1641 valuation of the four leading pharmaceutical companies listing on hochiminh stock exchange masters thesis (FILE WORD)

Acknowledgement...ii Table of contents...iii Chapter 1: Introduction...1 Chapter 2: Macroeconomics Analysis...6 Chapter 3: Industry Analysis...21 Chapter 4: Competitive Analysis...26 Cha

Dissertation submitted in partial fulfillment of the UWE ofhΓΓ

llyBristol England

Requirement for the MSc in Finance

FINANCE DISSERTATION ON

Valuation of the four leading

pharmaceutical companies listing on

Hochiminh Stock Exchange

LE HUONG HAO

ID No: 17970732 Intake 1

Supervisor: Dr Tran Tat Thanh

September 2018

A CKNOWLEGEMENT

I would like to express my sincere thanks to Dr Tran Tat Thanh for hissupervision and guidance His suggestions made my dissertation more profoundand more perfect Finally, I wish to show an expression from my heartfeltgratitude to my parents for their encouragement, and their support

TABLE OF CONTENT

Title

Acknowledgement ii

Table of contents iii

Chapter 1: Introduction 1

Chapter 2: Macroeconomics Analysis 6

Chapter 3: Industry Analysis 21

Chapter 4: Competitive Analysis 26

Chapter 5: Traphaco Joint Stock Company 32

Chapter 6: DHG Pharmaceutical Joint StockCompany 43

Chapter 7: Pymepharco Joint Stock Company 54

Chapter 8: ImexpharmCorporationJoint Stock Company 63

Chapter 9: Conclusion 71

References 72

Appendices 73

CHAPTER 1: INTRODUCTION

1 The Background of the Pharmaceutical Industry

The pharmaceutical industry plays a crucial role in the worldwide healthcaresystems It consists of different public and private companies which discover,develop as well as manufacture drugs and medications for both human and animal(Gennaro, 1990) The scientific research and development (R&D) of medicineswhich preclude or treat diseases is the main activity of the industry A variety ofpharmacological activity and toxicological properties are displayed through drugsubstances (Hardman, Gilman and Limbird, 1996; Reynolds, 1989) Due tomodern scientific and technological advances, the discovery and development ofinnovative pharmaceuticals are hastened in order to improve therapeutic activityand reduce side effects

1.1 An overview of the global pharmaceutical industry

In recent years, the global pharmaceutical industry has received anuncommon accelerated growth Its market is considered to develop perpetually.The amount of money for healthcare spending over the world in 2040 wasforecasted to reach to $24.2 trillion (Dieleman and colleagues, 2017) In an article,Dixon-Fyle and Kowallik (2010) predicted that most member countries ofOrganisation for Economic Co-operation and Development would expend morethan 20% of Gross Domestic Product (GDP) on healthcare by 2050 Besides, theglobal aging population increases in size and emerging countries have the betterconditions to access to healthcare

According to a report by The Business Research Company (2018), in 2017,the revenue of the world pharmaceutical market was recorded at $934.8 billionand a 5.8% rise from 2016 This figure showed a surge in comparison with 5.2%

in the previous period However, the change was not as fast as those for other twolarger segments including medical equipment and healthcare services In general,there is a more than 7% of the whole healthcare last year In the report, the growthmomentum of the pharmaceutical market in the world is expected to developcontinually and attain $1,170 billion in 2021

1.2 An overview of Vietnam pharmaceutical industry

Vietnam pharmaceutical industry has the same trend as the globalpharmaceutical industry The pharmaceutical market in Vietnam has had adramatic increase in the last decades It is arranged one of 17 pharmergingmarkets which have the highest growth rates in the world (Bui, 2018) In 2017,Vietnam pharmaceutical market was estimated to worth $5.2 billion and it grew10% from last year This rate was lower than the average rate from 2010 to 2015(14.6%) The compound annual growth rate (CAGR) of pharmaceutical market inVietnam between 2012 and 2017 was up to 19.7% This figure was higher thanthe average CAGR of countries in Asia-Pacific region (P.V, 2018) It isanticipated that the double-digit growth is maintained until 2025 (Quynh, 2018).Traphaco Joint Stock Company, DHG Pharmaceutical Joint StockCompany, Pymepharco Joint Stock Company, and Imexpharm Coporation isdominating Vietnam pharmaceutical industry The market share of most fourprestigious pharmaceutical companies accounts for more than 50% of Vietnammarket

2 Area of the Study

This study is proposing to analyse the performance as well as evaluatethe intrinsic values of the four in five leading companies in Vietnampharmaceutical market, namely Traphaco Joint Stock Company, DHGPharmaceutical Joint Stock Company, Pymepharco Joint Stock Company andImexpharm Corporation Except for the global market, the analysis refers toVietnam market which is the main region From the above -mentionedanalyses, the dissertation aims to gain a better understanding of the leaders inVietnam pharmaceutical industry and provide investment recommendationsfor investors regarding these firms.

