By Ulisari Eslita
The coronavirus pandemic has hit almost all industrial sectors hard, including the pharmaceutical industry. The Indonesian Pharmaceutical Companies Association (GP Farmasi) reports that its members have seen declines of between 50% to 60% in the demand for drugs during the pandemic, as people avoid visiting medical facilities. Furthermore, according to the association, the plunge in demand has led to companies lowering their production to less than half of their capacity during the last few months. Consequently, thousands of pharmaceutical workers have been laid off or furloughed.
Bucking the trend, PT Industri Jamu dan Farmasi Sido Muncul (SIDO) managed to remain profitable and even grow despite the industry’s difficult conditions. In the first semester of 2020, SIDO booked a Rp 413.8 billion profit, an increase of 10.6% year-on-year (YoY), whilst its sales remained steady at Rp 1.4 trillion. The herbal medicine and supplement segment was the major contributor to SIDO’s sales, contributing 63.2% of the total revenue, followed by its F&B and pharmacy segments. The company’s fundamental performance is likely behind the 10% gain on the company stock price on a year to date basis. As of the end of August, SIDO’s stock price closed at Rp 1,385, with Rp 21.3 trillion in market capitalization. The company’s stock price performance even outperformed the country’s largest pharmaceutical manufacturer Kalbe Farma whose share price remained flat at Rp1,610 over the same period.
Sido Muncul is a beneficiary of a growing “back to nature” and healthy lifestyle trend. People are taking preventive measures to protect themselves from being exposed to the COVID-19 virus, one of which is consuming more traditional health supplement products or jamu. According to Danareksa Sekuritas’ recent research, people are investing in four spending priorities during this pandemic besides staple foods: electricity, health products & vitamins, data packages, and education. Therefore, while other manufacturers are starting to cut production, SIDO launched 14 new products, including herbal products, supplements, and vitamins, during the first half of 2020.
“We did nothing major during the first semester of this year. We just tried hard to keep good stock availability as we aware the demand (for our products) are increasing significantly nowadays,” says Irwan Hidayat, Director of SIDO. He adds that to maintain product availability, SIDO also increased its raw material and packaging inventory levels during the semester.
According to Natalia Sutanto, an analyst at Danareksa Sekuritas, SIDO’s earnings will grow by 9.4% YoY, aided by tax cuts and operating expenses efficiencies. “With additions to its product portfolio paving the way for SIDO to tap the increasing demand for vitamins, SIDO has strong fundamentals with ample room for growth,” says Natalia.
She added net profit growth in the first half of this year was also equivalent to 47.5% of the target. Besides operating costs, the increase in net profit was supported by the government’s fiscal incentives, which caused the effective tax rate to fall to 22.4% in the first half of 2020.
“SIDO also maintains a solid balance sheet position with a net cash position,” she adds.
SIDO is aiming to achieve double-digit net profit growth this year. To reach the target, SIDO plans to continue strengthening its sales in the modern trade segment, which shows an increase in market share from 10% (as of the end of 2019) to 15% in the first semester of 2020. As many are aware, during the large scale social restrictions (PSBB), people tend to shift their grocery shopping to supermarkets and modern retail rather than shopping at traditional markets as it is perceived to be more hygienic and less crowded. Despite the growth, SIDO has started looking for efficiencies in its cash management by cutting this year’s capital expenditure from Rp180 billion to Rp135 billion and by limiting its marketing and promotion spending to only 10% of sales.
The pandemic, however, put pressure on SIDO’s export market as countries closed their borders. Even if a country is open to exports, cities may be locked down, causing difficulties in distribution and reducing sales. One example, cited by Leonard, SIDO’s CFO, is Tolak Angin’s weak sales performance in the Philippines because of the country’s lockdown policy. Tolak Angin is the most popular herbal product from the company. As a result, SIDO booked a lower revenue contribution from exports of 2% in the first semester of 2020, down from 5% last year.
The challenge in the export market doesn’t stop the company from looking for more opportunities. Last month, the company shipped a 20-feet container of Tolak Angin, worth almost $100,000, to Saudi Arabia. The export represented an opportunity amid the COVID-19 pandemic, as Saudi Arabia had recently raised tariffs for 500 types of products, except for biopharmaceutical and F&B products, to increase state revenue.
