We met up with Duopharma Biotech (Duopharma) management team recently. Key highlights were: i) the company has seen a robust demand from higher government expenditure on healthcare, ii) Erythropoietin (EPO) and Oncology to be main drivers for next 2 years and iii) insulin contract renewal is the main uncertainty for 2019. Overall, we are still positive on the group’s growth strategy by moving into a more niche product segment. Maintain BUY on Duopharma with an unchanged TP of RM1.52/share based on 20.0x CY19 EPS.

Stable Outlook

Management continues to see robust demand for pharmaceutical products from the public and private healthcare sectors in Malaysia. In specific, it has seen a slight increase in demand from the government, thanks to higher budget allocation (7.8% YoY) to The Ministry of Health (MoH) as tabled in Budget 2019. In Malaysia, we note that Duopharma has retained its pole position in terms of volume market share, while advancing to number 2 (from number 3) in terms value (1st is Pfizer) market share in 2018.

Looking forward, we expect the rankings, in both volume and value share, to remain unchanged. This is premised on our belief that Duopharma could win the new EPO contract and obtain insulin contract renewal before Nov-19. In addition, the commissioning of its oncology manufacturing facility in 3Q19 is expected to solidify Duopharma’s market position.

EPO and Oncology to be the growth engines for next 2 years

Duopharma recently received product registration for Erythropoietin (EPO) product (Erysaa). The product usage is for adjusting red blood cell generation according to a human body’s oxygen requirement and the company has the exclusive license to package, fill and finish, and distribute the EPO product in Malaysia, Singapore and Brunei from manufacturer PanGen Biotech (Korea). In Malaysia, the estimated market value of EPO is around RM50-60mn/annum (private and government sector) and the group will compete against 2 existing suppliers for EPO, ie, Roche and Janssen, in Malaysia. We believe the group has a fair chance in winning the government tender estimated at circa-RM10-15mn/annum as management indicated its product pricing is very competitive.

On the oncology front, the group is on track to launch the first manufacturing oncology facility in Glenmarie, Malaysia, most likely to be ready for production come 3Q19 (manufacture generic oncology and other High Active Potency Products). Based on channel checks, the estimated oncology product sales in Malaysia is around RM400.0mn/annum so we see huge opportunity for this niche product. As far as competition is concerned, there are no local company that have this facility yet. For starters, Duopharma intends to roll out 2-3 major products and hopes to gain 25% market share (RM100mn/annum).

In short, we believe the exposure to niche pharmaceutical products will help Duopharma sustaining its margins as competition in the generic segment heightens.

Challenge for 2019

To recap, in 2016, the group bagged a 3+2 years contract from MoH to supply human insulin for the treatment of diabetes to all government hospitals and clinics. The contract value is RM300.0mn and will expire in Nov-19 (first term) this year. We believe the contract will be extended for another 2 years. Note that for insulin, there are 3 other competitors: ie, Novo Nordisk, Sanofi and Eli Lilly, in the market to compete for the contract. However, we believe Duopharma stands a fair chance as they are the only local company and competitive pricing. However, if the government chooses not to renew the contract, earnings impact is expected to be about 7% of our FY20 projected earnings. Note that as insulin is a trading product for Duopharma, margins are not as good as manufacturing ones (but revenue is high at circa-RM100mn/annum). Management shared that they will be more aggressive in other government tenders, which we believe will help mitigate the potential loss of insulin contract.

Maintain Buy on Resilient Pharmaceuticals Demand

We maintain Buy on Duopharma with an unchanged TP of RM1.52/share based on 20.0x CY19 PER. We continue to like CCMD for its i) strong market share in Malaysia, and ii) move into more niche pharmaceuticals products.

Source: TA Research - 8 Mar 2019