Sector Report - Pharma - Jaccar

8/9/2019 Sector Report - Pharma - Jaccar

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JACCAR EQUITY RESEARCH VIETNAMJACCAR EQUITY RESEARCH VIETNAM

Disclaimer :Please refer to important disclosuresat the end of this report www.jaccar.net

Pharmaceutical Industry NO PAIN, NO GAIN

Young market with a high potential growth (around 15% per year forthe next 5 years) thanks to drugs consumption on the rise.

Very difficult to operate for foreigners but still dominated byinternational products.

Strategic industry for the government in terms of development, whois promoting domestic production.

A very fragmented market with a multitude of local companieswhich produce all the same products (generics and foodsupplements)

The current economic situation burdens Vietnamese companies withheavier obstacles.

Partnerships between foreign and local would suit to all thestakeholders to Jaccars view.

We adopt a recommendation of REDUCE for DHG, DMC and IMP

with a target price of VND 86,500, VND 53,900 and VND 58,500respectively.

AnalystGORGIARD Servane81-85 Ham Nghi District 1Ho Chi Minh City+84 8 39 14 90 [email protected]

Achieved: December 12, 2008

Next events

Domesco Medical Import & Export JSC31/03/2009: Shareholder meeting

25/12/2008: Dividend

Hau Giang Pharmaceutical JSC30/12/2008: Extraordinary Shareholder Meeting

26/12/2008: Dividend payment

Imexpharm Pharmaceutical JSC15/04/2009: Results
http://www.jaccar.net/http://www.jaccar.net/mailto:[email protected]:[email protected]://www.jaccar.net/


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PHARMACEUTICAL INDUSTRY

www.jaccar.net 2
http://www.jaccar.net/http://www.jaccar.net/http://www.jaccar.net/


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CONTENTS

NO PAIN, NO GAIN ......................................................................................................... 1

INVESTMENT CASE ....................................................................................................... 5

VIETNAMESES WELCOME NOT SO EASY! ............................................................ 8

Governments antibiotics against foreign bacteria ..................................................... 8

When the law makes everything more complicated ....................................................................... 8

Industrys governmental vitamins or poison pills? ...................................................................... 9

The custom duty pain ..................................................................................................10

The Vietnamese distribution network: bypass and complication ........................... 11

Inescapable hospitals ...................................................................................................................12

Profitable Pharmacies ...................................................................................................................13

Wanting wholesalers .....................................................................................................................13

DONT REST ON ONES LAURELS: TREATMENT NEEDED ..................................... 14

Local manufacturing on the cheap ............................................................................. 14

Rising equipments quality ............................................................................................................14

Basic Vietnamese production .......................................................................................................15

Vietnamese short-term vision: no promotion, no R&D ............................................ 17

Minimal marketing expenses ........................................................................................................17

Looking for R&D ............................................................................................................................18

Reinforce the distribution network ............................................................................. 18

A DIFFICULT ENVIRONMENT TO COME OUT BIGGER OR NOT? ....................... 21

When prices bolts ........................................................................................................ 21

Requisite raw materials .................................................................................................................21

Significant salaries ........................................................................................................................22

Edgy exchange rate ......................................................................................................................23

And foreign companies hang on ................................................................................ 24

Local desperation ......................................................................................................... 26

CONCLUSION ...............................................................................................................27

COMPANY SHEETS ...................................................................................................... 28

Hau Giang Pharmaceutical JSC ...................................................................................................28

Domesco Medical Import & Export JSC .......................................................................................56

Imexpharm Pharmaceutical JSC ..................................................................................................77


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INVESTMENT CASE

In 2007, the Vietnamese pharmaceutical market represented around 1bn USD, according tomarkets consensus. High growth rate over the years, great potential, quite complex and obscureare its main characteristics. In fact with an average growth rate observed over the past few years

of more than 15%, pharmaceutical industry is destined to a good evolution potential. Comparedto the Indonesian market, which is twice the value but half the volume, Vietnamese market is asyoung, healthy and difficult, as the people. It records good fundamentals, relies mainly onvolumes and low prices. Indeed the Vietnamese population just starts to consider healthcareexpenses. The country counts 86 million inhabitants, as for July 2008 estimates which grows by1% per year, with almost 90% under 65 years-old, more than 70% rural, and yearly healthcareexpenses account only for 13.4$per person, compared to around 35$ in Thailand, 32$ inIndonesia and 19$ in the Philippines. The country is growing faster than its Asian neighbors.

Pharmaceutical market growth - ASEAN region

Source: IMS MIDAS Sep 2007.Legend: Sales in constant US$ at manufacturer level. Bubble size indicates sales

However the healthcare offer is restricted. Some international hospitals, 978 hospitals run by theMinistry of Health, the population has the choice between high-standards, international, veryexpensive hospitals or local, low-value, overcrowded ones. Most of the rich Vietnamese prefer togo abroad and spend between 500,000 and 1 million USD for treatment in Singapore, HongKong, Thailand, Europe or the US. For those who have low revenue, their choice goes to State-hospitals and if they can avoid it they will go to the pharmacy to get the medicine needed. IndeedVietnamese prefer to buy drugs directly from the pharmacist, according to advices orcommercials, than to go see the doctor.The healthcare industry is at its beginning, in the expansion phase. The offer is growing, thedemand is skyrocketing. Recently a healthcare park has been licensed in HCMC, for an

investment of 400 millions USD, including 5 hospitals with a capacity of 1,750 beds, researchcenter, residential living, etc. This project developed in joint-venture with 70% for SingaporesShangri-La Healthcare Investment Pte, is the first one of this scope and introduce high-endhealthcare treatment in Vietnam in order to satisfy the newly rich population.

0

5

10

15

20

25

0 5 10 15 20 25

%GROWTH

% SHARE IN ASEAN

A market with greatpotential: low prices,high volumes and 13.4$drug consumption perperson

Limited healthcare offer

THAILAND

PHILIPPINES

INDONESIA

MALAYSIA

PAKISTAN

SINGAPORE

HONG KONG

VIETNAM


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Evolution of the pharmaceutical market

Source: Jaccar

Above all the potential of the market is high; people spend more and more on healthcare. Even ifthe prices were frozen by the government from March 2008, the prices hike the rest of the yearcompensating the decrease in volume. This is the reason why Jaccars forecast of the market in2008 is 20%. By 2009 the market will suffer due to the economic crisis and the tightening of thegovernmental budget. However the volume will still continue to grow as the population and thedemand for healthcare products are increasing. This will be the main drivers of the VietnamesePharmaceutical market for the next few years, even if growth will be lower than previous years in2009 and 2010, compared to 23% in 2006 and 20% in 2007.

Pharmaceutical market revenue forecasts

Sources: IMS, Jaccar

The growth potential of the Vietnamese pharmaceutical industry mentioned above will be drivenby the volumes. Jaccar forecasts lower volume growth in 2008 and 2009, due to the economic

slowdown and the price hike, but an overall increase of the volume in the coming years, becauseof the raise in drug consumption by the Vietnamese population. Regarding the price effect, theVietnamese market is known to have very low drug prices. To Jaccars mind, prices will to grow

10

20

40

80

160

5 years 10 years 15 years 20 years 25 years

Saturation

Maturation

Expansion

Introduction

Saturation

Maturation

Expansion

Introduction

16 1613

23

20

20

13 1415 16479

556 627

771

925

1,110

1,254

1,430

1,644

1,907

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

0

10

20

30

40

50

60

70

80

90

100

110

2003 2004 2005 2006 2007 2008e 2009f 2010f 2011f 2012f

Millions

Growth (%) Value ($US)

An average 15% growthfor the next few years

THAILAND

PHILIPPINES

INDONESIA

SINGAPORE

VIETNAM

Pharmaceutical consumption per capita ($)

Time


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only a little in the future, as the government is very carefull on drug price increase and doesntallow any big raise.

Price and Volume growth ( 2006-2012e)

Source: Jaccar

The forecasts of average drug consumption is 15$/person/year in 2015. According to Jaccar, itwill arrive sooner, even if the international environment is not ideal and the country faces somemacro-economic problems. Indeed with the membership to the World Trade Organization (WTO)in January 2007, Vietnam is more impacted by global markets and politic decisions. The countryhas now to open more its borders and welcome international companies, willing to develop theirsales. For locals companies this membership is a real challenge, as they now have to face older,more developed, international companies. The government is still reluctant and preserves anenvironment that helps domestic companies. But we can wonder what will happen to theVietnamese pharmaceutical companies after the withdrawal of the privileges and if they will haveenough resources and potential to face bigger global pharmaceutical companies.

