Bargaining Power of Buyers of Kimia Farma Company: Low bargaining power due to Government Regulations
Kimia Farma, as one of the largest and oldest pharmaceutical companies in Indonesia, founded in 1817 by the Dutch government, has a strategic position in the national pharmaceutical industry. But behind all that, there are challenges related to the bargaining powers of buyers, one of the factors that make the bargaining power of Kimia Farma companies relatively low is due to government regulations. This is directly related to the Minister of Health Regulation Number 98 of 2015 concerning the provision of information regarding the highest retail price of drugs, in the regulation it is explained that pharmacies, drug stores, and hospital/clinic pharmaceutical installations can only sell drugs at prices equal to or lower than the highest retail price of drugs. The decree was made to regulate the prices of essential medicines and generic medicines that are considered essential for maintaining the health of the general public. The aim is to ensure the accessibility of necessary medicines to the public, especially those from the lower middle class. These prices are strictly regulated to make medicines accessible to the general public at more affordable prices. However, for companies like Kimia Farma, this regulation is
actually a challenge for them in determining selling prices that are in accordance with the company’s operational costs and business strategy.
Factors that influence the Bargaining Power of Kimia Farma company:
- Government pricing
In the pharmaceutical industry, the government applies price regulation as a policy tool to safeguard consumer interests. In this case, the controlled prices include essential medicines that are urgently needed by the public. Kimia Farma, as one of the largest generic drug manufacturers, is required to follow the prices set by the Minister of Health’s decree No 98 in 2015 on the highest retail price of drugs. With this regulation, the company must follow the predetermined standard price without having the freedom to adjust the selling price to be more competitive. This reduces the company’s flexibility in developing pricing strategies.
- Limitation in negotiating with supplier
Kimia Farma, as one of the leading pharmaceutical companies in Indonesia,
faces a major challenge in determining the selling price of its products. This challenge is mainly due to its high dependence on imported raw materials. Director General of Chemical, Pharmaceutical and Textile Industries of the Ministry of Industry (IKFT Kemenperin), Reni Yanita, stated that more than 90 percent of the raw materials for the national pharmaceutical industry are still met from imports. Imports of medicinal raw materials continued to increase from 27.05 thousand tons or 294 million US dollars in 2019, to 35.89 thousand tons or around 509 million US dollars in 2022. However, in November 2023, the imports decreased to US$356 million with a volume of 26.52 thousand tons. Based on country of origin, the largest imports of medicininal raw materials came from China with a contribution of 45 percent, followed by India with 27 percent, and the United States with 8 percent. The high dependence on imported raw materials puts Kimia Farma in a position that is more vulnerable to global price fluctuations. When raw material costs increase due to market or exchange rate changes, it is difficult for Kimia Farma to adjust selling prices. This is due to government regulations governing the highest retail price standard for drugs. With this regulation, Kimia Farma does not have the flexibility to increase its product prices quickly in response to rising raw material prices.
The price regulation implemented by the government through Minister of Health Decree No 98 of 2015 has had a significant impact on Kimia Farma’s bargaining power, both in negotiations with suppliers and consumers. The company must adhere to the predetermined prices without having the flexibility to adjust prices according to market conditions or increases in production costs. Although this lowers
Kimia Farma’s bargaining power, this regulation shows the company’s commitment in supporting the national health programme, which aims to provide access to affordable medicines for the community.
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