Vietnam Pharmaceutical Industry

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INDUSTRY COVERAGE

Healthcare spending per capita in Asia Asias pharmaceutical sector has been expanding rapidly and
in line with the regions strong economic growth, especially in
countries of the Association of Southeast Asian Nations
(ASEAN). The industry landscape of Vietnams
pharmaceutical sector, in our belief, is teeming with
opportunities. The combination of Vietnams expanding
population, higher levels of health awareness, and increased
access to medicines across the country, should provide a
roaring engine for the pharmaceutical sectors acceleration in
the upcoming years.
However, the domestic pharmaceutical sector is facing
challenging structural weaknesses, the most notable of which
are: (1) low affordability of medical drugs, (2) inadequate
price control regime which leads to large price variances
across Vietnam, (3) widespread corruption among healthcare
officials, (4) inadequate intellectual property regime which
hinders the future flow of foreign investments, and (5) the
menacing presence of counterfeits in the market.
By the end of 2012, Vietnam had a total of 183 drug makers,
half of which were manufacturers of western medicines.
Vietnams pharmaceutical sector is characterized by a strong
reliance on imports of raw materials (90% are imported)
while domestic production accounts for only 50% of the
countrys annual drug consumption. Local firms inability to
source raw materials from domestic sources is hindering the
flow of FDI investments from the global pharmaceutical
companies.
Currently, there are 13 pharmaceutical companies listed on
the Hochiminh Stock Exchange (HSX) and Hanoi Stock
Exchange (HNX), representing 1.4% of the total aggregate
market cap of both exchanges. As of April 2, 2014, the peer
index gained a 12-month return of 56%, and trading at an
average P/E of 12.2x and P/B of 2.1x. The three public
pharmaceutical companies with the largest market
capitalization and 2013 revenues are DHG Pharmaceuticals
JSC (DHG), Traphaco JSC (TRA) and Domesco Medical
Import-Export JSC (DMC).
Please see important disclosure information at the end of this report.

Revenues of Vietnams pharmaceutical sector

Pharmaceutical stock price index

383
278
201
97 97 96 95 60
0%
4%
8%
12%
16%
20%
0
100
200
300
400
500
USD 2000 2011 2000 - 2011 CAGR
2.1
2.4
2.8
3.3
3.9
4.6
5.4
6.2
0%
6%
12%
18%
24%
0
2
4
6
8
2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Growth USDbn
Pharmaceuticals industry
Pharma growth (%)
GDP growth (%)
-20%
0%
20%
40%
60%
80%
Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
Pharmaceutical stock price index
VN-Index
HNX-Index
VIETNAM PHARMACEUTICAL INDUSTRY
April 2014

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CONTENTS
PHARMERGING THE NEW GLOBAL TREND ........................................................................................................... 3
PHARMACEUTICAL TRENDS IN ASIAN MARKETS ........................................................................................................ 4
VIETNAM PHARMACEUTICAL INDUSTRY ..................................................................................................................... 7
KEY INDUSTRY PLAYERS .................................................................................................................................................... 9
VALUE CHAIN...................................................................................................................................................................... 10
Raw materials: 90% are imported ................................................................................................................................. 11
Domestic medicines: an uphill battle against imported products .............................................................................. 13
Distribution channel: of maze and matrix .................................................................................................................... 16
Pharmaceutical advertising ............................................................................................................................................ 21
LEGAL FRAMEWORK ......................................................................................................................................................... 21
Regulatory bodies ........................................................................................................................................................... 21
Intellectual property protection ..................................................................................................................................... 22
Trans-Pacific Partnership ............................................................................................................................................... 23
Governments master plans ........................................................................................................................................... 23
PHARMACEUTICAL STOCKS ON THE EXCHANGE ................................................................................................... 24
CONCLUSION ....................................................................................................................................................................... 27


PHARMERGING THE NEW GLOBAL TREND
The emerging markets are currently regarded as the new promised land for the global
pharmaceutical industry. The pharmaceutical markets in those countries have witnessed
spectacular growth as compared to the mature markets in North America and Europe.
Pharmaceutical markets in selected countries

Note: Bubble size reflects 2012 population.
Source: IMS Health Market Prognosis; Global Insight; Booz & Company analysis

