Pharmaniaga Manufacturing Berhad (PMB) produces general pharmaceuticals including anti-diabetics, cardiovascular and over the counter (OTC) products. PMB has the biggest oral solid dosage facility in Malaysia, equipped with the latest technology in encapsulation, compression, coating and blistering machines. The research analysts from MIDF Research witnessed the facility’s processes and machineries during the tour, with a little insight on anti-diabetic drugs and paracetamols.
Product shortage addressed. Before the tour, the research analysts were briefed on the current issues faced by local pharmaceutical companies. Recall that recently, the Ministry of Health had addressed on a shortage of drugs in the private sector. The shortage was not due to depleting raw material for the manufacturing process, but rather exhaustion of stockpiles since the spike of Covid-19 cases in March 2022. During that period, 98-99% of the cases were in Category I and II, which only gave mild symptoms that could be treated with generic OTC medication. The surge of buyers caused the stocks to decrease. Additionally, after the movement control order (MCO) was lifted, common illnesses such as influenza returned to the population.
High demand bears positive outlook. Despite having no problems with raw materials, PMB stated that the high demand has caused manufacturing to go beyond 100% capacity (as opposed to the optimum 70% with the remaining 30% set to make way for sudden order spikes). The group’s paracetamol production had increased over two times the normal capacity. Liquid drugs are also facing the imbalance of demand and supply, as such the syrups were requested to be delivered from Pharmaniaga’s Indonesian plants.
Meanwhile, PMB is looking into purchasing new machineries to deliver on the demand growth, as well as replacements to its
existing ones. It is also looking into investing in a new land for added warehouses, after the Government concession was
confirmed. However, it remains cautious of purchasing too many assets as it is believed that the number of infection cases
for both Covid-19 and Influenza A are expected to drop by August 2022.
Progressive delivery and branding. Pharmaniaga provided 750 pharmaceutical products under concession with the
Government. To ensure that hospitals receive the medication needed within 7 days, the group forward purchase from
suppliers within 3 to 6 months. Additionally, Pharmaniaga is on a mission to establish its own brand of pharmaceuticals as
household names, such as for Actimol, Baraka and Citrex. Meanwhile, Pharmaniaga is also in the middle of distributing its
products via vending machines. Currently, there are 20 cashless vending machines distributed at petrol stations and
universities in the Klang Valley, and 80 more are expected in 2022-23. The vending machines would add into Pharmaniaga’s
performance once the remaining machines are distributed.
Impact of high cost. Recall that Active Pharmaceutical Ingredient (API) prices had increased in tandem with the inflationary pressures plaguing the world. For Pharmaniaga’s API transaction, most of its suppliers are locals. API price consist of 30% of PMB’s drug manufacturing cost. Despite the increasing cost, Pharmaniaga managed to maintain its retail prices to continuously capture the pharma market and retain its customers. Fuel cost for its logistics segment have no direct
implications as it consists of only 0.1% of the total transportation and distribution cost. In addition, Pharmaniaga’s expenses
are balanced with its in-house manpower (with only a marginal percentage being expatriates) and wholly-owned warehouses.
Halal as added value. All manufacturing plants in Pharmaniaga had established itself as halal facilities since 2012. Since
then, the group had been tapping into producing halal insulin and vaccine, with recent news on its effort to manufacture
halal ovine-based anti-coagulant (“MoC for halal anti-coagulant to meet rising demand”, 16 July 2022). Its primary halal
plant in Puchong is expecting completion by 2024, with a normal target growth in Malaysia and an expected surge in growth
for Middle East countries, once registration with the region’s regulators is completed.
Positive prospects. MIDF Research has a positive stance on Pharmaniaga’s prospects. The group has increase its
profitability in the last few months as demand for pharmaceutical products continue to increase well into the second half of
the year. Its logistics segment will renew its concession agreement with the government in 4QCY22; assuring a steady order
of drugs for public hospitals in the near term. Additionally, Pharmaniaga’s effort to push its brands to be household names
could reset the public sentiment that only certain brands of drugs would give out the same effect, hence increase its future
income. MIDF Research is also optimistic on its vending machine venture which is part of the sector’s solution to accessibility and digital healthcare.
Revised FY22-23 earnings estimates. In consideration of the above, the research house revise its earnings estimates for FY22 and FY23 upwards by +12% and +10% respectively. As such, target price is increased to RM0.97 (previously RM0.91),
based on pegging a PER of 6.0x, which is its 5-year mean PER, to the revised EPS23 of 16.2sen.
Maintain BUY. All in all, MIDF Research maintains its BUY call on Pharmaniaga with the revised target price of RM0.97. The analysts like the group for its robust portfolio and resilient operations in maintaining a sufficient stockpile of pharmaceutical products for the public and private sectors. According to the analysts’ opinion, the demand for pharmaceutical products would not flatten any time soon, given that: (i) Covid-19 is still ongoing with the risk of a new variant emerging remain to be high, (ii) infectious diseases caused by crowd after MCOs and volatile weather, and (iii) halal OTC and specialised drugs are sought after, especially in Muslim-majority countries. It is also expected a significant increase profitability once all vending machines are online, its concession agreement with the Government (expected to be signed in 4QCY22) and its halal products manufactured and commercialised in 2024.
