Responsive COVID-19 for Recovery Project under the Asia Pacific Access Facility (RRP INO 54425-001)

FINANCIAL ANALYSIS

A. Introduction

1. The financial analysis of the proposed Responsive COVID-19 Vaccines for Recovery Project under the Asia Pacific Vaccine Access Facility was carried out in accordance with the Technical Guidance Note on Financial Analysis and Evaluation of the Asian Development Bank (ADB). Under the project, ADB intends to provide a loan to state-owned enterprise PT Bio Farma (Persero) (Bio Farma), to be guaranteed by the Republic of . The project will provide Bio Farma with financing for vaccines procurement and logistics based on an agreed list of eligible expenditures in order to vaccinate priority populations against the coronavirus disease (COVID- 19) under the government-funded program in accordance with the national vaccination allocation plan.

2. In 2020, Bio Farma became a holding company owning 90% stake in PT Tbk and 80.6% stake in PT Indofarma Tbk (Indofarma).1 The government approved these restructuring efforts in order to: (i) strengthen the independence of the national pharmaceutical industry, reduce dependency on imports, and increase exports; (ii) boost research and development capability; and (iii) leverage economies of scale and increase productivity so products can be made available at affordable prices. Under the Project, Bio Farma may onlend proceeds of ADB loan to its subsidiary Indofarma to support the latter’s purchase of COVID-19 vaccines that meet applicable eligibility criteria and other requirements.

B. Methodology and Assumptions

3. A financial statement analysis was conducted separately for Bio Farma and Indofarma by evaluating the historical performance and financial forecasts of both entities. An analysis was then conducted to test the sensitivity of the financial position of the companies against changing assumptions.

4. The procurement of COVID-19 vaccines commenced in 2020. The financial costs are estimated based on the purchase price of the vaccine from potential suppliers plus the costs associated with storage, handling and delivery of vaccines. The Ministry of Health (MOH) is expected to purchase all the vaccines at a price which will allow either Bio Farma and Indofarma to recoup their costs and earn a reasonable profit margin. However, contracts for sale of vaccines by Bio Farma and Indofarma to MOH are still being negotiated.

5. The analysis takes into consideration the procurement of COVID-19 vaccines by either Bio Farma and Indofarma. It is assumed that Bio Farma will take on the full $450 million ADB loan and will onlend $350 million to Indofarma on essentially the same terms as ADB loan to Bio Farma.

C. Financial Statement Analysis of PT Bio Farma (Persero)

6. Historical performance. Bio Farma has been profitable throughout 2015–2019 based in part on regular sales to MOH for Indonesia’s national program, although the net profit margin has consistently declined for the past 5 years from 29% in 2015 to 14% in 2019. Bio

1 For reference, attached is the financial statement analysis of Kimia Farma to give an indicative view of the performance at the group level.

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Farma’s cash flow from operating activities during the period was positive, and it has a good liquidity position with current ratio of at least 2.6x. It has a low debt level of 0.3x as of end of 2019.

7. Bio Farma has fully complied with the financial covenants set by its existing creditors which included debt service coverage ratio (DSCR) of 1.4x, current ratio of 1.1x and debt to equity ratio of 3x. The decline in the DSCR in 2019 can be attributed to lower cash flows from operations in that year which is partly due to the decrease in the sale of MR Vaccine 10DS. Despite this, DSCR remained very strong at 8.4x. Table 1 provides the historical financial performance of Bio Farma.

Table 1: Summary of PT Bio Farma (Persero) Historical Financial Statements (Rp million) 2015 2016 2017 2018 2019 STATEMENT OF INCOME Total Revenue 2,329,623 2,315,759 3,011,570 3,235,225 2,542,591 Total Expenditure (1,446,643) (1,621,448) (2,289,865) (2,480,534) (1,964,731) Operating Profit 899,273 675,626 705,562 754,690 577,859 EBITDA 1,027,743 841,680 879,475 908,075 737,226 Net Financing Costs - (9,342) (8,071) (27,323) (87,246) Profit after Tax 670,593 501,041 525,356 543,226 355,940