Currently there are 3 key pharmaceutical companies listed on the Vietnamese Stock-Exchange:

DHG Pharma (DHG): Vietnamese leader on the pharmaceutical market in term ofrevenue, DHG is developing a strong distribution network. The management is focusingon increasing the number of subsidiaries rather than the production capacity. Our targetprice is VND 86,500 (USD 5.2), with a Reduce recommendation, due to overvaluedstock price.

Domesco (DMC): One of the top 3 among Vietnamese companies on the pharmaceuticalmarket, DMC is a strong distributor, with 48% of its revenue coming from trading.Today DMC is in a strong restructuring process and focusing on core business. Theinvestments are limited and the costs are revised. For DMC, our recommendation isReduce with a target price of VND 53,900 (USD 3.3).

Imexpharm (IMP): According to most experts of the market, IMP is a good, reliable

company, who has developed efficient manufacturing facilities. The company is well-known as an excellent generic producer, who can rely on the support of the governmentand a strong and impressive General Director, Mrs. Dao. IMP is today involved inseveral under-license drugs contracts with foreign companies. Our target price is VND58,500 (USD 3.2) and the recommendation is Reduce.

Five new ones have been recently listed too. However, we have decided to focus on DHG, DMCand IMP in our report:

Pharimexco (DCL) OPC Pharmaceuticals (OPC) Cai Lay Pharmaceutical (MKV)

Traphaco (TRA) Ha Tay Pharmaceutical (DHT)

3% 3%

7%

2%

3% 3%

2%

2006 2007 2008 2009 2010 2011 2012

19%

17%

13%

11% 11%12%

14%

2006 2007 2008 2009 2010 2011 2012

Volume growth ratherthan price growth

Eight Vietnamese listed

companies


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VIETNAMESES WELCOME NOT SO EASY!

The accession to WTO has been a big step for Vietnam entering a global economy. This impliescommitments, guidelines the government has to accept and respect. The pharmaceutical sectorhas now to welcome foreign investors and make their way easier. However the market still shows

constraints to regulate the entries, and to allow Vietnamese companies to enjoy some advantages.

Governments antibiotics against foreign bacteria

The governments objective is to develop the healthcare sector and promote local production ofdrugs, to reach 60% of the total Vietnamese drug consumption by 2010. Vietnamese authoritiescreate a set of rules and regulations to help local pharmaceutical companies to expand.

When the law makes everything more complicated

Even with the WTO access in January 2007, the Vietnamese market is still quite closed. In factlots of sectors are still restricted for foreigners. The pharmaceutical sector is one of them.

According to the Investment Law of 2005, the creation of a company requires certain restrictions,depending on the sector. For a foreign pharmaceutical company, there are 3 ways to enter themarket.

First a foreign company can establish a 100% foreign-owned company. This type of legalentity can also be a factory. The newly created factory can distribute by itself itsmanufactured products. On the other hand, this does not allow the company to distributeits imported products, not manufactured in the Vietnamese factory. As a consequence for

the imported products, it will have to use a distributor.

The main disadvantage of this way is the tax scheme. 100% foreign-owned companiesare taxed at a 28% annual rate. This is subject to changes as from 01/01/2009, a new taxrate will be implemented at 25%. The other constraint is the huge investment needed tocreate a factory, at least 20 million USD. Some international pharmaceutical dont havethe financial power, or simply dont want to manufacture in Vietnam, because they havealready factories on other Asian countries like India and/or China.

The second way that foreign companies can use to enter the Vietnamese pharmaceuticalmarket is by creating a joint-venture with a Vietnamese partner, who must own at least51% of the company. A joint-venture has the normal activities of a company(buying/selling).Foreign companies use rarely this type of legal entity mainly because it implies to lookfor a Vietnamese partner. As a foreigner it is quite difficult to do, as you dont know themarket and the players who could be interested to create a partnership with you. Youneed somebody in the country, you can rely on, to find you a Vietnamese company toform a partnership. It is complicated, time-consuming and needs a lot of trust among theparties. In accordance with the guideline from WTO, by January 2009, the Vietnamesegovernment has to reform this measure to allow creating a company with no restrictionregarding the capital contribution of the Vietnamese partner.

However, according to most of the observers of the market, this reform will not be implemented

before July 2009, maybe January 2010.

Local production has toreach 60% of totalVietnamese drugconsumption by 2010

3 ways to set up:-100% foreign-owned-Joint-venture-Representative office


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Finally foreign companies are allowed to be present in Vietnam as representative office.According to the law, a representative office cannot have a revenue and so cannot sell, itis a cost centre. Its goal is to promote the products of the company. As a result andbecause distribution is also a restricted area, to sell, foreign companies need to gothrough a distributor. There are three kinds of distributors:

- Vietnamese State distributors: most of the State-owned pharmaceutical

companies are distributors of imported products. For example

Vinapharm, which is a State-owned company under the Ministry of

Health has 17 companies around Vietnam responsible of trading and

import/export;

- Vietnamese private distributors: every Vietnamese private

pharmaceutical company can be a distributor for imported product;

- Foreign distributors: there are only 3 foreign distributors on the market:

Zuellig Pharma (Germany), Diethelm (Switzerland) and Megaproduct

(India).

Zuellig Pharma is the biggest of the 3 foreign distributors and most of the internationalcompanies work with it. They often use one of these distributors to distribute their importedproducts and a Vietnamese one, as its connections with authorities are stronger than those offoreign distributors, especially for hospital biding. Solvay Pharmaceutical for example uses 3different distributors: Zuellig Pharmaceutical, Diethelm and KimChau. For Vietnamesecompanies it is much easier as they can be distributors for themselves or for another company.

The decision to choose one of these legal entities is often driven by political or financial reasons.A representative office is not taxed, as it doesnt have a revenue. Building a factory needs biggerinitial investment. And creating a joint-venture asks for trust and reliability with an unknowncompany. That is why most of the international companies chose the representative office as legalform to create a company in Vietnam. Out of 35 foreign companies of our panel, we found that23 set up a representative office when they enter the Vietnamese market. That is to say that theyhave to rely on a distributor to market their products.

Legal entity repartition of foreign companies

Source: Jaccar

Industrys governmental vitamins or poison pills?

Like in every country in the world, healthcare is a sensitive subject. As it touches everyinhabitant of the country, most governments like to keep a certain control over this issue. InVietnam, every province has its own pharmaceutical manufacturer, as so do all part of thegovernment. There are pharmaceutical companies belonging to the Ministry of Health, belonging

13%

77%

10%

Branch + Own-Factory

Rep Office

JV

Most foreign companieshave a representativeoffice in Vietnam

Strong lobbying locally


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to the police, belonging to the customs This is one of the reasons why the pharmaceuticalindustry counts 1,330 domestic companies and is subject to strong lobbying.

The government objective is to improve health of its people. Through its Five yearsDevelopment Plan 2006-2010 issued in March 2006, the Vietnamese Government describes itsgoals and the actions to achieve these goals. Regarding healthcare and pharmaceutical, theambition is high: increase average life-expectancy to over 72 years, decrease maternal and infantmortality, reduce the rate of malnutrition, improve average height of young people, increase thenumber of doctors, pharmacists and hospital beds per 10,000 people. Today, according the 2008estimates of the CIA (Central Intelligence Agency), the life-expectancy is 71.33 years, infantmortality is 23.61 deaths per 1,000 births and according to Ministry of Health numbers, there are32 medical staffs per 10,000 people.

To achieve these goals, the government is willing to open the healthcare system to private andforeign investment, to a certain extent. The country is certainly needing hospitals beds and well-educated doctors, but it does not call for foreign pharmaceutical companies. The will of thegovernment is to open the healthcare to foreign investors but to keep the pharmaceutical

production locally and develop it, in order to reach a local production of at least 60% of the totalmedicines consumption by 2010, versus around 50% today.

One of the government acts to promote domestic production was developed in the Five yearsDevelopment Plan 2006-2010 and increases the proportion of generic drugs in the hospitalsdrugs portfolio. As a result, as local production is mainly generics, the authorities are, through adiverted way, promoting domestic companies. This proportion is targeted to reach 25% of thetotal drugs in 2010.

With the implementation of the national healthcare insurance, the government will also lookclosely at the costs of medicines and will change the methods of hospital fee collection at publichealthcare centers according to the principle of collecting exactly and enough necessary

expenses1

The custom duty pain

. Moreover with the economic difficulties in Vietnam, the tightening of thegovernment budget and the increase of operating expenses, hospitals will have to reduce their billand so be more careful of the drugs they buy. Consequently, generics will be chosen incomparison with more expensive drugs, like branded medicines.

In Vietnam importation is very limited. For pharmaceutical products, like drugs, medicalequipment, it is an exclusivity of Vietnamese companies, and mainly State or former State-owned companies. Foreign companies have to go through an importer to enter medicines inVietnam. Most of Vietnamese pharmaceutical companies act as importer, either for themselves,

like Domesco Import Export Company, a local pharmaceutical manufacturer, which almost 50%of its total revenue come from imported products; or for distributors.

