8 things I learned from the 2019 Pharmaniaga AGM

Pharmaniaga Berhad is a healthcare company and generic pharmaceuticals manufacturer in Malaysia. It conducts research and development, procures, and manufactures generic pharmaceutical products. It markets and distributes pharmaceutical products and medical equipment through its logistics and distribution segment and owns a community pharmacy business. It is also present in Indonesia through its listed subsidiary, PT Millennium Pharmacon International Tbk.

As a government-linked company that is majority-owned by Armed Forces Fund Board (a pension fund for the Malaysian armed forces) indirectly through Boustead Holdings Berhad, Pharmaniaga was recently flagged by the cabinet for being a market monopoly.

Here are eight things I learned from the 2019 Pharmaniaga AGM:

1. Revenue grew 2.6% year-on-year to RM2.4 billion in 2018 — a five-year high. Concession-related revenue that came from the Malaysian government contributed to 53% of Pharmaniaga’s revenue in 2018.

Source: Pharmaniaga 2018 annual report
Source: 2019 Pharmaniaga AGM presentation slides

2. Net profit has been dwindling since 2014 and decreased 21.6% year-on-year to RM43.2 million in 2018. Managing director Farshila Emran attributed the rather big drop in net profit since 2015 to Pharmaniaga’s responsibility to build a pharmacy-hospital information system as per a concession business. They delivered the system in 2016, which cost Pharmaniaga over RM300 million and affected their net profit. The system has been delivered to the government and is a database with patients’ data which can be accessed by different government hospitals and clinics. One of the conditions set by Boustead Holdings Berhad to buy Pharmaniaga from UEM Group Berhad back in 2010 was to obtain renewal of the agreement, which it did. However, when the existing management took over from UEM in 2011, they were unaware of the need to build a new system. The profit margin of the concession business is estimated to be below 2%. The managing director shared that majority of Pharmaniaga’s returns come from the manufacturing segment instead.

Source: Pharmaniaga 2018 annual report

3. Through the concession agreement, Pharmaniaga purchased, stored, supplied, and distributed medical products to government hospitals and clinics operated by the Ministry of Health in Malaysia, between 1998 and 2009. The contract was renewed in 2009 for another 10 years till November 2019. Pharmanniaga acts as a middleman to facilitate and administer the supply chain between the government and suppliers chosen by the government. Its manufacturing segment is not involved in the concession agreement business but it participates in government and private tenders. The managing director reiterated that Pharmaniaga is not a monopoly. In 2018, it supplied 33.4% of the total product by value procured by the government whereas the remaining products were recorded by over 80 other suppliers.

4. number of shareholders were concerned about the end of the concession agreement in November 2019. The chairman believes the agreement will be renewed and had ‘no reason to believe there are hiccups along the way’ as Pharmaniaga achieved 98% performance metrics among 21 key performance indicators as rated by the government. However, in my opinion, Pharmaniaga does not quite have a concrete plan to replace the revenue portion generated from the concession business should they fail to obtain the agreement renewal. The managing director’s was optimistic about the government’s potential renewal of the agreement with Pharmaniaga and declared during the AGM: ‘I am very optimistic, I am not going to be pessimistic, whatever it is we will get the concession, we will work towards the concession, and we have delivered what needs to be delivered for the concession, therefore we are the best for the concession.’

5. A shareholder was keen to know more about the 25.3% year-on-year increase in finance costs to RM36.1 million in 2018. The managing director attributed the increase to technical issues that arose from the upgrade of the government’s electronic procurement system, ePerolehan. The issues went on for a year before it was resolved by early 2019. As a result, Pharmaniaga had to draw down loans from banks to pay its suppliers in order to ensure the continuous supply of drugs to the government although they did not receive any payment from the government in the meantime. In 2018, trade receivables increased by 34.6% year-on-year to RM222.8 million because of slow collections from both the Malaysian and the Indonesian governments. According to the CFO, Pharmaniaga aims to reduce its borrowings and trade receivables in 2019.

6. A shareholder was interested to know more about the drastic drop in other income to RM1.0 million in 2018 from RM9.0 million the previous year. The managing director explained that there was a one-off compensation award in 2017. It was regarding an investment made by the previous management in a former joint venture in China prior to 2011. The current management which joined after 2011 realised they could not get back the money from that particular investment. They brought the case to arbitration in which they were compensated RM8.0 million.

7. A shareholder raised the fact that the chairman also chairs the audit, nomination, and remuneration committees. The chairman acknowledged the issue and shared the recommendation of external auditors to merge the audit and remuneration committees as well as establish a risk committee at the board level.

8. The CFO explained that inventory was 42.9% higher in 2018 at RM693.0 million compared to the previous year because of the addition of 136 products to the approved products purchase list. She added that they are required to stock up to two months of non-essential products and three months of essential products.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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