STATEMENT OF FINANCIAL POSITION Assets 5,680,663 5,922,454 6,449,448 7,401,158 7,940,399 Liabilities 636,531 620,302 799,492 783,319 742,156 Borrowings - - - 655,000 1,050,000 Equity 5,044,132 5,302,152 5,649,956 5,962,839 6,148,243

FINANCIAL RATIOS Current Ratio 4.4x 4.1x 3.4x 3.2x 2.6x Debt to equity ratio 0.1x 0.1x 0.1x 0.2x 0.3x DSCR NA 90.1x 109.0x 33.2x 8.4x EBIT Margin 38.6% 29.2% 23.4% 23.3% 22.7% EBITDA Margin 44.1% 36.3% 29.2% 28.1% 29.0% Net Profit Margin 28.8% 21.6% 17.4% 16.8% 14.0% Debt to EBITDA NA NA NA 0.7x 1.4x Interest Coverage NA 72.3x 87.4x 27.6x 6.6x Return on Equity 13.3% 9.4% 9.3% 9.1% 5.8% (ROE) Return on Assets 11.8% 8.5% 8.1% 7.3% 4.5% (ROA) ( ) = negative, EBIT = earnings before interest and taxes, EBITDA = earnings before interest, taxes, depreciation, and amortization, DSCR = debt-service coverage ratio Source: PT Bio Farma (Persero), Asian Development Bank estimates.

8. Financial projections. For the period 2020-2024, the projections show a healthy profitability position for Bio Farma with a net profit margin of at least 5.5% (Table 2). The project will slightly increase the debt to equity from 0.0x in 2020 to 0.4x in 2021, but still very low compared to industry benchmarks. Bio Farma is expected to continue to comply with its covenants. Current ratio will continue to remain stable from 1.9 to 3.8 except for 2022 at 9.2. Debt to equity is expected to cap at 0.4x, while debt-service coverage ratio (DSCR) is projected at 4.4x to 10.6x.

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Table 2: Summary of PT Bio Farma (Persero) Projected Financial Statements (Rp million) Projections 20202 2021 2022 2023 2024 STATEMENT OF INCOME Total Revenue 3,208,497 26,201,042 7,606,063 5,146,433 6,036,176 Total Expenditure (2,636,136) (24,255,578) (6,492,014) (4,571,495) (5,394,210) Operating Profit 724,075 2,066,147 1,445,733 835,420 956,737 EBITDA 878,064 2,304,989 1,722,710 1,415,182 1,512,349 Net Financing Costs (151,715) (120,683) (331,685) (260,482) (314,771) Profit after Tax 412,520 1,439,643 824,396 425,455 475,055

STATEMENT OF FINANCIAL POSITION

Assets 25,340,919 35,869,474 33,373,735 27,115,650 27,614,423 Total Liabilities 4,300,336 13,513,005 10,624,762 4,188,542 4,339,896 Borrowings 1,049,150 8,544,192 9,347,054 2,849,733 2,886,959 Other Liabilities 3,251,186 4,968,812 1,277,708 1,338,809 1,452,937 Equity 21,040,583 22,356,470 22,748,973 22,927,108 23,274,527

FINANCIAL RATIOS Current Ratio 1.9 3.0 9.2 3.6 3.8 Debt to equity ratio 0.0 0.4 0.4 0.1 0.1 DSCR 2.2 10.6 4.9 5.0 4.4 EBIT Margin 22.6% 7.9% 19.0% 16.2% 15.9% EBITDA Margin 27.4% 8.8% 22.6% 27.5% 25.1% Net Profit Margin 12.9% 5.5% 10.8% 8.3% 7.9% Debt to EBITDA 1.2 3.7 5.4 2.0 1.9 Interest Coverage 7.1 8.8 5.8 4.7 3.1 Return on Equity 4.8% 14.6% 8.0% 4.1% 4.4% Return on Assets 3.2% 6.2% 3.9% 2.9% 3.1% ( ) = negative, DSCR = debt-service coverage ratio, EBIT = earnings before interest and taxes, EBITDA = earnings before interest, taxes, depreciation, and amortization, Source: PT Bio Farma (Persero), Asian Development Bank estimates.