Though this way they can benefit from another substantial revenue, knowing that importation feecan reach 1.5% of the total import value.

The importer, like the distributor, has to handle the stocks and the financial risk of their clients.On the Vietnamese market, the distributor often acts as a wholesaler.

To Jaccars opinion, with the access to WTO and the implementation of the guideline in theVietnamese law, the government will have to let these kinds of barriers go and ease the processfor foreign companies. The government is currently working on a new law about dos and donts

of foreign companies, in regard to importation and distribution. This regulation should be

1Five Years Development Plan 2006-2010, Department of Planning and Investment, Vietnam Authorities

Will to open healthcareservices and developlocal production

The government ispushing hospitals to buylocal generics

Importations arerestricted for foreigners

A long way to go beforean open market


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available before the end of the year. But we think the changes will be long and the reticence toissue importing business license for foreign companies will last, at least until 2010.

The Vietnamese distribution network: bypass and

complicationThe distribution in Vietnam is very complex and unstructured. The reason of this state is mostlybecause the distribution relies on personal relationships between medical sales representative anddoctors, hospital directors, pharmacist and contributions. All the pharmaceutical companies,foreign and local, currently in Vietnam develop a strong network of medical sales representative,with each of them the role to approach doctors, hospitals, pharmacies. DHG has currently 700medical sales representatives, DMC around 350, Sanofi has approximately 200 salesrepresentative but can count on a well-known international brand and a good reputation, andZuellig Pharma has 120 medical representatives.

Distribution Network for foreign companies

Sources: IPS, Jaccar

This particular distribution network has several implications:

For international pharmaceutical companies it can be expensive but in reality it is not somuch. Firstly because they can rely on well-known brand and products that are notproduced in Vietnam. As a result, hospitals, doctors, pharmacies have to purchase themto treat their patients. The lobbying costs represent around 5-6% of their total revenue in

Vietnam. Moreover they often implement internally a strong code of conduct, whichdoesnt allow them to unethical behavior.

HospitalsPharmacies

Distributor

Manufacturer

Abroad

Vietnam

Fee, money transfer

1.5%

6-9%

20%

Representative office

Patient

Doctors

Importer

Wholesaler 2-5%

prescription

promotion

The medical salesrepresentative is the keyelement of distribution

International companiesrely on strongadvantages: brand nameand high-tech products


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For local companies, on the contrary, it is a much bigger expense. Indeed as allVietnamese pharmaceutical manufacturers produce the same kind of medicines; it takes astrong relationship with their interlocutor and some support for hospitals and doctors toprescribe Vietnamese drugs. For domestic companies, selling expenses can grow up to30% of the total revenue.

For customers, the Vietnamese pharmaceutical market is characterized as high volume,low prices. Meanwhile the selling expenses often work as margin transfer, and it is themanufacturer that usually lowers its price. Consequently the consumer still benefit fromlow prices. And even if there is a little rise, the price is nevertheless low.

Vietnamese pharmaceutical companies have their own network of medical sales representatives.

Distribution Network for domestic companies

Source: Jaccar

Inescapable hospitals

Currently, there are 978 hospitals (central, provincial and district hospitals) run by the Ministry ofHealth, around 47 hospitals run by other ministries and approximately 28 private hospitals, i.e.3% of the total hospital beds available. State-owned hospitals are the only market which presentsan interest for pharmaceutical companies.

Hospital distribution is operating through a bidding process. When a drug or a piece of medicalequipment is needed, once or twice a year, the hospital places a bid, in which every company canapply by offering a tender. Out of all the companies that answered the hospital chooses 3 toprovide one type of product required. As the process to apply as hospitals supplier is very longand requires money and a complex and structured medical file, all the pharmaceutical companiescannot answer the bid. When the hospital chose the company to supply drugs or medicalequipments, prices are fixed until the end of the contract, i.e. the next bid.

There is no common buying cooperation between hospitals; every hospital is responsible for itsexpenses, and so run its own bidding process. Consequently, the medical representative has tovisit every hospital. 5 years ago, in some European countries, like France or Germany, the sameprocess was applied. Since governments have created central buying services to gather suppliersfor all hospitals. Such move is on its way but will take time to implement in Vietnam. Eachhospital is run according to the own way of its director and Jaccar doesnt see effective central

buying before 2 to 4 years.

The role of the medical sales representative is to meet with doctors to present its products and itscompany. Pharmaceutical companies organize seminars for doctors to understand better the

Patient

Doctors

promotion

prescription

Fee, money transfer

20%

20-50%

Hospitals

Local Manufacturer

Wholesaler

Pharmacies

State hospitals are thebiggest market inVietnam

which operatethrough a biddingprocess

with no purchasecooperative for themoment


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drugs, its application and restraints. For international companies these seminars are scientific asthey develop and import new drugs for the Vietnamese market. For local companies, as theirproducts are well-known since long time or very safe medicines, this is more like lobbyingseminars where they test their relationship with the doctor, hospital director or pharmacist. In allcases, the sales representative is the key, as most of the buying process is based on relationship.

For any pharmaceutical company, hospital is a tough market, mainly because credit terms are atleast 3 months and prices must be low. The pharmaceutical company needs a good workingcapital management before starting to work with hospitals. Furthermore with the current pricefreeze, some domestic companies working with State Hospitals opted out of their contractspaying a fee of 10 to 20%. They said, if they did not, their losses would have reach 45-50%.However, many local producers said they cannot stop supply, as they could not afford to damagetheir relationship with hospitals. Indeed even if hospital market represents only around 20% ofthe total value of the Vietnamese pharmaceutical market, to be present in the hospital is anecessity, as the condition to sell in pharmacies (80% of the market) relies on it.

Profitable Pharmacies

Like for hospitals, medical representatives build a network among pharmacies and visit them topromote their products. Pharmacies are a big market, as there are, according to the authorities,39,016 pharmacies nationwide. Most of them are small, one of a kind pharmacy, belonging to oneperson, theoretically a pharmacist. There are not retail chains of drugstores, because Vietnamesepharmacists dont have the money to build it and the distribution process is closed by authoritiesfor foreign companies. Out of this total, only 83 are GPP (Good Pharmacies Practice) accredited.Vietnamese local customers habit goes to small pharmacies, as they only go to see the doctors ifthey have a serious diseases. Instead they go to the pharmacists, ask for advice and buy the exactquantity of drugs needed.

Recently local authorities wanted to tighten regulations to improve drugstores practices, for

example ban selling medicines to patients without a doctors prescription. By 2011, pharmaciesthat do not meet GPP standards, issued by the International Pharmaceutical Federation (IPF) in1993, would only been able to sell medicines that do not require prescription, which are verycheap drugs.

The GPP standards requires the full-time presence of a pharmacist, a facility at below 30 degreesCelsius, proper pricing for goods and clear labeling for medicines showing the origin andinstructions for use. Upgrading a pharmacy is a big investment for small pharmacists, around 500million VND (30,000 USD), and they are still hesitating especially regarding the fear of losingtheir capital when the house-rental contracts expire, as lots of them rent their facilities.

Unfortunately this regulation was dropped because of the impossibility of implementation. In factit didnt match with the Vietnamese lifestyle and would have been too expensive for smallpharmacies. By this law the government decided to be clean on the evolution of the pharmaciesmarket. Lots of pharmacies would have shut down by 2011 as there are too many, probably morethan 50%. The government wanted to improve the quality and quantity of controls on counterfeit.

Wanting wholesalers

Wholesalers play a minor role on the Vietnamese pharmaceutical sector. They act as pharmacieswholesales and most of them are not established ones. They buy large quantities to distributorsthat they split to sell to small pharmacies as these cannot afford large quantity. In fact in Vietnammedicines are sold individually in pharmacies, not by box. If a customer needs only 15 capsules,

he will not buy 20 because there are 20 in the box. Wholesalers do the same with pharmacies,which only need some boxes. Meanwhile small pharmacies have no exclusive relationship withone wholesaler or distributor. They are shopping around, may buy one day from one distributor

and tough conditions:fixed and low prices andong payment terms.

A wide network of smallpharmacies

Some rare wholesalers


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and the next from another wholesaler. It totally depends on price and availability of productssince the wholesalers typically stock only fast moving items. There are also 7 pharmaceuticalwholesale markets in Vietnam: 3 in Ho Chi Minh City, 2 in Hanoi, 1 in Can Tho and 1 inDanang.

As a result the pharmaceutical industry in Vietnam is still quite restricted for foreigners and localcompanies can develop their position. The distribution process is completely unstructured andVietnamese companies benefit from a big advantage on this as they know it very well.International companies cannot access this market without a domestic partner. However lots aremissing and could be brought by foreigners.

