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.

• Growing  steadily.  A  generic  drug  manufacturer  based  in  Ipoh,  Perak, Hovid  Bhd  (Hovid)  produces  >400  kinds  of  drugs  under  one  roof.  Its revenue has been growing at a CAGR of 11.8% in 2009-2013 and export sales  contributed  52.5%,  or  MYR90.5m,  to  its  FY13  topline.  Hovid  is currently  looking  to  export  to  emerging  markets  and  the  Middle  East, which it has yet to  tap  into. We  estimate that its  export contributions  mayincrease to 56.0% in FY16 should this expansion prove successful.
• Strong  earnings  drivers.  Hovid  is  set  for  a  good  FY15  ahead,  given abundant  opportunities  in  both  domestic  and  global  pharmaceutical markets.  We anticipate  that  its  net profit  may  grow at a CAGR of 18.5% in  FY14-16,  or  MYR20.7m-32.7m,  on  the  back  of  growing  affluence, health awareness  and healthcare expenditure  in  the markets it operates. It also stands to benefit from the  “patent cliff”,  a  wider  export reach and capacity expansion going forward.
• Healthcare  industry  in  expansion  mode.  Frost  &  Sullivan  see  local healthcare  expenditure  growing  at an annual rate of 6.5% in  2012-2018to MYR68.4bn.  Private health expenditure,  specifically, is  slated to grow at  a  CAGR  of  16.5%  in  2010-2020.  It  is  also  expected  to  generate MYR13.8bn revenue in 2015 (2011: MYR7.5bn). In addition, the research house  sees  the  expansion  of  healthcare  services  nationwide  by  bothpublic  and  private  hospitals,  translating  into  increasing  demand  for generic drugs.
• Initiating  coverage  with  BUY  and  MYR0.46  TP.  We  value  Hovid  at MYR0.46  by  ascribing  a 17x  fully-diluted  CY15F  EPS,  at  a  discount  to the 18.9x  multiple of  its  global peers  and offering  a  14% upside from its current  price.  We  have  also  taken  into  account  the  company’s  recent disposal  of  a  51.0%  stake  in  Indian  pharmaceutical  company  Biodeal Pharmaceutical (BPPL IN, NR) and 381.0m warrants issued in 2013. We like Hovid for its: i) robust revenue pipeline, ii) strong and wide exposure to the export market, and iii) decent ROE of 12.0-13.0% in FY14-15. 

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.

Source: RHB