9. Sensitivity Analysis. Sensitivity analysis was carried out to test the robustness of Bio Farma ’s current ratio, debt to equity and debt service coverage ratio under various scenarios as follows: (i) a 10% decrease in revenue; (ii) a 10% increase in cost of goods sold; and (iii) a 10% increase in operation and maintenance costs. Based on the analysis, Biofarma has a strong and stable financial position and can withstand changes in revenues and costs under the scenarios described in Table 3 below.

2 Analysis was made in FY 2020. Actual figures available is only up to FY 2019.

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Table 3: Sensitivity Analysis – Bio Farma Current Debt to Sensitivity Parameter Variation DSCR Ratio Equity

Base case 1.85 0.61 2.16 Decrease in revenue -10% 1.85 0.62 2.12 Cost of goods sold +10% 1.85 0.61 2.16 Operation and maintenance costs +10% 1.85 0.61 2.16

D. Financial Statement Analysis of PT Indofarma

10. Historical performance. For the year 2016–2018, Indofarma has been operating on a net loss margin of up to 2.8%. In 2019, its net margin improved to 0.6%. In 2019, Indofarma’s current liabilities significantly decreased, but its non-current liabilities jumped by 270% due to restructuring of its loans. Current ratio from 2015–2018 is between 1.0 to 1.2 which makes its liquidity position vulnerable to sudden changes. Table 3 below provides more information on the historical performance of Indofarma.

Table 4: Summary of PT Indofarma Historical Financial Statements (Rp million) 2015 2016 2017 2018 2019 Total Revenue 1,621,899 1,674,703 1,631,317 1,592,980 1,359,175 Total Expenditure (1,566,970) (1,641,267) (1,635,600) (1,567,070) (1,309,120) Operating Profit 54,929 33,436 (4,283) 25,910 50,055 EBITDA 73,065 55,303 30,939 58,318 69,466 Net Financing Costs (40,779) (52,431) (52,532) (51,241) (40,589) Profit after Tax 6,566 (17,367) (46,285) (32,736) 7,962

Current Asset 1,068,157 853,506 930,982 867,493 829,104 Non-Current Assets 465,551 528,127 598,893 574,858 554,832 Current Liabilities 846,731 704,930 893,289 827,238 440,827 Non-Current Liabilities 94,269 100,947 110,176 118,466 438,173 Borrowings 300,878 421,473 494,537 558,342 483,316 Equity 592,709 575,757 526,410 496,647 504,935

Current Ratio 1.2x 1.2x 1.0x 1.0x 1.8x Debt to equity ratio 0.5x 0.7x 0.9x 1.1x 0.9x Debt Service Coverage Ratio 0.2 0.1 0.0 0.1 0.3 EBIT Margin 3.4% 2.0% -0.3% 1.6% 3.7% EBITDA Margin 4.5% 3.3% 1.9% 3.7% 5.1% Net Profit Margin 0.4% -1.0% -2.8% -2.1% 0.6% Debt to EBITDA 4.1x 7.6x 15.x 9.5x 6.9x Interest Coverage 1.3x 0.6x -0.x 0.5x 1.2x Return on Equity (ROE) 1.1% -3.0% -8.8% -6.6% 1.6% Return on Assets (ROA) 0.4% -1.3% -3.0% -2.3% 0.6%

11. Financial projection. To improve its financial performance, Indofarma is revamping its business strategy by expanding sales of medical and herbal medicines and reducing exposure to generic drugs segment. Due to pressures from government and the public to keep the prices of generic drugs at an affordable level despite rising costs, Indofarma’s profitability was adversely impacted. Under Indofarma’s turnaround strategy, from a share of 9% of revenues in 2020, the sale of medical devices is expected to cover 40% of total revenues in 2024. On the other hand,

5 the share in the revenues from the sale of third party products for drugs is expected to decline from 60% in 2020 to 29% in 2024. Indofarma’s current ratio is expected to improve from 1.5x to 1.7x and profit margin from 1.9% to 3.2% (Table 4).

12. The sale of COVID-19 vaccines will drive Indofarma sales and improve its profitability position with its net profit margin increasing from 1.9% to 2.7% to 2021. However, purchase of COVID-19 vaccine will lead to sharp rise in debt. From a debt to equity ratio of 1.0x, the ratio will increase to 11.8x in 2022. Further, DSCR will go down from 2.6x in 2020 to less than 1 in 2022- 2023. Indofarma has encountered difficulties in managing its debt in the past which led to the restructuring of its loans in 2019.