The group comprising Brazil, Russia, India, China, Mexico and Turkey (BRICMT)
represent countries that have had strong GDP growth in the last decade while this group
possesses relatively more stable economies than other emerging markets. The countries
within BRICMT have been the popular destinations for foreign direct investment (FDI)
from the large pharmaceutical companies in the developed world. However, large global
pharmaceutical firms have recently been paying more attention toward countries
classified as the second-tier emerging markets (STEM). STEM, a diverse group of
countries, comprises the more matured economies in Eastern Europe (e.g. Poland), the
former Soviet bloc (e.g. Ukraine) as well as the more dynamic countries in the South
East Asia region (e.g. Vietnam, Indonesia, Thailand). Within STEM, the pharmaceutical
market in Vietnam was the smallest in size but possessed the highest growth during
2012, reflecting the countrys promising future potential.
The BRICMT and STEM countries made up what IMS Health termed pharmerging
markets. In 2011, IMS Health estimated that the pharmerging markets contributed
USD186 billion to the global pharmaceutical revenues. In addition, IMS Health predicted
that revenues from these markets would achieve a compound annual growth rate
(CAGR) of 14.3% between 2011 and 2016. The most common characteristics that can be
observed within the pharmerging markets are:
Upward trend in drug spending per capita, as well as increased access and
affordability of healthcare services;
An expanding middle class, creating a greater demand for high-quality medicines
and healthcare services;
The STEM group is
increasingly attracting
attention from large global
pharmaceutical firms.
Within STEM, Vietnams
pharmaceutical market had
the smallest in size but
largest in growth in 2012.


Changing lifestyles that increase the prevalence of cardiovascular and respiratory
diseases and cancer;
Improvements in the protection regimes of intellectual properties, although the
speed of improvements varies across countries; and
Government seeking betterments of the public health by making strong investments
into education, infrastructure and healthcare.
Development of disease patterns across the world (% mortality rate)

Source: WHO; Booz & Company analysis
PHARMACEUTICAL TRENDS IN ASIAN MARKETS
Asias pharmaceutical sector has been expanding rapidly and in line with the regions
strong economic growth and demographic changes, especially in countries belonging to
the Association of Southeast Asian Nations (ASEAN). Several dominant macro trends,
such as rising household incomes, increased government expenditure on healthcare,
higher life expectancies and consumer health-awareness, have all boosted demands for
pharmaceutical products in the region. According to the Economist Intelligence Unit (EIU),
regional pharmaceutical sales doubled from USD97 billion in 2001 to USD214 billion in
2010, and will reach USD386 billion by 2016, reflecting the 2010 to 2016 CAGR of 10%.
Population growth in Asian countries stems from the combined results of higher birth
rates in some countries, lower infant mortality rates and increased life expectancies.
Asian countries that possess lower birth rates, such as China, Japan and Singapore, are
facing ageing populations, presenting growth opportunities for pharmaceutical
companies to manufacture specialized drugs for the elderly.
The dramatic rise in incomes across Asia over the past ten years has contributed
significantly to the increases in healthcare spending among the regional countries.
About half of Asia still lives in rural areas, but they have greater access to mainstream
medicines and healthcare services, thanks to continual efforts made by both the public
and private sectors.
Europe
Eastern
Mediterranean
Southeast Asia
The Americas
Africa
Western Pacific
Other
Diabetes mellitus
Respiratory diseases
Injuries
Malignant neoplasms and cancer
Infectious diseases, maternal & perinatal
conditions, nutritional deficiencies
Cardiovascular diseases
Shift from infectious to
cardiovascular diseases

Along with other macro
trends, rise in incomes
across Asia has contributed
significantly to the increase
in healthcare spending within
the regional countries.


GNI per capita for selected Asian countries

Source: World Bank

As Asian people have become richer, their diet habits have changed. For instance, the
growing middle class in the region consumes more sweetened food (e.g. candies,
chocolates) and beverages (e.g. soda, sport drinks). This has led to an increased
prevalence of cardiovascular diseases, cancer and diabetes within the regional
countries populations. Governments in the region have been investing in the healthcare
infrastructure and services in order to alleviate the expenditure burden on households
and adapt to the aforementioned changes in the disease profiles.
Real pharmaceutical spending per capita Healthcare spending per capita (USD)

Source: World Health Organization (WHO) Source: World Health Organization (WHO)

