Fixing things at Pharmaniaga

Thursday 04 Jul 2024

This article first appeared in The Edge Malaysia Weekly on June 3, 2024 - June 9, 2024

IF the management of pharmaceutical outfit Pharmaniaga Bhd (KL:PHARMA) are to be believed, the worst is over for the cash-strapped Practice Note 17 (PN17) flagged company.

And the catalyst that is likely to change the fortunes of the company — a proposed renounceable rights issue with warrants as a sweetener to shareholders that is slated to raise up to RM354.6 million; and, more importantly, a proposed private placement to a third-party investor or investors that could raise gross proceeds of up to RM300 million — could happen soon. Both the rights issue and placement are part of a regularisation plan to get Pharmaniaga out of PN17 classification, but are likely to have a far-reaching impact if management’s plans pan out.

In his first interview with the media since being appointed executive director in March 2022, Zulkifli Jafar says of the pending placement, “There are so many suitors that came to us — both international and local — but we don’t want investors; we want strategic partners who can build the business together [with us], which means they must be in the same industry ... You can see the CAGR (compound annual growth rate) for the pharma business is growing; it’s quite good.”

(Photo by Suhaimi Yusuf/The Edge)

Later in the interview, he divulges, “It could be Chinese or Indian parties also [that are eyeing a stake in Pharmaniaga via the placement] … It’s going to be [announced] very soon because, whatever it is, the exercise must [coincide with] the moment our regularisation plan is approved. We have been given three months to complete our regularisation plan; so, it should be very soon.”

Pharmaniaga was recently recognised by the World Health Organization as a vaccine manufacturer. “[With the WHO recognition,] whatever vaccine is produced in our plant is recognised to be of a certain standard,” Zulkifli explains. This recognition is also understood to be enticing the Chinese and Indian parties to buy into Pharmaniaga on the cheap.

At its close of 36 sen last Friday, Pharmaniaga had a market capitalisation of RM518.8 million, which some consider small for a company that has a seven-year concession for the supply of medicine to government hospitals.

The concession given to Pharmaniaga is merely for the logistics and distribution of an approved products purchase list (APPL). Currently, there are 729 APPL products, supplied by 96 companies selected via open tender.

Nevertheless, Pharmaniaga could ride on the back of a strong shareholder and its expertise, and even penetrate foreign markets. At present, the company has operations in Malaysia and Indonesia via 73%-owned PT Millennium Pharmacon International Tbk, which is publicly traded in Jakarta.

With a market capitalisation of just below US$10.81 million (RM50.88 million), PT Millennium Pharmacon International, which handles the distribution of drugs and medical supplies in Indonesia, and other companies under the Pharmaniaga banner contribute about 30% of Pharmaniaga’s top and bottom lines.

The Indonesian market is ripe for the picking, but cash-strapped Pharmaniaga has to put its house in order before it can make further inroads into Indonesia.

Putting the house in order

The proposed private placement is for up to 714.29 million new Pharmaniaga shares, which works out to 26.9% of the enlarged issued share capital of the drug manufacturer and distributor — a significant stake by any measure. This placement is slated to dilute the stake of Pharmaniaga’s largest shareholder, Lembaga Tabung Angkatan Tentera (LTAT), and its wholly-owned flagship Boustead Holdings Bhd to a collective 41.9%, from the existing 54.9%.

With many businesses under the Boustead Holdings banner not doing well, however, LTAT is likely to opt for a smaller slice of a profitable, lucrative pie.

Other than Pharmaniaga and Boustead Holdings, LTAT has a 72.38% stake in ailing Boustead Heavy Industries Corp Bhd (KL:BHIC); wholly owns Boustead Plantations Bhd, which was recently privatised; and holds 48.8% interest in Affin Bank Bhd (KL:AFFIN), in which a 25% chunk is likely to be sold to the Sarawak State Financial Secretary soon.

Boustead Holdings is mired in debt, and former defence minister Datuk Seri Mohamad Hasan had said in parliament last September that Boustead Holdings was in dire need of RM1.7 billion to redeem Islamic debt paper by end-2023 and would require an additional RM800 million to service its other obligations.

It is unclear whether the government has rendered any assistance to Boustead Holdings.

Meanwhile, LTAT, which has about RM11 billion in assets under management, is the pension fund for more than 140,000 veteran armed forces personnel and 115,000 members of the armed forces. It is grappling with its own woes and is hard pressed to pay out dividends to the military personnel.

In Boustead Holdings’ last financial results announced to Bursa Malaysia for the quarter ended March 31, 2023, prior to its RM700 million privatisation by LTAT, it had almost RM4 billion in borrowings with a maturity period of less than 12 months. On the other side of the balance sheet, its deposits, cash and bank balances stood at only RM565.8 million. Boustead Holdings’ total debts were a whopping RM10.56 billion at end-March last year.

As such, Pharmaniaga’s getting out of the PN17 category and returning to money-making ways is essential.

