PHARMANIAGA (Fundamental: 0.75/3, Valuation: 1.7/3) is the biggest pharmaceutical company on the local bourse by market capitalisation. It is the country’s largest pharmaceutical distributor and prime beneficiary of rising healthcare expenditure. Its business is also defensive.

The jewel in its crown is its exclusive rights to purchase, store and supply medical products to 140 public hospitals and 2,856 clinics nationwide since 1994, supplying 50% of the Ministry of Health’s needs. The government is the largest provider of healthcare services — provided almost free through public hospitals — in Malaysia.

Pharmaniaga’s 10-year concession expires in 2019 and allows for upward price revisions every three years. Sales to the MOH accounted for 76% of its revenue in 2014.

Its overall net margin, of 4.4%, is still considerably lower than the industry average — due to the low-margin logistics and distribution business. But profitability has been on an uptrend — as the company scales up its generic drug manufacturing operations and gains on operational efficiency and economies of scale. ROE improved from 7.1% in 2010 to 18.5% in 2014.

In this respect, Pharmaniaga stands to benefit further from the impending expiry of patents for major drugs worth US$132 billion and the increasing acceptance for cheaper generic substitutes.

The company intends to expand its target markets, including in Indonesia, the Middle East and Europe. Last year, Pharmaniaga acquired an Indonesian generic drug manufacturer and is in the midst of setting up a joint venture to construct a pharmaceutical plant in Saudi Arabia.

To be sure, the stock has climbed 53% year-to-date and is trading at a trailing 12-month P/E of 17.6 times. But the premium valuations are warranted given its leading market position, defensive business, growing manufacturing earnings and favourable demand prospects. Dividend yield is not too shabby either at 4.6%, based on dividends of 28 sen per share in 2014.

This article first appeared in digitaledge Daily, on August 6, 2015.

Insider Asia’s Stock Of The Day: PHARMA (06/08/2015)