Thanks to the positive macro catalysts mentioned above, Asia has become an attractive
market for the global pharmaceutical companies. In 2010, the Asia-Pacific region
accounted for 21% of Bayer AGs total revenues as compared to only 10% in 1990. In
addition, according to the international data provider fDiMarkets.com, there had been
653 cross-border investment projects in Asia between 2004 and 2011 worth a total of
USD29 billion, coming from 321 companies in the pharmaceutical (70%) and
biotechnology space (30%). China was the largest recipient with 186 inward
investments, followed by India (157) and Singapore (94). Global pharmaceutical firms
have been moving into Asian countries in order to lower their production costs and
960
470
710
3,540
1,030
20,690
2,000
430
5,720
1,580
3,420
9,820
2,500
47,210
5,210
1,550
19.5%
12.9%
17.0%
10.7%
9.3%
8.6%
10.0%
13.7%
0%
5%
10%
15%
20%
25%
0
10,000
20,000
30,000
40,000
50,000
China India Indonesia Malaysia Philippines Singapore Thailand Vietnam
USD 2002 2012 2002 - 2012 CAGR
2%
2%
4%
7%
9%
9%
10%
12%
0%
3%
6%
9%
12%
15%
383
278
201
97 97 96
95
60
0%
4%
8%
12%
16%
20%
0
100
200
300
400
500
2000 2011 2000 - 2011 CAGR
2000 2009 CAGR
From 2004 to 2011, there
had been 653 cross-border
investment projects flowing
into Asian countries.


expand the research and development (R&D) base. R&D accounted for 200 projects of
the 653 cross-border investment projects mentioned above, compared to manufacturing
with 175.
Another trend that attracts global pharmaceutical companies to Asia is the dominance
of generic drugs among the regions less-developed emerging markets due to their
affordability. In addition to employing market-based pricing strategy for foreign
markets, pharmaceutical companies have been partnering with local generic
manufacturers to broaden market shares and/or to capitalize on the loss of exclusivity of
patented/original drugs.
The original drugs in the chart below represent drugs that are still under patent
protections and therefore demand higher prices in the market. The generic drugs
represent pharmaceutical products that have the same bioequivalence (a.k.a.
medical effects) as the patent-expired drugs. Since manufacturers of generic drugs
do not have to go through the cost-intensive R&D process, as do the international
pharmaceutical companies, the prices of their products are generally much cheaper.
The market shares of generic drugs are substantially higher in the less-developed
Asian countries (Vietnam: 71%) as compared to those within the more-developed
category (Singapore: 35%).
Drug sales by patent protection status in 2011 in selected Asian countries

Source: IMS Health

4% 3%
6% 5% 5%
7%
19%
15%
4%
7%
22%
28%
50%
30%
41%
31%
57%
56%
55%
74%
96%
74%
69%
44%
65%
54%
62%
24%
29%
41%
19%
4%
0%
20%
40%
60%
80%
100%
Unbranded generics Branded generics Originals
More-developed Asian countries Less-developed Asian countries
The market shares of
generic drugs in the less-
developed Asian countries
are substantially higher
than those within the
more-developed category.


VIETNAM PHARMACEUTICAL INDUSTRY
According to Business Monitor International (BMI)s 2013 estimates, Vietnams real GDP
growth will reach 6.0% in 2014, and continue on the upward trend to reach 7.0% in 2017
thanks to the recovery of the global economies and to various stimulus measures set
forth by the Vietnamese government in recent years. From 2013 to 2017, BMI estimated
that Vietnams population will rise from 92 million to 95 million, representing a 5-year
CAGR of 0.9%.
Vietnams GDP Vietnams population

Source: BMI Vietnam Pharmaceuticals and Healthcare Report 4Q2013

According to the Drug Administration of Vietnam (DAV), by the end of 2013, Vietnam
had 39 FDI projects into the pharmaceutical sector with combined registered capital of
USD303 million. 26 out of 39 projects had gone into operations, comprising 24
manufacturing facilities and two storage facilities.
According to the data provided by the Ministry of Health (MoH), the market size of
Vietnams pharmaceutical industry was estimated to be USD2,775 million in 2013,
boasting a 10-year CAGR of 16%. Out of this amount, only USD1,300 million represented
drugs that were domestically produced. Currently, because of the countrys outdated
technology infrastructure and the domestic populations strong preference for foreign
medicines, drug imports account for more than 50% of the domestic demand.
Vietnams drug consumption in 2012 Vietnams drug consumption in 2013

Source: Ministry of Health (MoH)


6.2% 5.2% 5.3%
6.0%
6.9% 7.0%
7.0%
0%
6%
12%
18%
24%
30%
0
1,200
2,400
3,600
4,800
6,000
2011 2012 2013e 2014f 2015f 2016f 2017f
VNDtrn
Nominal GDP
Nominal GDP growth
Real GDP growth
89.9
90.8
91.7
92.5
93.4
94.2
95.0
0.0%
0.3%
0.6%
0.9%
1.2%
1.5%
86
88
90
92
94
96
2011 2012 2013e 2014f 2015f 2016f 2017f
Population
(million)
Population
Population growth
Domestically
produced
drugs
46%
Imported
drugs
54%
USD2,601
million
Domestically
produced
drugs
47%
Imported
drugs
53%
USD2,775
million
Imported drugs account for
over 50% of the domestic
pharmaceutical
consumption in Vietnam.