3 Study Objectives

In the study, I will show the “whole picture” of the global pharmaceuticalindustry, Vietnam pharmaceutical industry and make investmentrecommendations Initially, I give the current overview of the globalpharmaceutical industry and Vietnam pharmaceutical industry where is theproducts are consumed mainly After that, I evaluate the impacts of majormacroeconomic factors as well as the pharmaceutical industry both on global and

in Vietnam In the next, I will analyse the competition in Vietnam market and thefinancial ratios of the above companies Finally, after compute their intrinsicvalues, the investment recommendations is produced

4 Methods of Study

The study uses one of the most popular investment analysis approachnamely top-down investing This method looks first at a broad view of theeconomy’s macro environment and then, summarises the general industrialsituation After that, the four pharmaceutical companies are respectively analysedmainly based on their financial statements in order to assess their performances

Macroeconomic analysis

I use the PEST model (Political, Economic, Social, and Technological) inorder to examine how main macroeconomic indicators influence thepharmaceutical industry in the world and in Vietnam

Company analysis and valuation

I will summarise the main ratios of the four firms in order to consider theirfinancial situation and their profitability prospects through their financialstatements, a number of different financial databases (such as OSIRIS, Statista,EvaluatePharma and so on), and some financial website (such as the World Bank,the United Nations, DCAT Value Chain Insights and so on) Additionally, I buildvaluation models with the objective of calculating their intrinsic values

5 Organisation of Study

Based on the proposed analytical framework, this study includes ninechapters In the first chapter, I will give a brief introduction to the study area and

its purposes The second chapter concentrate on the current globalmacroeconomic and Vietnam macroeconomic In the next chapter, I shows themajor events or issues of the global and Vietnam pharmaceutical industries Theforth chapter will analyse the existing forces driving the competition in themarket From chapter five to chapter eight, the business description, performance,and prospects for the future on each of the top four companies are presented.These chapters also evaluate companies’ intrinsic values and highlight succinctrecommendations for investors in respect of investing in these firms Finally, theninth chapter summarises the report.

CHAPTER 2: MACROECONOMIC ANALYSIS

The macro environment affect every business and every industry Toanalyse and monitor its impacts, people often use a framework or a tool namelyPEST model In this chapter, I will examine its influences on both the global andVietnam pharmaceutical industry through political, economic, social, andtechnological The changes in these four elements leads the changes in thepharmaceutical market

1 The Global Macroeconomic

As I mentioned above, the value of the global pharmaceutical market hasgrown rapidly in recent decade and it is forecasted to continually have the upwardtrend in the next years According to a market research company namelyEvaluatePharma, there were an annual CAGR of only 1.2% increase in theprescription drug sales between 2011 and 2017 This figure is expected to climbnearly six fold from 2018 to 2024 in comparison with that in the previous periodand the prescription drug sales is projected to reach $1.2 trillion in 2024(EvaluatePharma, 2018)

1.1 Political factor

Corporate tax reform in the US

In December of 2017, a new tax policy was issued in the US and the newcorporate tax is 21% which was fall from 35% in the previous period This hasbeen a first large US tax reform since 1986 In the 2017 tax law, there is areduction in the orphan drug credits that are intended to encourage thedevelopment of this drug type in treating rare diseases A credit may be requiredequal to 25% of qualified clinical testing expenses for one year by the

pharmaceutical manufacturers Hence, the credit is not repealed and only limited.However, the partial loss of this credit will be compensated with other advantages

of the tax act Consequently, the impact of corporate tax reform on the industry isnot perfectly adverse (FitchSolution, 2017)

Brexit impacts

In 2017, the decision to withdraw the European Union (EU) of the UK wasannounced and it was an important event occurred It led to a largest problem forthe European pharmaceutical industry because the European Medicines Agency(EMA), which is the pharmaceutical regulatory authority of the EU, was located

in the UK After a long consultative time, in November of 2017, the headquarters

of EMA will be moved to Amsterdam in the Netherlands and it starts to operate inMarch of 2019

According to Arnum (2018), “nine associations representing the Europeanand British pharmaceutical, biotechnology and over-the-counter medicinesindustries have stressed the importance of securing cooperation and a timelyagreement between the UK and EU on medicines regulation as the partiesnegotiate trade policy post-Brexit”

In 2018, the major issue is the negotiations of the UK related to the around exit plan, the next trade policy and their influences on the investment aswell as the flows of products between the UK and the EU (Arnum, 2018)

all-1.2 Economic factor

Gross Domestic Product (GDP)

Because investment, manufacturing, and trade were continuously recoveredand commodity-exporting developing countries took advantages of increasing inthe commodity prices, the global economic in 2017 grew more significantly thanthe expectation The growth rate increased from 2.4% in 2016 to 3.1% in 2017 It

is forecasted to maintain this rate in 2018 (The World Bank, 2018)

