Kenanga, Hong Leong Downgrade Pharmaniaga

New open tender process takes time, says Hong Leong.

KUALA LUMPUR, Nov 1 – Kenanga Research has downgraded Pharmaniaga Berhad from MP (market-perform) to UP (under-perform) after the government-linked company failed to get a renewal of its sole concession to supply the Ministry of Health (MOH) medicines.

Health Minister Dzulkefly Ahmad announced yesterday that the government has decided to replace MOH’s concession system of logistics and distribution services for medical supplies with an open tender system, 25 years after the Bumiputera tender agent first received sole concession in 1994.

After the Mahathir administration privatised the medicine procurement system in 1994, a 15-year sole concession was given to Southern Task (which later became known as Remedi Pharmaceuticals Sdn Bhd, which in turn became known as Pharmaniaga Logistics Sdn Bhd) to procure, store and distribute certain pharmaceutical products and medical devices to government hospitals and clinics, according to a Malaysia Competition Commission (MyCC) report. The concession was then extended for a decade to 2019, which ends this November 30.

“The stock has been de-rated on the concerns of government reviewing all medical supplies concession agreements of which Pharmaniaga has a 10-year contract ending in November 2019.

“However, we believe all is not lost for Pharmaniaga considering its track record, platform and systems already in place for the distributions of such medical supplies,” Kenanga said today.

Kenanga said that Pharmaniaga is supported by its global operations.

“Overseas, its Indonesia 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 its 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.”

Hong Leong Research has also done a similar downgrade on Pharmaniaga from MP to UP following the announcement of the government’s decision.

“While we are negative on the news, there is some saving grace for Pharmaniaga from (i) the migration to open tender will take time and its services will still be required during the transition and (ii) it has the upper hand to participate in the open tender given its experience and incumbent position,” Hong Leong said in a statement.

“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.”

Hong Leong also spoke on how implementing an open tender system might take time and Pharmaniaga might still be of service till then.

“The 15-year concession first expired back in Oct 2011 but extensions were granted for it to continue its services until the new agreement was inked in Mar 2015. If these were used as anecdotal evidence on the possible timeline, then perhaps, Pharmaniaga’s near term earnings (i.e. FY19-20) are arguably intact as it continues to operate under the current terms,” said Hong Leong.

As at 2.30pm today, Pharmaniaga stocks were trading at RM2.14, translating to a drop of 3.17 per cent.

Kenanga has cut the price target from RM2.35 to RM1.60 with a price call of Sell, whereas Hong Leong changed price target to RM2.14 with a price call of Hold.

Pharmaniaga is the biggest Bumiputera tender agent in the country with exclusive concession to supply 700 items in the Approved Product Purchase List (APPL) comprising medicines and other medical items, determined by MOH, to government hospitals, institutions, and clinics. This comprises over a third of the government’s drug supply.

All tenders for APPL items must pass through Pharmaniaga Logistics, according to MyCC.

Pharmaniaga’s concession provides distribution and logistics services for the products procured under the APPL. According to MyCC, Pharmaniaga supplied 38.5 per cent of the RM2.3 billion total cost of medicines procured for all MOH hospitals, institutions and clinics in 2015.

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