Fear of losses keeps M&A in pharma humble

Only five of the 100 biggest M&A deals in Vietnam in the past 10 years were pharma-related, Photo: Le Toan

After opening an office in Hanoi in late 2016, India’s Renova Global Pte., Ltd. is looking for opportunities to co-operate with local manufacturing companies in Vietnam to transfer technology and co-invest.

“We are very actively looking for mergers and acquisitions (M&A) opportunities in leading local pharmaceutical companies. Several discussions are ongoing. Very soon, there will be some major investments from the Indian pharma industry in Vietnam,” Renova Global’s director Pankaj Aora told VIR.

Other multinational corporations (MNCs) have shown interest in expanding to and within Vietnam via M&A. They, however, still hesitate to invest heavily, as the sector remains a conditional business, with some restrictions for foreign investment.

Growing interest, few big deals

Since 2009, Vietnam has seen five M&A transactions in the pharmaceutical industry in The List 100 announced recently by AVM Vietnam.

The most valuable of these deals was worth $100 million, coming from Taisho Pharmaceutical Ltd.–one of the Japanese largest companies in the field–acquiring a 24.9 per cent stake in Vietnam’s biggest publicly traded drug maker, DHG Pharmaceutical JSC, in 2016. The four others included CFR International’s $63 million stake acquisition in Vietnam’s third-largest listed drug maker Domesco JSC (DMC); Adamed Group’s $50 million deal with Davipharm, Vietnam’s fastest-growing pharmaceutical company; the acquisition of Vietnamese drug manufacturer Glomed by US-based Abbott Laboratories; and Daiwa-SSI Fund’s acquisition of a 20 per cent stake in CVI Pharma.

Despite slow beginnings, pharmaceuticals and healthcare are among the sectors with the greatest potential for M&A deals in the coming months, driven by the accelerated equitisation of state-owned enterprises (SOEs).

State Capital Investment Corporation (SCIC) will divest a large number of state shares in DMC and DHG in 2018-2020. SCIC holds 35 per cent of DMC and 43 per cent of DHG. DMC and DHG are expected to appeal to foreign investors, as DMC’s foreign ownership limit (FOL) was scrapped in 2016 and DHG’s will follow this year. Two other promising state capital divestments are the sale of 20 per cent of Vietnam Medical Equipment Corporation in 2018 and Vietnam Pharmaceutical Corporation’s sale of another 30 per cent this year, after 35 per cent of it was put up for sale in 2017.

According to the Pharma Group of the European Business Chamber in Vietnam

(EuroCham), which now has 26 members, lifting the FOL in the pharmaceutical industry would send a positive signal to foreign investors. A clear path in converting partnerships into majority ownership would persuade companies to invest more heavily in Vietnam.

The speed with which US-based Abbott made steps to increase its holdings in DMC demonstrates how attractive the local pharmaceutical industry is. In September 2016, when DMC removed its FOL, Abbott increased its stake in the firm to 51.7 per cent.

For DHG, the FOL removal will allow Taisho to increase its stake. The Japanese company has raised its ownership in DHG from 24.9 to 32 per cent.

The trend is now gathering momentum, as many MNCs have worked with SCIC on M&A. Japan, Singapore, India, and South Korea are among the most interested.

“South Korean companies often concentrated on green-field investments and the establishment of production bases in Vietnam. They now focus on M&A to tap into their Vietnamese partners’ available assets, thus reducing costs and expediting expansion in the country,” Michael DC Choi, senior deputy director of the Korea Trade-Investment Promotion Agency, told VIR., “There are some M&A deals under negotiation in Vietnam, focusing on agro-chemical, pharmaceutical, and services.”

EuroCham’s Legal Sector Committee predicts that the number and value of completed M&A deals in Vietnam are expected to grow further in 2018-2019, especially if the EU-Vietnam Free Trade Agreement is ratified and enters into force as anticipated.

Gains and losses

One year after Daiwa-SSI Fund made its investment in CVI Pharma, the company showed positive business results in 2017, with an on-year rise of 60 per cent in revenue and 40 per cent in profit.

“All our operations are now more transparent, with improvements in business governance. In addition, we have funding for a high-tech factory which will be put into operation in late 2018. We might sell more stakes in the future to serve our development plans,” said CVI Pharma’s chairman Phan Van Hieu.

Not all M&A transactions have brought immediate positive outcomes like CVI Pharma’s, and some have even resulted in reduced business targets in the short term.

As shown in its second-quarter consolidated financial statement, DHG’s pre-tax profit hit VND360.7 billion ($16.03 million) in the first half of this year, fulfilling just 44 per cent of the whole-year target, while net profit touched VND310 billion ($13.77 million), down 14 per cent on-year.

Doan Dinh Duy Khuong, acting CEO of DHG, admitted that the FOL removal will force the drug maker to give up some business lines, including sales of goods manufactured by other units. Therefore, it set a target of no revenue growth in 2018. Besides, DHG has decided to reduce its annual growth targets in 2018-2020 to 13 per cent in revenue and 7 per cent in profit. DHG’s previous annual revenue growth target was 15 per cent.