Duopharma chases growth as demand outpaces capacity

TheEdge Tue, Oct 29, 2019 05:00pm - 4 years View Original


DUOPHARMA Biotech Bhd has a problem — it cannot expand production capacity fast enough to keep up with the market.

To date, it has five new effervescent products ready to go since two years ago — on top of two already in the market — but not the manufacturing capacity to spare to actually make them, says group managing director Leonard Ariff Abdul Shatar.

It may be a surprising quandary considering that its RM7 million plant in Bangi, Selangor, which can produce up to 50 million effervescent tablets a year on a 24-hour shift cycle, was only commissioned in October 2017. It was the first such facility in Malaysia.

“We thought the new plant could sustain our expansion, but the market grew faster than we thought,” Leonard tells The Edge in an interview.

He says the company plans to invest RM40 million in growing the plant capacity by 150% to 125 million tablets a year, an expansion that will take up to 2022 to complete.

By then, the number of consumer healthcare products awaiting manufacturing capacity should swell to eight. To cater for further potential growth of the market, Duopharma has room for another round of same-site expansion that could take the capacity up to 250 million effervescent tablets annually.

Duopharma’s expansion drive is fuelling growth in its top and bottom lines. In 6MFY2019, the company recorded wider margins as net profit rose 35.24% year on year to RM28.38 million on the back of a 15% y-o-y revenue growth to RM295.85 million.

That puts the company on track to surpass its full-year net profit of RM47.64 million from RM498.72 million revenue in FY2018, which was already a record high. That year, Duopharma defended its market leadership in terms of sales volume while advancing from third to second in terms of sales value, according to its annual report.

Consensus estimates compiled by Bloomberg from four analysts tracking the stock see Duopharma’s revenue hitting RM572.2 million — breaching the half-a-billion-ringgit threshold for the first time — this year and RM620.2 million in FY2020.

Similarly, net profit is forecast at RM56.3 million this year and RM61.9 million in FY2020. All four research houses retain their “buy” ratings on the counter with target prices ranging from RM1.56 to RM1.70.

Last Thursday, Duopharma closed at RM1.36, having risen 19.15% over the past year and implying a further 14.7% headroom based on the lowest analyst target price with a “buy” rating. Its market capitalisation was RM924.95 million.

But the growth mode may be putting some strain on the company’s finances. In the first six months of FY2019, Duopharma generated RM9.18 million in net cash from operating activities, but that was wiped out by RM28.64 million in investing expenses and a further RM23.34 million in debt repayment.

To offset the cash burn, the company drew down a further RM40 million in borrowings. That explains why its cash balance as at June 30, 2019, remained at RM96.17 million, implying a cash burn of RM2.08 million in six months.

Meanwhile, inventories crept up by 9.1% over the same period to RM152.26 million and receivables grew 41.2% to RM178.08 million. Looking at it another way, Duopharma may not need the RM40 million drawdown — which incurs finance cost — if the additional receivables totalling RM52 million had been fully collected.

Leonard denies any collection issues, saying that the sharp increase in receivables is a function of the company’s turnover growth. Duopharma extends credit periods of up to 90 days to its clients. Overdue receivables make up a “negligible portion”, Leonard adds.

 

Chasing acquisitions

The Duopharma chief says the company’s balance sheet can take on more debt if necessary as it is eyeing potential acquisitions abroad.

The target markets are Indonesia and the Philippines, which have similar regulatory frameworks to Malaysia. Duopharma has operations in both countries as well as Singapore and plans to set up a representative office in Myanmar by 2021.

“We want to internationalise our operations. So, that does not mean only growing our export volume but also potentially acquiring production facilities in these countries,” says Leonard.

Duopharma is currently in talks for several potential targets but none is at an advanced stage. Potential acquisitions could be up to about RM150 million in deal size, Leonard says.

The company will likely look to borrowings to fund any acquisition, he adds. At present, Duopharma’s borrowings total RM261.05 million, compared with RM503.73 million in total equity, implying a gross gearing of 0.52 times.

Leonard says the management is comfortable with up to 1.0 times gross gearing ratio. That implies a potential war chest of about RM241 million. It is worth noting that this is a moving figure as the company’s dividend reinvestment policy, which it expects to continue, will further expand the equity base. It has a policy of paying out at least 50% of its profit after tax.

The long-term game plan is to have a balanced portfolio in terms of revenue generation, with a third coming from Malaysian public-sector contracts, a third from Malaysian private-sector consumption and the rest from Asean markets, according to Leonard.

What will be Duopharma’s competitive advantage in the Asean context? Leonard says the company is relying on growing its unique products to compete with other players with larger-population home markets such as Indonesia and the Philippines.

These are primarily products launched over the last five years, including the recently unveiled Erysaa, an erythropoietin (EPO) biosimilar. EPO adjusts the human body’s red blood cell generation based on oxygen requirement levels.

Currently, products launched over the last five years contribute 20% to revenue, says Leonard. The goal is to increase that proportion to 40% in the next five years.

As at FY2018, only 8% of its revenue was ex-Malaysia. As for its domestic revenue, the public sector proportion actually rose to 51.5% in FY2018 versus 34% in FY2016.

When asked about possible overdependence on the Malaysian public sector, Leonard says, “Remember that the public sector consumes 70% of pharmaceutical products in Malaysia, So, in that perspective, we are still under-represented.”

Looking ahead, Duopharma hopes to sustain its double-digit turnover growth to continue outpacing the average market growth of 6% to 8% per annum, he adds.

 

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