Highlights

• Text of the Trans-Pacific Partnership (TPP) Agreement was released on 5th November 2015 by TPP Parties.

• Based on the TPP Agreement, there would be an extension of the exclusivity period for new drugs. However, period of extension differs ranging from 3 to10 years.

• Foreign drug companies from TPP members are allowed to setup manufacturing plants in Malaysia, and vice versa.

Comments

• With affordable medicinal products and generic drugs being out of reach for a longer period, this would be a bad news for the rakyat. But, we see this situation as catalysts and opportunities for Pharmaniaga.

• As the sole concession holder, logistics and distribution arm is the group’s main contributor (revenue: >95% and PBT: 32%) by earning a margin on top of the drug value delivered. This would translate into improved earnings in the future as pharmaceutical products remain high.

• TPP may present Pharmaniaga outsourcing opportunities. With its Sungai Petani (on average: 70%) and Puchong (still under capacity, <10%) plants running at subpar utilization rates, it has ample space to invite and secure more production contracts and further boost manufacturing contributions.

• Manufacturing regulation is not a concern with Malaysia as a member of PIC/S (Pharmaceutical Inspection Co-operation Scheme). Its production facilities are of high standard, quality complying with GMP (Good Manufacturing Practice) and enjoy halal certification. Overlapping TPPA and PIC/S members include Australia, Canada, Japan, New Zealand and Singapore.

• Even with a shorter period of patent protection, this does not guarantee generic players’ success in replicating biosimilar drugs within the extended period cost effectively. However, leveraging on outsourcing arrangements, knowledge transfer will yield higher achievement along with R&D improvements. Also, Pharmaniaga has a huge library of off-patent drugs and medicinal products under their distribution.

• On a different note, an allocation of RM4.6bn was stated in Budget 2016 to supply medicines, consumables, vaccines and reagents to all government hospitals and clinics. We opine that this will benefit Pharmaniaga as it is the sole concession holder to purchase, store, supply and distribute drugs and medicinal products to 148 government hospitals and 1,400 clinics.

Risks

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

Forecasts

• Unchanged pending a meeting with the management.

Rating

• BUY , TP: RM6.93

Positives

• Synergy from acquisition, quarterly dividend, secured business outlook thanks to CA as well as defensive and growing business.

Negatives

• FOREX, high level of stock and gearing.

Valuation

• Maintain BUY with unchanged TP of RM6.93 based on unchanged FY16 P/E multiple of 15.8x, 15% discount to US peers (see Figure #1).

Source: Hong Leong Investment Bank Research - 12 Nov 2015