Duopharma Biotech expects to bounce back from 2023 blip this year

Friday 03 Jan 2025

This article first appeared in The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024

DUOPHARMA Biotech Bhd is set to report weaker revenue and earnings for the financial year ended Dec 31, 2023 (FY2023), its first annual profit decline in four years. This comes amid a double whammy of higher operational costs and a dip in demand, which group managing director and executive director Leonard Ariff Abdul Shatar describes as “a perfect storm”.

However, the generic pharmaceutical group behind brands such as Champs, Flavettes, Proviton and Uphamol is expected to resume its growth trend this year.

Duopharma is expecting its performance for the final quarter of 2023 to be broadly in line with the first nine months of last year, as it sees no changes in market conditions.

Results for 9MFY2023 show the group’s net profit falling 16.6% to RM44.14 million from a year ago, while revenue slipped marginally by 1.4% year on year to RM537.23 million. Duopharma will report its results for the final quarter of 2023 later this month.

“We don’t expect fourth-quarter earnings results will be much different from 9MFY2023 because there was nothing special happening. December is also typically the weakest month for public procurement of drugs, not just for Duopharma but also for other pharmaceutical companies. Things usually go back to normal from January onwards,” Leonard Ariff tells The Edge in an interview. The Ministry of Health (MoH) does not spend much on medication procurement in December given that its account closing period falls in 4Q.

Duopharma is expected to post a net profit of RM66.58 million for FY2023, based on the average of five analysts polled by Bloomberg, down 5% from RM70.11 million in FY2022. Revenue is expected to reach RM669 million, down 4% from a record RM696.72 million in FY2022.

“It’s been a difficult year. We experienced a perfect storm in 2023,” says the 58-year-old Leonard Ariff, who has been at the helm of Duopharma since the demerger from its then parent Chemical Company of Malaysia Bhd in December 2017.

Several factors, including higher operational costs, contributed to the decline. “We had ratified a revised collective agreement at an augmented value, which we knew was going to hit us in 2023. But what caught us off guard was the upward revision of electricity tariffs and the kicking-in of the new provisions of the Employment (Amendment) Act 2022, such as provisions of overtime payments,” he says.

The group also saw higher borrowing costs after Bank Negara Malaysia raised its overnight policy rate by 25 basis points to 3% in May 2023. Duopharma’s finance costs rose 64% to RM12.79 million in 9MFY2023 from RM7.79 million a year ago.

“Fluctuation in the exchange rate was another factor. About 70% by value of our raw materials are imported and denominated in US dollars. We are not the only ones. Generally, the pharmaceutical industry is quite sensitive to [changes in] exchange rates,” he says.

According to Leonard Ariff, in 2023, revenue was also dragged down by a disruption in demand from the public sector segment. “The last time the government had conducted a tender [of drug items under the approved products purchase list (APPL)] was in 2017. It then rolled over the contracts during the Covid-19 pandemic. In 2023, it reopened the [APPL] tender. But during the re-tender period, there were some disruptions in demand from the public sector.”

In addition, one of Duopharma’s principals terminated its sales and marketing contract earlier last year, which shaved about RM15 million off the group’s annual revenue target for 2023.

And while Duopharma had benefited from a surge in demand for its popular vitamin C brands, Champs and Flavettes, in the pandemic years of 2020 to 2022, those “exceptional” conditions had waned. “As the country shifted to the endemic phase, the spurt in consumption started to taper off. The group saw sales in the consumer healthcare sector soften by about 20% and 25%, which worked out to about RM20 million. So now we are back to pre-pandemic levels of demand in late 2019,” Leonard Ariff says.

The group’s profit was also hit by a one-off impairment charge as it wrote down about RM2.3 million, the value of a parcel of vacant leasehold land, during 9MFY2023.

Back on growth path this year

Leonard Ariff is more upbeat on 2024, expecting the group to return to its growth trajectory. “We are quite bullish about 2024. Some of the issues that we saw in 2023 are normalising. We believe that the programmes that we have in place will buffer a lot of the cost increases that we saw in 2023.