13. On the upside, specific to the sale of COVID-19 vaccines, there is certainty in the collection of these sales as Ministry of Health will allocate from the national budget for the payment of the vaccines, which will help in the liquidity position of Indofarma.

Table 5: Summary of Indofarma Projected Financial Statements (Rp million) 2020 2021 2022 2023 2024 STATEMENT OF INCOME Total Revenue 1,645,000 9,432,585 3,262,764 4,233,946 5,515,408 Total Expenditure 1,551,000 8,946,275 3,034,370 3,979,909 5,223,092 Operating Profit 94,000 486,310 228,393 254,037 292,317 EBITDA 119,000 536,310 253,393 279,037 317,317 Net Financing Costs (35,000) (88,758) (88,758) (89,758) (35,000) Profit after Tax 32,000 253,786 60,348 78,331 175,487

STATEMENT OF FINANCIAL POSITION Current Asset 878,000 1,280,533 980,712 980,712 1,035,470 Non-Current Assets 594,000 5,809,742 5,809,742 597,942 592,942 Current Liabilities 527,000 671,600 671,600 671,600 671,600 Non-Current Liabilities 378,000 5,633,000 5,622,000 395,000 388,000 Borrowings 543,000 3,782,760 3,776,160 639,960 635,760 Equity 567,000 785,584 496,854 511,763 568,520

FINANCIAL RATIOS Current Ratio 1.7 1.9 1.5 1.5 1.5 Debt to equity ratio 1.0 7.5 11.8 1.3 1.1 Debt Service Coverage 2.6 1.5 0.7 0.0 1.0 EBIT Margin 5.7% 5.2% 7.0% 6.0% 5.3% EBITDA Margin 7.2% 5.7% 7.8% 6.6% 5.8% Net Profit Margin 1.9% 2.7% 1.8% 1.9% 3.2% Debt to EBITDA 4.6 10.9 23.1 2.3 2.0 Interest Coverage 2.7 5.5 2.6 2.8 8.4 Return on Equity 5.6% 32.3% 12.1% 15.3% 30.9% Return on Assets 2.2% 3.6% 0.9% 5.0% 10.8% ( ) = negative, EBIT = earnings before interest and taxes, EBITDA = earnings before interest, taxes, depreciation, and amortization, Source: PT Bio Farma (Persero), Asian Development Bank estimates.

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14. Sensitivity Analysis. A sensitivity analysis was carried out to test the robustness of Indofarma ’s current ratio, debt to equity and debt service coverage ratio under various scenarios as follows: (i) a 10% decrease in revenue; (ii) a 10% increase in cost of goods sold; and (iii) a 10% increase in operation and maintenance costs. Table 6 below shows the results of the sensitivity analysis. The current ratio, debt to equity and DSCR are not robust for all sensitivity scenarios tested.

Table 6: Sensitivity Analysis - Indofarma Sensitivity Parameter Variation Current Ratio Debt to Equity DSCR

Base case 1.46 11.80 0.05 Decrease in revenue -10% 0.90 53.97 - Cost of goods sold 10% - 0.02 31.56 - Operation and maintenance costs 10% 1.30 12.85 0.04 DSCR = debt-service coverage ratio. Source: Asian Development Bank.

E. Proposed Financial Covenants – to be included in the Loan Agreement

15. Based on above analysis, proposed financial covenants to be included in the loan agreement between Bio Farma and ADB are the following: (i) minimum current ratio is 1.0x; (ii) maximum debt to equity ratio is 3x; and (iii) minimum debt service coverage ratio is 1.2x. The current ratio will measure the liquidity position of the company to ensure that it is able to meet its short-term obligations. The debt to equity ratio allows the users of financial statements to have an overall picture of how the company’s operation is being financed while the debt service coverage ratio will determine whether the company is able to service or pay its debt requirements.

16. To enable close monitoring of its sustainability, Indofarma will be required to submit, on a quarterly basis, its interim financial statements and report its performance in terms of following ratios: current, debt to equity and DSCR. The same reporting requirement will also be imposed at the consolidated or group level. In the event that the financial ratios stated in the preceding paragraph are not met, Indofarma will submit a debt management plan to ADB within 90 days from the end of the fiscal year.