Zulkifli says, “We submitted the regularisation plan for approval to Bursa Malaysia in February. So, we’re hoping to get the approval in July. If we get the approval in July, we should complete the whole process by the end of the year.”

Pharmaniaga tumbled into PN17 in February 2023 after a massive impairment brought about by the company’s overstocking and failure to offload RM552.3 million worth of Covid-19 vaccines. The impairment caused the company to bleed a quarterly net loss of RM664.39 million for its fourth quarter ended December 2022, in contrast to a net profit of RM85.47 million for the corresponding quarter a year before.

After the huge impairment, Pharmaniaga CEO Datuk Zulkarnain Md Eusope left the company in March 2023. He had basically taken the fall for the impairment and the overstocking of vaccines. Questions were asked as to whether he had acted on the instructions of government officials, but there was no official response to these queries.

In a strange twist, Zulkarnain is slated to return to sister company Boustead Plantations — which is wholly-owned by LTAT and Boustead Holdings — as CEO, with an announcement likely to be made soon. Incidentally, Zulkarnain’s return to the group, which could be seen as absolving him of the Covid-19 vaccine overstocking fiasco, coincides with Pharmaniaga’s changing fortunes.

Is the worst over?

In a nutshell, Pharmaniaga’s business is two-pronged: logistics and distribution (L&D) of pharmaceuticals; and manufacturing of drugs. Margins for L&D are thin, but those for manufacturing are considerably better.

Thus, it is no wonder that the company’s focus seems to be geared more towards manufacturing.

Zulkifli says: “If you look at it, 2025 and 2026 will be very, very handsome. A lot is happening, especially [in terms of] our biopharma (biopharmaceutical product manufacturing).”

To this end, Pharmaniaga and China’s CSPC Pharmaceutical Group Ltd forged a partnership last July for the research and development, manufacturing, and commercialisation of innovative pharmaceutical and biopharmaceutical products.

The aim of the tie-up was to produce CSPC’s biopharmaceutical portfolio, especially its mRNA technology platform for vaccine development, which would result in the commercialisation of CSPC’s products in Malaysia and, possibly, Indonesia.

Pharmaniaga’s biopharmaceutical product manufacturing is housed in its insulin and vaccine plant in its Puchong facility, which was completed at end-2023 for RM280 million to RM300 million.

When Pharmaniaga announced its large investment of RM300 million for its Puchong plant, it had its sceptics.

“You will see the revenue starting to generate soon,” Zulkifli says. “From an industry perspective, gross margins for a [pharmaceutical] distribution company could be 6% to 10%, but gross margins for a pharmaceutical manufacturing company, may be 30% to 50%.

“Biopharma is on the higher-end margin; so, our effort to try to increase non-concession revenue is because the manufacturing, non-concession [business] offers higher margins.”

At present, 60% of Pharmaniaga’s business is non-concession; the rest is via government concessions, which have fixed margins, but the aim is for an 80:20 split.

Pharmaniaga has a 4% market share of the private pharmaceutical market but hopes to increase it to 10% by end-2025, which could have a significant impact on its bottom line.

Pharmaniaga’s financials

In the first quarter of its financial year 2024 ended March (1QFY2024), Pharmaniaga chalked up a net profit of RM25.65 million on the back of RM964.96 million in revenue. In 1QFY2023, it raked in RM2.65 million in net profit from RM880.45 million in turnover. The last time it made more than RM20 million in net profit was in 1QFY2022.

As at end-March 2024, Pharmaniaga had deposits, cash and bank balances of RM86.6 million; on the other side of the balance sheet, it had short-term borrowings of RM1.09 billion and long-term debt commitments of RM125.27 million.

The company had accumulated losses of RM472.15 million as at March 31, 2024, resulting in negative shareholders’ equity of RM272.1 million.

Pharmaniaga’s operating cash flow for the three months in review was in a deficit of RM55.39 million, slightly better than the deficit of RM65.64 million a year ago.

“We are improving our cash flow. We are strengthening our private market; we are now [involved] in higher-margin products and we’re also moving towards optimisation … The regularisation plan involves a rights issue of about RM345 million plus placement of about RM300 million.

“With all this in place, we believe we can manage our cash flow. In fact, based on our simulation, we will be back to positive cash flow, hopefully, by the end of this year,” Zulkifli concludes.

Less dependent on low-margin concession business

On the 23rd floor of The Bousteador in Petaling Jaya, Pharmaniaga Bhd (KL:PHARMA) executive director Zulkifli Jafar meets The Edge for an interview. He seems a little nervous with the incessant photographs being taken, but comes across as capable and level-headed as he shares his insights into the challenges at Pharmaniaga and the outlook for the company. The following are excerpts of the interview.

When Khazanah Nasional Bhd had Pharmaniaga, I think in 2009, it (Pharmaniaga) made net profits of about RM60 million in 2008, RM50 million in 2007, and RM15 million before that. So, what changed over the years? Why isn’t Pharmaniaga doing as well now?

