Indofarma is a state-owned manufacturer of medical supplies and medicines. As pharmaceutical companies go in Indonesia, it is not a particularly big one. In 2019, using current exchange rates, Indofarma had a net profit of $3.2 million on $85 million in revenue and roughly $32 million in equity. In its latest financial filing, which covers the period ending June 2023, Indofarma reported negative equity of $2 million and a net loss of $7.5 million.
Some of the turnaround in Indofarma’s fortunes can be attributed to bad management. In recent years it had to take big write-downs on unsold inventory and unpaid receivables owed to Indofarma by various parties. It appears that during the pandemic the company over-produced or acquired too much stock and also extended credit to certain customers when it probably shouldn’t have.
Other state-owned pharmaceutical companies in the region, like Malaysia’s Pharmaniaga, experienced similar financial struggles during and after the pandemic. Pharmaniaga took big losses after it purchased too many COVID-19 vaccines, which went unsold and eventually expired. Indofarma was not a major player in Indonesia’s vaccination program, but the turbulence of that period in general seems to have caused management to misread the market and incur substantial losses.
But Indofarma’s problems go beyond bad management decisions made in the normal course of business. The company is currently the target of numerous investigations into the accuracy of its financial reporting as well as other fraudulent actions. This includes allegations that, among other things, the firm was involved in online lending activities and the booking of fictitious sales. The financial services regulator along with the state audit agency and the attorney general are now looking into these matters.
Indofarma’s financial chicanery echoes a similar case in the mining industry, where it was discovered that state-owned tin miner PT Timah was allowing privately owned companies to operate illegally on its mining concessions. Like PT Timah in that case, Indofarma was also recently consolidated under the umbrella of a larger state-owned holding company called Bio Farma. It is Bio Farma, which has a much healthier balance sheet, that has extended a shareholder loan to Indofarma and allowed it to remain solvent for the time being.
Along with retailer Kimia Farma, these three companies are meant to form the backbone of a biomedical and pharmaceutical production and distribution network in Indonesia, which will be operated by the state and focus on high value added activities like vaccine development and other biomedical research. Merging these firms is supposed to allow the state to better control the development of the industry in a way that it cannot do when they are operated under their own direction and without a shared strategic vision.
PT Timah was part of a similar consolidation of state-owned mining assets under a holding company called MIND ID. As in that case, once Indofarma came under tighter state control and supervision, and once it began posting losses, the government stepped up its scrutiny and uncovered this long list of fraudulent activities.
Indofarma’s relatively small footprint in the industry limits the extent to which this financial malfeasance is likely to spill over into the wider economy or the pharmaceutical sector.
Minister of State-Owned Enterprises Erick Thohir, who wields substantial influence in the current government, has portrayed this as evidence that the Indonesian state is working to clean up and tighten supervision of key state-owned companies in strategic sectors like biomedicine and mining. There’s likely a lot of truth to that statement, as Indonesia’s state-owned investment fund recently invested in Kimia Farma.
The long-term goal is obviously to use Bio Farma and Kimia Farma as conduits to channel more foreign investment (and presumably technology and research collaboration) into the domestic biomedical and pharmaceutical industry. The success of such a plan will rest heavily on whether the industry is seen as transparent, trustworthy, and competent. Cleaning up an underperforming and relatively small firm like Indofarma is an obvious but important part of that process.