Forex advantage, favourable industry dynamics to drive drugmaker
THE weakening of the ringgit and favourable industry dynamics emerging in the pharmaceutical industry could be a catalyst to drive future growth for Hovid Bhd.
The generic drugmaker and dietary supplement manufacturer says the appreciation of the US dollar would benefit the company given that it derives about 55% of its sales from overseas markets.
“The development on the currency front is positive for us and in the last one year we have already made some forex gains. Given that a substantial portion of our sales are derived from overseas, we will benefit from this,” Hovid’s managing director David Ho tells StarBizWeek in an interview.
“The dynamics of our company is also such that we are also shielded from these currency changes. We have to import our raw materials in US dollars and are able to export again to balance the effect when we pay more in ringgit for raw materials,” Ho adds.
With the currency winds blowing in its favour, Ho expects the company to maintain the growth that it recorded in its first half into its second half of the financial year 2015 ending June 30 (FY15).
“We are hoping to continue the growth trend as seen in the first half of about 15-20% growth in profits and revenues over the previous year. The catalyst would be in the new plant which has not really kicked into the earnings year,” he says.
For its first half of FY15 Hovid saw a commendable rise of 26% in its net profit to RM10.38mil on the back of revenues also rising by 14.4% to RM97.1mil.
Profits growth outpaced its topline due to the higher foreign exchange gain arising from the stronger dollar, the company said earlier.
At its current share price, the company is trading at a price to earnings ratio (PER) of 16.23 times and a forward PER of 14.83 times.
Despite its lengthy presence on Bursa Malaysia, only RHB Research and CIMB Research cover the stock with an equivalent of a “market weight” rating on the stock and a target price of 44 sen.
New plant, new earnings
Meanwhile, the completion of its new tablet and capsule production facility in the latter part of this year will double the capacity of its existing production facility once the two phases of this plant are completed.
“In terms of revenue we would be more bullish on FY16 and the plant will contribute to about an additional RM3-4mil a month for the first year of operations. This figure can go up to RM5-6mil after a year after one or two years of operations once we can get more products registered in Australia and Europe,” Ho says.
He notes that these estimated figures also largely depend on new registrations as the company would need to get its products first approved for use in its export destinations.
“The plant was built to immediately cater to the existing backlog in orders now. We had some constraints in capacity in our old plant as well.
“We plan the new plant in two phases, phase one will be running by June 2015 while phase two should be running by early 2016,” Hovid’s chief financial officer Andrew Goh says.
“Phase one will increase the tablet and capsule (drugs) facility by about 30% upon full utilisation, if phase two is also included it will double our existing capacity for tablet and capusule and this includes many other products,” he adds.
In addition to this plant, the company would also see the completion of a centralised warehouse that will consolidate all its other smaller warehouses some of which are sitting on rented spaces into this more efficient warehouse.
“This will be completed by the end of 2015 or early 2016 and its operations will be more automated as it is computer driven with very few people working. This helps us reduce handling costs in the longer run and a better inventory management,” Ho says.
The new warehouse will have a capacity of 5,000 pallette locations that would be located in proximity to its present production facility.
Hovid is also investing into a research and development (R&D) centre in Penang to allow the company to conduct more clinical studies.
“This will allow the expedition of the launch of new products.
“We will continue our partnership with University Science Malaysia (USM) in this new R&D centre,” Ho says.
Other than producing generic drugs and dietary supplements under its own Hovid brandname, the company also does contract manufacturing for other drugmakers.
“More than 95% of our revenue is derived from our own Hovid branded products. And we also license some of our own products to the multinational (MNC) drugmakers such as Merck, Sanofi and Abbott. This demonstrates the innovation and know-how involved in our products,” Goh says.
Hovid licenses its products to the MNC’s on condition that it also manufactures it for them under their brandname.
The company, which was first established in the 1940s, initially started selling its standalone Chinese herbal product, the Ho Yan Hor herbal tea that is widely available in local stores and pharmacies.
Today, the company’s manufacturing portfolio includes almost 400 different types of products that are exported to more than 45 countries around the world.
Opportunities in expired patents
Moving forward, Ho says he sees opportunities in the RM422bil of prescription and pharmaceutical drug patents that are set to expire in the next 10 years.
“There is a huge market opportunity here for us as these patents expire but bear in mind that developing the generic also takes time as long as two to three years after the patent expires. It is not such as straightforward matter,” Ho says.
Pertaining to this matter, Ho says he hopes Malaysia’s patenting process can be reviewed as the industry’s competitiveness to eventually be able to produce the generic version of a patented drug hinges highly on this process.
Citing the example of a patented drug called Viagra, originally designed by US-based Pfizer which patents had already expired overseas but has not yet expired in Malaysia.
“Say if a company files in the year 2000 but the patent is only approved in 2007 - so the clock starts ticking from 2007 not the year 2000. The additional seven years incurred is because we were late to approve the patent,” Ho says.
“This is why we hope the Government can review the patenting process to ensure the country is competitive because if the process is delayed, then the generic version that will be manufactured here will also be delayed.
“And the missed opportunity makes us lose our competitive advantage as other countries can manufacture the generic drug earlier,” he adds.