Cover Story: Pharmaniaga readying for a 2024 lift-off

TheEdge Thu, Mar 31, 2022 02:00pm - 1 year View Original


HAVING experienced its most profit­able year in 2021, Pharmaniaga Bhd would be justified in heading into 2022 with confidence. Yet, its group managing director Datuk Zulkarnain Md Eusope says it is taking nothing for granted.

Pharmaniaga, the country’s largest listed pharmaceutical company, has a five-year strategy to move to its next phase of growth, which includes pivoting to fast-growing opportunities such as the biopharmaceutical industry, while keeping its traditional businesses such as logistics and distribution (L&D) humming.

It expects its strategy to pay off in 2024, with annual revenue exceeding RM5 billion from thereon. Revenue rose 77% year on year to reach an all-time high of RM4.82 billion in the financial year ended Dec 31, 2021 (FY2021).

The strategy focuses on four areas: to strengthen its L&D business in Malaysia and Indonesia; expand its pharma products; become a serious player in the biopharma industry, particularly in the development of insulin and vaccines; and expand its footprint in new international markets.

(Photos by Shahrin Yahya/The Edge)

In his first exclusive interview with the media since assuming the top job at Pharmaniaga in September 2020, Zulkarnain, a former CEO of Felcra Bhd, tells The Edge that the plan includes reducing reliance on the concession business over the next two to three years.

“When you are dependent on concessions, people will say the business is growing because of help from the government. So, while we recognise that the concession business with the government is important, we want to grow our non-concession business and expand outside the country,” says Zulkarnain, 53.

Currently, nearly half of its revenue is generated from the L&D division, driven mainly by the government’s drug and medical supply concession. In FY2021, the L&D division had the most sales, at RM2.28 billion, followed by the manufacturing division, at RM1.87 billion, and Indonesia operations, at RM893.08 million.

The drug and medical supply concession, which was originally set to expire on Dec 31, 2021, was extended to end-2022. In January, Pharmaniaga announced that it had received a letter from the Ministry of Health (MoH) agreeing in principle for the group to continue its services in supplying medicines and medical supplies to MoH facilities for another 10 years.

“We are still finalising the terms of the new concession agreement and hope to sign it before the second quarter of 2022,” Zulkarnain says.

While L&D is the largest contributor to revenue, he points out that it has a low profit margin. Most of its profits come from the manufacturing segment, accounting for 70% of the group’s net profit of RM172.2 million in FY2021.

“The L&D division operates on a thin profit margin of 1% to 2%, while the manufacturing business can command a margin of about 20%,” Zulkarnain says.

“So, the L&D division can be a bit of a drag on overall profitability, especially as a result of losses in supplying medicines and medical supplies to remotely located government hospitals and clinics in Sabah and Sarawak, owing to high transportation costs. That is more of a corporate social responsibility effort.”

Pharmaniaga is allotting RM295 million for capital expenditure (capex) this year, which will be used partly to boost efficiency at its L&D division by fully automating its warehouses in the northern and eastern regions, including Sabah and Sarawak. A portion of the capex will also be used on its halal vaccine and insulin projects and digitalisation plans by its Indonesian L&D arm, PT Millennium Pharmacon International Tbk (MPI) (see “Indonesian unit MPI eyes inorganic route for growth”).

The group also aims to expand its L&D business to include non-healthcare products such as fast-moving consumer goods (FMCG) from 2022. “We have the infrastructure. Currently, leading L&D players in the FMCG sector in the country are non-Malaysian companies, that is, Zuellig Pharma and DKSH Holdings (Malaysia) Bhd.”

Meanwhile, the group plans to ramp up its spending on advertising and promotion (A&P) to increase awareness of its pharma products. “Prior to my joining Pharmaniaga in 2020, the company typically spent less than RM1 million a year on such activities. We have about 320 products (both drugs and consumer healthcare products) being manufactured at our plants, but many people are unaware of them,” Zulkarnain says, adding that it spent close to RM9 million on A&P last year.

The group will also increase its A&P spend in Indonesia this year. “For starters, we will allocate RM3 million to RM5 million because the population there is big. We distribute about 70 pharma products there. If we can unlock the [market] potential in Indonesia, our revenue target of RM5 billion by 2025 can be easily achieved.”

Making a big leap into biopharma

Much has changed for Pharmaniaga since the start of the Covid-19 pandemic in early 2020. It went from making RM27.49 million in FY2020 to posting a record net profit of RM172.15 million in FY2021, a gain of 526% y-o-y, owing mainly to sales of the Sinovac Covid-19 vaccines to MoH and the private sector.

But that performance came after suffering a net loss of RM149.2 million in FY2019 because of a large amortisation charge of RM247 million to supply MoH with hardware and software related to the Pharmacy Information System.

