This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

PHARMANIAGA Bhd, whose earnings were boosted by the supply of Sinovac Life Sciences Co Ltd’s Covid-19 vaccines to the government during the pandemic, is now taking a hit because of several hundred million ringgit worth of unsold vaccines sitting in its warehouse.

The main generic drug supplier to public hospitals could succumb to a massive impairment that is expected to make a dent in its financials.

The actual quantum would depend on the assessment of its auditors PricewaterhouseCoopers PLT on whether Pharmaniaga needs to make a full or partial impairment, three sources familiar with the company tell The Edge.

One of the sources estimates that the impairment could be to the tune of half a billion ringgit, “depending on how the auditors chose to skin the cat”.

Pharmaniaga’s balance sheet shows that its reserves were at RM257.11 million and shareholders’ funds at RM433.77 million as at Sept 30 last year.

According to its annual report for the financial year ended Dec 31, 2021 (FY2021), the carrying value of the company’s inventory as at end-2021 amounted to RM1.26 billion, of which RM561.4 million pertained to Covid-19 vaccines.

In an email response to questions from The Edge on the possibility of a large impairment, Pharmaniaga says, “Thank you for contacting us. We understand that this is of interest, however, we are unable to provide any comments on this enquiry for the time being.”

The Edge did not reach out to PricewaterhouseCoopers as all auditors have confidentiality agreements in place.

It is worth noting that besides Pharmaniaga, any large impairment could adversely impact its controlling shareholder Boustead Holdings Bhd, which holds a 51.85% stake in the company. Lembaga Tabung Angkatan Tentera (LTAT), which controls 59.42% equity interest in Boustead Holdings, has a direct 8.62% stake in Pharmaniaga.

It appears that the external auditors may have raised the issue of impairing the vaccine inventory in FY2021.

In its FY2021 annual report, Pharmaniaga says it had undertaken an impairment assessment amounting to RM200 million for its wholly-owned unit Pharmaniaga LifeScience Sdn Bhd (PLS) in Puchong — the subsidiary that is involved in the production of Covid-19 vaccines.

Pharmaniaga had concluded that “no impairment loss was required for the investment in the subsidiary as at Dec 31, 2021, as the recoverable amount is in excess of its carrying amount”.

“We focused on this area as the Covid-19 vaccines inventory balance is material and its recoverability assessment involves significant judgement. In making such (an) assessment, management has considered the continuing uncertainties surrounding the Covid-19 situation globally and potential demand for the Covid-19 vaccines.

“Based on management’s assessment, no impairment was required as the group expects to be able to sell the Covid-19 vaccines within FY2022,” the pharmaceutical company says in the annual report.

It is unclear how many Sinovac Covid-19 vaccines were supplied by Pharmaniaga to the government for the second booster shots this year.

Through PLS, Pharmaniaga had in March 2021 developed the capability to manufacture two million doses per month of the Covid-19 vaccine developed by Sinovac. This came after a signing ceremony in January that year, where Pharmaniaga acquired 14 million doses of Sinovac’s Covid-19 vaccine.

In its FY2021 annual report, Pharmaniaga says it had delivered 20.4 million doses of the Sinovac Covid-19 vaccine “to the government of Malaysia, 4½ months ahead of time. This has accelerated the government’s National Covid-19 Immunisation Programme and enabled Malaysia to be amongst the countries with the fastest vaccination rates in the world”.

The annual report states that Pharmaniaga had also sold 30,000 Sinovac Covid-19 vaccines to Myanmar’s Hemas Mandalar Pharmaceuticals Ltd. It is not known if Pharmaniaga’s 73% unit in Indonesia, PT Millennium Pharmacon International Tbk, which distributes pharmaceutical products, or its 96%-owned subsidiary PT Errita Pharma, which manufactures pharmaceuticals, had any dealings in bringing Sinovac’s Covid-19 vaccines to Indonesia.

The size of the impairment is also dependent on the auditors’ valuation of the Sinovac Covid-19 vaccines. In March last year, in an exclusive interview with The Edge, Pharmaniaga group managing director Datuk Zulkarnain Md Eusope said the Sinovac Covid-19 vaccines were to be sold to the private market at a wholesale ceiling price of RM62 a dose and retail price of RM77 a dose.

However, in December 2021, former health minister Khairy Jamaluddin — in a meeting with Public Accounts Committee chairman Wong Kah Woh — was reported to have said that Pharmaniaga was selling Sinovac Covid-19 vaccines at RM130 per dose, or RM260 for two doses.

It is also unclear if the Sinovac Covid-19 vaccines have expired. In November 2021, the National Pharmaceutical Regulatory Agency approved a six-month extension for Sinovac and Pfizer Covid-19 vaccines from the date printed on the label, thus extending the shelf life of the vaccines from six months to 12 months for vials stored at temperatures of 2°C to 8°C.

For its nine months ended Sept 30, 2022, Pharmaniaga chalked up RM37.07 million in net profit on the back of RM2.65 billion in revenue. For the corresponding period the year before, the company recorded RM86.67 million in net profit from RM4.1 billion in turnover.

As at end-September 2022, Pharmaniaga had cash and bank balances of RM32.79 million. Its short-term borrowings stood at RM776.99 million while long-term debts were at RM308.6 million.

Pharmaniaga’s share price closed at 52 sen last Thursday, translating into a market capitalisation of RM674.63 million.

The company is due to release its annual financial results by the end of the month. Soon, the minorities will have a clearer picture of the recoverability of Pharmaniaga’s Covid-19 vaccine inventory.

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