Highlights

Indian’s Supreme Court rejected Novartis’ attempt to win patent protection for Glivec (also known as Gleevec in US), a drug used to treat chronic myeloid leukemia as well as a rare type of stomach cancer.

The denial was based on the basis that Novartis had failed to prove significant clinical efficacy enhancements of their drugs over already-patented compounds (imatinib mesylate).

In India, Glivec costs about USD1,900 per month, compared with around USD175 for a number of generic versions that Indian companies like Cipla Ltd and Ranbaxy Laboratories began to produce after Novartis lost its bid to register a patent in 2006.

Comments

We view this as a fair judgment considering that it is not a new or significantly innovated compound and should allow generic versions to be made available for the needy.

As a member of the WTO, Malaysia is obliged to offer protection for chemical compounds but is allowed to set its own definition and standards for what is an invention.

When a drug is patented, it is protected from imitation for 20 years, allowing the producer to monopolize and command high price.

Commonly, producer will modify the drug or compound slightly when the patent is about to expire to justify for patent renewal. This practice is popularly known as “evergreening” of the patent.

If adopted as precedence, this ruling has a positive implication and perceived as a catalyst for Pharmaniaga who produces generic drugs.

There will be a wider range of drugs which are in high demand available to manufacture. Although generics are normally sold at a huge discount to blockbusters, Pharmaniaga will continue to enjoy decent margins as they do not incur huge investments in R&D.

Catalysts

Gaining market share in non-concession and private sectors, synergistic benefits from acquisition, continuous effective operational strategy.

Risks

Political/regulatory/competitive/FOREX risks, failure/delay in drug delivery under CA, compliance to production standards/contamination and drug patent disputes.

Forecasts

Unchanged.

Rating

BUY, TP: RM9.17

• Positives - Synergy from acquisition, quarterly dividend, secured business outlook thanks to CA.
• Negatives - FOREX, high level of stock and gearing.

Valuation

We maintain our BUY call on the stock with unchanged TP of RM9.17 pegged at unchanged P/E multiple of 12.5x average FY13-14 earnings.

We believe this valuation methodology would better reflect the fair value of the company as FY13’s earnings will be impacted by accelerated amortization of the novation contract, which is a non cash item.

Source: Hong Leong Investment Bank Research - 26 Apr 2013