Zulkarnain believes those days are over. The pandemic has undoubtedly accelerated its plan to go beyond manufacturing pharma products to include biopharma products such as vaccines and insulin, he notes. The group’s venture into vaccine manufacturing with Chinese firm Sinovac Biotech Ltd further reinforced its capability to become a global vaccine player.

“Prior to 2019, Pharmaniaga had not gone into the biopharma industry. Fortunately, Covid-19 came at the right time. [Venturing into vaccine manufacturing in partnership with Sinovac] has given us confidence that we have the potential and capability to become an international player. Our people now believe that, with the right strategy and the right partners, we can do it. That’s why we are working hard to expand our footprint internationally.”

As part of its drive to grow its product pipeline, the group plans to develop at least 10 new offerings in the pharma segment annually, or about 200 new pharma products by 2030. It also plans to develop five new biopharma products in the next five years.

“If we position ourselves strategically, we can generate more profits in the next two to three years,” he says.

In January 2021, Pharmaniaga signed an agreement with Sinovac Biotech to carry out the fill-and-finish manufacturing process of the latter’s Covid-19 vaccine locally, which is the last step of filling the vials with the vaccine before they are distributed. It marked a milestone not only for Pharmaniaga but also for the country, as Malaysia was among five countries entrusted with undertaking the fill-and-finish process, along with Indonesia, Brazil, Turkey and Egypt.

This was not the first collaborative project between Pharmaniaga and world-renowned biopharma firms, though. It has partnered with Serum Institute of India, South Korea’s SK Bioscience Co Ltd and Thailand’s BioNet Group in vaccine manufacturing. Pharmaniaga will also be partnering with Mumbai-based MJ Biopharm Pvt Ltd to enter the insulin segment.

With Sinovac Biotech, Pharmaniaga took a huge risk by investing close to RM45 million in retrofitting and repurposing its small-volume injectable plant in Puchong, Selangor, for the fill-and-finish manufacturing of the Sinovac Covid-19 vaccine as well as transfer of technology and training of the fill-and-finish programme.

“At the time, the World Health Organization (WHO) had yet to approve any Covid-19 vaccine for use. But we had set our mind on becoming a vaccine player [and were willing to spend big to get in the act]. We also believe that the inactivated vaccine technology used by Sinovac Biotech is a proven one,” Zulkarnain says. It was reported that other vaccines that use similar methods include those for polio, Hepatitis A and rabies.

In June 2021, WHO listed the Sinovac Covid-19 vaccine for emergency use. The following month, Pharmaniaga successfully completed its obligation to supply 12.4 million doses of Sinovac vaccine to the government — 4½ months ahead of the contract schedule. It further supplied an additional eight million doses to MoH through a combination of both fill-and-finish vaccine and finished vaccine imported from China in the following months.

On the size of the market for Sinovac vaccines, Zulkarnain says Pharmaniaga has supplied 20.4 million doses to MoH under the national Covid-19 immunisation programme — equivalent to 10 million people, or one-third of the population in Malaysia. Thus, he estimates that there are 10 million Sinovac vaccine recipients who require the booster shot.

Earlier this month, the government approved lowering the age limit for receiving the Sinovac vaccine to five to 11, from 12 to 17. Zulkarnain estimates that two million more doses will be required for this group.

“The government has yet to place additional orders of Sinovac vaccine from us for booster shots and children. We are currently in discussion with the government about this, although they have given the green light for the vaccine to be sold to the private market at a wholesale ceiling price of RM62 a dose and retail price of RM77 a dose,” he says.

Crossing borders to support Sinovac vaccine demand

On Feb 21, Zulkarnain said during the group’s 4QFY2021 results briefing that it expects its financial performance in FY2022 to be better than in FY2021, driven by robust vaccine demand, better contribution from Indonesia and growth in its over-the-counter products.

As at March 16, 97.5% of the Malaysian population aged 18 and above had received two doses of Covid-19 vaccines.

Zulkarnain believes there could still be a need for Sinovac vaccines to boost people’s waning immune responses, but acknowledges that future revenue contribution from this vaccine may be lower. “I expect the country to get to endemicity by 2025, which means people still need a Covid-19 booster dose in 2022, 2023 and 2024.”

With that in mind, Pharmaniaga is looking beyond Malaysia to supply Sinovac vaccines. So far, it has secured orders for 200,000 doses from the private sector in Myanmar and is in negotiations with three other countries.

“I don’t want to name them until we have finalised talks, but we have sent letters to seven countries in Africa. This year, we are looking not only to the local market but also to international markets for potential Sinovac vaccine supply orders. A large part of the population in many African countries, Bangladesh and some countries in Southeast Asia such as the Philippines, Myanmar and Laos remain unvaccinated against Covid-19. Why? They don’t have money to purchase vaccines,” Zulkarnain says.

