Kalbe Farma Acquires Sanofi Distributor

What's going on?

PT Kalbe Farma acquires 80% ownership stake in PT Aventis Pharma, the primary distributor of Sanofi Group in Indonesia.

What does it mean?

Ever wonder how drugs are made? Here is a quick overview of how the pharmaceutical market works:

At each step, the price of medicine gets more expensive as each company take profit.

So let's say a manufacturer can produce a drug for $10 per pill. They then sell it to the distributor at 50% mark-up ($15) to cover the cost of R&D and to earn profit. The distributor handles the transport of the drug from manufacturer location and deliver it to hospitals and pharmacies at $18 a pill (20% mark-up). And finally, the pharmacy sells it to us normal people with another 20% mark-up, leaving us to pay $22 a pill (Yay! insert sarcastic emoji here).

Let's get back to the story now.

Kalbe is Indonesia's largest pharma company. They have been publicly listed since 1991, with annual revenue of US$1.7 billion and 12% market share in the prescription drug market. Best known as a pharma manufacturer, over the years Kalbe have diversified into other health areas.

Currently they have four business units:

• Prescription medicine

• Consumer health (Fatigon, Extra Joss, XonCe, Promag, Sakatonik)

• Nutritionals (Prenagen, Milna, Morinaga, Fitbar, Entrasol)

• Distribution and Logistics - the country's most extensive pharma distribution network spanning 200,000 outlets (hospitals, pharmacies, retail stores)

If you have to guess, which business unit do you think brings the most sales?

You'd be forgiven to think it's the medicine or consumer health business, given that that's what we know them for. In fact, the Distribution and Logistics business is their biggest money maker, bringing in 37% of total sales. It is also their highest source of growth, with sales growing 29% from 2020 to 2021. This strategy started in 2005 when they acquire PT Enseval, which at the time was Kalbe's largest distributor in the country.

Sanofi Group is a giant French pharma company, specializing in prescription medicine and vaccine development.

This deal makes sense for both sides.

For Kalbe, the deal gives them a license to distribute and market Sanofi products in Indonesia. This will expand their product offering in the prescription medicine space, in particular for diabetes and cardiovascular diseases, and vaccines.

For Sanofi, they can focus on what they do best, that is research and development and their core US and European market. In Indonesia, they can rely on Kalbe's distribution network and marketing capability to reach more patients, instead of running it themselves.

Kalbe does not operate like a traditional big pharma company. Big pharma companies like Sanofi or Pfizer normally spends billions of dollars a year in drug development (R&D budget can get close to 25% of sales). Once they discover a drug that works and get approval, they can sell it exclusively for a number of years, protected by patents.

On the other hand, we have Kalbe, where R&D budget is only 1% of sales, while selling and marketing expense is at 22%. So basically Kalbe understands that rather than competing head-on with the big global pharma companies, they rather build a gateway to the Indonesian market through their distribution and marketing network.

Any foreign companies that want to enter the market will face two choice: Build their own distribution (more costly and time-consuming). Or partner with a trusted local player and have a quicker path to market.

Sanofi choose the latter.

What can we learn?

There are several ways to grow a business:

• Organic: growing a business by increasing sales and expanding operation (e.g. Coca Cola introducing a new Coke flavor to generate more sales)

• Horizontal integration: buying businesses similar to your line of business (e.g. Coca Cola buying a local tea brand to expand its product offering)

• Vertical integration: buying businesses who supplies to you or who buys from you to have more control of the value chain (e.g. Coca Cola buying a local distributor)

Kalbe buying Aventis is an example of horizontal integration. By partnering with Sanofi, they have more products to offer and have access to new types of patients.

Kalbe buying its distributor Enseval in 2005 is classic vertical acquisition. Buying a distributor allows Kalbe to reduce distribution cost and capture higher profit margin.

And for organic growth, Kalbe is aiming to increase sales in the Asean market, where they rely on existing products and market these to consumers in countries with similar characteristics to Indonesia (e.g. Philippines, Vietnam, Singapore, Malaysia).

Lastly, they have also increased their research and development into herbal medicine.

This has two advantages: herbal drugs are less costly to develop and less cost to produce since herbal plants are sourced locally in Indonesia. Whereas for chemical drugs, raw materials rely heavily on imports from China.

I hope today's story gives you a good overview of how a pharma company works and what makes Kalbe so unique in this industry.

Until next time...

- Jason

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