The great recovery

IT was a bitter pill for investors when Pharmaniaga Bhd plunged into Practice Note 17 (PN17) status in 2023 after a massive Covid-19 vaccine impairment shattered earnings and eroded market confidence.

Few expected the government-linked pharmaceutical group to recover so quickly.

However, in just over two years, Pharmaniaga is back and appears to be on a stronger footing, anchored by a high-stakes bet on insulin manufacturing, vaccines and biopharmaceuticals that could redefine the company beyond its traditional role as a healthcare distributor.

The pharmaceutical company exited PN17 status in March after undertaking a regularisation exercise involving a capital reduction, rights issue and private placement.

More importantly, the group has now chalked up nine consecutive profitable quarters, signalling what management insists is no temporary rebound.

Managing director Datuk Zulkifli Jafar says the company’s recovery was driven by a sharper operational focus and a deliberate exit from non-core businesses.

“We are very focused now. We do not venture into other businesses,” he tells StarBiz 7, adding that Pharmaniaga had shut down several non-core operations after the PN17 episode.

The company’s latest growth engine centres on insulin and biopharmaceutical manufacturing – areas where Pharmaniaga believes demand visibility and margins are significantly stronger than its traditional logistics and distribution (L&D) business.

Its biggest breakthrough came recently when it secured a government contract worth about RM281.7mil over three years to supply human insulin to public hospitals.

The award effectively positions Pharmaniaga as Malaysia’s first local manufacturer of human insulin, a development that management sees as important not just for the company, but also for the country’s healthcare security.

“The idea behind this – and why the government is giving us priority – is simply to ensure the stability of supply in the country,” Zulkifli explains.

He shares that Malaysia previously faced supply disruptions after multinational pharmaceutical companies shifted focus towards higher-value insulin analogues instead of human insulin, forcing the government to temporarily move some patients to more expensive alternatives.

“There was an instability, resulting in the government having to move some patients into analog, which is more expensive than human insulin,” he says.

The government’s response has been to encourage localisation and avoid reliance on a single supplier – a policy shift that Pharmaniaga expects will continue to favour local manufacturing players.

The insulin opportunity itself is substantial.

According to Zulkifli, Malaysia now has about 3.5 million diabetic patients, with the number projected to rise to five million by 2030.

“Unfortunately, because of our lifestyle, the number of patients will likely increase to five million by 2030,” he says.

The worsening diabetes numbers translates into long-term demand visibility for insulin and related diabetes treatments.

Unlike the Covid-19 vaccine boom that evaporated after the pandemic normalised, insulin demand is viewed as sustainable.

“Once you’re on insulin, you’ll be on it forever,” Zulkifli points out.

The company expects margins from insulin manufacturing to also significantly outperform conventional trading activities.

“Manufacturing will be around 25% to 29% margin,” Zulkifli says, compared with roughly 20% for trading operations.

Pharmaniaga is now scaling up production at its Puchong facility, which currently has the capacity to produce about 25 million insulin cartridges annually – enough to meet Malaysia’s entire human insulin requirement.

“If I increase by one shift, then I can ramp up to about 40 million cartridges a year,” Zulkifli notes.

The group is not stopping at human insulin.

It is also developing insulin analogues, Aspart, Aspart Mix and glucagon-like peptide-1 receptor agonists (GLP-1RAs) such as liraglutide and semaglutide, which are increasingly used in diabetes and obesity treatment.

“We are quite strong in our anti-diabetic portfolio,” Zulkifli notes.

The company expects to begin localising insulin analogue production by the third quarter of 2027.

Beyond Malaysia, Pharmaniaga is also exploring export opportunities to selected markets, particularly Central Asia, leveraging Malaysia’s halal certification credentials.

“Our human insulin is halal-certified. So our target is actually Central Asia,” Zulkifli says.

That said, insulin is only one pillar of Pharmaniaga’s broader manufacturing ambitions.

The group has invested roughly RM300mil into its biopharmaceutical complex in Puchong, which integrates insulin, vaccine and small-volume injectable production.

According to management, the plant could eventually become the company’s single largest earnings contributor.

The company is also aggressively expanding into vaccines under the national immunisation programme.

Among the products currently under development are pneumococcal conjugate vaccine (PCV13), enterovirus 71 (EV71) vaccine for hand, foot and mouth disease (HFMD), and Hexavalent vaccines targeted for launch by 2028.

“We are hoping by 2028, we can launch it. That is a very big market,” Zulkifli says of the Hexavalent vaccine opportunity.

High entry barriers

The management believes these biopharmaceutical activities provide a far stronger moat than conventional pharmaceutical distribution due to their high barriers to entry and regulatory complexity.

“For them to enter, they need to spend so much money,” Zulkifli says, noting that manufacturing plants require years to build and secure approvals.

That strategy partly explains why Pharmaniaga’s valuation has surged since emerging from PN17.

The stock is now trading at a premium to many healthcare peers, with Zulkifli acknowledging that the company trades at roughly 25 times earnings compared with peers at about 15 to 18 times.

However, he argues that investors are increasingly pricing Pharmaniaga as a future manufacturing-driven pharmaceutical player rather than merely a concession-based logistics and distributor (L&D).

“In the next five years, I would say Pharmaniaga will be known more as a manufacturer,” he says.

Under its Vision ONE30 roadmap, the company is targeting RM300mil in profit after tax and at least RM3bil in market capitalisation by 2030.

The longer-term plan is to gradually tilt the group’s earnings mix away from L&D towards manufacturing.

Currently, Pharmaniaga’s bottom-line contribution is roughly 60% L&D and 40% manufacturing. By 2030, the company aims to reverse that ratio to 30% L&D and 70% manufacturing.

Even so, risks remain.

Government procurement remains highly price-sensitive, while new entrants into insulin manufacturing could intensify competition over time.

Geopolitical tensions and rising freight costs also continue to pressure global pharmaceutical supply chains.

But Zulkifli remains confident the group’s recovery is fundamentally different from previous cycles because it is now anchored on long-term structural healthcare demand rather than temporary pandemic-driven earnings.

“Healthcare is the most sustainable,” he emphasises. “Either we will achieve it faster or slightly slower.”

For now, the market appears willing to believe that Pharmaniaga’s recovery story is no longer just medicine for short-term pain, but the beginning of a far larger transformation.