Key takeaways from Duopharma’s analyst briefing are: i) expectations of contract renewal from the government tenders, ii) strong double digit growth from the consumer healthcare segment and iii) FY19 will be a satisfactory year. We increase our earnings for FY19/FY20/FY21 by 5.2%/5.2%/2.7% after increasing our sales volume assumptions. Target price raised to RM1.70/share (previously RM1.62/share) based on unchanged 19.0x CY20 EPS.

Expectations on Government Tenders and Budget 2020

On government tenders and Pharmaniaga’s concession which will expire in November-19, negotiations are on-going. Note that historically, it usually takes a 6-7 months cycle to do the tenders (i.e.: a lot of products, evaluation that needs to be done). With the limited time left, management believes that the government will most likely roll-over the tenders. Thus, if the government were to ask Duopharma or other pharmaceuticals companies to extend offer price by another 1 year, Duopharma is likely do it given that the current exchange rate is about the same as when the last round of tenders were called. We believe this will bode well for Duopharma as circa-52% of its revenue from the government will look more secure moving into 2020. On the insulin tender, which will also expire in Nov-19, management has engaged with the Ministry of Health to opt for the 2-years extension. According to management, the response has been quite positive and it hopes to hear something within the next 60 days (probably same time with the rest of the tenders). We remain confident of the contract renewal given its competitive pricing and the proven track record (i.e.: delivery timing and quality). Other main products that Duopharma bid for the government tender were: i) erythropoietin (EPO) product, worth RM20mn and ii) Insulin Glargine, worth RM16m over the next 2 years respectively. On the upcoming Budget 2020, management hopes that the government will reintroduce reinvestment allowance, which was not renewed in Budget 2019 (Duopharma tax rate at 23.5% in 1H19 versus 20.2% in 2018).

Strong Growth from the Consumer Healthcare Business

Management believes that within the next 2-3 years, Duopharma’s consumer healthcare business will worth over RM100mn in terms of revenue (currently about RM75mn). Moving forward, the group will continue to defend its market share (No.1) in the children vitamin’s segment and tap more aggressively into the adult vitamin segment (more attractive in terms of total market potential). We are positive on the continued strong double digit growth from Duopharma’s consumer healthcare business as this will reduce its dependence on government

contracts. On the recent news by Reuters on contract manufacturing to China, management is not too keen on contract manufacturing due to the low margin. They will only do it if they have the capacity as it spreads out fix cost over a larger range of products. We understand that the request for contract manufacturing is a norm (from China, Japan, Korea, Australia and Europe as well). Note that currently, 3% of Duopharma’s revenue comes from contract manufacturing. Management reiterates that it will be more focus on marketing its own products.

Minimal Impact From the Proposed Medicine Price Control

Management does not oppose the price control but it believes that implementing price control will not solve the healthcare inflation. Instead, the government should promote competition in order to bring down medicine prices in a meaningful and sustainable way. As Duopharma produces affordable generic medicines, management opines that it will not have major impact. Management believes the government will go after expensive patented drugs first.

FY19 will be a Satisfactory Year

Recall that in 1H19, Duopharma recorded PAT growth of 35.2% to RM28.4mn ahead of revenue growth of 15% to RM295.9mn. Generally, management does see a reduction in consumption for the private sector, which has been happening in the past (migration of patients from private hospital into government sector, mostly due to the state of economy). On the flip side, we have seen an increase in government demand and we expect overall demand for pharmaceuticals to remain resilient. As far as 3Q19 earnings are concern, we expect earnings to be stronger by at least 25% YoY, due to timing of government purchases and strong demand. At current share price, dividend yield remains attractive at 4.2% based on FY20.

Impact

We increase our FY19/FY20/FY21 earnings estimates by 5.2%/5.2%/2.7% after increasing our sales assumptions and PBT margins by circa-4.8% and 0.2% respectively. However, we tweak our FY19 tax rate assumptions higher to 23.5% (from 21% previously).

Valuation & Recommendation

Following the earnings adjustments, we raise Duopharma target price to RM1.70/share (from RM1.62/share) based on an unchanged 19.0x CY20 PER. We continue to like Duopharma for its: i) strong market share in Malaysia, ii) resilient earnings and iii) decent dividend yield.

Source: TA Research - 6 Sept 2019