A bitter pill for Pharmaniaga to swallow

PHARMANIAGA Bhd ’s shares took a beating this week, declining sharply by 7.9% to RM3.73 on Friday, making it the largest single day drop in two years.

This was largely triggered by a news report, which revealed that the government has been paying a large premium for medicines and consumable supplies through middlemen such as Pharmaniaga.

The article claimed that Pharmaniaga is the sole concession holder for the purchase, storage and supply of branded and generic drugs and medicines to 148 government hospitals as well as 2,781 clinics and district health offices nationwide.

Health Minister Dr Dzulkefly Ahmad, however, has refuted the claims, stating that it was “strictly incorrect” that Pharmaniaga is the sole concession holder as there were other vendors supplying directly to all of the ministry’s health facilities.

Last year, the total expenditure for medicines and consumable items by the Health Ministry (MoH) amounted to an RM3.3bil.

Of this total figure, about 33.4% or RM1.1bil was from the concessionaire company, while 66.6% or RM2.2bil were purchases by facilities through central contracts or quotations.

Dzulkefly points out that Pharmaniaga would source for required medicines and sell them to MoH at a pre-determined price with an additional fixed-percentage mark-up and commission rate to cover the costs of distribution, inventory holding, and procurement.

According to CIMB Research, Pharmaniaga has held exclusive rights since 1994 under a concession agreement to purchase a list of medical products under MoH’s approved product purchase list (APPL) from suppliers selected by MoH, and distribute them to medical institutions under MoH’s jurisdiction. Pharmaniaga procures medical products at prices which have been predetermined by the MoH with its suppliers.

The concession agreement was last renewed in 2009 for a period of 10 years, which will expire by November 2019.

“Through a tender exercise (every three years), MOH selects the suppliers of products for the APPL based on its own product specifications and criteria.

“While Pharmaniaga does organise these tender exercises under the concession agreement, we understand that it does not play any part in the selection of suppliers by MoH,” the research house says.

As of financial year ended Dec 31, 2017 (FY17), revenue from the concession agreement made up 49% of Pharmaniaga’s total revenue of RM2.3bil, and is fully reflected under the logistics and distribution (L&D) segment, which makes up 68.3% of FY17 revenue.

The concession agreement is not limited to the supply and distribution of third-party or generic brands, but a portion of the drugs and medicine supplied include Pharmaniaga’s own manufactured brands.

“In our view, margins for the concession agreement business are thin given that the earnings before interest and taxes (Ebit) margin for the overall L&D segment was 1.2% in FY17.

“Note that L&D division’s FY17 Ebit only made up 17.7% of the group’s total FY17 Ebit, with the remaining generated by its manufacturing segment (69.3%) and Indonesia operations (13%),” says CIMB Research.

A spokesperson for Pharmaniaga tells StarBizWeek that the group is receptive to an open tender exercise, should the government decide to manage the concession as such, going forward.

“Pharmaniaga has always been transparent in its practices and ready if the government decides to manage the concession through an open tender exercise.

“Based on our consistent performance in meeting the service levels, we have full confidence in our competitive edge,” adds the spokesperson.

It is estimated that Pharmaniaga’s manufactured brands contribute to approximately 4% of the total Malaysian pharmaceutical market.

“It is difficult to ascertain the total pharmaceutical market share in Malaysia as it is very fragmented,” says the Pharmaniaga spokesperson.

Furthermore, Pharmaniaga fulfills a key requirement of the concession agreement through the delivery of the Pharmacy Information System (PhIS) to all government facilities equipped with the requisite infrastructure.

The PhIS provides greater operational efficiency and improves the end-user experience. During a media briefing held in conjunction with Pharmaniaga’s annual general meeting last April, Pharmaniaga managing director Datuk Farshila Emran had said that the group was working on reducing its dependency on the concession business.

“Efforts are focused on increasing the non-concession business and exports both within and beyond the Asean market.

“We also intend to introduce more over-the-counter products and grow our consumer healthcare segment,” she said.

The group’s Indonesian operations have been performing well, constituting some 32% or RM736mil of total group revenue in FY17.

Apart from that, Pharmaniaga is able to leverage on its niche of producing Halal-certified products, with plans underway to market them in Southeast Asia, Asia-Pacific, and Europe.

To date, the group has more than 60 products that are halal-certified.

Meanwhile, MIDF Research does not discount potential price revisions on the supply of medicines to the MoH in the future, due to the current financial situation of the government. “We take comfort in the fact that the government has announced that it will re-look into increasing the annual budget allocation to the MoH from the current 4.5% to 6%-7% as this would potentially mean more business for the local pharmaceutical players.

“We opine that the revenue coming from the government will potentially remain intact with a potential increase due to the reintroduction of sales and services tax (SST),” the research house says in a recent report. To recall, 2,900 drug brands listed in National Essential Medicine List (NEML) were exempted from the goods and services tax (GST).

This only makes up about 25% out of 12,000 drug brands registered in Malaysia, where the balance 75% is still subjected to GST. According to industry players, depending on the quantum, the reintroduction of SST could potentially lead to an increase in price of medicines from before.