OSK 7 September 2009

THE BUZZ
The Edge Weekly reported over the weekend that CCM Duopharma (CCMD) is close to
getting a contract from the Government to produce the generic version of Tamiflu for
Malaysia. It also said CCMD is the final stage of obtaining certification to manufacture the
drug, which is used to treat the H1N1 flu, and will subsequently be bidding for a government
contract to supply the flu doses. The supply contract is estimated at around RM60m for a
period of 3 years, the report added.
OUR TAKE
Capitalising on market opportunity. We are not entirely surprised with the news given that
it is in line with the nature of CCMD’s business to explore potential in creating the formulation
for generic pharmaceutical products. Given that Tamiflu is in high demand due to the H1N1 flu
pandemic, we believe that CCMD has intensified efforts to come up with its generic version of
Tamiflu to capture the market opportunities. As CCMD has, over time, been awarded more or
less similar contracts for other generic pharmaceutical products by the Government, this is
just the usual supply contract. Nevertheless, we are positive on the news as the contract will
be earnings enhancing for the company and there is sizeable market potential for the drug’s
generic version. We understand that the supply of Tamiflu in Malaysia is currently limited and
private hospitals and clinics are prescribing ‘Fluhalt’, a generic Tamifly brand from Ranbaxy.
Incrementally earnings enhancing. Due to strategic reasons and risk management on the
part of the government, we believe it is unlikely for the contract to be awarded to a single
party in order to reduce the dependence on a sole supplier for the medication. However, we
believe CCMD stands a good chance of securing a big portion of the contract given its strong
presence in the government sector supported by its track record. Currently, around 35% of its
revenue comes from government supply contracts. Based on the assumption that CCMD will
secure half of the total contract value, this may potentially translate into an additional RM10m
in revenue a year, or less than 10% of its annual revenue. Assuming a PBT margin of 30% for
the contract would contribute RM3m to PBT, or 7.5% of our FY09 forecast. Despite the
potential incremental impact on its revenue and earnings, overall we are positive on this
potential contract as it will enhance CCMD’s earnings. We have not incorporated the
contract’s potential value into our forecasts pending confirmation of the news report.
Taking a bite on Pharmaniaga’s pie? The government concession to supply
pharmaceuticals and medical supplies awarded to Pharmaniaga (Not Rated) will expire by
year-end. Although it has been reported that the concession will be renewed, we gather that
there is a possibility of CCMD and its sister company, CCM Pharmaceuticals, securing a
portion of the concession, especially for pharmaceutical manufacturing. Although there are
still no concrete details on this potential development, we believe it will result in significant
earnings enhancement for the company, should it materialise.
Upgraded to BUY. We maintain our forecast, but due to the more than 10% upside from the
current price and its attractive dividend yield, we are upgrading our call from Neutral to BUY,
with a higher target price of RM3.10 from RM2.70 previously, after rolling over our EPS from
FY09 to FY10 at 12.5x PER. Despite its low liquidity, the potential positive news flow could
provide a re-rating catalyst for the company