We attended CCM Duopharma Biotech Bhd (CCMD) analyst’s briefing yesterday feeling positive on the back of: i) expectations of stronger 3Q18 earnings, ii) upcoming new niche products excitement and, iii) future expansion plans are on track. Based on our estimates, we project a 10% increase in revenue for FY18 mainly due to higher demand and the launch of new products. Maintain BUY on CCMD with an unchanged TP of RM1.52/share based on 20.0x CY19 EPS.

Stable Demand and Outlook

Management continues to see a stable demand for pharmaceutical products from public and private healthcare sector in Malaysia. Note that in 1HFY18, the government sector contributed 54% of total revenue. Meanwhile, private and export sector accounted for 39% and 7% respectively. In terms of market share, CCMD is still No.1 by volume and No.3 by value and market share in Malaysia. Management said its targets to be No.2 in terms of sales value, which we think is achievable by the end of this year.

Management also saw a double digit growth from its OTC products, namely from Proviton, Uphamol, Flavettes and Champs. Moreover, we believe its 3-year insulin contract worth RM300mn will provide good earnings visibility for FY19. Capacity expansion wise, CCMD’s Klang and Glenmarie plants are on track to be completed by 2020.

In terms of M&A, the group continues to target companies in the Philippines and Indonesia. They are also re-looking into some domestic companies, especially those would brings value add to CCMD. We understand that this is because of certain drugs will require the whole facility to be dedicated to manufacture one particular product. Previously, the company can manufacture any drugs in a single facility. We believe this is partly related to compliance to Good Manufacturing Practice (GMP) guidelines.

Upcoming New Products

Moving forward, the group will focus more on specialty products like Biotherapeutics, Oncology, Diabetes, Renal and Cardiovascular. There are 2 new products in the pipeline:

i) Erythropoietin (EPO) product (Erysaa) will be in 4QFY18. It is currently pending regulatory approvals, most likely to be regulated in the current quarter. To recap, the estimated total market value for EPO is around RM50-60mn/annum (private and government sector). For Malaysia, we understand that there are currently 2 suppliers for EPO, Roche and Janssen. Note that management expects the government’s tender for the EPO will be towards 1Q, next year. Assuming

ii) Hepatitis B. Note that, Malaysia has a high incidence of Hepatitis B (more than 200,000 Malaysians). Treatment cost used to be around RM8,000/patient. We understand that the previous government (Health Minister) targeted to bring down the cost to circa-RM1,300/patient. Thus, CCMD will take advantage of its calloboration with Natco, India to participate in some of the government tenders for Hepatitis B products.

In short, we believe the exposure to more niche pharmaceutical products will help CCMD maintain its margins as competition in generic drugs segment heightens. Note that the government sector consumes about 70% of generic drugs.

3Q Results Preview

We expect 3Q results to be in the range of RM10.5mn-RM13mn, which is stronger based on QoQ basics. To recap, CCMD reported 2Q18 revenue which declined by 7.0% to RM124.0mn, while net profit dropped by 2.9% to RM10.3mn. Historically, 2Q results are the weakest for CCMD mainly due to timing of government purchases.

In our estimates, we project revenue to grow 10% in FY18 mainly due to more new products and higher demand for pharmaceuticals products. We expect PBT margin to sustain at 11.0% level for FY18.

Impact

Maintain earnings forecasts.

Valuation

Maintain TP of RM1.52/share based on 20.0x CY19 PER. We continue to like CCMD for its i) strong market share in Malaysia, and ii) move into more niche pharmaceuticals products. Reiterate BUY.

Source: TA Research - 5 Sept 2018