Attachments: 1. PT Kimia Farma Historical and Projected Financial Statements

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PT Kimia Farma Tbk Financial Historical and Projection (Rp million) Historical Projections 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 STATEMENT OF INCOME Total 4,860,37 5,811,503 6,127,479 8,459,247 9,400,535 10,810,616 12,432,208 14,297,039 16,441,595 18,907,835 Revenue 2 Total (4,486,0 (5,368,67 (5,591,81 (7,514,56 (8,898,88 (10,233,71 (11,768,76 (13,534,08 (15,564,19 (17,898,82 Expenditur 94) 9) 8) 5) 0) 2) 8) 4) 6) 6) e Operating 374,277 442,824 535,661 944,682 501,656 576,904 663,440 762,956 877,399 1,009,009 Profit EBITDA 423,433 496,048 599,947 1,120,322 661,312 768,729 893,939 1,039,958 1,210,325 1,409,200 Net (36,142) (59,798) (85,952) (227,220) (497,970) (522,835) (601,260) (691,450) (795,167) (914,442) Financing Costs Profit after 252,973 271,598 331,708 535,085 15,890 54,069 62,179 71,506 82,232 94,567 Tax

STATEMENT OF FINANCIAL POSITION Current 2,100,92 2,906,737 3,662,090 6,378,008 7,344,787 8,446,505 9,713,481 11,170,503 12,846,079 14,772,990 Asset 2 Non- 1,135,30 1,705,825 2,434,059 4,951,083 11,008,09 12,659,304 14,558,199 16,741,929 19,253,218 22,141,201 Current 2 0 Assets Current 1,088,43 1,696,209 2,369,507 4,745,842 7,392,140 8,500,961 9,776,106 11,242,521 12,928,900 14,868,234 Liabilities 1 Non- 285,696 644,946 1,154,121 2,436,990 3,547,810 4,079,982 4,691,979 5,395,776 6,205,142 7,135,913 Current Liabilities Borrowings 320,344 818,237 2,016,056 4,863,240 8,266,169 9,506,094 10,932,008 12,571,810 14,457,581 16,626,218 Equity 1,862,09 2,271,407 2,572,521 4,146,258 7,412,927 8,524,866 9,803,596 11,274,135 12,965,255 14,910,044 7

FINANCIAL RATIOS Current 1.9x 1.7x 1.5x 1.3x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x Ratio Debt to 0.1x 0.3x 0.7x 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x equity ratio

EBIT 7.7% 7.6% 8.7% 11.2% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% Margin EBITDA 8.7% 8.5% 9.8% 13.2% 7.0% 7.1% 7.2% 7.3% 7.4% 7.5% Margin Net Profit 5.2% 4.7% 5.4% 6.3% 0.2% 0.5% 0.5% 0.5% 0.5% 0.5% Margin Debt to 0.7x 1.6x 3.3x 4.3x 12.4x 12.3x 12.2x 12.0x 11.9x 11.7x EBITDA Interest 10.x 7.4x 6.2x 4.1x 1.0x 1.1x 1.1x 1.1x 1.1x 1.1x Coverage (EBIT / Interest) Return on 13.6% 12.0% 12.9% 12.9% 0.2% 0.6% 0.6% 0.6% 0.6% 0.6% Equity (ROE) Return on 7.8% 5.9% 5.4% 4.7% 0.1% 0.3% 0.3% 0.3% 0.3% 0.3% Assets (ROA) ( ) = negative, EBIT = earnings before interest and taxes, EBITDA = earnings before interest, taxes, depreciation, and amortization, DSCR = debt-service coverage ratio Statement of income and statement of financial position are estimated with a growth rate of 15%, while the interest expense is assumed at 5.5% per year. PT Kimia Farma Tbk’s profit in 2019 dropped around 97% from 2018 net profit as company’s total expenditure increased more than revenue growth and company’s interest rate also increase 119% from 2018 as total debt also jumped around 70%. So the increased in total debt did not boost revenue growth as needed to maintain its return on equity in 2018. Source: PT Kimia Farma Tbk, Asian Development Bank estimates