According to BMIs research data, the total market size of Vietnams pharmaceutical
industry reached USD3,320 million in 2013, up 17% from USD2,840 million in 2012.
(These data discrepancies are common in Vietnam, where statistical figures can vary
across different governmental agencies.)
Sales of Vietnams pharmaceutical industry Vietnams pharmaceutical spending per capita

Source: BMI Vietnam Pharmaceuticals and Healthcare Report 4Q2013
We believe that the industry landscape of Vietnams pharmaceutical sector is teeming
with potentials. Vietnams expanding population, higher levels of health awareness
among the growing middle class, together with increased access to medicines across
the country, should provide a roaring engine for the pharmaceutical sectors
acceleration in the upcoming years. Between 2013 and 2017, BMI predicted that the
pharmaceutical sector would achieve a CAGR of 17.1% in sales.
Nevertheless, Vietnams pharmaceutical industry is not without its shortcomings and
weaknesses, some more entrenched and enduring than others:
Low affordability of medical drugs: Vietnams low per capita pharmaceutical
spending (1.9% of GDP per capital in 2013) highlights the countrys poor access to
medical drugs, which is caused by the high prices charged by imported drugs.
According to the MoH at a conference organized by the DAV in August 2013,
imported medicines account for 80% of the total medicines used in hospitals.
Inadequate price-control regime: Medicine cost varies wildly throughout the supply
chain due to the arbitrary price mark-ups by both drug distributors and retail stores.
According to a statement by Vietnams Health Minister, Ms. Nguyen Thi Kim Tien,
there are many instances of the same drugs being sold at significantly different
prices in various provinces. Not only does this situation erode the affordability of
medicines in various parts of the country, it also severely hurts consumers
confidence in the competence of both the DAV and MOH.
Corruption: There have been numerous accusations regarding the collusion between
foreign drug-makers and local distributors in order to keep prices high and doctors
receiving commissions for prescribing certain drugs. Such practices are putting
medicinal treatments beyond the budgets of many patients in Vietnam. Since
August 2012, Vietnams social health insurance fund has been running at deficit, in
part due to the mismanagement of funds as well as corruption. In a meeting
organized by the MoH officials in August 2013, it was estimated that the national
health insurance fund would face USD47 million in overspending in 2013.
2.1
2.4
2.8
3.3
3.9
4.6
5.4
6.2
0%
6%
12%
18%
24%
0
2
4
6
8
2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Growth
USDbn
Pharmaceuticals industry
Pharma growth (%)
GDP growth (%)
23.1
27.0
31.2
36.2
42.4
48.9
55.9
63.6
0%
5%
10%
15%
20%
0
20
40
60
80
2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Growth
USD
Pharmaceuticals spending per capita
GDP growth
While teeming with
opportunities, Vietnams
pharmaceutical sector is
hindered by numerous
structural weaknesses.


Lack of Intellectual property protection: Since 2004, the Office of the US Trade
Representative (USTR) has been including Vietnam among its list of watch
countries because of Vietnams inadequate mechanism for the protection of
intellectual property (IP). According to BMI, a large portion of Vietnams generic
drug market actually represents low-quality copies of unproven bioequivalence.
Vietnams entrance into WTO in 2007 did provide some improvements with the
regard to the countrys intellectual property regimes. That said, without stronger
standards and stricter enforcement, further improvements of Vietnams IP protection
regime will likely come at a very slow pace.
Counterfeit: Counterfeit drugs represent an extremely challenging issue in Vietnam
given the fact that pharmacy distribution in Vietnam is largely handled by private
dealers. In addition, the country has long and poorly monitored borders with
neighboring countries such as Laos, China and Cambodia, where the counterfeit
drug trade is very active. In February 2010, an arrest warrant was issued for a
number of individuals operating under a front company called Viet-Phap (Vietnam-
France) Medicine Company. These individuals were indicted for manufacturing and
supplying fake pharmaceutical products.
KEY INDUSTRY PLAYERS
By the end of 2012, Vietnam had 183 drug manufacturers, of which 98 were western
medicine producers, 80 traditional medicine manufacturers and five vaccine makers.
According to BMIs data, sales of the three largest listed companies in the industry, DHG
Pharmaceutical JSC (DHG), Traphaco JSC (TRA), and Domesco Medical Import-Export
JSC (DMC) accounted for approximately 9% of the total market in 2012.
2012 Revenues of selected pharmaceutical companies in Vietnam

