Why did Pharmaniaga shares plunge after its PN17 classification?

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Pharmaniaga Shares Plunged Following PN17 Classification Due to Significant Inventory Provisions and Financial Distress

Pharmaniaga Berhad's share price experienced a substantial decline of 43 per cent, plummeting to 25 sen from a previous closing price of 44 sen. This sharp fall was directly triggered by the company's announcement of a RM552.3 million provision for slow-moving inventories of Covid-19 vaccines. This significant provision led to Pharmaniaga being classified under Practice Note 17 (PN17), a status indicating financial distress within the company.
Impact of Vaccine Inventory Provisions

The substantial RM552.3 million provision set aside for nearly RM1.0 billion worth of unsold Covid-19 vaccines represents a direct hit to Pharmaniaga's financial standing. This write-down reflects the diminished value and potential obsolescence of a significant portion of its vaccine stock. The company's financial report for the fiscal year ended December 31, 2022, revealed a net loss of RM607.32 million, a stark contrast to the RM172.15 million net profit recorded in the prior year.
Reduced Revenue and Demand

Contributing to the financial strain, Pharmaniaga's revenue for FY2022 saw a significant decrease of 27.1 per cent, falling to RM3.51 billion from RM4.82 billion in the previous year. This downturn in revenue is primarily attributed to a substantial reduction in demand from the government for Covid-19 vaccines, highlighting a sharp pivot in public health procurement priorities.
Analyst Downgrades and Target Price Reductions

The financial repercussions of the inventory provisions and reduced demand have led to a negative reassessment by market analysts. MIDF Research, for instance, revised its earnings estimates downwards by 79 per cent for FY2023 and 87 per cent for FY2024, while also slashing the target price for Pharmaniaga shares from 77 sen to 48 sen and downgrading its recommendation from 'buy' to 'neutral'. Similarly, Hong Leong Investment Bank reduced its FY2023 and FY2024 earnings forecasts by 51 per cent and downgraded the stock to a 'sell' rating.
Potential for Provision Reversal

Despite the current financial challenges, there remains a possibility for a reversal of the impairment provision if Pharmaniaga can successfully liquidate its existing Covid-19 vaccine stockpile. The company is reportedly in discussions with entities such as the Islamic Development Bank and the Ministry of Health to explore avenues for selling this inventory. The outcome of these negotiations could significantly influence the company's future financial performance and its ability to exit the PN17 classification.

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Why did Pharmaniaga shares plunge after its PN17 classification?

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