INVESTMENT HIGHLIGHTS

• No changes to concession agreement with MoH

• Re-introduction of SST might increase price of medicines

• Minimal impact on local pharmaceutical companies

• FY18-19F earnings estimates maintained

• Maintain NEUTRAL with unchanged TP of RM4.20 per share

No changes to concession agreement with MoH. Despite the recent change in the Federal Government we understand from Pharmaniaga that at this juncture; the concession agreement to supply medicines to Ministry of Health (MoH) is still intact and business is as usual as the company is governed by the MoH’s policies. That said, we do not discount any price revisions on the supplies in the future due to the current financial situation of the government. However, we take comfort in the fact that the government has announced that it will relook into increasing the annual budget allocation to the MoH from the current 4.5% to 6-7% as this would potentially mean more business for the local pharmaceutical players.

Re-introduction of SST might increase price of medicines. To recall, under the Goods and Services Tax (GST) system 2,900 drug brands listed in National Essential Medicine List (NEML) were exempted from GST. This only make up about 25% out of 12,000 drug brands registered in Malaysia where the balance 75% is still subjected to GST. According to industry players, depending on the quantum; the reintroduction of sales and services tax (SST) could potentially lead to an increase in price of medicines from before. Furthermore, it is yet to be known if the medicines listed under NEML will continue to be exempted or otherwise.

Minimal impact on local pharmaceutical companies. We are expecting the re-introduction of SST to have minimal impact on generic drug manufacturers in Malaysia. For the two largest generic drug manufacturer in Malaysia, Pharmaniaga and CCM Duopharma Biotech (CCMD MK, NR), the largest purchaser of generic drugs (70% of the country’s total medicines) is Malaysia’s MoH. Currently, the sales to MoH make up 90% and up to 60% of Pharmaniaga and CCMD’s revenue respectively. Therefore, we opine that the revenue coming from the government will potentially remain intact with a potential increase due to the re-introduction of SST.

Earnings forecasts maintained. We are maintaining our earnings forecasts for now pending further announcement on MoH procurement policies and clarity on the re-introduction of SST. Key risks to our earnings forecasts would be: (i) better or lower than expected government concession orders and; (ii) better than expected cost reduction.

Maintain NEUTRAL with unchanged TP of RM4.20. All in, we are maintaining our NEUTRAL recommendation on Pharmaniaga with an unchanged TP of RM4.20. Our TP is derived via pegging our FY19F EPS of 29sen to an unchanged FY19F target PER of 14.3x which is -1SD lower than the average of its historical five-year rolling PER. We think this is fair, given that we believe that procurement of drugs and medical supplies going forward from the Ministry of Health will continue to be moderate as it tries to manage the ballooning healthcare costs in the public hospitals. That said, we take comfort in the fact that both its private sector business as well as Indonesian operation have been contributing well to the group’s overall revenue which we think will bode well for the company in terms of future earnings contribution. In addition, we take comfort in the fact that the government has announced that it will relook into increasing the annual budget allocation to the MoH as this would potentially mean more business for the local pharmaceutical players.

Source: MIDF Research - 7 Jun 2018