However, this upward trend is predicted to continue in a short time TheWorld Bank (2018) alerts “Over the longer term, slowing potential growth - ameasure of how fast an economy can expand when labor and capital are fullyemployed - puts at risk gains in improving living standards and reducing povertyaround the world”

Because the central banks’ post-crisis accommodation is eliminatedgradually and there is a decrease in the investment growth, the developedcountries is projected to weaken modestly to 2.2% this year before falling to 2%easily in the next year Due to the recovery of the commodity export activity, thisgrowth in 2019 for the emerging market and developing countries is expected toreinforce to 4.7% after increasing to 4.5% in 2018 (The World Bank, 2018)

Table 2.1: Real GDP

Source World Bank

Notes PPP = purchΓasing pcv>er party, e = estimate f≡ forecast World Bank forecasts are frequently updated based on new information Consequently.

projections presented hΓere may differ from tiose contained in otter World Bare document even Ể base assessments of OOtnties prospects do not differ at any grven moment In time Cotntry Cfassiications and lists of emergng market and de V* top ng economies Í EFvC Es) are presented in Table 1.2 BRICS include Brazi Russ ∣a India ChΓina, and SouthΓ Africa

1 Aggregate grown rates calculated UB ng constant 2010 U S dollar GDPwegMs

2 GDppowthΓvaluesareonafecaIyeerbasB Aggregates thΓat ndude friese counties are calculated LBng data compiled on a calendar yeβr r base Pak B tan’s

growthΓ rates are based on GOP at factor OQSt ThΓe Xkjnn labeled 2017 refers toFY20l6l7

3 ThΓe Xkmn labeled 2016 refers to FV2016T7

4 World trade volume of goods and non∙factα services

5 Simple average of Dubei Brent, and Wes t Texas Intermediate For additional nfαmaδon Dleas e see WWW WOrIdbank erg geoon Dleas e see WWW WOrIdbank erg geo

Source: The World Bank.

Consumer price index (CPI)

In developed countries, the upturn in GDP growth has led to ease thedeflationary pressures The yearly steep increase in energy price in comparison

with the lows shown in the half of 2016 affected the dynamics of inflation in themiddle of 2017 The long-term inflation in the developed economies is estimated

to have an upward trend in 2017 compared to that in the previous year It revealsthe decrease in a return to deflation expectation Generally, the inflation in thesecountries is estimated to be 1.5% on average in 2017 and this number is smallerthe inflation targets of the central bank

In developing economies and economies in transition, there is a fall in pricepressures This helps the countries such as the Russian Federation and SouthAfrica to recover their exchange rates after dramatic depreciations in two years

2015 and 2016 In African countries where serious drought and other related shocks lead to the shortages in agriculture industry, following by thedouble-digit inflation rate at the beginning of 2017 Three in four of the countrieshas the inflation which is equal to or lower than their inflation targets in 2017.However, the inflation is above its goal in other countries For example, in Africa,various countries still keep that rate high although their exchange rate is morestable and the food price inflation is eased

weather-In general, the inflation rate is forecasted to be close to the targets of thecentral bank in developed countries and be steady or reduce in developingeconomies as well as economies in transition (United Nations, 2018)

Table 2.2: Inflation 2015-2019

Aππu-aJ percentage chΓange 5 201 2Λ16 201l7 b 2018 i 2019 c

2017

Urtfed Scales αf Amevica Đ.I 13 U 2-1 2.1 -0.5 •O.4

European Unran 0.0 03 1J

⅛ 13 11 ■02 -0.1 EU- 1 0.1 03 13 13 11 0.2 -0.1

Sou rec; UWDE5A.

hΓguncs OiChΓde 1 /CFiiJDt-IJ [BpllvarUnReptlJhΓCfrfX

1 Esilmried.

C Fureca S I, based ∣ π pin cr ∣ ProJea UNL

Source: United Nations

1.3 Social factor Age structure

Population aging is an issue that most countries in the world are facing Theaging of population is a phenomenon that the number and the proportion of people

at the age of 60 years old and over go up This is considered as one of the mostnotable social changes in the twenty-first century This problem affects most

sectors of the society such as the markets of labour and finance, housing,transportation, the structures of families, intergenerational relationship and so on(United Nations, 2017) According to World Population Prospects: the 2017Revision (2017), the number of older people last year was 962 million and it ismore than double as huge as in 1980 when this figure was only 382 million Theglobal population aged 60 years and older is forecasted to continually rise morethan two times by 2050 and to be up to appropriate 2.1 million It is projected toreach to 3.1 billion in 2100 (United Nations, 2017).

