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Outlook of Pharmaceutical Stocks related to Healthcare

In addition to the sector of construction which we’ve discussed last week, in the last fe days I often receive questions (by email) about the prospect of Kalbe Farma (KLBF), Tempo Scan Pacific (TSPC), etc., aka pharmaceutical stocks, related to the government program that called Social Security of Health (Badan Penyelenggara Jaminan Sosial Kesehatan, or BPJS Kesehatan, it’s more and less similar to Obama’s Healthcare), which has been running since the beginning of 2014. Then, after Jokowi sworn in as President on 20 October yesterday, shortly afterwards he launched his program of 'magic cards', one of which called Indonesia Healthy Card (Kartu Indonesia Sehat, or KIS), which may make you curious, how about its impact on the stocks of pharmaceutical in Indonesia Stock Exchange (IDX). Well, before that, let us first discuss the theme of 'health' from the beginning.

As a country, the constitution of the Republic of Indonesia requires the government to provide the most basic needs of society, ie education and health. So even though the two 'commodities' (education and health) are often being used as subjects of political campaign by the candidates of legislator, senator, regent, mayor, governor, or President (in the elections), usually with 'free' labels, but after they are elected, these officials are supposed to provide affordable education and health (does not need to be free at all, except for poor people who really can not afford) for all Indonesian people in the area where he was in charge, even though he had never promise it before (in his political campaign).

Again, in the constitution, since Indonesia proclaimed its independence on August 17, 1945, then the issues of education and health of all people in the area became the responsibility of the new Government. However, in its practice, the Government requires a long process to achieve these goals (affordable education and healthcare for all citizens). In terms of health, the program of healthcare was first launched in the Soeharto era, precisely in 1968, under the name Organizing Body of Healthcare Fund (Badan Penyelenggara Dana Pemeliharaan Kesehatan/BPDPK). This program aims to provide a kind of insurance for civil servants and pension recipients (of civil servants and armed forces), and members of his or her family.

So, if you think that BPJS Kesehatan is the first program of healthcare by the Government of Indonesia, now you know that GOI had launched its predecessor since 46 years earlier. We might say that BPJS is the latest form, which is expected to be better than its predecessors, of programs of healthcare by the Government.

Back to the history of the health program. As was mentioned above, when it was created in 1968, the Government's health program covered only civil servants, retirees, and their family members. In 1984, the coverage expanded, where state officials and their families are also covered by the program. In 1991, the directors, commissioners, and employees of state-owned enterprises also including the coverage. In 1992, the Health Insurance Company (PT Asuransi Kesehatan, or Askes) was established as a healthcare company of the state. Although formed as a company, but PT Askes is almost like a non-profit organization because it only focus on the provision of healthcare for its members (this is different from a private insurance company that would focus on commercial profits). PT Askes allowed to contribute nothing to the government as its sole shareholder, as long as the company can carry out their jobs effectively, which provides health services to the holders of Health Insurance Card (Kartu Askes).

By the end of the 90s, the holders of Kartu Askes were still limited to civil servants, military, retirees, state officials, and employees of state-owned enterprises (and may also the members of the police and local officials), but not commoners. You may say that Kartu Askes was still a privilege for certain circles, but not reach the entire community.

Then, at the reign of President Susilo Bambang Yudhoyono (SBY), precisely in 2005, the Government established the Poor Health Insurance program. PT Askes, who had never cover the poor before, launched the Health Insurance Card for the Poor (Kartu Askeskin). At this point, if you are belong to families who can not afford a healthcare, you would be able to receive healthcare service for free from the government (or by paying small premiums), although you are not civil servants.

But of course, just because the government launched Kartu Askeskin, it does not mean that the whole of the poor in Indonesia can immediately obtain the benefits, because the implementation of the program would take time. However, based on my own observations, in some areas such as Cirebon and Bandung (because I often come over there), the poor people are able to receive medical treatment for free at the nearest health center. Those of you who live in big cities and playing stocks every day may never directly see the free healthcare, because you might not receive it as well (because you’re not poor, are you?). Bu  I could say that President SBY has left a legacy that deserves to be appreciated in the field of healthcare for the people.

Then in the beginning of 2014, the President changed the name of PT Askes into BPJS Kesehatan, and its healthcare coverage expanded to all Indonesian citizens without exception. Even for foreigners who living in Indonesia for more than six months, they are also required to be a member of BPJS. So starting in 2014, whoever you are, civil servants or not, poor or not, you are entitled to health services from the Government by paying a premium of approximately Rp60,000 (US$ 6) per month only  (varies depending on the level of coverage). As for the poor, they do not need to pay any premium aka free. Of course, once again, when the program launched, it does not mean that it can directly reach all citizens. If the process goes well, then in 2019, all of the Indonesian citizens will become members of BPJS Kesehatan.

