• On 22 Mar, Malaysia’s Drug Control Authority (DCA) under the Ministry of Health has issued a cancellation and product recall of pholcodine, an opioid medicine that is used in adults and children for the treatment of non-productive (dry) cough. It is also used in combination with other active substances for the treatment of symptoms of cold and flu. Hence, a total of 14 pholcodine-related products has been recalled in Malaysia (Exhibit 2).

• Malaysia’s DCA cited findings that people who took medications containing pholcodine in the past 12 months face a higher risk of developing anaphylaxis – a severe life-threatening allergic reaction that could occur within seconds or minutes after exposure to the irritant with the administration of muscle relaxants or neuromuscular blocking agents (NMBAs) used in general anaesthesia during surgery.

• We understand that the market size for pholcodine-related products amounts to RM20mil in Malaysia currently. Based on our channel checks, pharmacies, clinics and hospitals will return all pholcodine-related medications to pharmaceutical (pharma) companies, which will issue credit notes or replace medications in kind. All in, pharma companies will bear the costs associated with product recalls.

• Duopharma Biotech (Duopharma) is marginally negatively affected as Promedyl Plus Linctus (Exhibit 2) sales accounted for only 0.1% of FY22 revenue. In addition, the equipment used to produce Promedyl Plus Linctus can be utilised to generate alternative medications with a simple change of ingredients, thus there is no need for a write-off.

• Separately, Apex Healthcare (Apex) is likely to slightly benefit from this development given that the group’s cough and cold medications do not contain pholcodine. Under a best-case scenario, assuming Apex is able to capture half of the RM20mil pholcodine-related market with its products, we estimate that its FY23F revenue of RM905mil can increase by an insignificant 1.1%.

• Maintain Overweight on the Healthcare sector. For exposure to the sector, our top pick is Duopharma (FV: RM2.06/share). We continue to like Duopharma as the largest local pharmaceutical manufacturer which can leverage on: (a) the rising take-up of generic drugs in Malaysia, (b) upcoming industry’s patent cliff in 2023-2026 and booming biosimilars with the company’s strength in R&D and state-of-art manufacturing facilities; and (c) ever-growing Vitamin C market with its popular brands, Champs and Flavettes.

• In terms of valuation, Duopharma trades at a lower FY23F PE of 13x vs vs IHH’s 28x and Apex’s 18x.

Source: AmInvest Research - 24 Mar 2023