We attended CCM Duopharma Biotech Bhd (CCMD) briefing and plant visit (Bangi site) yesterday feeling positive on the back of: i) expansion of manufacturing facilities is on track, ii) introducing more niche products going forward and, iii) continuous growth momentum. Management sees a better demand this year for pharmaceutical products. Based on our estimates, we project a 5% increase in revenue for FY18 mainly due to more new products and better margins. Maintain BUY on CCMD with an unchanged TP of RM3.40/share based on 21.0x CY18 EPS.

Expansion of Manufacturing Facilities on Track

The group’s Manufacturing Optimisation Strategy (MOS), which includes rationalising and upgrading facilities to facilitate future growth is on track and likely completed by 2020. CCMD has 3 manufacturing plants located in Bangi, Klang and Glenmarie.

We visited its Bangi Plant, where most of its ethical and OTC products are manufactured. CCDM’s products are mainly in oral solid dosages, soft gels, liquids and cream forms. Expansion in Bangi Plant has been completed following completion of its warehouse (Bangi 3).

Meanwhile, expansion of Klang plant is at pilling stage. To recap, expansion of its Klang plant will enlarge production capacity by approximately 40% to 50% and house the manufacturing of oral solid dosage and specialty products. Meanwhile, Glenmarie plant is expected to be completed by the end of next year. The plant is being retrofitted to a new HAPI plant, where it will be the first plant in Malaysia to manufacture generic oncology drugs and other High Active Potency products. Management is looking to manufacture a total of 12 oncology products, mainly on breast cancer.

Products Updates

CCMD indicated the 3-year insulin contract would provide good earnings visibility for FY18-19. We have already seen the full effect of it in its FY17 results whereby revenue grew 49.5% YoY to RM468.0mn. Besides that, the recent launch of its new OTC products like Flavettes brand made in Malaysia, effervescent Vitamin C have been very encouraging.

There are a few new products in the pipeline. The main one includes: i) Erythropoietin (EPO), which promotes the formation of red blood cells by the bone marrow. Management sees demand coming from the private sector, targeting haemodialysis centres. The product is expected to be in the market in 3Q18. The estimated total market value for EPO is around RM40-60mn/annum. Assuming 50% market share, it works out to be around RM20mn-30mn, ii) Hepatitis C, whereby CCMD entered into a collaboration with Natco Pharma LTD of India (right to market and sell) last December to commercialise a range of Hepatitis C products in Malaysia. They are in the process of regulating the product. Note that, there are around 400,000 Malaysians having Hepatitis C.

Outlook Going Forward

The group is still No.1 in terms of volume and No.3 in terms of value and market share in Malaysia. We understand that CCMD has a market share of 21% for generic medicine, which is considered high. As a result, management guided that future earnings growth would have to come from exports. In FY17, exports contributed only 8% of total revenue. CCMD sees the Philippines as one of the main country where it can grow further. In our estimates, we project revenue to grow 5% in FY18 mainly due to more new products, higher ASPs and better margins. We also see a stronger demand this year for pharmaceutical drugs from the government sector. Meanwhile, CCMD’s OTC products will continue to grow backed by stable demand for its vitamin C products such as Champs, Flavettes and Proviton. We believe the penetration into renal, cardiovascular, oncology and bio therapeutics would give them better margins going forward as these are mainly niche products.

Forecast

FY18-20 earnings are raised by 0.1% after making some minor housekeeping to our model.

Valuation

Our TP for CCMD is maintained at RM3.40/share based on a target PE of 21.0x against CY18 EPS. Reiterate BUY.

Source: TA Research - 29 Mar 2018