This paper empirically examines the influence of firms’ one-year lagged of total new products (t-1), one-year lagged profitability (t-1), and market share of new products to firms’ amount of sales revenue in pharmaceutical generic companies in Indonesia. The data used in this study was panel dataset, gathered from six large pharmaceutical generic companies in Indonesia, during the period 2006 to 2010. The regression analysis method uses fixed effect models, with generalized least squares (GLS) method. The result shows that firms’ one-year lagged of total new product (t-1), one-year lagged profitability (t-1), and market share of new products to be positive and affect significantly the firms’ sales revenue in the pharmaceutical generic companies in Indonesia.Pharmaceutical Generic Companies, Profitability, New Generic Product, Market Share, Sales Revenue

Simanjuntak, Destrina Grace

Tjandrawinata, Raymond R.

English

Research Papers in Economics

A Study on Influencers of Total Sales Revenue of Generic 
Pharmaceutical Companies in Indonesia 
Destrina Grace Simanjuntak and *Raymond R. Tjandrawinata
1 
Department of Business Development and *Dexa Laboratories of Biomolecular Sciences 
Dexa Medica Group, Jakarta 15224 
 
 
Abstract 
This  paper  empirically  examines  the  influence  of  firms’  one-year  lagged  of  total  new 
products (t-1), one-year lagged profitability  (t-1), and market share of  new products to 
firms’ amount of sales revenue in pharmaceutical generic companies in Indonesia. The data 
used  in  this  study  was  panel  dataset,  gathered  from  six  large  pharmaceutical  generic 
companies in Indonesia, during the period 2006 to 2010. The regression analysis method 
uses fixed effect models, with generalized least squares (GLS) method. The result shows 
that firms’ one-year lagged of total new product (t-1), one-year lagged profitability (t-1), 
and market share of new products to be positive and affect significantly the firms’ sales 
revenue in the pharmaceutical generic companies in Indonesia. 
 
Keywords: Pharmaceutical Generic Companies, Profitability, New Generic Product, Market 
Share, Sales Revenue  
JEL: A10, C23, G30, L21, M21
                                                           
1  Corresponding  Author:  Department  of  Business  Development,  Dexa  Medica  Group,  Jakarta,  15224, 
Indonesia. Phone (62)(21)7451777. Fax (62)(21)7452573. Email: raymond@dexa-medica.com 2  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
1. Introduction 
To protect new innovations in the pharmaceutical market, the patent is used to restrict 
competing firms from copying the innovation within a certain period. Generics are known 
as certified drugs equivalent to those brand-name medicines that are allowed to enter the 
market when the patents of original drugs expire (Moreno-Torres, Puig-Junoy, and Borrell-
Arque, 2007). In Indonesia, generic drugs might be a key driver of competition and cost 
containment in pharmaceutical markets, because almost all pharmaceutical companies in 
Indonesia, produce generic drugs. In Indonesia, generics are authorized when twenty years 
have passed since the original brand-name drug was introduced in the market. Because of 
many pharmaceutical companies producing generic drugs, the price competition between 
generic competitors is stronger in Indonesia. Based on Moreno-Torres, Puig-Junoy, and 
Borrell-Arque (2007) a study was conducted in Spain, concluding that there are four driver 
keys for fostering generic entry, that being: 1) when the number of generic firms already in 
the market increases, there are more direct competitors and the average number of generic 
entries turn lower; 2) number of active ingredients per therapeutic subgroup that decreases 
the average number of generic entries; 3) market size in terms of revenues, which affects 
positively; and 4) the time trend has significant fostering effect on generic entry. 
Several studies were focused on generic entry in pharmaceutical industries. Rudholm 
(2001), found that expected profits affected positively the number of generic entries, but the 
longer the exclusivity period of the brand-name product, the lower the likelihood of generic 
entry. However, Reiffen and Ward (2005) empirically suggested that the larger expected 
profits could be expected to occur with more and faster entry into the generic markets.  3  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
Profitability of the drug industry is an important issue because profits provide a way for 
pharmaceutical  firms  to  gauge  what  types  of  product  consumers  value  most  (A 
Congressional Budget Office Study, 2006). Chen, Chang, and Lin (2006) empirical studies, 
found that larger firms must increase their profitability, in order to invest more in R&D 
resources,  and  then  increase  their  innovation  performance.  In  pharmaceutical  business, 
profits are important stimuli and become a source of funding for research and development 
activity, which in turn leads to a stream of health-enhancing new products (F.M. Scherer, 
2001). We have shown previously that one-year lagged profitability has a positive and 
significant  effect  on  firms’  amount  of  R&D  expenditure  in  multinational  R&D  based 
pharmaceutical companies (Simanjuntak and Tjandrawinata, 2011). As time goes by, an 
increase in the number of new products that they produce will increase their sales revenue. 
More  consumers  use  the  new  products,  the  more  markets  share  of  these  products,  and 
ultimately it will affect their sales revenue.  
The main purpose of this study is to show the effect of profitability, total new products 
and market share of new product on firms’ amount of sales revenue on pharmaceutical 
generic companies. In this paper, we expect to observe our hypothesis, that is:  
Hypothesis 1: Firms’ amount of profitability is positively associated with firms’ amount of 
sales revenue. 
Hypothesis 2: Firms’ amount of total new products is positively associated with firms’ 
amount of sales revenue. 
Hypothesis 3: Market share of new products is positively associated with firms amount of 
sales revenue.  4  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
Following hypothesis formulation, a model was devised to investigate the relation of 
each hypothesis on the model of total sales in the generic pharmaceutical company. We 
found that firms’ one-year lagged of total new product (t-1), one-year lagged profitability 
(t-1), and market share of new product have been positive and affect significantly the firms’ 
sales revenue in the pharmaceutical generic companies in Indonesia. 
 
