This article first appeared in The Edge Malaysia Weekly on March 21, 2022 - March 27, 2022

PHARMANIAGA Bhd’s Indonesia-listed logistics and distribution arm PT Millennium Pharmacon International Tbk (MPI) is looking at inorganic growth opportunities such as acquisitions and joint ventures (JV) to accele­rate its growth.

“We are approaching a few companies. Some of them are also our principals. We cannot reveal their names, but we are trying to work with them because some of these companies have good products and good marketing teams, but they do not have the funds (to grow),” MPI president director Ahmad Abu Bakar tells The Edge in a vir­tual interview.

“This is an opportunity for us to see if we can work with them or acquire them. (Through acquisitions) we will also have a product and marketing team ready without having to start from scratch.”

Ahmad says the plan to grow inorganically is also prompted by its desire to reduce its reliance on third-party products. MPI currently distributes pharmaceutical products manufactured by Pharmaniaga’s 85%-owned Indonesian subsidiary PT Errita Pharma and Pharmaniaga, as well as third parties. MPI holds the remaining 15% stake in Errita, a generic drug manufacturer based in Bandung.

“We are targeting 2023 to acquire a company that manufactures OTC (over-the-counter) products and also a medical device company,” he says, adding that an acquisition will help position MPI for “extraordinary growth” going forward.

Pharmaniaga’s latest quarterly announcement on Feb 17 shows that its Indonesia operations, which consist of MPI and Errita, recorded a revenue of RM893.08 million in the financial year ended Dec 31, 2021 (FY2021), a 10.3% increase from RM809.78 million in FY2020. The Indonesia operations accounted for 18.5% of Pharma­niaga Group’s FY2021 total revenue.

For FY2022, MPI has set an annual sales growth target of 13%.

Incorporated in 1952, MPI is listed on the Indonesia Stock Exchange and is one of the top 10 distributors of pharma and related products for foreign as well as Indonesian principals in Indonesia. This complements Pharmaniaga’s core business of manufacturing, marketing and distribution of pharma and medical products.

Pharmaniaga purchased a 55% stake in MPI for RM12.2 million in 2004, gradually increasing its holding to 73.43% as at Dec 31, 2021.

On prospects, MPI president commissioner Joefly Joesoef Bahroeny is optimistic that MPI is well-positioned to pursue growth as well as ride Indonesia’s economic recovery. “The pharma industry is expected to grow about 12% to 13% per year. Currently, Indonesia’s pharma market is worth IDR84 trillion (US$6 billion) and is expected to reach US$10 billion by 2024.”

He observes that in the past two months, the company’s financial performance has returned to pre-pandemic levels as more people are going back to hospitals to conduct normal medical check-ups and undergoing elective surgical procedures that were postponed because of Covid-19. This is good news for MPI, as 70% of the products it distributes are prescribed drugs.

MPI’s annual report for 2020 shows its earnings took a hit when the pandemic broke out in 2020, with its net profit tumbling to IDR2.8 billion in FY2020 compared with IDR7.88 billion in FY2019. Sales were lower at IDR2.64 trillion from IDR2.73 trillion a year ago.

For the nine months ended Sept 30, 2021 (9MFY2021), however, MPI recorded a higher net income of IDR10.01 billion (RM2.94 million) compared with IDR3.71 billion a year ago on the back of higher sales of IDR2.27 trillion compared with IDR1.95 trillion during the same period. MPI has yet to file its 4QFY2021 results on IDX.

Against this backdrop, the company is looking to further expand its reach in the pharmaceutical products distribution industry in Indonesia by opening more branches, especially in the eastern region.

“There are more than 2,000 pharma distributors [operating] in Indonesia, but we are one of the national distributors. [As a] national distributor, [our business] covers the whole of Indonesia, with 33 branches,” says Ahmad.

“We plan to [open more branches] in the eastern part of Indonesia [such as] Sulawesi, in line with the Indonesian government’s policy to [encourage businesses to] expand towards the eastern areas. We are targeting to open [a branch] in Lombok, but we need to gather more data before we open [any branch] there.”

Amid rising operating costs owing to higher transport and freight costs and a potential minimum wage hike in Indonesia, Ahmad sees challenges in protecting its profit margin.

“Indonesia has a very wide area, hence the transport costs can be very high, between 5% and 20% [of the company’s total operating costs], depending on the location. In Jakarta and Java, it is still okay. But if you want to send (goods) outside of Java such as Bali, Sulawesi, Lombok and Kalimantan, the cost will be higher,” he explains.

Another challenge the company faces is cash flow due to slow payments received from government hospitals as well as interest rate hikes that will further burden its bank borrowings.

“Because we are utilising a lot of bank loans for expansion, the interest rate will be a challenge. At the moment, the interest rate is 6.5% to 7%, but you can’t deny that it used to be at the 10% to 12% levels before the pandemic. So I think the interest rate would probably slowly go back [to the pre-pandemic level],” Ahmad adds.

MPI’s debt service ratio stood at 1.51 times in FY2020 compared with 1.34 times in FY2019, its annual report shows. A debt service coverage ratio of one or above indicates that a company is generating sufficient operating income to cover its annual debt and interest payments.

The pandemic saw a significant shift towards digital transformation due to movement restrictions. Recognising the need to adapt to the changing landscape, MPI has begun its digitalisation programme.

The programme involves migrating its on-premise Oracle infrastructure to being cloud-based, as well as launching its sales and payment applications by the end of this year.

MPI’s share price has fallen 13% year to date to close at IDR119 last Friday, giving the company a market capitalisation of IDR151.6 billion.

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