KEY INVESTMENT HIGHLIGHTS

• Pfizer, BioNtech and Moderna’s >90% Covid-19 vaccine efficacy, a positive news for the world

• Emergency approval by FDA required to expedite vaccine production and distribution

• Fill and finish process to be conducted locally will benefit local pharmaceutical companies

• Fill and finish cost and revenue will depend on how vaccine will be administered either via oral or perenteral

• FY21F earnings estimates could be lifted by RM2.77-6.04m

• Maintain NEUTRAL with an unchanged TP of RM4.74 per share

Positive news for the world. The recent announcement by US pharmaceutical company Pfizer Inc. (NR) and Germany’s BioNTech SE (NR) that the novel coronavirus (Covid-19) vaccine they are currently testing has achieved >90% efficacy was very well-received by the world. Following the encouraging announcement, global market rallied - the US Dow Jones and S&P500 indices closed higher by +2.95% and +1.2% respectively while the European stocks closed +4.0% higher. Additionally, oil price has also shot up by +11.0% to USD41.22pb as the announcement provided some respite to the otherwise gloomy global economic outlook that has wiped out close to 30% in global crude demand thus far. The announcement provided the world with hope that the pandemic - which has resulted in the loss of 1.3m lives worldwide can finally be contained, and economic activities can finally be restored to pre-Covid19 level.

So, what’s next? The announcement by Pfizer and BioNTech pointed out that the vaccine developed by the companies have managed to prevent >90% of symptomatic infections in the trial of tens of thousands of volunteers, the most encouraging scientific advance so far in the battle against coronavirus. While the results are preliminary, the development could help to pave way for the companies to seek an “emergency-use authorization” should the vaccine research proves that it is also safe for usage. Pfizer is expecting to receive two months of safety follow-up data, a key metric required by US Regulators before an emergency authorization can be granted in the third week of November. If the findings present no adverse results, Pfizer could apply for an authorization in the U.S this month or in early December.

More vaccine options on the horizon? In its announcement yesterday, Moderna Inc. (NR) has disclosed that it has also achieved a >90% efficacy (c.94.5%) for its Covid-19 vaccine which uses similar messenger RNA (mRNA) technology as Pfizer and BioNTech’s vaccine. It also added that it has reported no adverse results from the finding. Furthermore, we understand that Moderna’s vaccine would require lesser degree of cold storage when compared against Pfizer’s -70 degree Celsius. Following closely behind are, AstraZeneca-Oxford, Russia’s Sputnik V and Johnson & Johnson; companies that have entered Phase 3 trials for their respective COVID-19 vaccines and are currently awaiting trial results. This concurrent development not only brings more option to the table but also brings the world closer to preventing further new cases of Covid-19 infections.

What’s next for local pharmaceutical manufacturers? While not much information is available at this juncture with regards to the fill and finish tender for the Covid-19 vaccine, we understand that Pharmaniaga is one of the frontrunners to win the tender. This is due to the fact that Pharmaniaga has a: (i) well-established logistics and distribution network nationwide and; (ii) large capacity of sterile and liquid plant to conduct the fill and finish process for the vaccine. Currently, Pharmaniaga’s small volume injectable (SVI) plant located in Puchong has the capacity to produce 10.0m doses per month.

We understand that to undertake the fill and finish process for the vaccine, Pharmaniaga will require a small CAPEX investment of RM2.0m which will be spent towards retrofitting its existing SVI plant. The retrofitting will take a month to complete which would also include putting in place new machineries. While there is no information on the financial impact on Pharmaniaga if it were to land the tender however; the volume is expected to be quite substantial – to the tune of 44.8m doses for a minimum of two doses for Malaysia to produce herd immunity.