2. Data and Methodology 
2.1 Samples and Data Collection 
This research was conducted in the  generic firms of the pharmaceutical industry in 
Indonesia. Financial data used in this study, were obtained from annual financial reports of 
each pharmaceutical company as well as the IMS (Intercontinental Marketing Services) 
database.  This  study  analyzed  six  Indonesia  public  pharmaceutical  generic  companies 
(which  are  owned  by  domestic  companies),  Kalbe,  Tempo  Scan  Pacific,  Kimia  Farma, 
Indofarma, Pyridam, and Darya Varia as samples in this study. Data used in this study were 
taken from the period 2006 to 2010. Since there are one-year lags in the profitability (t-1) 
and total new product (t-1) variable, then the whole panel data observations become 24 
observations. The definitions and measurements of these constructs were further defined as 
follows: 
1.  Sales Revenue 
Total  sales  revenue  was  used  as  the  dependent  variable  in  our  model.  Total  sales 
revenue data was obtained from the income statement contained in the annual financial 
statement of each pharmaceutical company.  5  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
2.  Profitability 
One-year lagged (t-1) profit after tax was used as the proxy data for profitability. The 
data  was  obtained  from  the  income  statement  contained  in  the  published  annual 
financial statements of the pharmaceutical companies.  
3.  New Product 
The data used as a new product variable was obtained from total new generic products 
produced by each generic pharmaceutical company every year. This data was obtained 
from IMS (Intercontinental Marketing Services) database. New products are defined as 
those products launched within the past 24 months.  
4.  Market Share 
The data used as a proxy for market share of generic new products was obtained from 
IMS (Intercontinental Marketing Services) database. 
 
2.2 Methodology and Models  
This  study  was  conducted  by  using  regression  analysis  method  using  fixed  effect 
model,  with  generalized  least  squares  (GLS)  method.  In  the  fixed  effect  model,  it  is 
assumed  that  although  the  intercept  may  differ  across  individuals,  each  individual’s 
intercept does not vary over time; it is time invariant (Gujarati, 2003). Each cross-sectional 
unit has its own (fixed) intercept value, in all N (observations) such values for N cross-
sectional units in fixed effect model (Gujarati, 2003). GLS was necessary to correct for 
within-group  and  contemporaneous  serial  correlation  (Vernon,  Golec,  Lutter,  and 
Nardinelli,  2006).  The  purpose  of  this  study  is  to  examine  that  there  is  a  positive 6  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
relationship between the firms’ one-year lagged of total new product (t-1), one-year lagged 
profitability (t-1), and market share of a new product to the firms’ amount of sales revenue 
in pharmaceutical companies, especially in pharmaceutical generic companies, during the 
period 2006 until 2010. The model equations used in this study is: 
      (1) 
Logarithmic transformation is used for all variables contained in the model, except for 
market share, because with logarithmic value, elasticity value is obtained, making it easier 
for us to see clearly and interpret the relationship between the dependent and independent 
variables. Market share variable was represented as percentages value, and as such it does 
not  need  to  be  represented  in  logarithmic  scale.  In  the  model  described  above,  the 
coefficient of each independent variable (slope) shows the elasticity of the firms’ one-year 
lagged of total new product, one-year lagged probability, and market share to the firms’ 
sales revenue, respectively. This shows the percentage change in the firms’ sales revenue, 
for one percentage change in the firms’ one-year lagged of total new product (t-1), one-year 
lagged profitability (t-1), and market share.  
 
