Vaccine distribution is a challenging business

Duopharma Biotech bldg

AFTER much hullabaloo about listed companies announcing their attempts to get linked to the Covid 19 vaccine distribution in Malaysia, it does seem as if the duo of Pharmaniaga Bhd and Duopharma Biotech Bhd are most likely going to be the biggest players.

This week, both companies said they secured contracts from the Ministry of Health (MOH) to supply millions of doses of Covid-19 vaccines by China’s Sinovac Life Sceinces Co Ltd and Russia’s Sputnik V by Gamaleya Research Institute. With the hype of vaccine deals, both Pharmaniaga and Duopharma counters jumped on the news of their deals with the government.

Most analysts covering these stocks, while remaining positive on this latest development, cautioned that both counters have pricey valuations. Kenanga Research is keeping an “underperform” call on Pharmaniaga, as its share price has raced ahead of the group’s prospects.

“The recent run-up in Pharmaniaga’s share price has rendered its valuation unattractive and seems to have over-priced the positive near-term prospects, ” the research house said. Similarly, TA Securities is maintaining a “sell” call on Duopharma due to pricey valuations, with a target price of RM1.92 per share based on 21 times calender year 2021 (CY21) earnings-per-share. The stock closed on Friday at RM3.54 a piece on a historical price earnings multiple of 45 times earnings.

Pharmaniaga Bhd and Duopharma Biotech Bhd said they secured contracts from the Ministry of Health (MoH) to supply millions of doses of Covid-19 vaccines by China’s Sinovac Life Sceinces Co Ltd and Russia’s Sputnik V by Gamaleya Research Institute. -- Reuters

Meanwhile, MIDF Research believes the stock price of Pharmaniaga has overpriced the vaccine story, which will cap its share price appreciation going forward. Despite the rally in share prices of stocks related to Covid-19 vaccine distribution, the vaccine story is a bit more complex than say the personal protective equipment (PPE) story that saw various players jumping in to produce and supply PPE in the last one year. According to MIDF Research senior analyst Noor Athila Mohd Razali, the supply of Covid-19 vaccines could be limited to the two largest pharmaceutical manufacturers in Malaysia.

“We believe that other local pharmaceutical companies will not be officially requesting to join the Covid-19 vaccine bandwagon. “This is primarily because both Duopharma and Pharmaniaga are currently the two largest pharmaceutical manufacturers in Malaysia that have already in place, the logistics, warehouse and distribution capabilities to undertake the nationwide Covid-19 distribution, ” she says. She says regulatory approvals for the vaccine is required from the National Pharmaceutical Regulatory Agency (NPRA) and licences needed to distribute the Covid-19 vaccine.

“Licenses to supply and distribute the vaccines as well as preparation of the logistics and warehousing aspects that comply with NRPA are required, ” she adds. Meanwhile, she reckons that the registration and approval process from NPRA could take between 90 days to 120 days, which would hinge on the desired results achieved from the phase three clinical trials conducted by pharmaceutical companies.

However, the government has revealed that it is on track to meet the target vaccination of 82.8% of the Malaysian population by early next year. It is important to note that there are non-pharmaceutical companies that are not ruling out to venture into vaccine deals such as Solution Group Bhd, Bintai Kinden Corp Bhd, Ho Wah Genting Bhd, My EG Services Bhd and Yong Tai Bhd, Nexgram Holdings Bhd, Kanger International Bhd and Bioalpha Holdings Bhd.

But will these companies get a green light from NPRA to distribute the vaccines? Up till now, none of these companies have secured an approval from NPRA for vaccine distribution despite inking deals with their vaccine partners overseas. In the case of Solution Group Bhd, it has received the approval from NPRA for its vaccine fill and finish (F&F) facility design plant.

There was also the case of Metronic Global Bhd that aborted its deal with Taiwan’s Medigen Vaccine Biologics Corp after the government said there would be no middlemen in the Covid-19 vaccine supply chain. The government has said that private companies can take part in the vaccines roll out. However, Science, Technology and Innovation Minister Khairy Jamaluddin said that private companies’ initiatives are purely commercial deals that have nothing to do with the

government. For local pharmaceutical companies, Athila explains they would be hard-pressed to get into the vaccine bandwagon because their balance sheet may not be able to withstand a large procurement order compared to the healthcare giants.

“Pharmaniaga and Duopharma have in place the logistics, warehouse, and distribution capabilities to undertake the vaccine distribution nationwide, ” she points out. Pharmaniaga is currently MOH’s main concessionaire while Duopharma provides regular pharmaceutical supplies to MOH facilities nationwide.As of now, both the pharmaceutical companies would supply around 18.4mil doses of the Covid-19 vaccines to the government. On top of that, the government would also want to see the vaccines delivered in the best price competitive manner.

This would mean that Pharmaniaga and Duopharma may not record high profits for the distribution of vaccines as previously seen for PPE suppliers. Although the vaccines would contribute positively to both the Pharmaniaga and Duopharma earnings, Athila estimates the impact to their bottomline is likely to be fairly minimal as margins are likely to be lower for both the F&F as well as distribution of the vaccine.

“This is given that the vaccines procured are readily made or finished vaccine and does not require additional logistics requirements like ultra cooler box as both the vaccines only require 4°C of cold storage – which is within both Pharmaniaga and Duopharma’s current cold storage capacity of 2°C to 8°C, ” she points out. Moreover, industry experts also note that that logistics and distribution margins are low for the pharmaceutical companies.

Pharmaniaga’s profit before tax for its logistics and distribution segment is razor-thin, averaging at 0.5% over the last 20 quarters, according to Kenanga Research. In the case of the Covid-19 vaccine supply game, it possibly could turn out different from what has been seen in the last one year of the PPE segment.