United Nations (2017) calculated that the proportion of elderly people stood

at 13% of the global population in 2017 The annual growth the size of thepopulation aged 60 years old and over is estimated at a rate of 3% The aging wasoccurred all over the world and the largest percentage of older people (about 25%)was currently in Europe By 2050, except Africa, one in four of other parts’population in the world will be people at the age of 60 years and older (UnitedNations, 2017)

Table 2.3: Projected distribution of the world’s population from 2017 to 2100

by age group

Source: Statista

Table 2.4: Percentage of population aged 60 years or over by region, from

1980 to 2050

Source: United Nations

Rising health consciousness

People seem to be more proactive in taking care of their health at presentthan in the past Although professional healthcare continuously operates to treatthe diseases for everyone, the regard to preventative methods is rising, especiallyyoung people and it shows the changes in people’s awareness and behaviours.People desire to have a healthy lifestyle and nutrition, fitness, stress fromwork as well as the environment are matters that they pay more attention to.Elderly people have more demands for good health, active retirement, longevityand independence The better the education is and the higher the income is, themore accurate they choose Younger consumers spend much cost on healthcareand if necessary, they is willing to pay a high prices in order to attain their targets(Gustafon, 2017)

1.4 Technological factor

Digital Patient Communication

In recent years, new technology has been used to contact with the patients

by drug stores and it inform about pickups, manage refills, and so on Phone callsand texts are sent automatically to their patients Currently, patients expect morefrom all healthcare providers to a communicated type that help them to controltheir own health (Manna, 2018)

Health Applications

There is at least a health application that is used by a patient Only 32% ofsurveyed patients believe that these applications are provided by pharmaceuticalcompanies Other patients trusts that patient groups supply these applications Thereason is that pharmaceutical firms are reputed to be greedy, uncaring, and to takemore interests in their profits than their patients Therefore, it is necessary forthem to improve their relationship with patient groups as well as individualpatients

Many different companies and support groups are able to cooperate to buildhealth applications that keep specific conditions under control The firms may getbetter data related to outcomes, compliances and to put up education as well asinformation for patients

Moreover, it is able to gamify the health applications in order to enhance thecompliance, especially with complicated regimens or when handle childrenproblems (Manna, 2018)

2 Vietnam Macroeconomic

The spending on drugs per capita in Vietnam had an upward trend from

2.1 Political factor

Expiration of exclusive protection for origin medicines

In April of 2017, Drug Administration of Vietnam, which is an organisation

of Ministry of Health, announced that 447 in 698 origin medicines had expiredtheir exclusive protections As a result, all other pharmaceutical companies maytake the formulation and manufacturing process in order to produce generic drugswithout conducting any researches or any experiments (Pharmaceutical IndustryReport, 2017)

National pharmaceutical industry development strategy to 2020, vision 2030

The general goal of this strategy is to supply drugs adequately, timely with agood quality and a reasonable price based on the disease structure in each period

of socio-economic development Moreover, these medicines have to guarantee to

be used by safely and suitably In detail, drugs that manufacture domesticallymeet national demands, which is providing all of them for disease prevention andtreatment at the right time Besides, it is necessary to try to produce specialized

drugs, actively make vaccines as well as biological productions, and manufacturethe drug materials The pharmacies in the distribution network need to fulfill theirstandards and training the high quality human resources requires to strengthen.The systems of distribution, medicine testing, clinical pharmacy and druginformation should be improved as advanced countries in the Asian region (Lam,2014).

2.2 Economic factor

GDP

In 2017, the economic growth rate reached 6.81% After the difficulties ofbottoming out in 2012, the national economy has shown the steady growth as thegrowth has been always higher than the average growth level during the 2011 -

2017 period

Inflation rate

During recent years, the inflation rate tends to decrease remarkably In 2017,the inflation rate was less than 5% (lower than the average inflation rate in the

2011 - 2017 period which was 6.5%)

Public debt/GDP ratio

This year, the public debt /GDP ratio has fallen to 62% compared to 63.6%ratio in 2016 The growth rate of public debt also tends to decrease; during the2011-2015 period, the average public debt growth rate was 18.4%, in 2016, itincreased to 15% and 9% in 2017 At the same time, the budget deficit is ondecline, the recurrent expenditure rate of state budget expenditure has fallen to64.9% this year and is expected to be 64% by 2018

In detail, the proportion of the golden population (aged 15-64, the mainconsumer group) had continuously increased from 62.9% in 2001 to over 70% in

2011 The percentage was maintained at over 70% in the period of 6 years from

2011 to 2016 and reached a peak at 70.3% in 2013 This figure was 69.79% in

2017 and it is projected to decrease to 61.7% in 2050 It means that Vietnam hasbegun to enter the aging phase of the population The birth rate is declining andthe proportion of young people at the age of under 15 is forecasted to decreasepersistently over the subsequent 30 years The number of Vietnamese elderlypeople will go up more and more (Pharmaceutical Industry Report, 2017)

