KUALA LUMPUR (Jan 6): A spike in the prices of active pharmaceutical ingredients (APIs) could potentially erode drug makers' margin for 2023, said RHB Investment Bank Bhd (RHB IB) Research.

In a note on Friday (Jan 6), the research house said that as Malaysia relies heavily on API imports from China to India, the API price spikes could impact Duopharma Biotech Bhd, whose API imports account for 50% to 60% of its total raw material costs.

“Numerous types of key starting materials and APIs, such as raw materials for the production of antibiotics, anti-infective, and medication among others — imported to India appear to be 25% to 35% more expensive.

“The Covid-19-induced lockdowns of the past years are putting strains on the supply chain, which is unable to catch up with the demand spikes as pandemic infections rise in China,” said analyst Oong Chun Sung in the report.

He added every 10% spike in API prices is expected to affect Kotra Industries Bhd by 3% and Duopharma by 5% to 6%.

“Nonetheless, we expect the earnings impact to be minimal, as cost spikes may not happen as soon (earliest by 2Q2023), given that the major India API supplier still has four to six months of inventory,” said Oong.

RHB maintained KPJ Healthcare Bhd as its top pick for the healthcare sector, underpinned by its robust patients growth trajectory, being less impacted by nursing staff shortages, and potentially earnings-accretive post disposal of overseas entities by 2023.

“While we remain sanguine on healthcare service providers’ recovery prospects, we think KPJ’s greater domestic focus offers stronger earnings stability.

“For the pharmaceutical players, we believe the resilient consumer demand towards their products, recovery in export sales, and easing of the supply chain bottleneck should help to offset API price spikes,” he noted.

The key downside risks to the sector call are higher-than-expected operating costs, lower-than-expected patient visits/revenue intensity growth, and unfavourable drug pricing mechanisms from the Ministry of Health, the research outfit noted.