DONT REST ON ONES LAURELS: TREATMENT

NEEDED

The Vietnamese pharmaceutical market is not easily accessible for foreign companies, thegovernment is helping local companies to expand and grow, the distribution process is closed and

run by Vietnamese. But domestic pharmaceutical companies need to improve some importantcharacteristics of their business plan. The very first to change is the production, which is cheapand relies on low-tech equipment, and then the low expenses on advertisement and R&D. Andfinally the distribution network, concentrated on the South of Vietnam. Foreign companies canhere bring a reliable experience to Vietnamese companies.

Local manufacturing on the cheap

Vietnamese production could be defined by one word: cheap. Cheap production is low-valueproducts, such as generics, herbal products, with low margin. And cheap equipments are low-tech, often second-hand machines. On top all companies are manufacturing the same products.

Rising equipments qualityThe industrial equipments used by Vietnamese Pharmaceutical companies are usually verysimple and dont require lots of technologies, either mechanics or electronics. In fact, Vietnamesemanufacturing companies focus on generics, mostly as tablets and capsules. This type of productsis common and easy to manufacture and induce simple technology in process and equipments. Onthe contrary, injectable products, like vaccines, require equipment, environment and qualitycontrol, much more developed. But Vietnamese companies dont produce this kind of productsand the only liquid medicines available are syrups and eye drops. The production process is lesscomplicated and hygiene and quality control are lighter, usually done on site.

According to local companies, industrial equipments come from China, India, Thailand and alsofrom Europe or the US. In general manufacturers buy a mix of different machines; the choice isoften base on the price in order to buy either new or second-hand machinery depends on financialcapacity of the company and its future contracts. For example, Imexpharm uses equipments fromBelgium, Thailand and China. Some domestic companies, subcontractors for internationalpharmaceutical companies, have to provide themselves with high-quality equipments, to be ableto answer all the specifications required.

Today Vietnamese pharmaceutical companies have to face a great challenge: upgrade theindustrial equipment to GMP (Good Manufacturing Practice) standards. There are 4 differentlevels of GMP certifications, depending on the requirements asked:

GMP-ASEAN : standards from ASEAN (Association of South-East Asia Nation) GMP-WHO : standards set up by the WTO (World Trade Organization) GMP-EU : standards of the European Union GMP-FDA : American standards

Low-tech manufacturingequipment


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From a stage to another, the level of requirements is different especially in the reporting andmaintenance process. Indeed a GMP-WHO certification asks for more utilities, like air-treatment.The reporting is a very important condition and is stricter with GMP-FDA or GMP-EU than withGMP-WHO or ASEAN. To upgrade from GMP-WHO to GMP-FDA or EU, the company needsto invite the assessors to visit the factory for an audit that can cost between 30 to 50 K USD andmodify the production lines according to their observations. However the international standardshave been created to fit the closest as possible the American and European standards.

Since the WTO membership in January 2007, the Vietnamese government is implementingproduction and quality standards nationwide. Regarding the pharmaceutical industry, allmanufacturers must, by the end of 2010, upgrade their facilities to GMP-WHO requirements.GMP-WHO standards:

Avoid cross contamination Prevent mistakes Provide with a traceability Ensure responsibility Guarantee products performance

If companies cant respect these requirements, they will have to stop production. GMP-WHOstandards are more restricting than GMP-ASEAN but less that GMP-EU and GMP-FDA. Thesestandards are use to certify a production line. To some experts point of view, a production linehas to be built accordingly with the standards and that it is very difficult to adapt an existing line,because of the complexity of the building process. However the implementation of the standardsis a good start. Indeed building production line is very expensive. For a workshop with severalproduction lines, the investment needed is between 150,000 and 700,000 USD, depending on theequipment already there. Nevertheless regular maintenance and upgrade as soon as possible haveto be checked, in order to avoid a decrease in quality. GMP-WHO certifications have to berenewed very often, as they are valid for only 2 years.

Currently Vietnam counts around 170 pharmaceutical producers, among them 61 are GMP-WHOcertified and 19 GMP-ASEAN. This number is still very low and all the companies will not beable to apply GMP standards. Among big players of the sector, the assumption that 50% ofcompanies will not survive more than 5 years is agreed quite often. We can deduct that more thanhalf of the Vietnamese pharmaceutical companies will disappear until 2015.

The major challenge for Vietnamese companies till 2010 will be to become GMP-WHOaccredited in order to attract international companies. Indeed if the equipment used by localcompanies has international standards, foreign pharmaceutical companies would acknowledgethe quality of the process and as a result could be interested in subcontracting. Consequently,

Vietnamese pharmaceutical production would keep a high level, as whishes by the government.

Basic Vietnamese production

On the Vietnamese pharmaceutical market, almost every drug is available, from cheap genericlike paracetamol to high-tech drugs very specialized and traditional Asian medicine. The topselling products are drugs from plants/food supplements and antibiotics. You can find below thelist of top leading therapeutics class of drugs.

Upgrade in process

GMO-WHO is the newrule

Only 61 out of 170manufacturers haveGMP-WHO


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www.jaccar.net 16

On the other hand Vietnamese pharmaceutical production is limited. The domestic companiesmanufacture mostly generics, low-value medicines, internationally available because of theexpiration of the property rights. As a result every pharmaceutical company in the world canproduce it. In this category, the main production is antibiotics and pain-reliever.

Top 50 local products in revenue (2007) Top 50 local products in revenue (2010e)

Source: Jaccar Source: Jaccar

Consequently the Vietnamese production is uniformed and concentrates on antibiotics and foodsupplements/herbal medicine. The only high-value drugs could be found in the other category,which gather mainly generic treatment against allergies, blood pressure or hepatitis B. Excludingsome companies specialized in a particular category, like Traphaco, specialized in traditionalmedicine, all the other Vietnamese pharmaceutical companies produce the same drugs.

There is no diversification among local competitors and the management strategic view is moreto cooperate and copy than to be original. Vietnamese pharmaceutical companies choose whichproduct they want to manufacture regarding the top seller products in the world, not the localdemand. As a result local companies make the same products. On the opposite some internationalcompanies which develop their own-branded drugs, can be leader on some niche market. Solvay,for example, in Vietnam for a long time thanks to Laboratoires Fourniers, records high localselling volumes of its drug Lipanthyl, an anti-diabetic treatment, whereas the worldwide sales of

this product are dropping. The main reason is, as global sales of this drug are decreasing,Vietnamese pharmaceutical companies are not interested in producing this treatment. On theVietnamese market, Solvay is now the leader for this category of drug.

50%

12%

24%

14%

Food Suppl.

Pain-killer

Antibio

other

48%

12%

22%

18%

Food Suppl.

Pain-killer

Antibioother

Top selling therapeutic class of drugs (2007)

Rank Code Category Sales k USD Total %1 A ALIMENTARY T.& METABOLISM 188,193 21.9%

2 J SYSTEMIC ANTI-INFECTIVES 182,802 21.2%

3 C CARDIOVASCULAR SYSTEM 84,164 9.8%

4 N NERVOUS SYSTEM 71,906 8.4%5 R RESPIRATORY SYSTEM 67,662 7.9%

6 M MUSCULO-SKELETAL SYSTEM 44,930 5.2%

7 G G.U.SYSTEM & SEX HORMONES 39,539 4.6%

8 L ANTINEOPLAST+IMMUNOMODUL 30,960 3.6%

9 D DERMATOLOGICALS 29,600 3.4%

10 V VARIOUS 29,235 3.4%Source: IMS

Food supplements andantibiotics are the topsellers

Vietnamese philosophy:copy what is working


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The global generic market is dominated by Teva (Israel), in a process of buying back theAmerican Barr, and Sandoz, a subsidiary of Novartis. The Indians Ranbaxy (nearly brought bythe Japanese Diachi), Dr.Reddys and Cipla, are part of the main international generic companies,along with Zentiva (Eastern Europe). In France, Biogaran, belonging to Laboratoires Serviers,has a very strong position. In Vietnam, except Sandoz, present since 1991, these companies arenot active players. However, according to some experts, the liberalization of the market with theWTO membership will induce an increase in their market share and their brand recognition.

In order to differentiate in the next years, Vietnamese pharmaceutical companies are trying todiversify their business, especially in increasing their range of traditional/herbal medicineproducts. This is not the more profitable products and the total Vietnamese market is still limited(1 to 2 % of the total pharmaceutical market of nearly 1bn USD), but there is a potential todevelop brand recognition. Big international pharmaceutical companies dont propose this type ofproducts and Vietnamese customers buy it quite often. As a consequence to propose a range ofherbal medicine is a differentiation compared to foreign players and increase public brandawareness. Unfortunately all local companies are tacking the same path and dont innovatecompared to each other. The main products developed are light treatments and food supplements,

gathering medicine against cold, vitamins, organs well-being. The only companies which couldbe profitable with this kind of products will be the biggest ones that rely already on some brandrecognition.

