Duopharma sales expected to grow on demand from consumer healthcare unit

Duopharma Biotech Bhd
(Jan 29, RM1.70)
Downgrade to sell with an unchanged target price (TP) of RM1.70:Duopharma Biotech Bhd is unlikely to benefit from the influenza outbreak in Malaysia given the group does not supply any flu vaccine. On government tenders — for Erythropoietin worth RM10 million to RM15 million per annum — the health ministry (MoH) had yet to call for a tender, which was to take place in 2019.

However, we expect Duopharma sales to grow 7% in 2020 mainly driven by higher demand from the consumer healthcare segment and a 6.6% year-on-year increase to RM30.6 billion in the budget allocated to the MoH.

To recap, the MoH will use an external reference pricing to benchmark medicine prices in Malaysia against cheaper drug prices in certain countries, so that local drugs do not exceed the benchmark. As such, we believe it is too early to gauge the impact as the MoH is still in discussions with various parties, though there were no news in the last three months.

If implemented, the government will firstly go after expensive patented drugs in the first phase, likely taking at least two years before going after generic drugs.

All in, we expect Duopharma’s profit before tax (PBT) margin from government contracts to remain stable given the company had secured 30% of 2020 sales from the recent two-year extension of its insulin and approved product purchase list contracts from the government.

Duopharma is scheduled to release its financial performance for the fourth quarter ended Dec 31, 2019 (4QFY19) on Feb 13, 2020.

We expect its quarterly profit to fall in between RM10.5 million and RM12 million, relatively lower against earnings of RM14.4 million for 4QFY18, boosted by changes in accounting standards. However, this was a profit growth of 13% to 16% for FY19.

Our earnings estimates are unchanged. Our TP for Duopharma is maintained at RM1.70 a share, pegged at an unchanged price-earnings multiple of 19 times against 2020 earnings per share.

Duopharma’s share price has risen 77% in the past 12 months and 16% year to date. As such, we downgraded the stock to “sell”, from “buy” previously, due to its limited upside potential. — TA Securities, Jan 29