Pharmaniaga likely to remain key distributor even with open tender system

The company has a track record of 25 years, supplying medical items to govt hospitals, institutions and clinics


PHARMANIAGA Bhd should be unaffected in the near term as the migration to an open tender method for the distribution of pharmaceuticals in the national healthcare system will not occur immediately, according to Hong Leong Investment Bank Bhd (HLIB).

The research house highlighted a great deal of issues need to be ironed out such as the overall framework of the new model, as well as tender and evaluation before the winning bid is decided.

“Until all this is resolved, the government is likely to extend the logistics and distribution services of Pharmaniaga beyond Nov 30, 2019 (official concession expiry date), this has been echoed by the health minister,” it said in a research note last Friday.

Last week, Health Minister Datuk Seri Dr Dzulkefly Ahmad said Pharmaniaga’s concession to distribute drugs and medical supplies for the Health Ministry will end and there will no longer be a concessionaire for logistics and distribution services, but an open tender system would be introduced instead.

Pharmaniaga has been the sole concessionaire providing these services and its grant is scheduled to end this month.

Pharmaniaga share price closed 13 sen or 5.9% lower last Friday at RM2.08, valuing the company at RM543 million.

The company has lost 17% or RM109 million in the past two trading days after the government’s decision was made public.

Under the Approved Product Purchase List programme, Pharmaniaga, through its subsidiary Pharmaniaga Logistics Sdn Bhd, is the largest Bumiputera agent with the exclusive concession to supply 700 medical items to government hospitals, institutions and clinics.

Over the past 25 years, the company has been granted exclusive rights through a concession to supply pharmaceutical products to the Health Ministry.

Prior to this, Finance Minister Lim Guan Eng said on average, Pharmaniaga’s monopoly is costing the government over RM1.1 billion per year — prompting a review of the contract.

HLIB thinks the company will continue to have an edge in the open tender model as well.

“When the open tender is called, we believe Pharmaniaga will have the upper hand for the job due to having a competitive advantage of being the expert in cold chain pharmaceutical logistics and distribution, with a historically proven track record of 25 years, supplying drugs and medical items to over 148 government hospitals and 1,300 government health centres encompassing urban and remote areas,” HLIB stated.

In the past three years, on average, the logistics and distribution segment contributed 60%-62% to Pharmaniaga’s revenue and 7% to 10% to its profit before tax, the investment bank said.

During the last concession cycle which ended in November 2009, the renewal only happened in March 2011, after a gap of 1.5 years.

“If these were used as anecdotal evidence on the possible timeline, then perhaps, Pharmaniaga’s nearterm earnings (ie financial year ending 2019-2020 [FY20]) are arguably intact as it continues to operate under the current terms,” it said.

HLIB has lowered its target price for Pharmaniaga to RM2.14, based on reduction in price-earnings ratio from 15 times to 9.3 times.

“Although we reckon that Pharmaniaga could retain its services in an open tender, margin erosion is inevitable with competition in the picture,” it said.

Kenanga Investment Bank Bhd believes all is not loss for the group considering its track record, platform and systems already in place for the distributions of such medical supplies.

Overseas, its Indonesian operation remains a key area of growth, while further progress is being made in the European Union as the group seeks to expand its global presence.

“Over the longer term, we expect Pharmaniaga’s manufacturing division to propel earnings growth.

The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products,” it said.

Kenanga has revised its target price for Pharmaniaga to RM1.60, from RM2.35 previously, based on unchanged 11 times earnings per share for FY20.

Pharmaniaga is set to announce its third-quarter (3Q) results this month. Its net profit for the 2Q ended June 30 surged 72.06% year-on- year (YoY) to RM9.28 million as revenue increased 3.3% YoY to RM601.89 million on stronger demand at its Indonesian division.

For the cumulative six months, Pharmaniaga’s net profit rose 25.75% YoY to RM28.89 million, while revenue increased 15.6% YoY to RM1.39 billion on the back of strong performances from both the concession and non-concession businesses.

The pharmaceutical group’s, controlled by the Armed Forces Fund Board, dividend payout for the first half was 8.5 sen per share.