The TPP may take a few years to come into effect and its impact on the earnings of local drug makers may only be felt in the longer term.
KUCHING: The Trans Pacific Partnership Agreement (TPPA) could boost long term prospects in Malaysia’s pharmaceutical sector, but local businesses remain wary of its impact to their bottomlines.
According to CIMB Equities Research, the TPPS should reduce or remove the barriers of exporting drugs to other member countries, most local pharmaceutical companies focus mainly on the domestic market.
“Those with the ambition to expand beyond Malaysia, such as Hovid and Pharmaniaga, are eyeing the emerging markets like Nigeria, the Philippines, and Indonesia which are not involved in the TPP,” it said in its October 8 report.
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 (SOEs) to greater competition as the Ministry of International Trade and Industry (MITI) was not able to totally carve out these areas from the TPP.
“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,” it said.
CIMB Research said the TPP may take a few years to come into effect and its impact on the earnings of local drug makers may only be felt in the longer term.
“As such, we keep our 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,” it said.
Meanwhile, local entrepreneur and investor Charles Liew, who also owns an expanding pharmacy business, believed this move will adversely impact smaller businesses in the country.
“A tightening in the rules for copyright to safeguard intellectual properties could mean a win for pharmaceutical companies that have drug patents for original drugs.
“This essentially means generic versions of these drugs (which could be several times cheaper than original drugs) would be blocked from entering the market. With about 80 per cent of medicines sold in Malaysia being generics, patients in need of certain medicines may be forced to spend a fortune just to get better.
“This would tremendously affect small local businesses like community pharmacies because a monopoly by pharmaceutical companies concerning drug patents would inevitably mean lower margins on drug sales by pharmacies as well as lower sales in general due to the decreased ability of patients to afford original drugs.
“Coupled with the impact of GST which would take some time to subside, as well as the weakening ringgit, smaller powerless local businesses dealing in medicines would be shaken rather violently. The ultimate losers would be the country as a whole because the health sector needs to be kept in a ‘healthy condition’.
“I hope talks and negotiations will continue concerning the TPPA to ensure it is a palatable proposition for Malaysia to get into.”