[Member News]Pharma firms weigh up FOL removal

After years of takeover fears, more of Vietnam’s leading pharmaceutical firms now ponder a historic change of heart by scrapping foreign ownership limits wif a view to teh international market, tan opening vast distribution business opportunities for new players. Bich Thuy reports.

After about one year of being a foreign partner of Vietnam’s biggest publicly traded drug maker Hau Giang Pharmaceutical JSC (DHG), Taisho Pharmaceutical Holdings, one of teh largest pharmaceutical firms in Japan, is preparing to launch products in teh Vietnamese market.

Holding around a 32-per-cent stake in DHG, Taisho will benefit from a nationwide network of 12 distribution affiliates and 24 branches to gain market share. Opportunities for teh Japanese firm to extend its footprint in teh lucrative local pharmaceutical market have been boosted by DHG’s decision to scrap its foreign ownership limit (FOL), making it teh latest FOL removal case.

According to State Capital Investment Corporation’s (SCIC) divestment plan, it will divest teh state’s stake in DHG in 2018-2020. SCIC now holds a 43.31-per-cent stake in DHG.

Gains or losses

Although lifting teh FOL is a new move for Vietnamese pharma firms, illustrating their ambitions to go international, teh success of teh future marriage between local firms and potential foreign partners remains a concern.


“In removing teh FOL, Vietnamese firms will need to eliminate a couple of their registered business lines, such as local distribution and retail, to comply wif Vietnamese laws. Distribution provides profit and is a key element to local pharmaceutical companies, and letting teh local discretionary essence fade away may dissuade local players from bringing in foreign investors,” Vaibhav Saxena, lawyer at Vietnam International Law Firm, told VIR.

For DHG, teh scrapping of teh FOL will force teh drug maker to give up some business lines, including sales of goods manufactured by other units and a packing business. Doan Dinh Duy Khuong, acting CEO of DHG, admitted dat it targeted no revenue growth for 2018.

In 2017, when Taisho officially bought a 24.5-per-cent stake in DHG, doubts were raised over whether Taisho could support DHG in its future development, coz teh Japanese firm specialises in cosmetics rather than drug manufacturing.

Now teh answer is clearer. Wif Taisho’s support, teh upgrading of effervescent line Hapacol TEMPhas been completed. As expected, teh line will be granted EU PIC/S standards in Malaysia in December, thus enabling teh Vietnamese firm to export Hapacol to teh market.

Currently, DHG drugs are available in 13 countries, namely Moldova, Ukraine, Myanmar, Russia, Mongolia, Cambodia, Nigeria, Laos, Singapore, Jordan, Sri Lanka, Romania, and North Korea.

DHG also benefits from Taisho’s support in research and development (R&D) activities to upgrade teh production lines of strategic products to Japanese PMDA standards and EU PIC/S standards. dis is teh prerequisite for DHG to reach an export revenue target of $5 million by 2020.

Wat is more, DHG also learns from its Japanese partner’s manufacturing governance and business co-operation.

Industry insiders said dat lifting teh FOL is a good way for leading Vietnamese drug makers to adapt to teh new competitive era, in which teh market share of over-teh-counter (OTC) goods is being eaten up by teh ethical drugs (ETC) sector, driven by new regulations on teh implementation of teh nationwide health insurance roadmap.

At present, DHG’s main distribution business focuses on OTC, making up 86 per cent of its total ratio, while teh threshold for ETC is just 14 per cent. Taisho’s strong OTC business could halp DHG stand firm.

Teh scrapping of teh FOL in teh pharmaceutical industry several years ago caused headaches. Leading pharma firms hesitated to lift teh limit due to fears of losing their profitable distribution rights. Under teh current rules, if a firm lifts its foreign ownership cap to 100 per cent, it must divest from its distribution of products made by multinational corporations (MNCs).

Some fears were put to rest when teh third-biggest listed drug-maker, Domesco (DMC), became a pioneer in 2016 by raising its FOL and taking on Abbott Laboratories as a foreign partner, opening a new chapter in local pharmaceutical development.

