KUALA LUMPUR: An increase in the cost of raw materials for the production of pharmaceuticals due to strains on the supply chain could have an impact on domestic pharmaceutical players, said RHB Research.
However, the research firm expects the earnings impact to be minimal as cost spikes may not happen as soon (earliest by 2Q23), given that the major India API supplier still has four to six months of inventory.
"We believe the resilient consumer demand towards their products, recovery in export sales, and easing of the supply chain bottleneck should help to offset against API price spikes," it added.
The spike in Covid-19 infections in China is tightening supply for active pharmaceuticals ingredients (API), especially as Covid-lockdowns in recent years put pressure on the supply chain.
"As Malaysia relies heavily on API imports from China to India, the API price spikes could potentially erode drug makers’ 2023 margins," said RHB in its latest healthcare sector update.
It said Duopharma Biotech Bhd appears to be more susceptible to the price increase as the cost of APIs account for 50% to 60% of its total raw material costs.
For every 10% spike in API prices, RHB expects Kotra Industries Bhd and Duopharma to be affected by 3% and 5-6% respectively.
Meanwhile, the easing of China's Covid-19 restrictions is expected to have a neutral-to-mild positive impact on IHH Healthcare Bhd's China operations as bed utilisation operates near optimal levels.
The research firm noted however that IHH remains committed to reviewing its China operations as part of its non-core asset divestment strategy, follo;wing the signing of an equity transfer agreement to divest its effective 49% stake in Gleneagles Chengdu Hospital on Nov 24, 2022.
"Locally, the medical tourism revival remains intact, complemented by potential contributions from Chinese visitors (may not be significant; accounts for fewer than 10% of total medical tourists)," said RHB.
RHB maintained its "overweight" call on the healthcare sector while advocating for a domestic-centric play for now.
It said KPJ Healthcare Bhd remained its top sector pick due to its robust patients growth trajectory, being less impacted by nursing staff shortages and being potentially earnings-accretive post-disposal of overseas entity by 2023.
"While we remain sanguine on healthcare service providers’ recovery prospects, we think KPJ’s greater domestic focus offers stronger earnings stability," it said.
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