In this regard, Pharmaniaga has teamed up with a UK-based company to provide a financing scheme for the purchase of Sinovac vaccines. At the same time, it is in talks with Sinovac Biotech for Pharmaniaga to act as a springboard to countries where China has yet to sign bilateral agreements for the supply of Sinovac vaccines. “But that is subject to approval by Sinovac Biotech,” Zulkarnain says.

In any case, Pharmaniaga still aspires to be a vaccine manufacturer. Last December, it announced it was investing RM152 million to establish halal insulin and vaccine manufacturing plants in Puchong, slated to be completed in two years, as well as for the development of vaccine and related clinical trial activities.

For one, the group is looking to develop childhood vaccines for the flu and other infectious diseases. “It is not Covid-19 vaccine. There are so many diseases that require vaccination. Currently, 100% of the vaccines for children are imported. So, if we develop and produce them in Malaysia, then we can reduce the outflow of money,” Zulkarnain says, adding that the initiative will also contribute to job creation in the local biopharma industry.

“In addition, we help develop the local vendor system. The government set up the Malaysia Genome and Vaccine Institute and the national vaccine development roadmap, where we are a partner because we have the infrastructure and a team of more than 70 in-house scientists who look at the research and development of vaccines, insulin and pharma products.”

Eyeing 50% contribution from international markets

Currently, about 20% of Pharmaniaga’s total revenue comes from international markets, and it intends to boost that figure to 50%. In Indonesia, it has already established a presence via MPI and PT Errita Pharma, which has a manufacturing plant in Bandung. Last year, contribution from the Indonesia operations dropped slightly in percentage terms as sales of the Sinovac Covid-19 vaccine helped the local business.

For starters, in line with its aspiration to become a major regional pharma and biopharma player, Pharmaniaga plans to expand its footprint to Thailand and the Philippines.

“We have entered into memoranda of understanding with two biotechnology companies (BioNet Group and Bio-Innova Co Ltd) in Thailand — one is to develop biopharma products, especially vaccines, and the other is to explore opportunities in bioequivalence solutions,” Zulkarnain says.

Still, any significant results from these international market expansion plans will be seen only in two to three years, as the registration process for any new pharma product takes about two years and the group’s planned insulin and vaccine manufacturing facilities will come on stream only then. “That’s why I say 2024 will be the year when things will take off,” he adds.

Balancing dividend payment and reinvestment

Pharmaniaga’s latest balance sheet shows that net debt stood at RM802.87 million as at Dec 31, 2021, with a net gearing ratio of 1.9 times. Zulkarnain points out that the group’s higher borrowings last year were due mainly to the purchase of Sinovac vaccines. “Once our stock of vaccines goes out, our gearing will come down. We do the stockpile because we want to ensure that the vaccines are enough for the booster shots and children locally. But we are also working to supply to other countries.”

He says a good ratio is below 1 time, but he points to the fact that the company is on expansion mode. “So, a leverage ratio of 1.3 to 1.5 times would be good for us.”

Pharmaniaga’s FY2021 dividend payout ratio was 71%, lower than the more than 90% recorded from FY2016 to FY2018 as it reinvested its earnings and cash flow into capex for its ongoing expansion plans.

While the group is 51.85%-owned by Boustead Holdings Bhd and 8.62%-owned by Lembaga Tabung Angkatan Tentera, Zulkarnain says there is no pressure for the company to make dividend payments to its majority shareholders instead of using profits from operations to pursue expansion and lower its gearing.

“Unfortunately, for the last two years, Boustead Group was hit by the littoral combat ship (LCS) project, so we needed to assist them. Once the government agrees on whatever requirements and releases them from the LCS issue, I think Boustead will have no problem getting their finances sorted out, hopefully in another month.

“Then, by this year, we can have a good discussion on the dividend payout and the profits to be retained for our future expansion,” he says.

In 2011, the Ministry of Defence had awarded the RM9.1 billion LCS project to Boustead Naval Shipyard Sdn Bhd, a subsidiary of Boustead, for the supply of six units of LCS to the Royal Malaysian Navy. So far, none have been completed.

Bloomberg data shows that Pharmaniaga, which has a market valuation of RM975.9 million, is trading at a forward price-earnings multiple of 10.35 times on FY2022 earnings. Peers such as Duopharma Biotech Bhd, IHH Healthcare Bhd and KPJ Healthcare Bhd are trading at a forward PE valuation of 17.07 times, 34.81 times and 30.3 times respectively.

Pharmaniaga’s shares attained a one-year high of RM1.18 on May 31, 2021, before tumbling to close at 74.5 sen last Friday.

 

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