In 2010, our profits started to dip because we had one round of write-off on avian flu H1N1, at that time, of RM28.8 million. When we first started, margins were very good because we were the only player. But, over a period of time, more players started coming in and the government had to be fair to all.

When Boustead acquired Pharmaniaga (Boustead group acquired 86.81% of Pharmaniaga from Khazanah for RM534 million cash in June 2010), one of the preconditions was renewal of the concession [agreement, which] had tougher requirements and lower margins. It was not as lucrative.

If you look into the concession agreement, however, it’s very stringent. But, thank God, we have so far achieved almost 98% to 99% of the government’s KPI (key performance indicators).

Is that why even when you were classified as PN17, you still got the concession renewed?

Yes, because despite being in PN17, we still achieved 98% of our KPIs for government procurement.

Your concession is for how many types of products?

At the moment, there are about 600 products. [In total] there are about 1,200 products. So, you still have at least 600 products they have not finalised … [To be exact,] we have another 614 products that are in-coming.

When that happens, when it’s all approved, will your bottom line improve?

Yes … So, at the moment, if you look at our results, it is currently based on 536 products. Based on our discussion with the Ministry of Health, they are hoping to finalise all of the 1,200 products by September this year.

What sort of impact would that have on your bottom line? A 100% jump? Or is that too simplistic?

I will not say 100%, but I think it will have a significant impact. Remember, as a logistics and distribution player, it’s a fixed pass-through margin. But if more products come in, you get more revenue … It’s a volume game. The advantage is that we are also a manufacturer; so, for certain products, we participate in the tenders, and there are some products that we win [tenders for]. Our margin for that is actually very good.

How many products are you a manufacturer for?

We have more than 384 active products registered with us. Of course, there are some that we carry the distribution rights to, but the majority of it, we actually manufacture ourselves.

Would you say Pharmaniaga is dependent on government concessions?

No. In the past, yes, we were dependent 100%, but if you look into our strategy now, we are trying not to be too dependent on the concession business because margins are very small. So, that’s why we are improving our private sector business. We’re looking, if possible, [at] 80:20 — 80% non-concession, 20% concession.

How different is the margin between the concession and non-concession businesses?

It’s huge, as the concession [margin] is fixed. It’s a single-digit margin for the concession business. Non-concession, you’re talking at least 30% to 40% margin.

Pharmaniaga is perceived to be a company that depends on the government.

That’s a misperception, misconception. First, they said we monopolise, which is not true. We are handling only 34% of government concessions.

You talked about your biopharmaceutical product business. What’s the capital expenditure (capex)? Has it already been sunk in?

We’ve sunk in the capex already. In fact, we even got a grant from the National Institute of Biotechnology Malaysia … The plant is in Puchong, Selangor; by the end of this year, it will be completed 100%. It is the most advanced plant and whatever product that we produce there, we can sell it in European Union countries.

What sort of impact will this biopharma business have on your bottom line?

It’s going to be a very positive impact.

Where do you see Pharmaniaga in, say, 12 months?

The results today should continue to be better in 12 months and, in terms of portfolio, we will have more in hand.

How are things in Indonesia?

Our Indonesian business, our core business in Indonesia, is logistics and distribution as well. We have 35 branches, warehouses throughout Indonesia and we are increasing that. We should have two more this year.

Pharmaniaga’s current liabilities of RM1 billion — is it a problem?

It is, of course, it is a problem … It’s borrowings. So, that’s why, from our regularisation plan, you can see the RM345 million rights issue and [RM300 million] placement. We want to pare down [liabilities], reduce whatever is possible, and [at the same time] we have increased our revenue in terms of businesses.

From the placement, what exactly are you looking for from this new shareholder? Because from what you say, you seem to be doing all right. So, what exactly do you need from them?

Say, for example, there is another pharma company that might have products we don’t produce. We’re looking into a company in the same industry and can build up the business rather than, you know, just come in as an investor.

This may take you abroad to other countries.

That is in our pipeline. At the moment, we try to focus on Indonesia and Malaysia because, for Indonesia alone, we’re talking about a population of 270 million — it’s a huge population.

In Indonesia, the business is to supply to the government as well?

In Indonesia, we supply more to private than government, but we do supply to government hospitals as well. Indonesia is growing a lot; we can see the potential. The potential is huge.

You said things are becoming normal in terms of portfolio. Can you explain?

Profitability and cash flow — we should normalise our cash flow by the end of this year. With that cash flow, it will be easier for us to participate in more tenders. Other than that, in terms of our business, because we streamline it, [we will] move into optimisation and efficiency.

The more efficient we are, the more cost savings we get, because that is the nature of the business of logistics and distribution, and manufacturing. When you’re more efficient, you are more productive.

Our R&D (research and development) is about RM120 million a year; we’re trying to reduce the R&D spend. We can outsource for cheaper. There is a way to spend wisely and effectively.

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