The following article is written by a close friend – Wilson Wong.
He is an investor and works in the pharmaceutical industry.
I’ve found his analyses of companies to be really good and asked him to write this piece on Duopharma. It was his introduction and recommendation that put the company on my radar and eventually into my portfolio – the Freedom Fund.
As always, this is his take on things and you as a reader should always do your own due diligence before investing.
Also, both the investment and pharmaceutical terms used here might be a little advanced for some, if you have questions, please do leave a comment at the bottom of the article.
I thoroughly enjoyed reading this and I hope you do as well.
Duopharma Biotech Berhad, previously a subsidiary under CCM Berhad underwent a demerger in 2018 as part of a restructuring exercise for companies under PNB’s portfolio. A main reason for Duopharma’s demerger is to focus on building a strong pharmaceutical business.
Over the years, Duopharma has grown into Malaysia’s leading pharmaceutical company in terms of sales volume and no.2 in sales value (behind Apex Healthcare).
Duopharma’s portfolio consists of 367 generic drugs covering some of the very common therapeutic classes such as diabetes, cardiovascular disease, respiratory disease and many more.
On the consumer end, Duopharma boasts a portfolio of 70 different supplements. Its products include a few household brands such as Champs, Flavettes, and EyeGlo.
For readers who are not clear about the pharmaceutical business, every drug that is discovered or developed by a company has a 20-year patent.
During the patent period, the drug will be termed as a branded drug which only the original manufacturer is allowed to market and sell. Branded drugs usually command a higher price as the original manufacturer aims to recoup its R&D costs as well as to maximise profits within said 20-year period.
Think of this as your most advanced cancer drug which can cost you up to 6 digits annually. After the patent expires, other companies are then allowed to manufacture these drugs. As competition comes into play, the price will of course be lower. The same drug will be sold under different brand names at a more affordable price.
A good example would be Panadol. The next time you’re at a pharmacy, try asking for generic paracetamol. Then compare the price difference.
Duopharma, Pharmaniaga to Undertake Fill and Finish Process for Covid-19 Vaccine
14 July 2020 – our current Science, Technology and Innovation Minister Khairy Jamaluddin announced that the Prime Minister had agreed to this proposal and it will be executed once a vaccine is available. Investors immediately flocked towards these 2 stocks, causing a brief limit up on 15th July before an eventual price retrace.
A few days later, our health DG briefly mentioned that the vaccine might be available as soon as the end of this year. Both Duopharma and Pharmaniaga stock prices again immediately rallied with extremely strong buying sentiment. They both closed at RM2.85 and RM4.03 respectively (up by close to 100% before all announcements).
Duopharma – The Pros
Compared to pharmaceutical companies such as Pharmaniaga, Duopharma in general, has a higher overall margin. This is understandable as both companies essentially have a very different business model although general investors tend to lump them together.
Duopharma primarily focuses on manufacturing generic drugs and selling them to hospitals/government while Pharmaniaga focuses on logistics and distribution services for drugs.
Even though Pharmaniaga essentially monopolizes logistic and distribution services in Malaysia with their sheer amount and reach of distribution centres in Malaysia (that’s how our drugs can reach even the most rural hospitals), we cannot ignore that this also comes with a very high operational cost. It acts as a double-edged sword for Pharmaniaga.
Strategy to venture into niche drugs
Among all other pharmaceutical companies in Malaysia, Duopharma clearly outlined that they wanted to focus and develop a basket of niche drugs to meet the market gap. This is an interesting strategy and could pay off should they succeed in their venture.
Moat in Insulin production
I first encountered Duopharma when I was studying the price of insulin in Malaysia and realized that Duopharma offers the cheapest insulin to our public hospitals.
For those with a brief understanding of diabetes, you will know that all diabetic patients will eventually end up relying on insulin. As it turns out, Malaysia has one of the highest diabetic populations in the region.
Duopharma’s insulin contract was extended by the Malaysian government at the end of 2019 and is estimated at a value of around RM91.06 million. Looking back at their financial report in 2019, as much as RM283mil of revenue is derived from the public sector. By combining both numbers, insulin contributes a huge chunk to Duopharma’s bottom line.
Duopharma – Future Prospects
Acquisitions in Korea
In line with Duopharma’s strategy to foray into the development of niche drugs, the company acquired stakes in both Pangen Biotech (8.9%) and SCM Lifescience (5.8%). By partnering with both firms, Duopharma has access to the development process of biotherapies.
As of FY2019, PanGen had obtained product registration approval for Panpoetin, the EPO biosimilar co-developed with Duopharma Biotech, from the Korean Food and Drug Administration (KFDA) on 28 November 2019 and is in discussion to set up a joint biological manufacturing plant in Klang.
As for SCM Lifescience, they are on track with Phase II clinical studies for chronic graft-versus-host disease (GVHD) and Phase I clinical study for acute pancreatitis. Also, the company will embark on Phase 1 clinical trials for stem cell treatment for atopic dermatitis.
Launch of new bio-similar
This is again a bit technical and might be difficult for readers without pharmaceutical knowledge to understand. For certain breast cancer patients, they can be treated with a targeted treatment called Herceptin (trastuzumab). Duopharma had managed to manufacture a biosimilar of trastuzumab with Zuhera as the brand name. Again a biosimilar will be cheaper than the original biologic drug (almost similar to generic drug vs branded drug). This will again help Duopharma gain more sales and provide an affordable option to patients who cannot afford branded drugs.
Other expansion plans
Aside from developing revenue streams from niche drugs, Duopharma is also aggressively expanding its facilities. Over the last financial year, Duopharma completed its Highly Active Pharmaceutical Ingredients plant, upgraded its soft gel and liquid manufacturing line and is set to upgrade another Oral Solid Packing line in 2021. With the higher manufacturing capability, we should see a growth in revenues.
Duopharma – Risks
Losing out in government contract
Traditionally, Duopharma is relying a little too much on government contracts and will see it’s earning affected if they lose out in tenders. The management has acknowledged this issue and has since been working on improving sales in the private sector as well.
Clinical trial results
Clinical trials are always hit or miss. Should SCM Lifescience fail any of its clinical trials, it might affect potential new revenue streams for Duopharma.
Is it still worth buying Duopharma?
With the current price, the short answer is “NO”. Even with a government contract to manufacture Covid-19 vaccine pre-filled syringe, it will not propel Duopharma earnings by 2X and I doubt the growth will even be anywhere close to 50% yoy.
We need to remember that Duopharma does not develop the vaccine, they are just getting the vaccine and packaging it into syringes. Of course, if you are a speculative trader who spotted a nice chart pattern or indicator and can stomach the risk, Duopharma and Pharmaniaga will definitely be one of the few active stocks in the next few trading days. However, for long term investors looking for a good company, Duopharma is definitely worth keeping in the watchlist.
by Wilson Wong
For more analyses on companies, I have a list hERE.