Pharmaniaga’s concession agreement with government unchanged

KUCHING: Pharmaniaga Bhd’s (Pharmanagia) concession agreement to supply medicines to the Ministry of Health (MoH) is still intact despite a change in government.

In a corporate update, MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) detailed that there has been no change in the concession agreement between the Government and Pharmaniaga and it will be business for the pharmaceutical company as they are governed by MoH’s policies which have been left unchanged since the new government came into power.

In fact, the research arm detailed that the new government could potentially be a boon for the group as it was announced that the government will be relooking into increasing the annual budget allocation to the MoH from the current 4.5 per cent to 6 to 7 per cent.

“This would potentially mean more business for local pharmaceutical players,” said the research arm.

That being said, it should also be noted that the procurement of drugs and medical supplies will likely continue to be moderate as the government tries to manage the ballooning healthcare costs in public hospitals.

“That said, we take comfort in the fact that both Pharmaniaga’s private sector business as well as Indonesian operation have been contributing well to the group’s overall revenue which we think will bode well for the company in terms of future earnings contribution,” said the research arm.

And touching on the reintroduction of the Sales Services tax (SST), it is expected that the SST could potentially lead to an increase in the price of medicines from before should the SST not continue on with the exemption on tax for certain medicines.

To recap, under the Goods and Services Tax (GST) system, around 2,900 drug brands listed in the National Essential Medicine List (NEML) or a circa 25 per cent of all drug brands in Malaysia were exempted from GST.

Despite the potential negative impacts of this, MIDF Research guides that Pharmaniaga and other local pharmaceutical companies will likely see minimal impacts as 70 per cent of the country’s total medicines is the MoH.

“Currently, the sales to MoH make up 90 per cent and up to 60 per cent of Pharmaniaga and CCM DuoPharma Biotech’s revenue respectively. Therefore, we opine that the revenue coming from the government will potentially remain intact with a potential increase due to the re-introduction of SST,” said the research arm.

All in, MIDF Research is maintaining their ‘Neutral’ recommendation on Pharmaniaga with an unchanged target price of RM4.20 which is based on a FY19E EPS of 29 sen pegged to an unchanged FY19F target PER of 14.3 fold which is -1SD lower than the group’s average five-year rolling PER.