Table 2.5: Vietnam Age Structure from 2007 to 2017

Vietnam: Age structure from 2007 to 2017

Preference for brands known to consumers

Consumers usually do not take care of the drug origin that they purchaseand they often choose the imported drugs instead of their national dugs Theythink that the foreign medicines have the better quality and are able to treat theirdiseases more quickly Due to the situation of non-original and fake drugs mixed

in the pharmacies, customers buy famous brands which they know and get theadvice from their friends, their relatives (Harris, 2018)

CHAPTER 3: INDUSTRY ANALYSIS

In this part, I will analyse the global pharmaceutical industry and thepharmaceutical industry in Vietnam that is the major market consumption Thekey events and problems will access the general situation of the industry in theworldwide and in the domestic market

1 The Global Pharmaceutical Industry

1.1 Mergers and acquisitions in 2018

Guiding by a bullish stock market and the changes of US corporate taxform, mergers and acquisitions (M&A) of the pharmaceutical industry on globalare predicted to increase significantly in 2018 The reason is that both Big Pharmaand Big Biotech have the demands to restock and reinforce their pipelines.According to Arnum (2018), “in terms of M&A, corporate taxation was a majorimpetus behind several recent high-profile deals that were in part sought forfinancial reasons to achieve an improved tax position through corporate inversion

A corporate inversion occurs when a US-based multinational corporationrestructures itself so that the US parent is replaced by a foreign parent and theoriginal US company becomes a subsidiary of the foreign parent” The result inrising use of corporate inversions is to reform rules from US Treasury for thispractice during the Obama administration and terminate a wide range of largepharmaceutical M&A deals Some companies are uncertainty to change theirpolicies related to corporate inversion in the future, which is a factor in order toend the deals

For example, the two big deals are abolished by Pfizer (a pharmaceuticalcorporation in the US) including a projected merger of $160 billion with Allergan(a multinational pharmaceutical companies that have its headquarter in Ireland)and an acquisition proposition of AstraZeneca (an Anglo-Swedish multinationalpharmaceutical and biopharmaceutical company which set up the headquarter inthe UK) with $119 billion.

1.2 The new health economy.

“New health economy” is a compound word that represents a challenge waypharmaceutical and life-sciences firms are cope with In the economy, providers,especially hospitals, are consolidated in order to make profits through efficientways Besides, the patients are spent more interested in and they find that theyplay a crucial role in taking care of their health There is a reform in the pricebecause the pressures in relation to costs which have to pay go up Additionally,the role of the individual physician reduces and there is an increase in protocol-driven care Defraying for the value of media care instead of its volume arereceived more concentration In other ways, it will be more similar to a consumer-facing industry

1.3 Transparency initiatives in drug pricing

Drug pricing has been considered as a problem in recent years Currently,the concentration on the issue has risen with many different policy changes Themajority of these policy moves is legislative activity related to the transparency ofdrug price in the US Together with the accelerated growth during the recentyears, the increase in healthcare costs including pricing and transparency will bekept on solving in this year by the states of the US For example, the Senate Bill

(SB) 17 that was related to Prescription Drug Costs was signed by CaliforniaGovernor Edmund G Brown Jr in October 2017 It stipulated that pharmaceuticalcompanies compelled to have a notification before rising drug prices in order toraise the transparency in prescription drug In the bill, drug producers are asked tonotice before 60 days if there is a growth of more than 16% in drug price in twoyears The number of days for drugs that their wholesale price is higher than $40are 30 days before supply Furthermore, health plans and insurers are constrained

to give their annual reports that show the impacts of drug costs on healthcarepremium in California Arnum (2018) said “On the federal level in the US, as part

of the healthcare reform policy debates in 2017, the issue of drug pricing alsoemerged for policy consideration with legislative proposals calling for the federalgovernment to negotiate lower prescription drug prices for Medicare and requiringdrug manufacturers to publically release data and information justifying anysignificant price increase.”

2 Vietnam Pharmaceutical Industry

2.1 Supply network

The supply network in Vietnam includes 1,910 domestic pharmaceuticalcompanies and 30 foreign invested enterprises In spite of overwhelming in thequantities, domestic medicines is weaker than foreign drugs According to thestatistics of the Drug Administration of Vietnam, the domestic consumption ofdomestically-produced drugs accounts for 48% of total consumption

2.2 Pharmaceutical import market

The situation of pharmaceutical import of Vietnam has tended to increasesharply in recent years In 2016, the import value of pharmaceuticals reached 2.56

million USD, up 10.4% over 2015, of which, importing pharmaceutical materialsaccounted for nearly 15% of the total value, reaching $ 381 million (+ 12.7% yoy)(according to the Customs Department) Demand for domestically-imported drugs

is largely the group of brand-name drugs, patented drugs and high-quality drugs(55% of total demand), of which the major import markets are Europe France,Austria, Belgium, Poland, Spain, While for the cheap drugs, import marketsmainly come from India and China

