Pharma firms weigh up FOL removal

More and more pharmaceutical companies are mulling over scrapping their FOL Photo: Dung Minh

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 the largest pharmaceutical firms in Japan, is preparing to launch products in the 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 the Japanese firm to extend its footprint in the lucrative local pharmaceutical market have been boosted by DHG’s decision to scrap its foreign ownership limit (FOL), making it the latest FOL removal case.

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

Gains or losses

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

“In removing the FOL, Vietnamese firms will need to eliminate a couple of their registered business lines, such as local distribution and retail, to comply with Vietnamese laws. Distribution provides profit and is a key element to local pharmaceutical companies, and letting the 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, the scrapping of the FOL will force the 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 that 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, because the Japanese firm specialises in cosmetics rather than drug manufacturing.

Now the answer is clearer. With Taisho’s support, the upgrading of effervescent line Hapacol has been completed. As expected, the line will be granted EU PIC/S standards in Malaysia in December, thus enabling the Vietnamese firm to export Hapacol to the 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 the production lines of strategic products to Japanese PMDA standards and EU PIC/S standards. This is the prerequisite for DHG to reach an export revenue target of $5 million by 2020.

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

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

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

The scrapping of the FOL in the pharmaceutical industry several years ago caused headaches. Leading pharma firms hesitated to lift the limit due to fears of losing their profitable distribution rights. Under the 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 the 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 the world’s leading nutrition groups, has advanced factories and R&D centres globally. Despite losing the 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 this year.

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

Currently what Vietnamese firms should do is to work on effective measures to grow amid tough competition with foreign rivals.

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

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

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

Taisho and other MNCs would definitely seize the 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 has 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 the FOL if SCIC gives us the green light,” Vu Thi Thuan, chairwoman of the Board of Directors at Traphaco, told VIR.

Imexpharm Pharmaceutical JSC, with its FOL currently set at 49 per cent, also announced that it will consider scrapping the 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, the pharmaceutical market has become further fragmented with the involvement of more domestic firms. Within just one year, several retailers have joined the race.

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

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

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

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

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