3. Result 
As  seen  in  Table  1  (based  on  Model  1),  a  positive  and  statistically  significant 
relationship  existed  between  log(NP?(-1))  and  log(SALES?).  The  positive  relationship 
between firms’ one-year lagged of total new product and firms’ sales means enhancement 
in firms’ one-year lagged of total new product can increase their current sales revenue. Our 
elasticity  estimates  showed  0.25  percent,  which  means  that  a  one  percent  increase 7  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
(decrease) in firms’ one-year lagged of total new product will be accompanied by 0.25 
percent increase (decrease) in firms’ amount of sales revenue. This is caused when the total 
companies’ new product increased, the value of sales revenue in the future would also 
indirectly increase. The Congressional Budget Office Study (2006) noted that successful 
new drugs will generate large cash flow that can be invested in R&D, and in turn will 
increase their innovation and also their sales revenue. This supports the hypothesis that the 
firms’ amount of total new products is positively associated with the firms’ amount of sales 
revenue.  
A  positive  and  statistically  significant  relationship  between  log(PROFIT?(-1))  and 
log(SALES?) has also been seen in our calculation (Table 1). This positive relationship 
between firms’ one-year lagged profitability and sales means that enhancement in firms’ 
one-year  lagged  profitability  can  increase  their  current  sales  revenue.  Our  elasticity 
estimates  suggested  that  a  one  percent  increase  (decrease)  in  firms’  one-year  lagged 
profitability will be accompanied by 0.28 percent increase (decrease) in firms’ amount of 
sales  revenue.  Chen,  Chang,  and  Lin  (2006)  proposed  that  pharmaceutical  companies 
should  raise  their  profitability,  so  that  they  can  invest  more  in  the  R&D  resources  to 
increase  their  innovation  performance.  When  their  innovation  increased,  more  new 
products will be produced, and subsequently they will contribute to the increased sales 
revenue. This supports the hypothesis that the firms’ profitability is positively correlated 
with the firms’ total sales revenue. 
 8  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
Table 1: Model (1) Result of Regression Analysis Based on a Panel of Six 
Pharmaceutical Generic Companies in Indonesia, Period 2006 – 2010 
Dependent Variable: LOG(SALES?) 
Total pool (balanced) observations: 24 
Variable  Coefficient  Std. Error  t-Statistic  Prob.   
C  14.91777  0.858092  17.38483***  0 
LOG(NP?(-1))  0.259354  0.054599  4.750194***  0.0003 
LOG(PROFIT?(-1))  0.282415  0.057548  4.907437***  0.0002 
MS?  0.181022  0.076884  2.354463**  0.0326 
R-squared  0.953576          
Adjusted R-squared  0.928816          
F-statistic  38.5132          
Durbin-Watson stat  1.804561          
      Two-tail significance levels: 
* Significant at level 10 % 
** Significant at level 5 % 
*** Significant at level 1 % 
 
  With regard to the market shares of total new products, a result depicted on Table 1 
was  seen  following  analysis  based  on  Model  1.  The  results  indicated  a  positive  and 
statistically  significant  relationship  between  MS?  and  log(SALES?).  The  positive 
relationship between market share and sales means that enhancement in market share of 
total  new  products  at  present  can  increase  their  current  sales  revenue.  Our  elasticity 
estimate  shows  to  be  0.18  percent,  suggesting  that  one  percent  increase  (decrease)  in 
current market share of total new products will be accompanied by 0.18 percent increase 
(decrease)  in  firms’  amount  of  sales  revenue.  When the  market  share  of  new  products 9  Destrina Grace Simanjuntak and Raymond R. Tjandrawinata 
 
 
 
increases, many consumers are expected to use the products, therefore increase in sales 
revenues, is seen to occur. 
 
4. Conclusion 
The purpose of this study was to examine the influence of total profitability, total new 
products,  and  market  share  of  new  products  on  the  firms’  amount  of  sales  revenue  on 
pharmaceutical generic companies in Indonesia. Regression analysis has shown a positive 
and statistically significant influence, thus, enhancement in the firms’ one-year lagged of 
total new generic product, one-year lagged of total profitability, and market share of total 
new  product  can  increase  firms’  amount  of  sales  revenue  on  pharmaceutical  generic 
companies.  Thus  it  can  be  concluded  that  sales  revenue  on  pharmaceutical  generic 
companies in Indonesia, strongly influenced by their profitability, the total new generic 
product that they produce, and market share of their new generic products.  
 
Acknowledgment 
We gratefully acknowledge the helpful suggestions of Annemarie Basson. The paper is 
much improved because of her excellent reviews. 
 
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A study on influencers of total sales revenue of generic pharmaceutical companies in Indonesia

A study on influencers of total sales revenue of generic pharmaceutical companies in Indonesia

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