“In terms of revenue, we expect to see a recovery in 2024 with the new contracts that we will execute with the government. The recent open tenders [for APPL] are all going to be awarded soon. The price negotiations have concluded. We are now waiting for the formalised contracts, which will start contributing to revenue this year.

“We also believe the private sector segment will continue to grow at [a rate of] 4% to 6%. As for the consumer healthcare sector, we think the decline in demand has bottomed out and therefore we should be able to see growth in 2024. It’s probably not to the levels that we saw in 2021 and 2022, but I think we have now returned to a steady state,” he says.

Duopharma will be rebalancing its portfolio in the consumer healthcare segment to build up its products other than vitamin C, such as Uphamol. Today, Duopharma is the country’s largest supplier of paracetamol under the Uphamol brand.

Analysts are also upbeat on the group’s prospects, as they see Duopharma benefiting from the higher allocation of RM41.2 billion to MoH in Budget 2024, primarily for the development of various healthcare facilities and procurement of medicines and consumables, which are expected to increase demand for medicine. They expect Duopharma to post a net profit of RM86.3 million on revenue of RM767.25 million in FY2024, according to consensus estimates compiled by Bloomberg.

The private sector accounts for 47% of the group’s revenue, while the public sector contributes 45% and the export segment the remaining 8%. Leonard Ariff says this revenue composition is intentional as a way to mitigate risks to market demand.

“Over the years we noticed that whenever Malaysia goes into a slight economic downturn or softening, you find a migration of patients from private to public healthcare. So for us, strategically, it is always to have a balance between private and public in order to make sure that patient migration doesn’t affect us. Irrespective of what is the condition of the economy, we will see at least volume growth, not necessarily value growth, because prices (of drugs supplied to) the government are slightly lower than the private side.”

He points out that in Malaysia, the government consumes about 60% of total pharmaceuticals in the country, while the private sector consumes about 35% to 40%. “Some quarters argue that we are overreliant on the government sector with our exposure at 45%, but my argument is that we are actually underrepresented because the government consumes 60%.”

Company did not benefit from Covid-19 vaccines

While Covid-19 generated multibillion-dollar annual sales for some pharmaceutical companies, Leonard Ariff says Duopharma was not among them.

Its initial plan to supply Russia’s Sputnik V in 2021 fell through as the vaccine was not approved by the World Health Organization (WHO) under the latter’s emergency use listing. The pharmaceutical group then went on to distribute China’s Sinopharm vaccine, which was WHO-approved.

“Vaccines did not give a boost to Duopharma’s earnings. If anything, it was the opposite because we had to write down the value of the vaccines we had brought in. If you look at the take-up rate of the first booster, it was actually quite low. And when the government announced the second booster on a voluntary basis, hardly anybody took it. If the pandemic had continued [for] longer, then I think the government’s plan was to establish a private sector supply for those who were prepared to pay out of pocket, while continuing to provide vaccines for those who couldn’t afford them,” Leonard Ariff says, noting that the impairment on Sinopharm vaccines amounted to some RM20 million in FY2021 and about RM30 million in FY2022.

Duopharma has now halted sales of the Sinopharm vaccine amid poor demand for Covid-19 vaccines.

Slow demand for such Covid-19 vaccines following the country’s move to the endemic phase also saw Pharmaniaga Bhd, whose earnings were boosted by the supply of Sinovac vaccines to the government during the pandemic, suffer losses from substantive stock write-downs. It had announced in 2023 an impairment amounting to a staggering RM552.3 million, brought about by unsold Covid-19 vaccines. The group fell into Practice Note 17 status for financially distressed companies and suffered its largest ever quarterly net loss of RM664.39 million in the final quarter of its financial year ended Dec 31, 2022.

Critics have slammed Pharmaniaga’s poor handling of vaccine procurement because it bought too much. But Leonard Ariff says the Covid-19 pandemic was an unprecedented crisis. “Nobody had any experience. So to me, it is a little bit unfair to say you should have done this. In hindsight, everybody has a 20/20 vision.”

He says lessons learnt from the pandemic include that Malaysia should establish some level of self-sufficiency, especially for critical drugs, should another pandemic happen. “This is something that Duopharma has been lobbying for for quite a number of years — that even though Malaysia has a relatively small population of 33 million, we should be seeking self-sufficiency in some of these drugs so it makes us less reliant on imports in times of emergency.”

