Pharmaniaga is one the largest integrated pharmaceutical companies in Malaysia. Due to high reliance on its concession agreement income, earnings were bumpy over the past 2 years as the government reduced orders for pharmaceutical products. Going forward, the earnings should improve as Pharmaniaga is increasing the contribution of non-concession agreement through manufacturing of in-house generic products, which enjoy better margins than the logistics and distribution division. Expansion in Indonesia also provides long term growth opportunities.

Largest Integrated Pharmaceutical Group in Malaysia

Pharmaniaga is the largest listed pharmaceutical company in Malaysia by market cap that is involved mainly in the distribution of pharmaceutical, medical products and hospital equipment. 70% of its revenue is derived from Malaysia and the Ministry of Health (MoH) is its largest client (67% of total revenue). It has exclusive rights to supply 600 types of medical products under the Approved Product Purchase List (APPL) to Government-owned hospitals through a concession agreement, which amounts for 50% of MoH’s total expenditure in pharmaceutical products (RM2.1bn). This has provided a stable revenue stream of RM0.9-1.1bn from the government over the past 6 years.

Reduce Reliance on Concession Agreement

Pharmaniaga has a manufacturing division producing more than 480 pharmaceutical products with a total of 210 approved registrations in 14 countries worldwide. Going forward, the division is expected to be a major earnings growth driver as it seeks to expand its non-concession revenue by supplying more in-house generic drugs to government hospitals, private hospitals and clinics. Non-concession revenue contribution has risen to 49% in 2016 and management expects further growth for this segment.

Indonesia, a New Market to Provide Additional Growth

Pharmaniaga’s first foray into the Indonesian pharmaceutical industry was in 2004, through 55% owned PT Millennium Pharmacon International, a listed distributor that provides L&D services. Subsequently, Pharmaniaga acquired a 75% stake in PT Errita Pharma, a manufacturing facility of generics and OTC products in 2014. Indonesian operations now account for 30% of Pharmaniaga’s total revenue and it has grown at 21% and 27% yoy for 2015 and 2016 respectively. Given the large population size (300m) and a relatively lower healthcare expenditure/capita of USD99 (vs Malaysia’s USD456), longer term growth prospects should be favourable.

Source: Affin Hwang Research - 8 Sept 2017