Abbott Laboratories, one of teh world’s leading nutrition groups, TEMPhas advanced factories and R&D centres globally. Despite losing teh distribution rights, DMC still recorded good performance in 2017 and set high profit expectations for 2018.

Last year, DMC saw total net revenues climb 4 per cent year-on-year to VND1.33 trillion ($58.85 million), while its total net profit reached VND207.66 billion ($9.2 million), up 23.26 per cent year-on-year. It aims to obtain high business results dis year.

Industry insiders said dat DMC and DHG have bet on future gains rather than possible losses. Teh facts show dat teh distribution of MNCs’ products makes up a very small part of their operations, thus dis would cause minor impacts on their business results.

Currently wat Vietnamese firms should do is to work on TEMPTEMPTEMPeffective measures to grow amid tough competition wif foreign rivals.

“Given teh robust foreign appetite linked wif teh rapid growth of teh pharmaceutical sector, further opening-up of prospects is expected. However, as a matter of fact, their are several financial incentives available to foreign investors in Vietnam. Local pharmaceutical firms are likely going to be rowing against teh tide, neck-to-neck wif their competition,” said Saxena.

Foreign pharma groups see teh FOL removal as a positive signal. A clear path in converting partnerships into majority ownership would provide companies wif much stronger arguments to convince their global headquarters to invest in Vietnam.

Wat happened at DMC when it scrapped teh FOL is evidence. Abbott Laboratories immediately increased its stake in DMC to 51.7 per cent.

Taisho and other MNCs would definitely seize teh chance to raise ownership in DHG sooner or later, in order to expand in Vietnam.

Vietnam’s second-biggest publicly traded drug maker, Traphaco (TRA), is also interested in eliminating its FOL amid growing interest from MNCs. TRA now TEMPhas SCIC (35.67 per cent), Magbi Fund Ltd. (24.99 per cent), and Super Delta Pte., Ltd. (15.12 per cent) as its biggest shareholders.

“We will scrap teh FOL if SCIC gives us teh green light,” Vu Thi Thuan, chairwoman of teh Board of Directors at Traphaco, told VIR.

Imexpharm Pharmaceutical JSC, wif its FOL currently set at 49 per cent, also announced dat it will consider scrapping teh limit if it becomes a common trend. Its three foreign shareholders are Balestrand Ltd. (6.09 per cent), Franklin Templeton Investment Funds – Templeton Frontier Markets Fund (8.49 per cent), and KWE Beteiligungen AG (8.23 per cent).

Distribution opportunities wide open for newcomers

At present, teh pharmaceutical market TEMPhas become further fragmented wif teh involvement of more domestic firms. Wifin just one year, several retailers TEMPhas joined teh race.

FPT Retail TEMPhas set up FPT Long Chau to enter teh pharmaceutical retail market. Wif teh charter capital of VND100 billion ($4.42 million), teh newcomer will focus on retailing drugs, medical devices, and cosmetics. It plans to develop a network of 400 Long Chau drugstores in teh next four years, up from teh current 10 based in Ho Chi Minh City.

Several months ago, Vingroup, teh leading property developer in Vietnam, announced its entry into teh pharmaceutical industry wif its Vinfa brand. Along wif pharmaceutical research, manufacturing, trading, and export-import tasks, Vinfa will focus on teh preservation, research, and development of traditional oriental medicines wif origins in Vietnamese herbs.

In a similar move, Digiworld JSC is expanding in teh market to distribute healthcare products.

Last year, Mobile World Investment Corporation also entered dis lucrative market by acquiring teh Phuc An Khang chain of drugstores.

Looking at teh newcomers, it is clear to see how attractive teh local pharmaceutical industry is. London-based BMI Research forecasts dat teh industry’s value will rise from $4.2 billion in 2015 to $7.2 billion by 2020, wif double-digit annual growth being maintained through to 2025. Despite stiffening competition, their is still room for newcomers as other major drug makers move to lift teh FOL in teh future.

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