We initiate coverage on Hovid with a BUY call and a FV of MYR0.46. It offers investors exposure to both the pharmaceutical and healthcare industries, with non-cyclical earnings and a global market reach. Future revenue drivers include: i) the “patent cliff” phenomenon, ii) in-house drug development, and iii) capacity expansion. We ascribe a 17.0x fully diluted CY15F EPS, at a discount to the 18.9x average of its peers.
Key Investment Themes
“Patent cliff” to power growth. Hovid is expected to be one of the beneficiaries of a “patent cliff”, ie major lifestyle drugs – or innovator drugs – going off-patent in the coming years. What this means is that the intellectual property protection period for such drugs has expired.
Between 2014 and 2016, more than 20 lifestyle drugs are expected to go off -patent.These include: i) Micardis (hypertension), ii) Renegel (kidney), and iii) Advicor(cholesterol). These drugs, which are expected to go off-patent soon barring an extension of their patent protection period, are estimated to worth USD34bn-66bn in worldwide sales in FY14-15, according to industry estimates. Innovator drugs are known to be more expensive than their generic variants. Therefore, the shift to the latter will be more economical for consumers in the longer term. Hence, we believe that Hovid will be able to grow its revenue substantially should it manage to tap into such opportunities going forward.
Robust backlog of existing drugs pending approval. Hovid is set for a good year ahead with many drugs pending approval in Malaysia and several other countries,which are expected to further drive growth in FY14-15. The drugs, estimated at approximately 363 types, are currently pending product registrations in various countries. These drugs are expected to generate MYR30.0m in sales within 18 months of the drugs being officially registered in the respective countries.
Developing in-house lifestyle drugs. Hovid is currently developing two lifestyle drugs in-house targeted at liver and kidney patients. These drugs are currently undergoing intensive research and development (R&D) at Ohio State University, the company’s research partner in the US. The drugs, the first of their kind, will tap further into the potential of its proprietary TocovidSuprabio health supplement. TocovidSuprabio is a health supplement targeted at minimising brain cell death especially for those who have high risk of stroke. It can also be consumed by those with diabetes, cholesterol and hypertension. These drugs are anticipated to hit the shelves within 3-5 years. TocovidSuprabio is expected to be Hovid’s breakthrough as a drug innovator, and will be produced and marketed under the company’s label. Expanding its reach and capacity. Hovid is looking to further expand its global reach by penetrating into new untapped export markets. For instance, it aspires to penetrate the Middle East market in the near future.
Additionally, Hovid is also in the midst of increasing its production capacity via the expansion of its Chemor manufacturing plant in Ipoh, Perak. This expansion will see the plant producing capsules and tablets at high volume through the installation of new production equipment. This is expected to raise production capacity by 30%.Currently, Hovid is operating at 80.0%-90.0% of its current plant capacity. On top of this, Hovid is building a bioequivalence test centre at Universiti Sains Malaysia (USM) in Penang. It is also setting up a centralised warehouse in Ipoh. The former is expected to be completed by 2015 while the latter ought to be in operation by end-2014. The new facilities should ultimately improve its product distribution and drive its business growth by centralising the company’s business operations and allowing it toconduct more in-house tests than it could before.
Ethical drugs are the main revenue contributor. Hovid’s current product mix mainly consists of: i) ethical drugs, ii) dietary supplements, and iii) consumer products. Ethical drugs refer to medication that requires a doctor’s prescription while dietary supplements consist of a range of vitamins and health maintenance supplements that can be bought over-the-counter (OTC). The latter do not require a prescription to purchase. Consumer products, on the other hand, refer to Hovid’s herbal tea, disinfectants, sanitisers and other similar products. As at FY13, of the three categories of products, ethical drugs accounted for 72.0% of its total sales. Dietary supplements accounted for 21.0% of topline while consumer products made up the balance.
Wide distribution network. Hovid enjoys the advantage of a wide networkdistribution across 50 countries worldwide. The company is able to distribute it products easily throughout Asia, Africa, North and South America. In FY13, Malaysian sales made up 47.5% of its full-year revenue while exports accounted for the remaining 52.5%. We expect this trend to continue going forward, with export sales being the main driver for both revenue and profit.