On the lookout for acquisitions

Duopharma Biotech Bhd has an appetite for acquisitions. It is swimming in cash following the issuance of the first tranche of its RM2 billion Islamic bond programme amounting to RM364 million in September last year. Its cash balance stood at RM281.88 million as at end-September 2023, while borrowings totalled RM589.83 million. The group’s net gearing ratio stood at 0.46 times.

“If you look at our record over the last three years, generally we try to keep about RM100 million cash on the balance sheet in the group. At the moment, it is above RM200 million, which is unusual. But it gives us a lot more ammunition to do some of the projects that we are looking at and reduce the need to raise external funding,” group managing director and executive director Leonard Ariff Abdul Shatar tells The Edge.

“We have a team of people who are perpetually reviewing potential mergers and acquisitions (M&A) targets both domestically and regionally. But so far we haven’t found any target of interest because the potential companies have to align strategically with the direction in which Duopharma wants to grow, which is in the healthcare space. Ideally, it is in an area that we have knowledge about.”

While the group is open to making a deal, it is in no rush. “No, we don’t have any specific time frame in mind. There is none [to conduct] due diligence yet. Personally, I believe there is still a lot of organic growth opportunity within the Malaysian market but we have to push overseas more, which means the portfolio Duopharma has moving forward has to be unique, and that is one of the reasons why we are pushing the biologicals side because there is less competition and it is unique, which will give us a better range of products in order to export,” Leonard Ariff says.

The group is also evaluating setting up manufacturing facilities overseas as part of its M&A strategy. Duopharma Biotech currently owns and operates three manufacturing plants in Selangor in Klang, Bangi and Glenmarie.

“All three [plants] are operating at what we describe as a comfortable capacity in the sense that we don’t have to reinvest in new capacity at least for the next three to five years unless something drastic changes.

“However, the export segment, which is [transacted] in US dollars, acts like a natural hedge for us. But it accounts for less than 10% of our total revenue. Ideally, we should grow that to above 20% of revenue. There is no timeline to achieve this because we first need to develop the portfolio, the products, the market access, the routes to market and others, so we are still in that process of capacity building,” he says.

Potential synergy generated from investee firms

Leonard Ariff says Duopharma has been actively investing in companies overseas where it sees potential to promote product development in Malaysia in the form of technology transfer.

For instance, Duopharma holds a 7.55% stake in South Korea’s PanGen Biotech Inc, which has expertise in the research and development (R&D) of high-molecular biopharmaceuticals, and has 2.73% equity interest in another South Korean company, SCM Lifescience Inc, which specialises in the R&D of cell therapies.

“We invest in these companies because we think the rights that we obtain from the investment are cheaper than trying to do it ourselves. Locally, we also invested [3.35% equity interest] in a start-up called Naluri Hidup Sdn Bhd, which has developed a digital holistic healthcare application. We knew that the digitalisation of healthcare would come about, but we weren’t quite sure which direction it would go in. So rather than investing in our own team and then making a lot of mistakes, we decided to invest in Naluri. That is one thing that Duopharma has done over the years. We take a small equity portion in companies in return for certain rights, allowing us to shorten the development time frame,” he says.

Permodalan Nasional Bhd is the largest shareholder in Duopharma with a direct stake of 44.107%. The Employees Provident Fund held 8.525% equity interest as at Feb 16, 2024.

Leonard Ariff says the group does not have a dividend policy. “Our payout is based on the availability of cash over the forward 12 months. You can see from our cash balance it is reasonably healthy. If we don’t announce a dividend, I think that would make for some disappointed shareholders. But no promises.”

For FY2022 and FY2021, Duopharma’s dividend per share stood at 2.3 sen, compared with 6.5 sen and six sen for FY2020 and FY2019 respectively.

Of the five analysts covering Duopharma, four have a “buy” rating and one a “hold”, with an average price target of RM1.48, which indicates a potential upside of 17% from last Thursday’s closing price of RM1.26. Shares of Duopharma have fallen 23% over the last one year. At the close of trading last Thursday, its stock was valued at RM1.21 billion.

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