Vietnamese short-term vision: no promotion, no

R&D

As Vietnamese production is common and low-value, and the generic market is very competitive,as the first to enter is the first recognized by customers, it seems logical that to survive and attractclients, companies advertise a lot and try to differentiate by looking for new medicines. In fact

local companies advertisements are very small and R&D expenses quite limited.

Minimal marketing expenses

The budget for marketing expenses in pharmaceutical companies is limited (between 2% and 4%of total revenue). In fact Vietnamese companies advertise only a little, and mainly locally, that isin their town, at best in their province. The selling expenses, as described by Vietnamesecompanies, include mostly the costs of the medical representatives. Indeed the best way to sell aproduct in Vietnam is by close relationship with the client and that is why the distributionnetwork is important when talking about medicines.

Domestic pharmaceutical companies explain that their marketing actions are seminars,

promotional actions and articles in newspapers or on television. Seminars can refer to business lunch or dinner with their clients. Under no circumstances

it is scientific seminars, like organized by foreign companies, including new drugspresentation. As most of the medicines of Vietnamese pharmaceutical companiesproducts are generics and food supplements, a presentation of this kind of products hasno use.

Regarding promotional actions, it concerns events for the public like, free drugsdistribution, free diagnostic This intends to promote the companies to the public, asfinal consumers choose drugs according to ad, advice from friends or preference for acompany instead of another.

And finally newspaper and television advertisement refers to appearance of the company

to an event related in the news. Only few Vietnamese companies advertise directly ontelevision, as it is very costly (around 30,000 USD minimum for a small clip) and thenumber of channel is very large and regional.

The top global genericproducers are not presentin Vietnam

All local companiesdevelop herbal treatments

Small advertisingexpenses throughbusiness lunch andpromotional actions


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Looking for R&D

Regarding Research and Development (R&D), domestic pharmaceutical companies dont do any.Some companies wanting to diversify into traditional medicines try to look for new drugs fromplants. But their budget is too limited to start R&D like the international companies. The

medicines manufacturers dont have the equipment to produce high-tech drugs, this is logical thatthey dont have the resources to do R&D for this kind of products.

Moreover R&D induces lots of constraints. At first the requirement for government subsidy andfacilities is necessary, as R&D is a long-term process. The governments orientation is a keysuccess factor for companies willing to develop R&D. Today, the government is interested indeveloping laboratories for science experiments, 15 just opened in HCMC, but these facilities arenot exclusively for medical experiments and the preference is given to scientific research that willoffer practical uses. The healthcare R&D is not considered as a priority. In the Five-YearsSocio-Economic Development Plan 2006-2010, the authorities plan to accelerate the researchand apply technological advances to intensify farming, in order to increase productivity, generate

jobs and produce goods for consumption, production and export. No quantifies objective has

been set yet. The medical research is for the moment at its premises and is not going to take offsoon.

Secondly the University programs dont train doctors to work in R&D. The country is alreadylacking of educated doctors/nurses/pharmacists, the health of people is a priority. The main goalof the government until 2010 is to renovate the educational system, by modernizing theeducation, upgrading the quality of teaching methods and teachers, increase enrollment intouniversity and training. There are only 2 University of Pharmacy/Medicine in Vietnam, one inHCMC and one in Hanoi.

Finally companies dont plan to spend time and money on R&D. The shortage of educatedresearchers and the difficulties to borrow money from bank intensify this situation. Consequently

with no facility, no subsidy, no educated people, no money, no long-term vision, Vietnamesepharmaceutical companies lose interest in this mater.

This environment will not change soon, to Jaccars view. Even if its long-term vision is toencourage and develop research, the government has other priorities for the next 5 years andmedical R&D is not the most important. Some companies work by themselves, in cooperationwith some research centers, like the Medicine University of HCMC, to develop new medicines.But the discovered drugs are, for the moment, alternative treatments, i.e. medicines already existto treat this type of disease.

Reinforce the distribution network

The Vietnamese pharmaceutical market is uneven according to the region, even the province.There are 64 provinces in Vietnam, divided into 3 main regions: North, Center and South.Northern Region counts mainly Hanoi and Haiphong, Center Danang and Hue and the South HoChi Minh City and the Mekong Delta.

No technology andesource to do R&D

ome R&D in alternativeosage forms oreatments


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www.jaccar.net 19

Population repartition (2007) Population reparation (2010e)


Pharmaceutical revenue repartition (2007) Pharmaceutical revenue repartition (2010e)


Ho Chi Minh City and the Mekong Delta only account for around 60% of the total Vietnamesepharmaceutical market. Indeed lots of local pharmaceutical companies have their head-quarter inthe Mekong Delta. The 4 listed companies of this industry are located in Can Tho, Cao Lanh andVinh Long. This can be explained by the important population density in a region representingless than one quarter of the total country (23%). HCMC is the biggest city of Vietnam with morethan 8 million inhabitants. Meanwhile the region is known as very fertile and jobfull that attractslots of people. The other reason is, as a fertile and attractive zone, HCMC and the Mekong Deltagather the more rich people. The average healthcare expenses are forecasted to increase for the

next 5 years (15$/person/year in 2015, compared to 10$ in 2006 and 4.2$ in 1995), and so thebiggest cities in Vietnam, Hanoi, HCMC and also Danang, are targeted.

36%

27%

17%

20%

North

Center

South

Mekong

37%

24%

22%

17%

North

Center

South

Mekong

25%

15%

49%

11%

North

Center

South

Mekong

24%

10%

55%

11%

North

Center

South

Mekong

Most of thepharmaceutical revenues made in the South


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In spite of a wish to expand the distribution network, domestic pharmaceutical companies cantfor the moment claim a nationwide network. Most of the Southern companies have the biggestpart of their revenue coming from the South and the same scenario for the Northern companies.The challenge for Vietnamese pharmaceutical companies is now the development of a nationwidenetwork like the foreign distributors, such as Zuellig Pharmaceutical who are able to deliverdirectly a product all around the country.

The improvement of the distribution network is a key-success factor for Vietnamese companiescompared to foreign ones. Indeed only Vietnamese companies can understand and work with itscomplexity and blurriness2

. Moreover its a huge advantage in order to become subcontractor ordistributors for international pharmaceutical companies. It seems to Jaccar that if local companiescan claim good industrial equipment with international standards and a strong and connecteddistribution network, it will be more profitable for foreign pharmaceutical companies to choose aVietnamese partner than to import or produce locally.

Distribution network of the 3 biggest Vietnamese pharmaceutical companies

Sources: DHG, Jaccar Sources: IMP, Jaccar Sources: DMC, Jaccar

2CfI-C : The Vietnamese distribution network: bypass and complication

86%57%

5%

9%17%

12%

45%

26%

29%29%

% of branches in this region

% of this region in the total revenue40%

45%

16%

55%

39%

13%

48% 71%

14%

29%


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www.jaccar.net 21

A DIFFICULT ENVIRONMENT TO COME OUT

BIGGER OR NOT?

The Vietnamese pharmaceutical industry is complex. Even with support from the government

and the local sector process, local companies must face lack of competitiveness and originality intheir business plan. The current environment adds also more challenges. In addition tocompetition from international companies on their market, Vietnamese pharmaceuticalcompanies must face a striking global economic crisis. The best of them will have a chance togrow and expand, if they succeed to take the challenge.

When prices bolts

At the beginning of 2008, the US subprime crisis started a slowdown in the global economy. As aresult we saw a jump in prices of basic raw materials: oil, milk, rice. And, consequently,companies and consumers have to face a general increase of the expenses. In Vietnam, inflation

is skyrocketing, over the 10 first months of 2008, the CPI (Consumer Price Index) rose by morethan 23%. The main impact comes from food and foodstuffs, accounting for 42.85% if the basketof consumer commodities and services. In the meantime, in October 2008, CPI decreased by0.19% over September 2008. The CPI forecasts for the whole year 2008 stand around 25%,according to BMI.

Companies are not safe. Increase of raw materials, salaries, transportation, services. The realchallenge, in a developing country environment, is now to stop and minimize losses. ForVietnamese pharmaceutical companies API (Active Principle Ingredients), needed to producedrugs and salaries, are the main operating expenses, accounting for between 50 and 80% of thetotal revenue.