2.3 Output market and distribution network

The pharmaceutical industry has two major distribution channels, includingthe Ethereum Classic (ETC) and the Over-the-counter (OTC)

For ETC

According to the General Statistics Office, by 2016, Vietnam has 13,591health care facilities nationwide, including 1,077 hospitals and 11,102 clinics incommunes and wards Businesses distributing via ETC are mainly throughbidding Medical establishments shall base themselves on the drug demand todecide on the division of bidding packages

For the OTC

According to statistics from the Ministry of Health (MOH statisticalyearbook 2011 - 2015), there are over 42,169 drug retailers in the country, with anaverage of over 10,000 retail outlets people The retail distribution market ofpharmaceuticals is a relatively high penetration segment, so competition is quitefierce Besides Phano (67 pharmacies in the South West region), Pharmacity (69drugstores in Ho Chi Minh City), ECO Pharma (10 pharmacies in Ho Chi MinhCity) , the pharmaceutical retail market will have the presence of An Khang

drugstore chain acquired by the Mobile World from Phuc An Khang drugstorechain and two major retailers, Digiworld and Nguyen Kim, to this field in thecoming time.

2.4 M & A activity

With positive growth prospects, the sector is still very interested by foreigninvestors In addition, domestic pharmaceutical companies mainly producefunctional foods and generic medicines, while high quality drugs include genericdrugs, medicine is a playground for foreign businesses and FDI enterprises.Therefore, in order to increase competitive advantages for domesticpharmaceutical companies, while supporting the expansion of R & D activities, M

& A is considered as a necessity Domestic pharmaceutical enterprises

A decree has brought great opportunities for public enterprises to seekforeign partners, specifically the decree on public enterprises that can open theroom to 100% instead of 49% as before Facing this situation, DHG and Domescoare two pioneers in the foreign room to 100% At present, the foreign ownership

of DHG is 49%, in which foreign shareholder Taisho - Japanese drug maker haspurchased 21 million shares of DHG respectively hold 24.4% of shares A similarstory took place at Domesco when Abbott's subsidiary CFR International Sparaised its stake to 51% as a strategic shareholder In addition, Abbott Group hasstrong acquisition of pharmaceutical company Glomed - a pharmaceuticalmanufacturing company in Vietnam in 2016 Some other M & A stories of thepharmaceutical industry in recent years also have to mention the trade Theacquisition of Phamaceutical Corp's stake in Pymepharco (49% ownership) and

Lam Dong's acquisition of Lam Kim (10.42% ownership) In the coming time,IMP and TRA are expected to be the next two names in the M & A deal.

CHAPTER 4: COMPETITOR ANALYSIS

Michael Porter’s Five Forces model is a powerful tool used to analyse thecompetition through identifying the major competitive effects in the market(Visual Paradigm, n.d.) The competition of the pharmaceutical industry will beassessed with five factors including rivalry amongst competitors, bargainingpower of suppliers, bargaining power of buyers, threat of substitute products, andthreat of new entrants Because the four companies that I evaluate are in Vietnam,this chapter will be only examined in Vietnam pharmaceutical industry

1 Rivalry amongst Competitors

Vietnam pharmaceutical companies relatively have the same productportfolios because of their historical characteristics and their ability tomanufacture or research new products are limited Most of their drugs arepenicillin and cephalosporin antibiotics, painkiller (paracetamol) or anti-inflammatory (ibuprofen) According to the data in 2016, in the total of 148manufacturers, the number of domestic firms producing antibiotics was up to 90firms This figure for painkiller, anti-inflammatory and cardiovascular drugs wasrespectively 72, 69 and 96 firms (Pharmaceutical Industry Report, 2017)

For large-scale enterprises, especially the companies listed on the stockexchange, the state and foreign shareholders put the pressure of increasing theirrevenue As a result, their growth rate is maintained highly and the competitionpressure on the market rises

Additionally, there is a large division of pharmaceutical companies acrossregions in Vietnam Most of them that include both production and distributionfirms are located in the South (DHG Pharmaceutical Joint Stock Company,Pymepharco Joint Stock Company, Imexpharm Corporation, Domesco MedicalImport-Export Joint Stock Corporation, National Phytopharma Joint StockCompany, Mekophar Chemical Pharmaceutical Joint Stock Company,Vimedimex Medi - Pharma Joint Stock Company, etc.) It leads to keep the level

of competition in the area quite harsh and the highest competition is mainly in HoChi Minh City Except Hanoi, the pressure competition of other provinces in theNorth Central and the North is lower because a few local firms own theirstrengths in their relationships and distribution networks

2 Bargaining Power of Suppliers

There are a wide diversity of suppliers with the large supply ability and theglobal client network Thus, the risk of the medicine material input because oflacking or depending on a few internal pharmaceutical suppliers is low With thedata of buying these material input from national firms in the industry, the FPTSstatistic showed that a national enterprise always used two or three differentsuppliers for one kind of raw material (Pharmaceutical Industry Report, 2017).The companies continuously find and evaluate new suppliers that have thecompetitive prices The cost of switching suppliers is not large, but it takes fromone to three months to test new material types for medicines

