CIMB Research cautious of TPP impact on M'sia's pharma sector

It said that while the pact should reduce or remove the barriers on exporting drugs to other TPP member countries, most Malaysian pharmaceutical companies focused mainly on the domestic market.
“Those with the ambition to expand beyond Malaysia, such as Hovid and Pharmaniaga, are eyeing emerging markets like Nigeria, the Philippines and Indonesia, which are not involved in the TPP,” it said.
CIMB Research said the Malaysian government stood firm that the US-led TPP should not hinder the public’s accessibility to affordable drugs. However, until there was more clarity with the official release of its text, the TPP posed risks to all drug makers based in Malaysia.
The Malaysian Medical Association believes the TPP will extend the exclusivity period of new drugs, the period when drug originators have exclusive marketing rights. Currently, generic drug makers rely on new product launches to offset the declining profit margin of older generic drugs. A longer exclusivity period means that generic drug makers may have to hold back their product launches and suffer an overall decline in profit margins.
“We believe the TPP will subject government procurement and state-owned enterprises to greater competition, as the Ministry of International Trade and Industry was not able to totally carve out these areas from the TPP,” CIMB Research said.
“The government is the key customer of state-owned drug makers such as Pharmaniaga and CCM Duopharma. Their manufacturing profit margins are higher than those of their peers and their earnings are at risk should competition intensify.”
The research house said the TPP might take a few years to come into effect and its impact on the earnings of local drug makers might only be felt in the longer term. “As such, we keep our [current] earnings forecasts and target prices for Hovid and Pharmaniaga. Nonetheless, TPP still possesses a risk to the sector’s valuation as it could alter the sector’s long-term prospects. We may review our valuation basis for these stocks when we gather more details about the pact,”