Recognizing the growing importance of ecommerce, heightened further during the pandemic, SIDO has established online stores on Tokopedia and Shopee as well as its own website. The company also starts to sell its products through direct selling on social media. Irwan says that while the contribution is still small, the initiative will pave the way for the ongoing shift toward online shopping.
“During this pandemic, everybody is doing the same thing: shop and sell online, as people couldn’t go out. For us, these online stores are more on complementing our offline selling,” says Irwan.
Another blessing in disguise that helped SIDO’s performance this year and the future outlook is its raw material supply. According to Sannath Balasubramanyam’s column in Forbes Indonesia April edition, Indonesia’s pharmaceutical market was valued at Rp 115 trillion in 2019, which is around 0.7% of GDP, but it is severely exposed to supply chain disruptions given that the industry draws its raw material lifeline from imports. Over 90% of equipment & Active Pharmaceutical Ingredients (API) are imported. APIs are the base ingredients for most of the country’s drugs. Thus, although 85% of the medicines consumed are manufactured in Indonesia, their supply is at risk of continuity and external shocks due to the significant dependency on imports. Thus, Health minister Terawan Agus Putranto said the outbreak had created an opportunity to boost local production of pharmaceuticals and expand the use of local raw materials in the manufacturing process. Fortunately, many of SIDO’s raw materials are produced domestically, limiting its exposure to these risks.
“Our medicine products have to import raw materials, such as vitamins, taurine, and caffeine. However, our herbal products have no imported materials. So, during the current condition, we are not facing many problems,” says Irwan.
Irwan is the third generation to run the family-owned Sido Muncul, which means “dreams come true.” His grandmother Rakhmat Sulistio started the business in 1940 in Yogyakarta, later moved to Semarang. Irwan took over in 1972 when the firm had evolved from his grandmother cooking up jamu in her home to a 600-square meters factory. It was still a relatively small operation, competing against hundreds of other jamu makers. To remake the business, Irwan took plenty of bold moves, such as paying down some large debts, modernizing the equipment, and moving to a bigger location. Even then, it was barely profitable and grew slowly for many years.
The significant change came in 1997, amid the Asian financial crisis, after he got certification from the Ministry of Health for good manufacturing practices (GMP), the same qualification as a pharmaceutical company, effectively qualifying his products as medicine rather than a mere food supplement. At the same time, he invested Rp 30 billion for expansion, a risky move given that the entire region was in crisis, but it certainly paid off.
Despite the pandemic and its devastating effect on the tourism industry, last month Irwan Hidayat inaugurated a mixed-use complex in Semarang under the name Tentrem. The complex consists of a hotel with 211 rooms, an apartment complex, and a shopping mall with a total investment of Rp 2 trillion. The complex is designed with a Peranakan Chinese cultural feel, a mix of Javanese and Chinese cultures. Besides this new opening in Semarang, SIDO has operated a Tentrem Hotel in Yogyakarta since 2012. Both are operated under PT Hotel Candi Baru. A few months ago, Irwan signed an MoU with PT Praja Karalan Perdana to manage a Hotel Tentrem in South Tangerang, Banten Province.
The hospitality industry in the Asia Pacific region is still experiencing a slowdown through the end of the first semester of 2020. Hotel occupancy has decreased by 33.9%, according to Colliers International’s recent report. Furthermore, according to Colliers International Indonesia’s Head of Research, Ferry Salanto, hotels that have been dependent on business activities like in Jakarta and Surabaya are likely to take longer to recover.
However, Irwan Hidayat says he is confident to open his new Tentrem Hotel amid the Covid-19 pandemic because he feels the economy must be opened as soon as possible, otherwise, the negative impact will worsen. He notes that the government has instructed ministries, state institutions, and SOEs to hold meetings again in hotels to help domestic tourism. Nevertheless, Irwan admitted that opening a hotel during a pandemic was indeed a tough decision. However, the opening of the hotel is to spearhead the expansion of the hotel business in Semarang.