Saturday, January 28

Defensive play in store for healthcare players

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The shortfall in hospital earnings is expected to be offset by a recovery in patient volumes, supported by strong pent-up demand from both local and foreign patients. – Bernama photo

KUCHING (July 14): Defensiveness remains key for players in the healthcare sector as analysts predict a return to normalcy.

“As we transition into endemicity, Covid-19 related revenue such as Covid-19 lab tests, border screening, Covid-19 patients treatment and so on will no doubt continue to be on a decline in the second half of 2022 (2H22),” Hong Leong Investment Bank Bhd (HLIB Research) said in a sector review.

“The shortfall in earnings is expected to be offset by a recovery in patient volumes, supported by strong pent-up demand from both local and foreign patients.”

In general, HLIB Research saw that hospital operators experience an uptick in patient volume after the easing of every movement control and thus far, patient volumes have been on an overall uptrend.

“Looking at the quarterly patient volumes, we highlight that KPJ and IHH’s Malaysia inpatient volume is still 16 to 19 per cent lower than pre-pandemic level, hence we reckon that there will be more room for patient footfall recovery in 2H22,” it added.

Meanwhile, medical tourism or healthcare traveller revenue has been charting steady growth every year since 2011, but suffered a 53 per cent year on year (y-o-y) decline to below RM800 million in 2020 due to the pandemic.

However, the reopening of international borders has put Malaysia in a better position to revive the health tourism sector.

“According to the Healthcare Travel Industry Blueprint 2021-2025, Malaysia aims to generate RM1.7 billion worth of healthcare tourism revenue by 2025, which also implies that Malaysia’s healthcare tourism sector will only rebound back to pre-Covid levels in 2025,” HLIB Research said.

“Taking cue from the stronger-than-expected recovery in tourist numbers, whereby the tourist arrival numbers of 2.37 million from April 1 to June 17 has far exceeded the earlier target of two million tourists for 2022, we think the medical tourism sector could potentially return to pre-Covid levels ahead of Malaysia Healthcare Travel Council’s (MHTC) initial targeted timeline of 2025, ultimately leading to better patient recovery for both IHH and KPJ.”

While there has been increasing concerns on cost inflation eroding profits, the research house thinks that hospital operators are likely to emerge from this unscathed, owing to the inelastic demand for healthcare which gives hospital operators substantial pricing power.

“We note that IHH has revised its pricing to accommodate the hike in costs, while KPJ will remain cognisant of the situation and will pass on the incremental costs should its margins come under pressure.

“The ability to pass on cost increases is unlikely to significantly impact hospital operators’ profitability, in our view.”

Meanwhile, Pharmaniaga Bhd (Pharmaniaga) has yet to see any impact on active pharmaceuticals ingredients’ (APIs) supplies and costs so far as the group typically keeps three to six months’ worth of supplies.

Currency movements are also not expected to have a huge impact on APIs cost due to the hedging positions that could help mitigate the impact.

“That said, we do caution that, should there be any increase in costs, it would be difficult for Pharmaniaga to pass it on to the government and the Group could only cushion the impact by improving its overall efficiency.

“On a separate note, with the economies now reopened, we do foresee an improved demand for pharmaceuticals, as patients return to health facilities for treatment, as well as increased risk of common infections as people return to the workplace and school.

“We continue to like the sector for its defensiveness and strong pricing power (especially the hospital operators). Substantial pricing power is key in helping healthcare players better weather through this high inflationary period, in our view.”