This article first appeared in The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023

ATTENTION was again drawn to Pharmaniaga Bhd last week when Defence Minister Datuk Seri Mohamad Hasan announced that Lembaga Tabung Angkatan Tentera (LTAT) almost lost control of the generic drug maker when some well-connected persons attempted to acquire the company at a significant discount to its valuation through the “highest leadership”.

The minister told the media last Thursday that he blocked the deal, saying that such a fire sale would only happen “over his dead body”.

“I argued in the cabinet that Pharmaniaga nearly lost its concession. You can ask [LTAT CEO] Datuk [Ahmad] Nazim [Abd Rahman]. You may ask an MoF (Ministry of Finance) representative. I am telling you, it is not easy [to safeguard Pharmaniaga],” says Tok Mat, as the minister is known, when launching LTAT’s strategy for 2023 to 2025.

“[It was] to the extent that somebody made a bid through the highest leadership, wanting to buy our company at a discounted price. But I said, no, over my dead body ... Let us manage our companies together, and I am very sure we can rise again. When a coconut tree is bent, even a boar wants to climb it.”

Pharmaniaga is 52%-owned by Boustead Holdings Bhd, in which LTAT controls a 97.63% stake after a takeover offer. The armed forces fund also holds a direct interest of 8.6% in Pharmaniaga.

At last Friday’s close, Pharmaniaga’s share price was 38 sen, valuing the company at RM491.5 million. LTAT’s effective stake of 59.36% was worth RM291.75 million.

Coincidentally, the minister’s comment was made a day after Pharmaniaga announced that the Ministry of Health (MoH) had granted it a seven-year concession agreement to provide medical supplies and medicines to public hospitals.

“The government has maintained the scope and responsibilities for the provision of medicines and medical supplies to healthcare facilities under MoH for the new contract,” the pharmaceutical group tells The Edge in an emailed response to queries on the terms and conditions of the contract.

The company explains that while the new contract does not have a stipulated value, as it is driven mostly by the demand of drugs and consumables by the government’s health facilities, MoH’s 2023 published budget for the contract is RM1.6 billion — 36% of the ministry’s total drug and consumable procurement budget.

Based on the RM1.6 billion allocation and assumption of a net profit margin of 3.5%, a back-of-envelope calculation shows that Pharmaniaga’s net profit will be roughly RM56 million for the 12-month period from July 1, 2023, to June 30, 2024.

Despite the good news, the stock failed to stage a strong rebound.

The fresh concession agreement is no doubt a lifeline that Pharmaniaga needs to make it through the rough patch, as it is in the midst of regularising its financials after the massive RM552.3 million impairment due to unsold Covid-19 vaccines. It has eight more months to work on its regularisation plan.

A fund manager says the new concession will no doubt come in handy to revive Pharmaniaga’s financial health. He points out that the company had been operating the public concession all these years but still ran into financial trouble.

“The supply of generic drugs to public hospitals is a steady business. Does it mean Pharmaniaga needs more than just a concession to turn around? If you don’t have good cost control and risk management, any business could lose money, including concessionaires,” says the fund manager.

Kenanga Research maintains its “underperform” call on Pharmaniaga despite the new concession agreement.

“We project pedestrian earnings growth in FY2023 (ending Dec 31) at levels similar to pre-Covid, averaging RM40 million to RM60 million, driven by regular orders for medical supplies from the MoH concession,” Kenanga Research analyst Raymond Choo wrote in the latest research note, adding that the company’s negative shareholders’ equity of RM143 million as at March 31 has impeded its ability to pay out dividends.

Pharmaniaga has been granted the sole concession for the logistics and distribution of products procured under the Approved Products Purchase List (APPL) for 25 years since the federal government privatised the medicine procurement system in 1994. Pharmaniaga supplies more than 700 items on MoH’s APPL to government hospitals and clinics.

When the concession expired in 2019, it was given an extension for a period of 25 months, from Dec 1, 2019, to Dec 31, 2021. Later, Pharmaniaga was given two extensions stretching its agreement to end-June this year.

The latest concession agreement, which lasts until mid-2030, appears to have been given on a direct negotiation basis, despite views that the government should conduct an open tender, allowing healthy competition and a variety of choices rather than a monopoly by a single company.

Nonetheless, Health Minister Dr Zaliha Mustafa told the Dewan Rakyat on June 7 that the extension was due to Pharmaniaga’s successful track record in meeting MoH’s stringent key performance indicators, which consistently exceeded 98%. To recap, Dr Zaliha had let the cat out of the bag in mid-April, telling the media that MoH would continue the concession with Pharmaniaga with a 10-year extension.

Besides the deep losses caused by the one-off impairment, Pharmaniaga had a negative operating cash flow of RM62 million. As a result, the company is proposing a private placement of new shares to raise fresh funds for its working capital.

An analyst says the tight cash flow will hinder its expansion plan that aims to reduce dependency on the public contract. “When I look at Pharmaniaga’s cash flow, I do not think the group can expand its business right now because it needs more cash for marketing expenses and so on. It is also difficult for it to bring its revenue up to pre-pandemic levels,” he adds.

“Further, its recent private placement to raise RM44.55 million is not the best time, obviously, but it has no other choice. Maybe banks cannot fund it, so the group has to go to the capital market.”

Pharmaniaga posted RM2.65 million in net profit for the first quarter ended March 31 (1QFY2023), a far cry from pre-pandemic levels, when it recorded RM19.6 million in net profit in 1QFY2019. As at end-March, its short-term debts stood at RM1.03 billion, while receivables were RM552.36 million. Its payables as well as cash and bank balances stood at RM881.1 million and RM56.62 million respectively.

No one would want to sell one’s business cheaply. To get a good price, however, one would have to ensure the business is on a strong financial foothold and well managed. 

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