Pharmaceutical National health insurance coverage propsed

Indonesia Pharmaceutical: National health insurance coverage is agreed at Rp15,500/capita/month, lower than previously proposed figure at Rp22,200

Local newspaper Investor Daily reported that the government has, on a meeting yesterday, agreed to cover the national health insurance for the low-income segments at Rp15,500/capita/month, leading to a total budget of Rp16.7tn to be allocated in the upcoming 2014 state budget. The insurance recipients would cover a total of 86.4mn people, representing an addition of 10mn people from 2013 budget.

The approved figure is lower than our previous understanding for a coverage of Rp19,286-22,201 per capita per month, but it has nevertheless indicates the government’s eagerness to carry out the SJSN program. The approved number is about 2.4x higher than the current subsidy of Rp6,500/capita/month. According to the blue print that KLBF shared to us, the population coverage would increase from 86.6mn in 2013 to 140mn in 2014 and 245mn in 2019.

When we attended KLBF’s analyst meeting, we were also guided that in the short-term, generic drugs industry may grow 20-30% as a result of SJSN, higher than the total pharmaceutical industry growth of around 13-15% p.a. Requirements of state-owned government health facilities to prescribe for generic drugs would also support the growth of this segment, particularly when the government starts increasing its healthcare budget to GDP ratio that currently is among the lowest.

KLBF clearly has been preparing to penetrate the fast-rising generic drugs industry. A new generic drugs production facility in Cikarang has been completed in February 2012. Despite its thinner gross margin, we believe that unbranded generics are still appealing based on its massive volume potential and relatively decent operating margin (as no ads spending is required as compared to the branded drugs). Nevertheless, the impact to KLBF’s earnings would be very insignificant in the near-term, as unbranded generics only contributes less than 3% of KLBF’s revenues at the moment. At the current 32.6x FY13F PE, we do not see KLBF as attractive. We currently have a Sell call on the counter, while reviewing our target price.