Fill and finish costs and revenue will depend on how the vaccine is administered. While details with regards to the potential financial impact from the Covid-19’s fill and finish tender on Pharmaniaga remains scarce, however; we have tried to estimate the revenue and earnings contribution from the tender by using a study that we have come across published in 2018 by PATH, an international non-profit health organisation based in Seattle, US – an organisation that advocates worldwide health equity and accessibility. The study focused on how the cost of fill and finish as well as; cost of distribution would impact the total cost of vaccine production. Similarly, here, we will concentrate on the cost of fill and finish up to the point of delivery; which is the process that Pharmaniaga is expected to be entrusted with once the COVID19 vaccine arrives in Malaysia. According to the study, the total cost of delivery (TCOD) of a vaccine is highly dependent on how the vaccine is expected to be administered (i.e: oral or perenteral) and consequently, will also impact the cost of transporting the vaccine as different types of containers requires different method of transportation and degree of cold chain storage.

Using the data produced by PATH via its study on pharmaceutical manufacturers in 2018 as our cost base, we have adjusted and used our internal assumptions on the numbers to reflect current and local market environment to come up with an estimate on the potential revenue and earnings attributable to Pharmaniaga from the fill and finish tender. The assumptions took into account among others: (i) price inflation from potential surge in demand for vaccine containers; (ii) local currency exchange rate; (iii) scalability of Pharmaniaga vs international peers (iv) expected margin from the tender and; (v) 50-50% tender split with Duopharma Biotech (NR).

Impact to earnings. Based on the assumptions on the fill and finish costs that we have made, we estimate that Pharmaniaga’s FY21F earnings could be lifted by +3.4% to +7.4% or in the range of RM2.77-6.04m depending on how the vaccines will be administered and what type of container the COVID-19 vaccine will require. This is as the packaging and distribution method would be highly reliant on whether the vaccine will be orally or perenterally administered. We deem the estimates as fair given the urgency of the vaccine and potential difficulty that the company might face in transporting the vaccine – which might increase the TCOD of the vaccine.

The earnings contribution might seem significant in FY21F however, moving beyond FY21F we estimate that the contribution will correlate with the number of population that needs to be vaccinated every year – which we estimate to be lesser than in FY21F. That said, we are maintaining our FY20-21F earnings estimates at this juncture as we await for further development on the Covid-19 vaccine.

Target price. We are maintaining our target price to RM4.74 per share at this juncture pending further announcement from the Malaysian Government on the fill and finish tender. Our target price is derived via pegging our FY21F EPS of 31.6sen to an unchanged target PER of 15.0x which is the average of its historical five-year rolling PER. That said, based on our calculation, as we estimate that Pharmaniaga’s earnings could potentially be lifted by RM2.77-6.04m from the COVID-19 fill and finish vaccine tender, its target price would also be lifted accordingly to between RM4.87 and RM5.06 from our current target price.

Maintain NEUTRAL with POSITIVE BIAS. All things considered, we are maintaining our NEUTRAL recommendation on Pharmaniaga at this juncture, as based on the potential revision in target price, we opine that its current market price has overpriced the vaccine fill and finish story. That said, we have a POSITIVE BIAS on the company given that our assumptions are on the conservative side and its earnings could surprise on the upside especially given that the Covid-19 vaccine requirements have yet to be finalised. Furthermore, the recent resurgence of new cases in Malaysia and several countries in Europe that have eased their respective Covid-19 measures will continue to drive the demand for healthcarerelated products which include: (i) drugs and supplements; (ii) PPEs; and; (iii) various medical consumables.

In this regard, Pharmaniaga is well-positioned to benefit from this as it among the few industry players that have the capability to manufacture as well as; distribute medical drugs and pharmaceutical products nationwide owing to its extensive network of logistics. Additionally, it is still an attractive stock to accumulate given its positive industry-wide growth prospect and; it is currently trading at an attractive forward PER of 17.5x (lower than its similar-sized regional peers which typically averages at >20.0x forward PER). Also, it has a decent FY21F dividend yield of 3.2%.

Source: MIDF Research - 17 Nov 2020