CCM ... Apr11

Sources say US-based GlaxoSmithKline Pharmaceuticals plc (GSK) is eyeing a controlling equity stake in local generic drugs maker CCM Duopharma Biotech Bhd.

The source said the acquisition was in line with the trend in the global pharmaceutical industry, in which large players were scouting for takeover targets in emerging markets, as more expiring patents on drugs were generating a significant portion of their earnings.

CCM Duopharma is the largest generic drug maker in Malaysia. This could possibly bode well for GSK in the long run.

In Dec 2010, GSK proposed to take over Maxinutrition Group Holdings Ltd, a UK company that manufactures protein-enhanced functional nutrition products from Darwin Private Equity for £162 million (RM789 million) in cash, including the debt repayment. Its president John Clarke once said the acquisition was a “demonstration of GSK’s strategy to expand through appropriate bolt-on acquisitions that meet its strict
financial criteria”.

The world’s largest drug maker Pfizer Inc had in October last year announced its acquisition of Tennessee-based King Pharmaceuticals Inc for US$3.6 billion (RM11 billion) so that it could offer a fuller spectrum of treatments for patients across the globe who are in need of pain relief and management. Pfizer was paying a 40% premium for the acquisition. CCM Duopharma’s present undemanding valuation could possibly meet GSK’s criteria.

CCM Duopharma is hardly traded on Bursa Malaysia. One reason could be the company’s shares are tightly held. CCM Marketing Sdn Bhd, wholly owned subsidiary of Chemical Company of Malaysia Bhd (CCM), owns 73.37% shareholding in the company.

CMM’s net assets stood at per share of RM1.13 as at Dec 31, 2010.

CCM Duopharma and its parent company CCM said they had “no knowledge of any such move”.

Whether GSK is indeed buying CCM Duopharma remains unconfirmed observers pointed out that while the potential divestment of the controlling stake in CCM Duopharma could help CCM pare down its large debts, but the sales would also create a vacuum in the group’s earnings portfolio.

For FY10 ended Dec 31, CCM has total borrowings of RM836.5 million, consisting of long-term borrowings of RM311.7 million and short-term debts of RM524.8 million, against a cash balance of RM210 million. This translates into a net debt of RM626.5 million.

CCM’s net gearing stood at a high of nearly 85%, based on shareholders’ fund of RM740.76 million.

On the flip side, the disposal of the equity stake in CCM Duopharma would mean a loss of a steady income stream.

For FY10, pharmaceutical division is not the biggest contributor to CCM’s revenue, but it is the second most profitable one after chemicals division. Pharmaceutical business generated RM50 million to CCM’s revenue and RM21.6 million to the group’s pre-tax profit.

Furthermore, CCM Duopharma is rather generous in terms of dividend payment. For FY10, the company paid a total dividend of RM20.48 million, according to its cashflow statement.

Holding 73.37% in the generic drug manufacturer, CCM is expected to receive dividend income of RM15million. The amount will be handy for CCM to pay for about half of CCM’s net interest expense of RM32.2 million for the year.

Unlike its parent, CCM Duopharma has a clean balance sheet that allows the company to be generous in dividend payment.

It had a net cash of RM4.58 million as at Dec 31, 2010, comprising RM10.42 million in long-term borrowings, RM8.33 million in short-term borrowings and RM23.33 million cash.

For FY10, CCM Duopharma’s revenue totaled RM131.44 million, up 6.2% from RM123.8 million from the previous fiscal year while net profit amounted RM28.7 million, marginally lower against RM30.2 million the year before.

CCM Duopharma’s financial performance remains relatively resilient. For the past five years between 2005 and 2009, the company posted a compounded annual growth rate of 5.7% and 4.43% in revenue and earnings per share, respectively.

CCM could be possibly giving up one precious gem if it were to sell CCM Duopharma.