Highlights

• Last week we visited Pharmaniaga’s Lifescience plant along with some fund managers and analysts for a briefing and a tour of the facility. The facility, located in Puchong, manufactures small volume injectable (SVI). The following are some key takeaways from the visit.

Comments

• The SVI plant is the only pharmaceutical plant accredited with European Union Good Manufacturing certification in Malaysia. This provides the company with a strong footing to enter the EU market. We observed that the plant has room to ramp up production as it is running below capacity.

• Management shared that government offtake is lower yoy in 1HFY16. This trend is expected to follow through to FY17 as evidenced by the 2017 Budget Healthcare allocation (4.0bn 2017 vs 4.6bn 2016).

• Forays into Indonesia and the private sector to diversify earnings exposure are in place. The private sector accounted for 5% of revenue in 1HF16 (FY15: 4%), whilst Indonesia accounted for 29% of revenue in 1HF16 (FY15: 23%). To note, the local industry has grown to RM6.6bn in FY15 vs. RM6.0bn in FY14.

• Response from the government hospitals towards collagen medical dressing (produced by recent acquisition, Bio Collagen Technologies Sdn Bhd) is positive. Orders are expected to increase in the near term as the product achieves Halal status.

• Pharmaniaga is venturing into cosmetics in the near future. A day and night cream based on “Nigella Sativa”, also colloquially known as Habbatus Sauda is undergoing testing. A soft Launch is expected in November. The product will be positioned alongside international brands such as SK2.

• Pharmaniaga has successfully patented an extraction process for Kacip Fatimah (Labisia Pumilia) and has obtained USFDA approval to market the product as a supplement. We can expect more Phytomedicine products to come on stream in the near future.

• Outlook. The company has a roadmap to develop 200 products over the next 10 years. The R&D cost to develop a drug is circa RM0.3m; with a time frame of circa 4 years from initiation to commercialization. New products will be registered simultaneously so as to expedite the availability for distribution by Milennium Pharmacon Indonesia. 20 new products registered for PT Errita will be ready for market in 2017.

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 results 3Q16 later this month

Rating

HOLD ↔, TP: RM5.11 ↔

• We like Pharmaniaga for its defensive qualities, monopoly of the government concession business and its forays into Indonesia. Nonetheless, in the near term we expect the higher amortization and finance costs to drag earnings.

Valuation

• We maintain our HOLD call on the stock with TP of RM5.11 based on unchanged FY17 P/E multiple of 15.8x, 15% discount to US peers (see Figure #1)

Source: Hong Leong Investment Bank Research - 3 Nov 2016