Requisite raw materials

Over the 9 first months of 2008, the price of some basic API, like paracetamol, amoxicillin,cefalexin rose by an averaged 20-30%. Today the price of these products starts to decline slowly,due to lower oil prices. These materials are essential to produce antibiotics and pain-killers, firstmedicines manufactured in Vietnam, i.e. 60% of the total production. Until now, some companiessucceeded in counter the effects of the increase, by signing long-term contracts at the beginningof the year (and in general for 1 year) with their suppliers. For smaller firms, with no purchasingpower, a drop of the margin is quite certain and will increase the difficulties they face.Vietnamese companies have no pricing power regarding raw materials.

In Vietnam 90% of raw materials are imported, mainly from India and China, for almost 70%.The remaining comes from Europe and the US and is used for the production of a limited type ofdrugs, such as licensed medicines. China is the biggest importer of API, like cefalexin and its

derivatives. Furthermore, China is one of the last and the biggest country in the world to continueproducing penicillin, essential part in the composition of all the others API for antibiotics.Consequently, Chinese companies have a strong power over the rest of the world. The fluctuation

Soaring inflation in 2008that induces increase inall prices

API Prices jumped atmid-2008

Most used API in Vietnam

Name ApplicationCEFALEXIN Antibiotic

ACETAMINOPHEN Pain-reliever

AMOXICILLIN Antibiotic

ASCORBIC ACID Food Supplement

AMPICILLIN AntibioticSource: Jaccar


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of the APIs prices depends on the Chinese government. Indeed, during the last Olympic Gamesin Beijing, APIs activity stopped and prices jumped by more than 50%. The Chinese governmenthas in his hands the worldwide supply of API and can disrupt easily the global market, thanks tolocal measures, like closing factories or increasing exportation taxes.

API Price Evolution (2008)

Source: Phoenix Commodities

Even if bad quality can be found in some Chinese API producers, Vietnamese pharmaceuticalmanufacturer, especially the biggest, are quite fussy about the quality and control it. To Jaccar,there is not risk of poisoning with the biggest Vietnamese pharmaceutical companies.Forecasts on raw materials prices are today nearly impossible, as even specialists on this marketcant predict the evolution. The global economic future is today quite uncertain and API prices

depend on the Chinese government and international demand. Nevertheless Jaccar forecasts aslighter increase in raw materials price for 2009, due to drop in oil price and the same growth aspreviously observed for the next years.

API price Evolution (2007-2011e)

Source Jaccar

Significant salariesSalaries represent also an important operating expense for Vietnamese companies, especially inthe pharmaceutical industry, where the sales department counts lots of employees to reach asmany clients as possible. Domesco counts 1,000 employees, DHG Pharma 2,000 employees.With the high inflation rate experienced this year, 25% forecasts for 2008 according to BMI, and

$40

$45

$50

$55

$60

$65

$70

$75

$80

Tet Holidays Olympic games End of OlympicGames

Sep-08

$-

$20

$40

$60

$80

$100

2007 2008e 2009f 2010f 2011f

China is the biggestproducer of antibioticsAPI in the world

API Prices will continueo increase in the future

Vietnamesepharmaceuticalompanies counts lots ofmployees


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www.jaccar.net 23

18% and 7.8% for 2009 and 2010 respectively, salaries will have to be reevaluated. Somepharmaceutical companies, such as DHG Pharma, found a way to minimize expenses bycalculating sales representatives salary on the basis of cash earned, instead of sales. DHGPharma is an established and well-known company, very popular among Vietnamese people andin addition to the basic salary, the company offers bonuses and compensation, like transportation,lunch, rent

Moreover, despite habits of high employee turnover (approximately 5% of the total manpowerper year) in Vietnam thanks to the easiness of finding a job, and with the actual difficulteconomic environment, Vietnamese workers may change their behavior regarding employment,by staying longer in the company and accepting more difficult conditions. This is the reason whyDHG can implement such a remuneration based on performances. However smaller company ofthe pharmaceutical sector, with weaker brand name and fundamentals, could not change theirsalary policy so easily. The risk of employees leaving the company is strong in this case.

Edgy exchange rate

Another effect, expected this year, on the expenses of Vietnamese companies is the exchangerate. The Vietnam Dong (VND) leans back against the US Dollar (USD). The daily trading bandon inter-bank market increased progressively from January 2008 to +/- 3%. Every day thefinancial authorities, the State Bank of Vietnam, fix an official exchange rate between VND andUSD. Institutions, especially banks, have to comply with this rate, or be punished. However,banks can increase the real exchange rate to customers by increasing changing fees, use multipletransfers

With the drop of the USD and the economic problems of the country, and despite no officialdevaluation, the VND depreciates in real, in 2008, of almost 8%. Moreover, during June and July2008, Vietnam experienced a shortage in USD, which induced an increase of the officialexchange rate at 16,700/17,000 VND per USD but also a soaring growth of the black market

exchange rate to almost 19,000 VND per USD. The scarcity of USD in banks conducts to a creditcrunch; the only companies that could access loans were import/export companies and Statecompanies. The other firms had to buy USD on the black market, in order to pay their suppliers.Knowing that 90% of API, needed for the production of drugs, are imported and paid in USD,VNDs devaluation became for some companies a real problem and a heavy expense.

By the end of 2008, the BMI base we kept forecasts an exchange rate VND/USD at 16,600-16-700. According to BMI the VND will appreciate from next year and for the 4 following years toreach an average of 14,200 VND per USD in 2012. This trend is supported by the sharp rise inFDI, especially in 2008, in exports and current account and by the stronger growth of GDP from2010. Jaccars forecasts of the companies are based on these numbers.

A revaluation of the VND would allow the Vietnamese companies to enjoy low importationscosts and as a result increase their margin. On the other hand, their exportations would suffer, butas Vietnamese pharmaceutical companies dont export so much, the consequences on the

financial statements are minor. The exchange rate VND/USD will probably not be a risk for thefuture. The government holds the measures to keep it under control.

Big pharmaceuticalcompanies wont facestrong increase inpersonnel expenses

VND vs USDfluctuations caused localpharmaceuticalcompanies to increasetheir costs, even takedebts

Market, CPI and Exchange rate forecasts

2003 2004 2005 2006 2007 2008e 2009f 2010f 2011f 2012f

Real GDP growth, % change y-o-y 7.3 8 8.4 8.2 9 5.5 7 9 8.5 8.2

CPI % y-o-y, eop 2.9 10 8.4 6.8 13 26.4 12 6 5 5.5

CPI % y-o-y, ave 3.2 5 8.3 7.4 8 27.6 18 8 5.2 5.3

Exchange rate VND/US$, eop 15,656 15,001 15,913 16,072 16,018 17,000 16,000 15,000 14,400 14,000

Exchange rate VND/US$, ave 15,509 15,742 15,859 16,017 16,045 16,509 16,500 15,500 14,700 14,200Source BMI


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And foreign companies hang on

There are today in Vietnam, 170 drug manufacturers. Except some foreign companies, whichown their factories, like Sanofi-Aventis, and some joint-venture between local and international,most of these 170 companies are Vietnamese manufacturers, that is to say around 150. This high

number can be explained by the complexity and the potential of the industry. Indeed, whendistribution was not developed, each region, province, town, ministry created its ownpharmaceutical factory. Today more and more companies cover the nationwide market and mostof the small businesses have difficulties to face the increasing operating costs. Mergers,acquisitions and bankrupts will happen in the next 3 years.

With a value of around 1bn USD in 2007, according to the market consensus, the Vietnamesepharmaceutical market is dominated by foreign companies. In fact international corporations arein a dominant position regarding the local consumption while Vietnamese manufacturers controlthe production. And the government wants to keep the production locally.

The 10 first companies in term of total revenue are big international pharmaceutical

corporations; the first one would be the French Sanofi-Aventis with total revenue for 2007 of 52millions USD, followed by the American GSK with 48 millions USD. The first Vietnamesecompanies in the ranking are DHG Pharma, listed at the 7 th position. Domesco is 15th, Mekophar24th, Imexpharm 26th, OPC 49th and Pharimexco 170th.

The Vietnamese pharmaceutical market is quite particular because of the characteristics of theplayers. Indeed, some very big global pharmaceutical companies, leaders on most of the othermarkets, are not in Vietnam. For example Pfizer, giant global corporation, has a restricted activityin Vietnam and is ranked on the 6 th position, whereas Laboratoires Serviers, a more moderateFrench player, is number 3. The possible reason lays in the fact that the Vietnamese industry wasdifficult and didnt have a sufficient potential for these big companies, which just re-enter themarket and start a new local development. The membership of the country in the WTO is a majorfactor is this change of strategy.

