Hovid may be ripe for the picking

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This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

IT has been a tough couple of weeks for Hovid Bhd, from having to recall its Ternolol 50mg film-coated tablets due to wrong labelling to the subsequent revocation of the licences of both its manufacturing plants by the National Pharmaceutical Regulatory Agency (NPRA).

The cancellation of the licences followed an audit by the NPRA, which deemed the pharmaceutical company’s current Good Manufacturing Practice (cGMP) unacceptable and decided that its pharmaceutical quality system did not comply with the latest cGMP requirements.

However, Hovid has been allowed to sell its existing inventory. This means its other products are deemed to be safe for consumption, which is probably the company’s saving grace.

Still, these events have not gone down well with investors. The pharmaceutical company’s shares succumbed to heavy selling after the announcement of the revocation. The stock slid to 28.5 sen on Jan 11 — its lowest level since September 2013.

The company had alerted the investing public that there would be negative impact from the loss of its manufacturing licences. It estimated that turnover per share would fall by 4.63 sen and earnings per share would decline by 0.33 sen.

In its financial year ended June 30, 2016, Hovid posted a net profit of RM17.89 million compared with RM20.9 million the year before. The drop in earnings was due mainly to lower foreign exchange gains. Also, there was a one-off gain on divestment in FY2015. Meanwhile, EPS dropped to 2.24 sen from 2.73 sen previously.

Although Hovid’s share price recovered to 30 sen last Thursday, it was still trading at a two-year low. Based on the company’s market capitalisation of only RM240 million, some quarters opine that the pharmaceutical company looks attractive as an acquisition target at this juncture, when the ringgit is weak.

Managing director and chairman David Ho Sue San is Hovid’s single largest shareholder with a 33.8% stake.

Hovid’s plant in Ipoh is currently undergoing expansion, which will increase its capacity to manufacture tablets and capsules by 30%. The second phase of the facility’s expansion is expected to be completed by this year.

“The new facility has been designed to meet the pharmaceutical production standards of Europe, the US FDA (Food and Drug Administration) and the Australian TGA (Therapeutic Goods Administration). Apart from meeting the anticipated higher demand for our products, this new facility will increase our presence in Australia, Europe and the US in the future,” says Hovid in its 2016 annual report.

When fully commissioned, the plant would be able to handle the anticipated growth in orders for tablets and capsules in the next three to five years.

Hovid has an R&D centre in Bayan Lepas, Penang, which the company says will help improve its ability to expand its product portfolio. Furthermore, the pharmaceutical company has obtained 56 product licences overseas in recent times, including in Brunei, the Philippines, Laos, Uganda, Myanmar, Cambodia, Oman, Ivory Coast, Vietnam, Hong Kong and Nigeria.

Another factor that could make Hovid an appealing takeover target is that Ho is 67 years old and that his children are not keen to take over the family business. According to Hovid’s 2016 annual report, only Ho’s second daughter, Sarah Ho Lee-Mun, is in a key management role as the head of sales and marketing at the pharmaceutical company.

Nevertheless, analysts who track the stock do not see Hovid as an attractive takeover target. “There has been no indication of this from management. I don’t think it’s likely,” says one.

Things have been tough for Hovid in the last five years or so. In 2010, it slipped into PN17 status due to a disclaimer opinion expressed by its auditor on its financial statement for FY2010. This came on the back of biofuel producer Carotech Bhd defaulting on certain loans. Carotech, which also earned a disclaimer opinion from the auditor, was seen as a significant Hovid subsidiary. Within a day of the PN17 classification, Hovid’s share price had slipped 27%.

However, the company managed to lift itself out of PN17 status by Jan 17, 2012, after paring its stake in Carotech from 58% to less than 20%, implying that the biofuel producer was merely an investment for it. This gave Hovid’s share price a leg-up and it slowly regained its momentum.

Fast-forward to the present time, and some think the licence revocation of Hovid’s manufacturing facilities and the recall of its Ternolol tablet will not have a significant impact on it. “I don’t think Hovid’s reputation for its generic medication will be affected much as this is sold through doctors and hospitals. End consumers would not be aware of the situation at Hovid. But the question is, what if Hovid does not have enough supply to sell?” asks a fund manager.

According to a report by CIMB Research, the company’s inventory for the local market can only last for two to three months while its overseas inventory is for less than a month.

In a filing with Bursa Malaysia, Hovid says it will submit corrective actions to the NPRA by the end of the month and invite the agency to audit its facilities immediately after that. If all goes well, it expects the re-issuance of its manufacturing licences by end-March and for production to recommence by April 1.