Dupoharma Biotech looks towards FY24 for recovery
Analysts believe the near term outlook for Duopharma Biotech Bhd (Duopharma Biotech) remains challenging, but a longer term outlook into financial year 2024 (FY24) could bode well for the pharmaceutical player.
AmInvestment Bank Bhd (AmInvestment Bank) reduced its FY23-FY25 forecast earnings for the firm by 16, five and five per cents respectively mainly to account for weaker 2HFY23 sales compared to 1HFY23.
“It was also to account for lower FY23 core gross profit margin from 42 per cent to 40 due to the temporary shift in procurement process by the government from an approved products purchase list (APPL), which offers a guaranteed level of orders, to buying on a need basis following the APPL expiry in end-June 2023,” it explained in its notes.
“Our FY23 net profit has factored in potential tax savings of RM10 million in 2HFY23 upon the commissioning of plant K3 in 2QFY23.
“Duopharma clarified that lower-than-expected revenue from ethical classic and specialty segments in 2QFY23 was mainly due to weaker demand from the public sector.”
Based on market intelligence, AmInvestment Bank saw that hospitals under the Ministry of Health (MOH) were more cautious in procurement and distribution of drugs in 2QFY23, despite 2023 government allocation to MOH rising to RM36.3 billion.
“Recall that Pharmaniaga was classified as a PN17 company due to its negative equity position in late February 2023,” AmInvestment Bank recapped. “This led us to believe that Pharmaniaga’s financial distress disrupted significant orders from Duopharma, contributing to MOH’s soft demand in 2QFY23.
“Duopharma indicated that the company has not yet experienced any payment delays from Pharmaniaga.
“Surprisingly, Duopharma disclosed that the APPL expired at the end-June 2023 with no renewal in sight yet in FY23 from the government. This is unprecedented for the pharmaceutical industry.
“Without an APPL which provides an assured takeup level to suppliers, MOH has been purchasing on a need basis.”
AmInvestment Bank viewed this as it implies that MOH’s sales volume will be lower in 2HFY23 than 1HFY23, and disrupted Duopharma’s pricing strategy to pass on higher operating costs.
To recap, the group originally intended to revise prices in July 2023 if it had been awarded APPL renewals in June.
On a positive note, the group reported that the tendering of a new APPL contract with MOH has started. The award and supply of drugs to MOH under a new contract are expected to be concluded by 1QFY24.
“The new APPL will have a volume increase of three to five per cent over its predecessor, while the pricing will be comparable or slightly higher.
“Separately, the group guided that its consumer healthcare (CHC) segment could stabilise in 2HFY23 and regain growth momentum in FY24F. All in, we believe Duopharma will have an unexciting 2HFY23 earnings trajectory albeit a stronger FY24.”
Similarly, TA Securities Holdings Bhd’s research arm (TA Research remained sanguine on Duopharma’s FY24 prospects/
“Beyond prevailing demand softness, we remain bullish on Duopharma’s FY24 prospects. We anticipated a recovery in the government sector, driven by the new APPL contracts,” it said in a separate note.
“Note that the tendering of the new APPL contract with the government of Malaysia has started and is expected to be concluded by 1Q24.
“We expect APPL volumes to be higher by three to five per cent while average prices will increase as well. As for the nonAPPL products such as Insulin, we expect Insulin contribution to be higher at RM90 milion for FY24.”
Meanwhile, TA Research believed that the consumer healthcare segment will see an upward trend, given that Vitamin C sales has bottomed in 2Q23. In addition, the IRORO brand halalcertified anti-hair loss products are now available to consumers through e-commerce platforms in Malaysia.
The stem cell used in IRORO will be able to promote hair growth as well as scalp improvement.
“As for the ethical specialty sector and export segment, we expect sales to remain resilient in FY24. In all, we expect Duopharma’s net profit to surge 26.3 per cent to RM88.4 million in FY24.”