This article first appeared in The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

FINANCIALLY distressed Pharmaniaga Bhd is understood to have received proposals from interested parties looking to take a stake and participate in the pharmaceutical company’s restructuring, sources say.

The interested parties are said to include institutional funds, private equity firms and private entities run by accomplished businessmen who are looking to buy into Pharmaniaga on the cheap and play a part in the company’s rescue plan.

Pharmaniaga, which slipped into Practice Note 17 (PN17) of the Main Market Listing Requirements of Bursa Malaysia in February, is currently working on a regularisation plan, with assistance from investment banking outfit MIDF Group.

“There are several proposals on how to resurrect the company to resolve its issues, including cash calls to regularise its financial condition, share issuance and potential emergence of new shareholders,” a source says.

Another source says there are also proposals from other government-linked investment companies (GLIC) such as Permodalan Nasional Bhd (PNB) and Khazanah Nasional Bhd, but this remains conjecture at press time. He adds that proposals also came from private entities such as BP Healthcare Group and a couple of private equity firms.

BP Healthcare declined to comment when contacted.

At present, the main shareholders of Pharmaniaga are Boustead Holdings Bhd, which has 51.84% equity interest, and the Armed Forces Fund Board, or Lembaga Tabung Angkatan Tentera (LTAT), which has an 8.62% stake.

While the restructuring of Pharmaniaga is being finalised, LTAT is in the process of privatising Boustead at 85.5 sen per share, or RM703.25 million. Last week, the pension fund’s shareholdings in Boustead stood at 90.49%, which was accumulated via open market acquisitions as well as shareholders’ acceptances through the offer.

Another source says that apart from selling a stake in Pharmaniaga, LTAT could secure funding to rescue and hold onto the company.

In mid-April, the government extended Pharmaniaga’s concession agreement for the provision of medicines and medical supplies to the Ministry of Health’s healthcare facilities for another 10-year period. Pharmaniaga says it expects to conclude the concession agreement by the end of next month.

The company manages 35% of the government’s spending on pharmaceuticals, which in turn means the bulk of the group’s revenue and profit are generated from its concession with the government.

“At the moment, there are several proposals in place. Pharmaniaga would also need to re-evaluate its concession for a potential fundraising,” says another source.

An executive reckons that Pharmaniaga would require a capital injection of at least RM500 million to get out of PN17 status and stay afloat.

“Capital injection is a must for Pharmaniaga to exit its current PN17 status and repay its short-term borrowings. The question is whether it will be from the existing shareholders or entities, other GLICs,” he says.

As at March 31, 2023, Pharmaniaga had total borrowings of RM1.25 billion, of which short- and long-term borrowings stood at RM1.03 billion and RM222.78 million respectively. Its cash balance was a mere RM56.62 million.

Last February, Pharmaniaga fell under the PN17 classification for financially distressed companies after posting its largest ever quarterly net loss of RM664.39 million in the fourth quarter ended Dec 31, 2022.

The company took a hefty RM552.3 million impairment, owing mainly to its large inventory of unsold vaccines. Pharmaniaga also wrote down the goodwill of RM50.3 million of its Indonesian manufacturing units.

The group is required to submit its regularisation plan to the authorities within 12 months of the announcement, by Feb 27, 2024.

Following the announcement, Pharmaniaga saw the departure of its CEO Datuk Zulkarnain Md Eusope on March 14.

Shares in Pharmaniaga have been under pressure since the beginning of the year, which was exacerbated after it slipped into PN17. Its share price plunged as much as 54% this year to as low as 25 sen apiece on March 20. The share price has since recovered to 36 sen last Friday, giving it a market capitalisation of RM471.7 million.

According to Bloomberg data, Pharmaniaga is trading at a forward price-earnings ratio of 10.3 times, compared with its closest peer Duopharma Biotech Bhd’s 14.3 times.

The recovery in Pharmaniaga’s share price came about as the government extended the concession agreement with the group. Financially, Pharmaniaga has not recovered.

Its net profit plunged to RM2.65 million in the first quarter ended March 31, 2023 (1QFY2023) — barely 10% of the RM27.73 million it made a year ago — on revenue of RM880.4 million. The latest figures were also a far cry from its pre-pandemic levels. Pharmaniaga posted a net profit of RM19.6 million in 1QFY2019 on revenue of RM786.1 million.

The supplier of generic drugs to public hospitals attributed the big earnings contraction to lower customer demand in both its concession and Indonesia operations. In addition, it incurred higher financial costs as a result of the hike in the overnight policy rate. 

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