The Star Online, Saturday 22 July 2006

Overseas ops to be big for Hovid

By DANNY YAP

PETALING JAYA: Hovid Bhd, which recently started outsourcing its ethical drug manufacturing to India, expects overseas operations to be a significant contributor to revenue in three years.

The diversified pharmaceutical company, which manufactures about 300 healthcare products, now produces about 10%, or 30 ethical drugs in India.

Managing director David Ho said the plan to outsource some pharmaceutical operations had been brewing for some time.

“We have tied up with several Indian pharmaceutical companies to produce these drugs,” he said, adding that Hovid was also looking to build a manufacturing plant in India within 12 months.

Ho said the decision to outsource some manufacturing operations overseas was a strategic one seeing that Malaysia was not a cheap place to build and operate more plants.

“We believe the move to produce some products in India, where the cost of labour is overall cheaper, would have a major impact on Hovid’s bottom line in the near future,” he told StarBiz.

An analyst with Hwang-DBS Research said Hovid’s outsourcing strategy was a smart move to free its existing plants in Malaysia to manufacture more healthcare products with higher profit margins.

He also pointed out that the move to India would allow the company to produce cheaper generic drugs and tap into new and developing markets that were less regulated.

“Hovid’s outsourcing strategy provides a significant lift to its regional competitiveness,” he said, adding that positive research progress on the benefits of one of its patented products, also helped boost its image.

The analyst said Hovid’s 55.8% subsidiary Carotech Bhd was on track in its plans to produce biodiesel two weeks ahead of schedule.

“The hike in crude oil prices has also lifted biodiesel prices which is good for Carotech and indirectly benefits Hovid, being a major stakeholder,” he said.

“Hovid's value has risen only 24.6% versus Carotech’s 121.8% rise year-to-date. Current valuations largely ignore contribution from Hovid’s pharmaceutical division, as Hovid’s stake in Carotech (at a 10% holding company discount) is already worth RM1.45 per Hovid share,” he noted.

The analyst had raised 2006, 2007 and 2008’s forecasts by 4.8%, 8.1% and 4.6% respectively to reflect improved product mix and ongoing outsourcing efforts.

“Looking ahead, we are confident that margins will improve with increasing outsourcing production to lower-cost countries, such as India, and increasing focus on higher-margin over-the-counter products,” another analyst said.

For the nine months ended March 31, Hovid posted 48% rise in net profit to RM11mil from RM7.4mil in the previous corresponding period. Its revenue increased 38% to RM102mil from RM74.6mil before.