A vast number ofpharmaceuticalcompanies in VN

But almost 40% of themarket is made by 17nternational companies

Top 20 companies in Vietnam (in terms of revenue)

Rank Company Name Revenue 2007 (k USD)1 SANOFI-AVENTIS COR 52,164

2 GSK GROUP 48,654

3 SERVIER GROUP 22,206

4 BMS GROUP 21,028

5 NOVARTIS GROUP 20,537

6 PFIZER GROUP 19,972

7 HG PHARM 19,178

8 UNITED PHARMA 18,510

9 SOLVAY GROUP 15,848

10 ASTRAZENECA GROUP 15,793

11 BOEH. INGEL. GROUP 14,491

12 J&J GROUP 13,447

13 MERCK SERONO GROUP 12,840

14 IPSEN GROUP 12,723

15 DOMESCO 11,539

16 BAYER SCHERING GR. 11,382

17 ORGANON GROUP 11,237

18 GEDEON RICHTER 10,996

19 STADA 9,86520 ROCHE GROUP 8,996

Source: IMS


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Top 50 products in number of boxes sold (2007) Top 50 products in number of boxes sold (2010e)


Top 50 products in revenue (2007) Top 50 products in revenue (2010e)


On the other hand Vietnamese consumers prefer foreign products, especially European andAmerican ones, symbol of quality. Indeed, as mentioned above, most of the Vietnamese go to thedoctors office only if they have a very serious disease. A consultation is time-consuming andexpensive (an average of 100,000 VND for hospital doctor, namely 10% of the average monthlysalary). In public hospitals, waiting lines are very long and doctors not very friendly. So ifsymptoms are not severe, people choose to use the same treatment as previously used, or drugsthey saw on television, or advised from friends and family, and buy it at the pharmacy. ActuallyVietnam has recently been ranked 2nd country in the world of self-medication by the Associationof the European Self-Medication Industry (AESGP). As most of the medicines are OTC anddont need prescription, the country is developing a great resistance to antibiotics and drugallergies.

The only companies with a budget for marketing expenses and money to advertise nationally areforeign pharmaceutical companies. As a result products from international firms are chosen by

18%2%

4%

20%

56%

Branded Europe

Branded Japan

Branded US

Import Generic

Local Generic

18%2%

8%

18%

54%

Brand ed Europe

Branded Japan

Branded US

Impor t Generic

Local Generic

60%

4%

16%

14%

6%

Branded Europe

Branded Japan

Branded US

Import Generic

Local Generic

54%

4%

18%

12%

12%

Branded Europe

Branded Japan

Branded US

Import Generic

Local Generic

Because Vietnameseprefer foreign products

Which benefit fromlarge marketing expenses


26/103


www.jaccar.net 26

Vietnamese consumers, firstly because of the brand recognition and also because in peoplesmind western product means quality. Following are the top products in Vietnam. Foreignproducts are the top selling in number of box but also in revenue. Efferalgan for instance,products of the American pharmaceutical company BMS, 2nd product the most sold in Vietnam,was intensively advertise for several years.

Local companies only do a little bit of direct marketing, focus on their advantage to be close toconsumers. Indeed, as shown in the table above, domestic products are quite popular among thepopulation. Most of these top selling products are food supplements and complementarytreatments, like eye and ear drops, vitamins. International pharmaceutical companies dont havethis type of products in their portfolio and concentrate on high-margin drugs. The offer ofVietnamese companies, despite being low-margin, is in accordance with the local demand and

represents a great potential in case of a future development of more high-tech drugs.

Local desperation

In spite of increasing export, most of the Vietnamese pharmaceutical companies focus on thedomestic market. Export markets only represent a small part of the total revenue, between 1 and5%. The main export countries are the bordering countries, especially Cambodia and Laos,Eastern Europe (Russia, Ukraine) and for some of them Africa, through an external distributor forexample. This is the case for Domesco which is exporting its products to some African countriesthrough Tedis SA, a French pharmaceutical distributor.

The main reason of this lack of interest for export market may be found in the portfolio ofVietnamese pharmaceutical companies. As a matter of fact, as mentioned previously, localproduction gather mainly generic drugs, food supplements and herbal medicine. Potential markets

Top 10 products sold in Vietnam (in terms of revenue)

Rank Product Company ApplicationRevenue 2007

(k USD)1 AUGMENTIN GlaxoSmithKline Antibiotic 10,107

2 ZINNAT GlaxoSmithKline Antibiotic 6,883

3 PANADOL GlaxoSmithKline Pain-reliever 5,947

4 VASTAREL Laboratoires Servier Cardiology 5,747

5 EFFERALGAN Bristol-Myers Squibb Pain-reliever 5,596

6 DIAMICRON Laboratoires Servier Anti-diabetic 4,818

7 PLAVIX Sanofi-Aventis Blood solution 4,587

8 SMECTA Ipsen Anti-infection 4,101

9 VENTOLIN GlaxoSmithKline Respiratory system 3,747

10 DIANEAL LOW CALCI Baxter Oncology Hospital solution 3,720Source: IMS

Top 10 products sold in Vietnam (in terms of # of box)

Rank Product Company Application# of box sold 2007

(000 units)1 STREPSILS Boots Group Respitatory system 10,515,191

2 EFFERALGAN Bristol-Myers Squibb Pain-reliever 3,847,411

3 NATRI CLORID Pharmedic Ophtalmology 3,833,253

4 CORTIBION Roussel VN Dermato 2,845,912

5 VITA C GLUCOSA Mekophar (TW24) Vitamin 2,606,215

6 GLUCO C HG Pharmaceutical Vitamin 2,533,1547 NATRI CLORID Haipharco Ophtalmology 2,297,159

8 TETRACYCLINE Quaphaco anti-infection ears 2,156,698

9 PANADOL GlaxoSmithKline Pain-reliever 2,116,754

10 ALPHACHYMOTRYPSIN Sanofi-Aventis Anti-inflammatory enzyme 2,116,180Source: IMS

Vietnamesepharmaceuticalcompanies focus ondomestic market

because only fewpotential market


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www.jaccar.net 27

for these types of products are limited and are mainly Developing Countries that are looking forgenerics, cheaper, and Asian Countries, because of the medicine philosophy. However thesecountries are often overwhelmed by Chinese products. Implantations of Vietnamese products areconsequently restricted.

Meanwhile most of the Vietnamese companies dont have a GMP-accredited industrialequipment. So they can only export their products in countries with no regulations regardingcertifications. However it is now an exception. This situation could be problematic in the casewhere the local pharmaceutical market becomes overloaded. It doesnt seem that Vietnamesecompanies plan to develop their export market and they have rather specializing on Vietnameseconsumers.

CONCLUSION

Today Vietnamese production has a limited potential growth, partly because of all the problems ithas to face. High importations, operation costs on the rise, limited market caped by foreign

companies. The government wants to promote local production and is setting up a number ofadvantages, helps to promote and push domestic companies in this way. But barriers will have toend and Vietnamese pharmaceutical companies will be alone in front of bigger, richer, moreexperienced companies.

To Jaccars opinion, the way out for local manufacturers is cooperation with internationalpharmaceutical for distribution and/or production. But local companies have to gather essentialelements to attract investors:

An excellent quality of manufacturing equipment A will of mutual cooperation from the management A complete and efficient distribution network

Some local companies started already in this direction and received some propositions. Theothers will have to upgrade their facilities and adapt to the new rules of the markets or willdisappear. However some small pharmaceutical companies could survive under the control ofbigger ones, becoming subcontractors and potentially be absorbed. Their survival could beproduction for the domestic market, where constraints will stay lower than international ones.

Regarding foreign companies willing to take over local ones, in Jaccars view, it doesnt worthinvesting. Indeed, if they can fulfill certain conditions, Vietnamese pharmaceutical companiescould be great subcontractors or distributors. In this way, international companies dont need toinvest large amount of money, production stay locally, as wishes by the authorities, and the bestof the domestic companies can grow and expand.

The growth potential is however restricted today and would be interesting maybe in few yearswhen the number of companies would have decreased and the market would become more clearand foreseeable. The Vietnamese pharmaceutical sector could then grow as a subcontractingindustry with maybe 1 or 2 big ones which will dominate the local market, like in Indonesia,where the 3 biggest companies are local, thanks to previous development of the foreignpharmaceutical companies.

Currently there are 8 listed pharmaceutical companies on the Vietnamese Stock Exchange. Onthe pharmaceutical market, according to IMS, DHG is ranked 7 th, DMC 15th, IMP 26th, TRA 30th,DHT 47th, OPC 49th and DCL 170th (MKV is not included because it is a veterinary company)DHG is the leading Vietnamese company, and is often considered, along with Imexpharm thetwo best local companies on the market, DHG by its distribution orientation, Imexpharm by itsequipments and cooperation with foreigners. Our recommendation is to Reduce on both stocks,because of an overvaluation of the companies on the market.

and not enoughcertification to export in

developed countries


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COMPANY SHEETS Hau Giang Pharmaceutical JSC

SIMPLE COLD OR SERIOUS DISEASE

DHG is the biggest Vietnamese pharmaceutical company in terms ofrevenue with a total turnover of USD 77.9m in 2007, according to thecompany. The group has been managed for 20 years by Mrs. Pham ThiNga, a strong leader, who will probably leave the company within 5years

Its main activity is to produce generic drugs like antibiotics, foodsupplements such as vitamins, and to distribute them through its owndistribution network. In addition the company is entering the traditionalmedicine segment by investing into herbal raw material production andexpanding its herbal products range.

