WHILE many companies are shelving their expansion plans due to the economic slowdown, Bioalpha Holdings Bhd is doing the opposite. The home-grown health supplement maker is all geared to accelerate its growth in Malaysia, Indonesia and China.

Today, Indonesia is Bioalpha’s largest market, accounting for half of the group’s revenue in the financial year ended Dec 31, 2015 (FY2015).

“Since venturing into Indonesia in 2007, our product offerings have grown to seven, bringing in RM14.4 million in revenue last year. There is demand for more health supplement products, but the lengthy product registration period of up to two years has hindered the pace of our product rollout,” managing director cum CEO William Hon Tian Kok tells The Edge in an interview. Hon is the largest shareholder of Bioalpha with a 17.5% stake.

However, this will be a thing of the past when the group’s new manufacturing facility in Riau commences operations by the end of this month, which will speed up product registrations to just three to six months.

“[That’s because] we will only need to get approvals from the local authorities for locally produced items. This will enable us to launch 12 new products in the next 18 months,” Hon says.

According to him, the group employs different strategies to target the niche market segments in China, Malaysia and Indonesia (see Chart 1). It expects to register double-digit growth in the health supplement market in the three countries.

Bioalpha started marketing its products in China two years ago and it is now the group’s second largest market, contributing 28% to its revenue last year.

“Our products are sold on original design manufacturer (ODM) basis to our distributors in southern China, who then distribute them through online and mobile platforms. As such, you can see that sales to China have rocketed from a mere RM311,000 in 2014 to RM8.3 million last year,” Hon says.

Hon still sees huge potential growth in China, especially for halal-certified health supplement products, which are uncommon there. “Muslim consumers appreciate our product offerings and are willing to pay a premium for them. We plan to launch five new products next year and are working to penetrate Muslim-majority provinces in western China.”

Bioalpha is seeking to raise RM28 million from the equity market via a one-for-five rights issue after just 1½ years following its listing on the ACE Market. It plans to use RM13.5 million from the proceeds to launch its new products, RM10 million to expand its agricultural operations and the remaining RM3.5 million for capital expenditure.

To sweeten the deal, the rights shares will be issued at a discount of not more than 25% to the ex-rights market price and they will come with one free five-year warrant for every rights share subscribed.

While earnings per share would be diluted by 17% after the rights issue and by 29% if all the warrants are converted, Hon says Bioalpha is hopeful of doubling or even tripling its revenue in the next few years by pursuing various growth strategies.

The group’s net profit rose to RM6.79 million in FY2015 from RM6.43 million the previous year. It would have been higher if not for a one-off listing expenses of RM2.36 million. Revenue grew 9.6% to RM29.72 million.

Hon says domestic sales more than halved from RM13.9 million in 2014 to RM6.3 million last year mainly due to weak consumer sentiment and lower repeat sales from third-party pharmacies.

“To have better control of our distribution channel, we acquired a pharmacy chain for RM5 million earlier this year,” he says.

“None of the proceeds from the rights issue will be used to fund the pharmacy chain’s growth. We plan to expand our network from the current 14 outlets to 30 in the next 12 months through the franchise concept. This will free up our capital while allowing us to have management control to promote our house brands, which command better margins.”

He also points out that currently, about half of the group’s sales come from ODM products and the other half, from original brand manufacturing products. “In this respect, we are working with Perbadanan Nasional Bhd, our third largest shareholder, and MyANGKASA Holdings Sdn Bhd to offer franchising opportunities to bumiputera entrepreneurs.

“What differentiate us from other pharmaceutical companies in Malaysia are our integrated business model and technological edge. For instance, our herb farms in Terengganu and Johor, spanning a combined 1,300 acres, give us better control of the raw materials’ origin and quality. Furthermore, our proprietary liquid fermentation technology enables us to grow our mushroom ingredients in a lab, maturing in about a week, rather than a year if you grow them in their natural habitat.

“These result in better cost efficiency, and our profit margins are higher than the industry average despite our relatively small size (see Chart 2).

“Besides introducing new products, we have allocated RM10 million to expand our herb farms. We target to complete planting within the next two years and expect substantial harvest to boost our revenue by 2020.”

To maintain its technological edge, Bioalpha spends 15% to 20% of its revenue on research and development. It has obtained a RM20 million grant from the government to develop two herbal drugs for hormone therapy replacement and diabetes.

“We project another RM8 million is needed to commercialise these projects,” Hon says.

“The results from our pre-clinical trials have been positive and at the moment, we are waiting for approval from the Health Ministry to proceed with clinical trials. These projects will take another three years to see the results.

“If successful, we could either introduce our patented herbal drugs or monetise them by selling the patents to multinational pharmaceutical companies. Compared with traditional chemical drugs, herbal drugs have very few side effects and could have huge market value.” 

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