Supply risks shadow generic drug savings

PETALING JAYA: The RM1bil cost savings that Malaysia stands to gain by switching to generic drugs could be erased by price hikes of up to 50%, should India’s production costs spike due to geopolitical disruptions.

India is Malaysia’s primary source for generic drugs and relies heavily on the Strait of Hormuz for petroleum-based inputs and energy to run its manufacturing arm, said MBSB Research.

About 30% of suppliers are from India, and others include South Korea and Germany. These shipments do not travel through Hormuz.

“Globally, Hormuz is not a direct transit point for most finished drugs. However, the domino effect of the US-Iran war hits on hidden costs and raw material dependencies,” the research house said.

The conflict has triggered a surge in average selling prices for medications, posing a significant risk to the domestic pharmaceutical sector if it persists longer than six months.

Aside from the pills themselves, the crisis impacts upstream components. Notably, the Middle East accounts for 9% of global aluminium production.

“Shortages of these elements could affect the production of blister packs that house most generic drugs,” MBSB Research added.

The research house said, “To achieve pharmaceutical sovereignty, a multi-pronged long-term strategy of localisation of active pharmaceutical ingredients (APIs) and biosimilar production, as well as the establishment of a strategic buffer and adoption of advanced digitalisation, must be considered.”

MBSB Research’s top pick is Pharmaniaga Bhd for its long-term concession and new biopharmaceutical arm.

The research house has retained its “buy” call with a target price of 36 sen a share and kept its “positive” outlook on the healthcare sector.

“The immediate impact on a company level may be evident in Pharmaniaga, though we noted that it is a rather paradoxical situation of high strategic importance versus intense financial pressure.

“Pharmaniaga is seen to be the national shock absorber,” it said.

However, the biggest long-term concern is contract rigidity and API inflation.

Pharmaniaga supplies products under pre-agreed prices. With API costs spiking up to 90% for some generics, the group is highly likely to absorb this cost unless the government allows a price revision.

It holds adequate stock for now, but the industry is currently debating who is the bearer of the cost for the higher buffers.

“Additionally, the energy crisis creates a new drag on the group’s core profit – something that should be considered as this would impact its utility and packaging costs in the long run,” MBSB Research further said.

Pharmaniaga’s pivot from a simple distributor to a biopharmaceutical manufacturer is crucial for its turnaround.

The acceleration of its vaccine (PCV13, Hexavalent) and insulin manufacturing might be the factors that could reduce import dependency of non-generic drugs, further avoiding additional logistic surcharges and Hormuz risks associated with importing finished vials.

“Pharmaniaga reported RM13mil in its biopharmaceutical sales in 2025. This segment is expected to be a major profit driver by the second half of 2026, which could offset the thin margins in logistics,” MBSB Research added.