Local Pharma Players Pivot Toward High Value Exports To Protect Margins

---

 
MBSB Research expect the upcoming quarter three financial year 2025 (3QFY25) earnings for Malaysia’s healthcare sector to perform in a steady trajectory, similar to the US and Europe. 
“We believe private hospitals will sustain high patient demand, notably for NCD treatments and high-end services in addition to the support from critical government policy initiatives and incentives, and medical tourism,” said MBSB.
MBSB also expects the private sector will continue to expand its capacity to cater to this demand. “Hence, we believe healthcare services’ performance will remain stable in 3QFY25,” said MBSB.
Meanwhile, for pharmaceuticals, MBSB expects generic drug prices to remain competitive, especially against Indian and Eastern Europe imports, which will drive local selling prices lower for the private sector. 
This eventually will force local manufacturers to accelerate the shift into high-value products and focus on export markets to utilize their low-capacity, high-cost plants efficiently, consequently improving profit margins in the long term. 
Despite the positive turn for the subsector in the promotion, manufacture and distribution of biopharmaceuticals, MBSB noted that a significant change may not be visible yet in 3QFY25.
For healthcare service providers, labour shortage will continue to be a major issue. Malaysia faces a significant brain drain of doctors, nurses and specialists to higher-paying markets. 
This could increase the cost of recruitment and retaining talents, which could contribute to the expected medical inflation rate of 16% by 2026. Another challenge would be the increase pricing of specialty drugs, mainly GLP-1 to treat diabetes and obesity, and other biologics, as well as the APIs.
Similar to the headwinds faced in the US and Europe, the high cost of these drugs is expected to contribute to the rising medical inflation. The high prices could also negatively impact margins for local manufacturers, as they absorb the higher input cost, risking a margin squeeze.
As for medical gloves, despite the ongoing oversupply and the risk on profitability for glove manufacturers, the global trend of rising NCD prevalence provides an advantage to glove consumers (both healthcare service providers and drug manufacturers). 

Margins for glove will remain thin until the end-year as glove companies gradually return to pre-pandemic profitability, due to: 
(i) rising cost inflation through labour, utilities and raw material. 
(ii) increased foreign competition.
(iii) circumvention of China’s glove manufacturer to manoeuvre away from US tariffs. 
Nevertheless, global demand is expected to recover at small, steady paces until global supply capacity rationalises (approximately 370 bil pieces per year by 2026). 
All in all, MBSB opines that Malaysia’s healthcare players will likely see a continuous top-line revenue growth, fuelled by: 
(i) rising aging population and increasing demand for NCD treatments. 
(ii) the strong support from government initiatives (HWP, NIMP 2030, MYMT 2026), incentives (Budget 2026) and concessions. 
(iii) rising consumer spending, and (iv) ongoing digital and AI-technology adaptation. 
“However, we do remain vigilant on the downside risk to the earnings growth, due to cost inflation and domestic price caps,” said MBSB.
MBSB likes Pharmaniaga for its defensive concession income from its Logistics & Distribution (L&D) segment, making its revenue base highly stable and predictable, regardless of economic cycles. 
The successful execution of the regularisation plan is also a major catalyst, allowing for the resumption of dividend payments by 2026. The group is also pivoting towards higher-margin biopharmaceuticals moving forward, which could provide a large, profitable growth engine beyond basic generics and L&D.
Nevertheless, the downside risk remains on the volatile global API cost and regulatory changes. Meanwhile, IHH remained a main beneficiary to the rise of NCD prevalence and aging population.
Healthcare demand is inelastic, securing a long-term and stable revenue for the group. IHH also has strong brands across its network, allowing the group to cater to the growing middle class and medical tourists, insulating from low-margin pricing pressures. 
“However, we remain vigilant on the increase in medical inflation and operational cost due to labour shortage and technology integrations,” said MBSB.
Nevertheless, IHH’s share price had exceeded MBSB’s target price, as such they are reviewing their Buy call, pending the upcoming earnings announcement.
“We expect both companies’ 3QFY25 earnings to be within expectation, on the back of a stable topline and higher demand for both pharmaceutical products and NCD treatments,” said MBSB. — Focus Malaysia

---