And what about the Indonesia Health Card (Kartu Indonesia Sehat, or KIS) which was launched by President Jokowi, in early November?

If BPJS Kesehatan already have a legal basis in the form of law, the source of funds is clear (from the paid-in capital), and the implementation in the field is also clear (using the principle of mutual aid, where some members pay the fee for the poors through the premiums of Rp60,000 per month earlier), then the KIS is totally different. Including you may also still confused, what's the difference betwee KIS with BPJS. So I think that, if the focus is on how the impact of the healthcare programs to the pharmaceutical shares on the Stock Exchange, then we may focus on BPJS only.

Okay, so how do we calculate prospects of pharmaceutical stocks related to BPJS?

The fundamental difference between BPJS and Askes as its predecessor, as discussed above, is the scope of services, where BPJS (is expected to) serve all Indonesian citizens without exception. Say, from 250 million citizens of Indonesia, about 100 million of them are poor people, so that they may receive the healthcare service from BPJS for free. Then the other 100 million people are middle and lower class, which could pay a premium of Rp25,000 - 42,500 per month (we take the average Rp35,000, or US$ 3.5). And the remaining 50 million are the middle and upper class, who can pay a premium Rp60,000 (US$ 6) per month. So the turnovers are:

1. Rp35,000 x 100 million x 12 months, equal to Rp42 trillion per year, plus
2. Rp60,000 x 50 million x 12 months, equal to Rp36 trillion per year.

So the total is around Rp78 trillion per year! Or equal to US$ 7 billion per year. We can say that, assuming that BPJS do not take any profit unless for its operational costs, this is the figure of additional revenue potential for health care companies throughout Indonesia, including pharmaceutical companies, of course, if the program is running optimally. You also have to notice that the value of the premium between Rp25,000 - 60,000 per month, it could be raised or lowered according inflation etc, so in the subsequent years, the above figure could increase.

However, do not forget the phrase 'if the program is running optimally' above. In the first one or two years of implementation, BPJS may reach 20 – 30% of the population only, so the revenue would fell to Rp16 – 24 trillion. Also do not forget that, it is not pharmaceutical companies who receive the fund, but hospitals, health centers, doctors, pharmacies, and optics. So the revenue received by KLBF et al is after the revenue for hospitals, health centers, and pharmacies. Let say, the margin for pharmaceutical companies is around 70%, so the figure would fell further to Rp11 – 17 trillion. The revenue is then divided to approximately 200 pharmaceutical companies in Indonesia, depending on their market share respectively. If we take KLBF as the example, which is the largest pharmaceutical company in the Stock Exchange with a market share of 12%, then the additional revenue potential to be received by KLBF due to BPJS is about Rp1.3 - 2.0 trillion (US$ 130 – 200 million).

And what is the value of income of KLBF? Until the third quarter of 2014, it was Rp12.3 trillion, or Rp16.4 trillion if annualized, grew 7.5% compared to the same period in 2013. If the additional revenue of Rp1.3 - 2.0 trillion was realized, then it means KLBF revenue would increase by approximately 10 12% growth beyond the existing growth (bringing the total growth of more than 20% per annum), or significant enough.

The problem is, especially for us as investors, KLBF is the only pharmaceutical company whose performance is consistent in IDX (so we can hope that BPJS will actually contribute positively to the performance of the company), but on the other hand the valuation of the stock was so high. So if you use the approach of value investing, then this stock can not be taken. More sensible option might be Tempo Scan Pacific (TSPC). However, with PER of 18.4 times at the price of Rp3,000 per share, then it’s not an undervalue stock too. Sido Muncul (SIDO) may also be interesting, but it does not including the company that receive benefits from BPJS because they did not produce drugs to treat the disease, but rather to food supplement (Kuku Bima) and soft drugs (Jamu Tolak Angin). If you want a pharmaceutical company whose performance is good and consistent, then Darya Varia Laboratories (DVLA) was also good, but unfortunately the shares are illiquid. For Kimia Farma (KAEF), the problem is the same with KLBF: Overvalue! And what about the Indofarma (INAF)? Well, the company is in loss, so I do not want to take the risk.

So well, I'm not sure.. if in construction I could take Nusa Raya Cipta (NRCA), then at the pharmacy sector, I have not seen any interesting stocks, even though prospects seemed so real as the implementation of the program has been well so far. But like I said before, as long as the stock that we seek does not have strong fundamentals, or the valuation is not low, then the outlook is does not mean anything. We'll see if there is any of the stocks mentioned above that dropped to affordable levels, or if the company actually recorded a sharp increase in revenue and profit as expected.

I’m sorry if you did not find what you’ve been looking in this article, but I was just trying to be as honest as I can :)

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