In Vietnam pharmaceutical market, the production of domesticpharmaceutical companies is relied on drug materials that are imported from othercountries In 2017, there were totally 60,000 tons used to manufacture and the

percentage of imported raw materials accounted for from 80% to 90% Most ofthem were from China and India that have the large export turnover to Vietnam interms of medicines (Traphaco’s Annual Report, 2017) Besides, the capability ofnational pharmaceutical industry to produce pharmaceutical medicine materials islow Therefore, it is difficult for domestic enterprises to negotiate the price ofpurchasing these materials with their suppliers Only some of them such as DHGPharmaceutical Joint Stock Company, Imexpharm Corporation, Domesco MedicalImport Export Joint Stock Corporation, etc are able to be discounted when theybuy large quantities (Pharmaceutical Industry Report, 2017).

3 Bargaining Power of Buyers

Most customers or consumers do not have the adequate knowledge aboutthe consumption of a special commodity as drugs Their usages dependcompletely on the doctor's prescription or the pharmacist's advice

The customer power is only to pay and the customer right is only to selectsome popular drugs (such as eye drops, analgesic, antipyretic, etc.) as well asfunctional foods that are permitted to promote on the media mass

4 Threat of Substitute Products

Due to the particularity, medicines do not have any substitute products

5 Threat of New Entrants

5.1 Barriers of legal

Pharmaceutical industry in Vietnam has many conditional businesses thatare adjusted and managed complicatedly For example, the practitioner must have

a professional certificate in the pharmaceutical industry, the completed factorymust have a certificate of eligibility for operation and storage (Good StoragePractices), the research laboratory must have a particular certificate ofcertification (Good Development Practices, Good Laboratory Practice) Otherinstances are that each medication in the formulation requires a specificproduction license, the license waits for 18 to 24 months, the advertising saleshave many strict constraints, and the drug price is controlled by the Ministry ofHealth as well as the Ministry of Finance Moreover, the specific medicines areprohibited to advertise on mass media This is a main barrier for pharmaceuticalcompany to directly access their consumers They are able only to promote,introduce these products indirectly through specialized seminars or trainingsessions for specialized groups of pharmacists, doctors.

5.2 Barriers of property and technology

The initial investment for a pharmaceutical factory is at least $3-4 million Itmay be twofold or threefold higher when building the factory on internationalstandard, which requires the supervision of foreign organisations Additionally,firms need to spend their money on the branch network, distribution network andpharmacists that ought to exactly graduate with a degree in Pharmacist

5.3 Barriers of advantage and scale

The requirements of sales activities in the OTC channel are a large coverageand a pharmacist team that is able to approach, care, guide, train as well asintroduce the new products to retail pharmacies With those activities in ETCmarket, it is necessary to have the understanding of bidding procedures and therelationships with hospitals, health departments, health insurance, etc

5.4 Barriers of new domestic pharmaceutical companies

Applying the centralized bidding circular creates a favorable environmentfor the low-cost drug contractors to tender the bidding package that is related todrugs manufactured according to Good Manufacturing Practice standard of WorldHealth Organisation (WHO - GMP) in Generic drug tendering In the past fiveyears, a wide range of national pharmaceutical distributors have used outsourcing,acquired or invested in new WHO - GMP pharmaceutical factories in order toexploit the market segment With the low-cost segment targeting the biddingmarket, new firms in Vietnam have put an enormous pressure on the biddingprices for existing firms Some advantages of these enterprises are the long-term

as well as close relationship with the hospitals and health departments, theconsiderable bidding experience for many years However, when the qualitystandard are improved in the next years, the “trending” companies will beeliminated soon (Pharmaceutical Industry Report, 2017)

5.5 Barriers of foreign pharmaceutical companies

Some foreign pharmaceutical corporation such as Sanofi, Nipro, Taisho,Zeria, Abbott, and some from Korea, India, etc have moved their productionactivities into Vietnam in the last few years The reason is that they may takeadvantage of lower manufacturing cost with a lot of incentives This creates ahuge pressure on the national firms These enterprises tend to merge andacquisition (M&A) with domestic pharmaceutical companies in order to make use

of available assets such as land, factory, distribution network, employers, etc Ithelp to shorten their time to enter the market They compete in the segment of

high-quality drugs and specific medicines that Vietnam companies have not yetproduced (Pharmaceutical Industry Report, 2017).

