Why Malaysia’s Pharmaniaga Is In Financial Trouble

Pharmaniaga is one of the largest pharmaceutical distributors in Malaysia. A big part of its success is that since 1994 it has been awarded a government concession to provide medical supplies to the public sector. But Pharmaniaga is not a state-owned company, in that the government of Malaysia does not directly own shares.

Instead, it is majority-owned by Boustead Holdings, a diversified conglomerate owned by a military pension fund (Lembaga Tabung Angkatan Tentera, or LTAT) which is, in turn, controlled by the government. This ownership structure, in which the state has indirect ownership in firms through various layers of holding and investment companies, is common in Malaysia. It also has interesting implications for how such companies are run and how they fit into the wider political economy.

The majority of Pharmaniaga’s business comes from the state, with about 66 percent of revenue coming from government contracts in 2020. But lately, despite this closeness, the pharmaceutical company has fallen on hard times (for simplicity’s sake I have converted amounts from Malaysian ringgit to USD at the current exchange rate). In 2022, despite earning $730 million in revenue, Pharmaniaga posted a net loss of $126 million. This caused liabilities to exceed assets, which turned the company’s equity negative.

The board of directors now has “significant doubt over the ability of the Group and the Company to continue as going concerns.” You might expect a big conglomerate like Boustead Holdings to be capable of carrying these losses for the short term. But the past few years have already been rough, with Boustead eating huge losses from another subsidiary on a disastrous naval modernization project.

Pharmaniaga’s financial woes are only adding to that, and the main cause is simple enough: during the pandemic, it procured and stockpiled too many COVID-19 vaccines and was then unable to sell them. Because of this, the company was forced to take a write-down of about $115 million.

Initially, Pharmaniaga signed a contract with the Malaysian government to provide 12 million doses of the Sinovac vaccine. The contract was structured in such a way that Pharmaniaga would receive the raw materials and then “fill and finish” the vaccines at its manufacturing facility in Malaysia before distributing them as part of the national vaccination campaign. By mid-2021, all 12 million doses had been delivered.

However, Pharmaniaga did not want to stop there. 2021 was a very profitable year, almost entirely due to this newfound role in the supply chain of Sinovac vaccines. Although Pharmaniaga has research and development, and production facilities, historically it has mostly been a distributor of medicine and medical supplies. But manufacturing is a much more profitable line of business.

According to the 2022 Annual Report, the expected rate of profit from distribution and logistics is around 7 percent. For manufacturing, margins can rise as high as 32 percent. To capitalize on this and anticipating that demand would remain high during the pandemic, Pharmaniaga produced millions of additional vaccines in excess of the initial order.

But demand was not as high as expected. To hedge its bets against supply bottlenecks, the Malaysian government ordered vaccines from numerous manufacturers, including Pfizer and AstraZeneca. Pfizer ended up being the main vaccine supplier, with over 40 million distributed. In an interview with The Edge, former Health Minister Khairy Jamaluddin who was in charge of the national vaccination program, was adamant that he told Pharmaniaga he only needed the initial order of 12 million doses. Anything beyond that was their call, and at their own risk.

Without this guaranteed demand from the government (which is, we should remember, how Pharmaniaga traditionally makes most of its money), the pharmaceutical firm was unable to offload its extra vaccines and eventually had to write off the entire unused inventory as a loss.

With negative equity and lenders starting to call in their debts, Pharmaniaga has entered a compulsory restructuring process. And were it a regular private market firm, the future might be bleak. But Pharmaniaga has something that most companies don’t, and that is its special relationship with the government.

After some delay, the Ministry of Health recently extended the concession agreement for a further seven years, which means Pharmaniaga will continue providing medical supplies to government hospitals and facilities until at least 2030. The value of the contract was not disclosed, but we know this concession brings in hundreds of millions of dollars annually in revenue. As the company works to shore up its balance sheet and return to profitability, having a customer like the government to fall back on is a major shot in the arm for those efforts.