with projections that the figure will rise to about 5% in the near future.
Not everything is conducive. Dr. Boen sees the need for a review of policies on the national pharmaceutical industry to allow real progress. “In my opinion, we don’t need to reinvent the wheel by learning from only Western medicine. We also must learn from the most progressive countries such as China and India which have made advances in research of alternatives, for example in antibiotics,” he says.
Kalbe Farma has a strong reputation as a majority family-owned publicly listed company that stresses the importance of professionalism in managing its business. Since the formation of the company in 1966, it has always been managed by professionals, including members of the founding family.
Bernadette Ruth Irawati Setiadi has been CEO since 2008 with Santoso Oen and Ferdinand Ariyanto as commissioners. Commenting on the transfer of power, Dr. Boen says the appointments were not a casual decision. “We as founder members along with the commissioners had to sit together before electing Irawati, and in our view she was competent to hold the position,” he says.
The president commissioner position – normally a post that goes to the majority shareholder – is held by Johannes Setijono, a professional who has been with the company for more than 30 years.
Dr. Boen’s children Sinta Devianti and Sunadi Boenyamin are being groomed at positions in downstream Kalbe units. Shinta works in the CSR division while Sunadi has been placed in the distribution center. “They must be experienced from the lower levels of the company,” says Dr. Boen. Rostian Oen, the child of another founder, is being trained in the expanding hospital division.
The six founders also operate their own personal businesses. For instance F. Bing Aryanto is active in hospitals and education. The family also operates the Kalbe Business and Technology Institute, though it has proved less popular compared to the educational ventures of other tycoons, such as Mochtar Riady’s Pelita Harapan University, property developer Ciputra’s university or even newcomer the Bakrie School of Management, operated by Aburizal Bakrie’s family.
Apart from his passion for stem cell research, Dr. Boen is developing a business operating in the health tourism sector, in the belief that Indonesia can be a center of health tourism in the future. He points to the success of countries such as Singapore, Malaysia and Mexico in the sector.
He plans to build his first medical tourism hospital in Bali and then add new facilities elsewhere in Indonesia. “I will build hospitals which later can use stem cell techniques to cure patients,” he says with a smile. Now well beyond pills and prescriptions, Dr. Boen adds that the key to success for his new idea is excellence of service.