This article first appeared in The Edge Financial Daily on May 28, 2018

KUALA LUMPUR: Fresh out of a demerger from Chemical Co of Malaysia Bhd (CCM) in December last year, CCM Duopharma Biotech Bhd expects its performance to be better this year, driven by a stronger ringgit, better product mix and volume growth.

Its group managing director Leonard Ariff Abdul Shatar expects profit margins for its pharmaceutical products to be “quite good” this year, thanks to a stronger ringgit against the US dollar. The local currency has appreciated by 7% over the past year to close at 3.9813 to the greenback last Friday.

The stronger ringgit is a boon for CCM Duopharma as about 80% of its raw materials are imported. Leonard sees this translate into improved profits for the group from the third quarter of this year as it purchases raw material for its products.

The group is targeting double-digit revenue growth across all business segments for the current financial year ending Dec 31, 2018 (FY18).

Government contracts currently contribute about 60% of CCM Duopharma’s revenue, while the private sector, over-the-counter (OTC) products and export contribute about 18%, 12% and 10% respectively.

“Private sector sales are expected to continue to be strong [in FY18]. But the effervescent OTC products are the strongest segment at the moment,” Leonard told The Edge Financial Daily in an interview.

According to healthcare information company IQVIA, CCM Duopharma is the country’s largest pharmaceutical company by volume, but the third by value — behind Pfizer Malaysia and Merck Sharp & Dohme.

“We want to be Malaysia’s second largest pharmaceutical company by value this year,” said Leonard.

For FY17, CCM Duopharma’s net profit came in 56.7% higher at RM42.49 million, thanks to higher demand from the public sector via tenders and supply traded specialty products. Revenue rose 49.5% year-on-year to RM467.99 million.

With the government contracts accounting for the biggest bulk of CCM Duopharma’s revenue, Leonard said he is “not overly concerned” about the group’s ability to continue supplying to the government sector.

“We are supplying our products based on merit, our ability to manufacture cost effective products that work and our ability to distribute the products throughout the government infrastructure,” he added.

Looking for alternative higher margin, less competition products

As competition in the generic drug market heightens, margin squeeze becomes inevitable. Thus, CCM Duopharma is looking for alternative areas with lesser competition and maintained margin, such as cardiovascular, diabetes and renal haemodialysis.

The group is also moving into more speciality products. For instance, in an attempt to differentiate itself, it is focused on biosimilars such as insulin, which has been launched and supplied to the government for a three-year contract since January 2017 as well as EPO (Erythropoietin) that is expected to be launched by the second half of this year.

Leonard expects the supply of insulin to government hospitals to rise by 10% to RM100 million in FY18 from RM90 million in FY17, as part of the RM300 million worth of contracts it had clinched from the government over a period of three years.

“There are a lot of potential areas to diversify into [such as] localising products that have traditionally been imported or processed overseas,” said Leonard, adding that it is important for CCM Duopharma to grow beyond the oral dosage range of products and expand into the liquid facility, haemodialysis facility, oncology and effervescent.

Some of the potential areas which CCM Duopharma is looking at are the Factor VIII (an essential blood-clotting protein), plasma products, bone banking, vaccines, and also vector control (for controlling mosquitoes).

However, Leonard noted that CCM Duopharma’s traditional product range will still continue to be its cash cow and remain to be profitable going forward.

“We are efficient in manufacturing what we do. So, we are still able to retain a decent margin even with the growing competition,” said Leonard.

Leonard also noted that demand for pharmaceuticals is growing especially with an ageing population and opportunities are ample in Malaysia. He added that generic drugs are seen to be growing between 6% and 10% by value.

While there is no new developments on its merger and acquisition (M&A) exercises in Indonesia, CCM Duopharma has already started looking for M&A targets in the Philippines as part of its expansion plans.

“We are also not adverse to joint ventures. We are in discussions, but regulations in various countries in Asean differ. We are also cautious and we don’t want to take too much risk,” said Leonard, adding that most of the health markets in Asean are growing quite rapidly.

Meanwhile, CCM Duopharma has invested some RM15 million over the last three years for its back-end information technology infrastructure, which includes IT system management for warehousing, manufacturing and billing.

More recently, the group invested about RM1 million in its front-end infrastructure. The group is also talking to a few app developers and parties, said Leonard.

However, the group is still unsure if the e-commerce platform will be done by themselves, pre-existing vendors, pharmacy chains or even e-commerce platforms such as Lazada.

“We need to find out what ideal is most convenient for consumers as our products are temperature-sensitive products and we have to ensure the quality of the products as if they were to reach pharmacies,” Leonard added.

Year to date, CCM Duopharma shares have risen 24% to close at RM3.24 last Friday, giving it a market capitalisation of RM903.83 million.