From the above analyses, the rivalry amongst competitors is quite high inthe popular segment, and it is possible to develop into the high-quality segment.The bargaining power of suppliers is pretty good whereas the bargaining power ofbuyers is fairly low There is no substitute product because drugs are a specialproducts The threat of new entrants is also quite high

In general, through five elements, the competition level of Vietnampharmaceutical industry is fairly severe in present and in the following years Thefirst evidence is the self-reliance within the industry to reduce the number ofpharmaceutical companies to a reasonable number as well as concentratingresources and markets on strong companies Another demonstration is the newentrants of distribution enterprises that convert to manufacture or use theoutsourcing in order to take advantage of short-term opportunities frommanagement policies Finally, foreign pharmaceutical corporations penetrate inVietnam market They not only go through the product portfolio but also go intothe production process

20 16

20 15

20 14 Return on

2.8 8

3.0 7

Price Earning Ratio 20.12 18.70 12.07 12.35

CHAPTER 5: TRAPHACO JOINT STOCK COMPANY

TRAPHACO JOINT STOCKCOMPANY

“Effectiveness is the goal - Determination is the solution”

Traphaco Joint Stock Company (Traphaco) isVietnam’s second largest pharmaceuticalcompany Traphaco’s pharmaceutical distributionnetwork is the most powerful in the country withtwo distribution firms, 20 branches and morethan 23,000 retail pharmacies nationwide Thecompany focuses on developing in the Over-The-Counter market (OTC market) and manufacturingtraditional medicines

Events & Impacts

Quangtripharm due to the inefficientcooperation

with Nam Duong into a consignmentcontract, its revenue reduced by aboutVND100 billion

established in Hung Yen branch and it hasbeen the most modern Vietnam

• Business Description

Traphaco Joint Stock Company (Traphaco) is the second largestpharmaceutical company in Vietnam Traphaco’s distribution system is the mostpowerful in the domestic market In 2016, it contained two distribution firms, 20branches and more than 23,000 retail pharmacies nationwide (Traphaco’s AnnualReport 2016, 2017) The company extended with the establishment of four morebranches in Thai Nguyen, Yen Bai, Thua Thien Hue and Kien Giang (Traphaco’sAnnual Report 2017, 2018) The company concentrates on growing the OTCmarket and producing traditional medicines

According to Pharmaceutical Industry Report 2017, Traphaco is the leadingcompany in the traditional sector with the most two prominent products namelyBoganic and Hoat huyet duong nao Boganic which helps to improve the liverfunctions accounted 20% of liver tonic market and was one of top 10 excellentVietnamese brand products Hoat huyet duong nao which is a good drug for brainstood at 9% of brain tonic market In 2017, the company had a plan to develop thewestern medicines A smart pharmaceutical factory was established in Hung Yenbranch and it has been the most modern Vietnam manufacturing factory using toproduce western medicines (Bui, 2018)

In the structure of revenue in 2017, then revenue from producing goods was

up to 80% of the total revenue This figure from consignment import and otherstood at only 8% The rest that were from subsidiaries accounted for 15%(Traphaco’s Annual Report 2017, 2018)

■ Revenue from subsidiaries

Source: Traphaco’s Annual Report 2017

About the revenue by region and by sales channel, the sales mainly camefrom Northern and Southern sectors and there was some differences from thesetwo sectors In the OTC channel, the revenue from Northern and Southern sectorswas up to 61.8% and 18.3% of the total revenue respectively These numbers inthe ETC channel was respectively was 30.1% and 47.4% (Traphaco’s AnnualReport 2017, 2018)

The distribution network is strong, modern and professional with reasonablesales policies.

Traphaco’s growth rate is relatively high and is maintained continually Itmeans that the company may guarantee to do production and business activities.The company utilizes a rich source of medicinal herbs and a long traditionalmedicine It chooses to research and manufacture high-tech pharmaceuticalproducts, which has enabled Traphaco to take the initiative 80 % of domestic rawmaterials (Pharmaceutical Industry Report 2017, 2018)

1.3 Opportunities

Year 2014 2015 2016 2017

Healthcare awareness of people increases and they are conscious theimportance of preventing the diseases It is suitable with the strengths ofTraphaco’s products

The company is able to develop more kinds of drugs at the drugstores to riseits sales and its market share on its customer database

Natural conditions in Vietnam is convenient for planting the medicines and

it creates a great potential for national drug resource

In March of 2018, Vietnam joins the Comprehensive and Progressive pacific Partnership It brings a lot of opportunities for Traphaco to cooperate withmany foreign leading pharmaceutical companies It may help to exploit thecompany’s strength of distribution system

Trans-1.4 Threats

Concentrating on the development of the high quality products results in thehigh production costs It is difficult for Traphaco in bidding in the ETC channelbecause the price competition is extremely important and prerequisite

The competition is higher and higher in occupying the national market inVietnam, especially foreign pharmaceutical companies from the Europe, India andChina

At present, the situation of counterfeit drugs and the violation of intellectualproperty rights in pharmaceutical industry occurs more seriously Vietnamesepeople are dazed and bewildered due to a wide range of unknown drugs

2 Growth Trend