Are M&As still a top trend in the pharma market?

August 02, 2022 | 08:00
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After a significant decrease in the value of mergers and acquisitions (M&As) in Vietnam in 2018-2020, such activities have recovered in the past year. Ngo Thanh Hai and Nguyen Dieu Quynh from LNT & Partners offer their insight into the current M&A trend in the local pharmaceutical market.

According to an update on Global M&A Industry Trend conducted by PwC, pharmaceuticals, life sciences, and healthcare services continue to attract high levels of investor interest, and this trend will continue through the rest of the year.

Are M&As still a top trend in the pharma market?
Ngo Thanh Hai and Nguyen Dieu Quynh from LNT & Partners

There are three main reasons that M&As in pharmaceuticals could still be the future trend in Vietnam. Firstly, in the face of growing demand and rapid technological innovation, pharmaceutical companies must continuously improve and develop their research and development departments before their patents expire. Therefore, they will be ambitious to acquire smaller companies with existing conditions.

Secondly, to expand the business in Vietnam, the investors will need to consider opening a manufacturing plant or acquiring a current plant from domestic companies. Under World Trade Organization commitments, foreign investors can import but cannot distribute drugs to the Vietnamese market. Following Article 91.10 of Decree No.54/2017/ND-CP on guidelines for implementation of the Law on Pharmacy, they must sell the drugs to domestic wholesalers for carrying out distribution.

Therefore, the foreign investor will choose to acquire domestic manufacturers to take advantage of cheap production costs and the distribution system from local partners.

Thirdly, Vietnam will witness a strong development of medical technology with applications that allow users to book appointments and visit doctors through video chat. Telehealth and telemedicine will attract many investors to develop and open a strong network for patients (especially in rural areas) to use the best treatments from experienced doctors.

Steps to acquisition

Investors may establish a pharmaceutical import company or a representative office (RO), which is an inexpensive entry point for businesses looking to better understand the Vietnamese market. As a result, this choice is among the most popular for newcomers to the Vietnamese market and frequently comes before a more significant presence there.

According to Article 07 of Decree No.07/2016/ND-CP on establishment of representative offices or branches of foreign traders in Vietnam under the Commercial Law, a foreign trader must fulfil a number of requirements in order to be granted a license to open a RO, including being legally established and registered for business; operating and having at least one year left on the business registration certificate; and having the operation of the RO in line with Vietnam’s commitments under international treaties or having its operation approved by the minister of health.

Such an establishment license can be obtained through a straightforward process that takes only about 10 days.

A foreign pharmaceutical firm’s RO can specifically carry out the following tasks:

- Contacting and researching the market, promoting opportunities of the traders they represent, but are not allowed to directly deploy commercial advertising activities;

- Providing information about the company’s drugs to medical examination and treatment practitioners through dealers of pharma business establishments in the form of drug information documents that have been verified by competent authorities;

- Authorised to register drugs and medicinal ingredients in his/her name within the scope of activities stated in the license to establish an RO as authorised by a foreign trader; and

- Import of drugs, medicinal ingredients, and standard substances to serve clinical trials, bioavailability assessment, and bioequivalence testing. After the Law on Pharmacy 2016 and Decree 54 came into effect, more investors opened their businesses by establishing importing subsidiaries in Vietnam.

After receiving a certificate of satisfaction of conditions, the company can import and sell pharmaceutical products to local partners, obtain and be the marketing authorisation (MA) holder of the imported products, and conduct other marketing activities for such products.

Still, to carry out more actions such as selling drugs/medicinal ingredients to wholesalers, retailers, and health facilities, or bidding at public hospitals, investors shall need to build their own manufacturing plant or acquire a local plant via an M&A.

Typically, an M&A deal will take place after and subject to the outcomes of the diligence procedure in terms of legal, financial, and valuation aspects. Among those, legal due diligence is of great importance and offers a comprehensive picture of the target company in a legal aspect.

Aside from conducting legal due diligence on common issues such as investment, loans, material transactions, labour, intellectual property, and disputes, investors considering the Vietnamese pharmaceutical industry should pay special attention to several other aspects.

Firstly, they must check what business activities the target is conducting and if it has obtained the certificate of eligibility for the pharmacy business in its respective activities.

Next, they should check if personnel holding the following positions have been granted valid pharmacy practice certificates or not: the chief pharmacist of a pharmacy business establishment; the person in charge of quality assurance of a facility manufacturing drugs or medicinal ingredients; and the person in charge of clinical pharmacology of a health facility.

Third involves checking whether the drugs and medicinal ingredients that the target is trading have been granted with the MA and the valid term of that MA. It should be noted that the procedure for registering or renewing the MA for drugs and medicinal ingredients is cumbersome and time-consuming, especially given the stringent requirements for documentation in the application file for awarding or renewing such certificates. Therefore, the remaining validity term of such certificates should be a matter to be taken into account.

Checks should also be made regarding the warehouse and manufacturing plans, and whether or not those are in compliance with the likes of GMP and GSP standards. Finally, it must be determined if the target has imposed any administrative penalties. This reflects not only the compliance of the target but also the control and supervision situation of the competent authorities towards the target.

M&As in the pharmaceutical sector are relatively new to most local companies. Consequently, many Vietnamese companies are unfamiliar with the notion of due diligence and may be reluctant to disclose information. Therefore, foreign investors should be aware of this situation to have a proper approach to the target during the due diligence process to have the proper insight. After completion of this process, the parties to an M&A transaction will draft transaction documents to be executed. In this step, parties should note that no legislative provision in Vietnam explicitly recognises the legality of shareholders’ agreements or member agreements. Hence, the content of such agreements should be reflected in the charter of the target company to avoid the risk of dispute later.

Besides that, it is important to have experienced lawyers assisting the parties during the negotiation and closing of an M&A deal. Many issues occur which may break the deal if there are no innovative solutions from lawyers. For example, a merger filing is a required procedure to be conducted with competition authorities (in certain cases) before the execution and implementation of the transaction. However, both parties (even their advisors) may forget to address this issue.

Issues of concern

There are now just a handful of pharmaceutical companies in Vietnam that match international requirements. Before acquiring a target in Vietnam, international investors must do exhaustive legal due diligence. If an investor picks a firm that does not meet global GMP standards, he or she must account for the expenses involved in enhancing the quality of pharmaceutical manufacturing.

Alternatively, in order to increase their worth in the pharmaceutical M&A market, Vietnamese pharmaceutical companies could create GMP-compliant facilities and aim for higher international standards, such as Japan-GMP, PIC/S-GMP, or EU-GMP. This objective not only improves the quality of the pharmaceutical manufacturing market in Vietnam but also gives the firm a competitive edge in M&A transactions with foreign merchants. Another option is that investors might enter joint ventures with local firms to develop a pharmaceutical plant or a pharmaceutical-focused industrial park. This helps to ensure that the factory satisfies the investor’s requirements. In addition, it reduces expenditures and cumbersome processes since Vietnamese partners can be in charge of applying for permits and certificates.

By Thanh Hai and Dieu Quynh

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