The coming year is expected to be difficult, even if the pharmaceuticalmarket is less sensitive toward economic crisis. In addition VietnamWTO commitments will induce a greater liberalization of the market.Local companies will face harder competition and less profitability.

Currently DHG is investing to develop its distribution capacity to reach anationwide coverage and be one of the first Vietnamese companies withsuch a capacity. This is now DHGs top priority. In addition a strongdistribution network is a real advantage to attract foreign companieswilling to enter the Vietnamese pharmaceutical market.

Thanks to 2007 capital increase, DHG would have some cash reservesufficient to cover the normal activity, some small investments anddividends for 2009 and 2010. However the margins and ratios woulddrop. ROE and ROCE would lose respectively 11 and 17 basis pointbetween 2007 and 2009. Jaccar doesnt forecast a recovery until 2011.

DHG is often considered as a blue chip on the Vietnamese stock-exchange. We choose to evaluate DHG using the sector-basedtransactions methods, as the distribution network is and will be thestrongest asset the company is developing. The contact list is the mainvalue of this distribution network, so we used also multiples of thePrivate Banking sector. As a result we set a rating REDUCE with atarget price at VND 86,500.

SWOT ANALYSISStrengths Weaknesses Top 1 Vietnamese pharmaceutical company in

revenue

Building a strong distribution network with 700sales representatives

Several partnerships with foreign companies ontheir way

Products portfolio = cheap drugs : generics,traditional medicines, food supplements

Few R&D Distribution network relies on personal contacts

Opportunities Threats Pharmaceutical sector is one of the government

favorites and will do everything to promote it

International companies could be interested injoint-venture or subcontracts with locals

International companies dominate theVietnamese market

WHO deadline: in 2009 the market must openthe distribution to international players Global fluctuation of the price of API

Performance

Rating: REDUCE

Target Price: 86,500 VND

Company DataPrice, close (Dec 12, 2008): 126,000 VND

Price, close (Dec 12, 2008): 7.56 USD

Free Float (in %): 39.2%

Market cap. (VND bn): 2,520

Market cap. (USD m): 151.20

Turnover per day: 54,740

Bloomberg code: DHG VN

Company ContactsDr. Phm Th Vit Nga (CEO)Mr. L Chnh o (CFO)Ms. Le Thi Honh Nhung (IR)

www.dhgpharma.com.vn

Shareholder structureSCIC (State) 44.61%

Citigroup 5.98%

Vinacapital 2.20%

0

50,000

100,000

150,000

200,000

250,000

300,000

12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08

P ri ce P ri ce /V N I nd ex

P&L Highlights(VND bn) 2006 2007 2008e 2009e 2010e

Sales 873 1,285 1,459 1,628 1,870

EBIT 98 140 99 106 131

Op. Margin (%) 11% 11% 7% 7% 7%

Net Income 87 128 91 84 107

Net Margin (%) 10% 10% 6% 5% 6%

Fixed Assets 153 268 315 358 401

Debts 168 43 15 40 40

FCF (95) (179) (26) (65) (33)

FCF yield (%) -68% -99% -20% -51% -26%

Key Ratios(x) 2006 2007 2008e 2009e 2010e

EV/Sales 1.4 2.6 1.7 1.5 1.4EV/EBITDA 11.2 20.5 20.2 19.1 16.2

EV/EBIT 12.7 23.9 24.9 23.8 19.5

PE 12.8 26.7 27.8 30.0 23.6

P/Book 6.9 5.4 3.7 3.4 3.1

ROE (%) 54% 20% 14% 12% 14%

ROCE (%) 32% 27% 14% 13% 14%

Div. Yield (%) 1% 1% 3% 1% 1%

Payout ratio (%) 16% 30% 77% 36% 28%

Next Events30/12/08 Extraordinary Shareholder Meeting

26/12/08 Dividend payment

AnalystGORGIARD Servane

81-85 Ham NghiDistrict 1

Ho Chi Minh City

Tel: +84 8 39 14 90 60

[email protected]


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VALUATION

To valuate DHG we looked at different methods: DCF, Peers comparison, Assets, Sector-basedtransactions.

- We could not choose the DCF method. Indeed the Free Cash Flows of the company are

mostly negative.- The Peer Comparison is not relevant when talking about DHG because we could not find

a company comparable to DHG.

- Valuate the company with its factories is also not relevant. The production equipment is

not high-tech and doesnt require specific techniques or large investment. The Net Asset

Value was not accepted.

Finally, in Jaccars view, the most valuable asset of DHG is its distribution network, relying onpersonal contacts between the sales representative and its interlocutor. We choose to determinethe value of the distribution network using multiples of sector-based transactions.

DCFWe didnt choose to valuate DHG with the DCF method, because the company doesnt haverecurrent positive Free Cash Flows.

Even if cash is positive over the year, FCF is historically negative. The exception of 2008 ismainly due to a cash withdraw from 6 months deposit of VND 50bn (USD 3m). A significantchange in the future is, for Jaccar, very unlikely because of the structure of the FCF. Indeed 3main items consume the cash:

1) the working capital,2) the investments and3) the dividends.

The working capital relies on a particular combination that forces the company todevelop a strong working capital management. Historically it represents around 60% ofthe gross cash flow from operations. DHG pays its suppliers very quickly, after 15 daysin 2007. This turnover was improved by around 5 days, compared to previous years.Another upgrade is not forecasted, as the company doesnt have a strong negotiationpower with its suppliers. Meanwhile DHG records a receivable turnover of around 65days. Clients pay with long credit terms, hospitals benefit from at least 3 months termand pharmacies have around 1 month. In addition the manufacturer tends to keep highstocks, especially in 2007, when DHG increased its inventories by more than 90%. Theaverage turnover of inventories is more than 2 months.

Furthermore Investments represents also a big part of the cash burning. With VND 193bn(USD 11.6m) in 2007 (around 140% of the gross cash flow from operations), DHG has a

long history of investments (46% in 2005, 116% in 2006). The company is restructuringits distribution network, building its own subsidiaries, which require a substantialinvestment in land and building. For example in 2007, DHG bought VND 35.8bn (USD

Evolution of Cash and Free Cash Flow (2005-2011e)

Cash Balance(VND m)

Cash Balance(USD k)

Free Cash Flow(VND m)

Free Cash Flow(USD k)

2005 35,466 2,149 (4,683) (284)2006 35,002 2,121 (94,971) (5,756)2007 129,951 7,876 (179,372) (10,871)2008e 76,721 4,650 (25,693) (1,557)2009e 36,988 2,242 (64,733) (3,923)

2010e 3,845 233 (33,143) (2,009)2011e 16,076 974 52,231 3,165Source: Jaccar


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With the first set, we find a share value for DHG of VND 64,406, i.e. around USD 3.9, recordinga discount of 46%. However this valuation is irrelevant due to the group of peers chosen. Thiscalculation was given for information only.

Regarding the second set of peers, we chose mainly Asian drug manufacturer with production,activities and size close to DHG. Nevertheless we dont have enough information availablethrough Bloomberg and Factset for these companies.

SECTOR-BASED TRANSACTIONSJaccar considered another method to valuate DHG by sector-based transactions, either bypharmaceutical transactions or by valuing the most important asset of the company, that is thedistribution network.

Transaction in the Pharmaceutical sector

When we apply these transaction multiples to DHG, we arrive at a target price of VND 132,972(around USD 8). The targets are generics producers, they are bigger and more established

companies, which can explain the higher price obtained. The total revenue 2007 of thesecompanies is from 2 to 28 times bigger than DHGs total revenue.

Multiples Peer Group 1

Company NameMarket cap

(USD m)

EV/Sales

2008e

EV/Sales

2009e

EV/Sales

2010e

EV/Ebitda

2008e

EV/Ebitda

2009e

EV/Ebitda

2010e

EV/Ebit

2008e

EV/Ebit

2009e

EV/Ebit

2010e

PE

2008e

PE

2009e

PE

2010e

TEVA 34,334 3.12 2.57 - - - - 12.97 10.32 - 14.90 13.82 11.47RANBAXY 1,798 1.39 1.17 0.95 14.47 11.92 8.09 14.81 12.02 6.68 21.08 15.12 10.39

BARR 7,098 3.09 2.62 - 10.99 9.80 9.18 16.75 13.66 - 2

Sector Report - Pharma - Jaccar

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