The management anticipated the low demand from government for the 1HFY17 since December 2016. Therefore, they strategize by cutting the process during the low demand period to prepare for future tender. 50% of production line is shut down for maintenance and recalibration, and they forecasted high demand from the government 3QFY17 onwards. Though the strategy will cost them higher currently, they believe it is better to scale down and prepare for new production line that will commence on 3Q17. Essentially, the shutting down of 50% of the production line is for the preparation of new generic products. As the originator license is expiring soon, Pharmaniaga took the advantage of initiating 3 new generic products and one product currently on the pipeline. Therefore, we anticipate the earnings will turnaround later this year.

One of the reasons for the dip in earnings is higher finance cost due to lower government spending for procurement of drugs and medical supplies hence Pharmaniaga has to keep more stocks, so they are initiating stock optimization process to address this issue. Apart from that, amortization cost for Pharmacy Information System (PhIS) is increasing about RM60m a year but they are looking at extending the existing amortization period from 10 years to 15 years hence amortization cost will go down in future about RM30m a year.

As the current Concession Agreement is coming to an end in 2019, the management is negotiating for an extension and so far, they are in line with the agreement and in compliance with the government guidance. This extension will benefit Pharmaniaga in terms of better cost management, thus will contribute to earnings visibility in the future.

As part of their corporate responsibility program, they launched a diabetic awareness program throughout Malaysia. Rate of diabetic patients in Malaysia has been increasing over the years and one alternative to tackle the issue is by introducing Stevia, a sweetener and sugar substitute with no calorie content in it.

Outlook

Pharmaniaga expects their earnings to be in the spotlight in 1QFY18 with the significant impact on profitability 2HFY18. Their Indonesian unit will remain a key area of growth and at the same time, making a progress in its global presence. The management reiterates that their aim is to optimize their cost utilization across their operations. Looking at longer-term horizon, Pharmaniaga expects their manufacturing division to pilot their future earnings. 4Q onwards production will ramp up to capitalize on the Health Ministry’s Approved Product Purchase List (APPL) open tender of 117 new products (currently Pharmaniaga is manufacturing 480 products) and the contribution to Pharmaniaga is expected to be around RM300m.