VND in billion Sale PAT
DHG Pharmaceutical JSC* 2,931 491
Traphaco JSC* 1,401 128
Domesco Medical Import-Export JSC* 1,261 90
Mekophar Chemical Pharmaceutical JSC 1,101 70
Pymepharco JSC 1,011 123
Hai Duong Pharmaceutical
Medical Materials JSC
859 20
Imexpharm JSC* 818 78
Nam Ha Pharmaceutical JSC 739 12
Ha Tay Pharmaceutical JSC* 677 15
Medipharco-Tenamyd Central
Pharmaceutical JSC
644 11

(*):listed companies. Source: VPBS collected

DHG Pharmaceutical JSC (DHG) is currently the largest domestic drug-maker in terms of
both revenues and profits. The companys main products are generic over-the-counter
(OTC) drugs in the antibiotic and pain-reliever categories. In 2012, revenues from the
sales of antibiotics and painkiller drugs accounted for 38% and 19% of DHGs total
revenues. In early 2014, the company had successfully finished and put in operation two
new production plants that increased total annual production capacity from 4.6 billion
units to 9.6 billion units. In 2013, DGH recorded VND3.5 trillion in net revenues and
VND589 billion in net income, representing a 2009 to 2013 CAGR of 19% and 13%,
0
500
1,000
1,500
2,000
2,500
3,000
VNDbn Revenues Profit-after-tax
DHG Pharmaceutical JSC
(DHG), Traphaco JSC (TRA)
and Domesco Medical
Import-Export JSC (DMC)
are the three largest listed
companies.


respectively. DHGs gross and net margins were the highest among listed companies
during 2013, recording 47% and 17%, respectively.
Traphaco JSC (TRA)s two most popular products in the market are Boganic
(supplements for livers functions) and Hoat Huyet Duong Nao (supplements for brain
functions). In 2012, sale of these two products together accounted for 34% of the
companys total revenues. TRAs main competitive advantage is the ability to source
90% of the raw material needs from its local suppliers while other drug makers in the
same field have to rely on imported products from China. In 2013, TRA recorded VND1.7
trillion in sales and VND149 billion in net income, representing a 2009 to 2013 CAGR of
23% and 31%, respectively. Last year, TRA had gross and net margins of 43% and 9%,
respectively.
Domesco Medical Import Export JSC (DMC)s offerings comprise a wide range of
products, from traditional medicines and vitamins & supplements to antibiotic, pain-
killer and specialty drugs. DMCs better known products in the markets are the generic
specialty drugs used for treatments for diabetes and cardiovascular diseases as their
costs are 30% to 40% lower than the imported products. In 2013, DMC recorded VND1.4
trillion in net sales and VND106 billion in net income, representing a 2009 to 2013 CAGR
of 8% and 9%, respectively.
VALUE CHAIN
Sales channels for domestic pharmaceutical companies Commercial channels for foreign pharmaceutical companies

Source: VPBS Source: VPBS

Domestic
manufacturers
Distributors /
Wholesalers
Promotion
activities
Prescription
drugs
Raw materials

Hospital
bidding
End-users purchases of medicines
Pharmacies /
Retailers

Hospitals /
Clinics

Importers & Distributors /
Wholesalers
Promotion
activities
Prescription
drugs
Foreign
Manufacturers
Representative
Offices
Hospital
bidding
End-users purchases of medicines
Foreign
countries
Vietnam
Pharmacies /
Retailers

Hospitals /
Clinics


Raw materials: 90% are imported
Each drug is made up of two main components, the active pharmaceutical ingredient
(API) and the excipient. The API is the biologically active substance that decides the
medical usage of a drug. The excipient, on the other hand, is an inactive substance
formulated alongside the API, for the purpose of bulking up the dosage form for ease of
dispensation (e.g. sucrose used as tablet powders). The excipient might also serve
various therapeutic-enhancing purposes, such as facilitating drug absorption or
solubility. In Vietnam, alongside APIs and excipients, herbs and herbal extracts are also
used for medicinal purposes, especially in the field of traditional medicines.
APIs of originator drugs are usually protected by laws until the expirations of their
respective patents. For excipients, pharmaceutical companies can choose either to keep
them protected as trade secrets or to apply for patent protection if applicable.
Vietnams import of raw materials for the domestic pharmaceutical production

Source: General Statistics Office (GSO)

According to the MoH, due to the countrys under-developed expertise in the pharma-
chemical field, Vietnam can only produce about 230 APIs, the majority of which are un-
complex and low-value, such as the amoxicillin trihydrate compound used in the
production of antibiotics. However, the MoH reported that there were 524 different APIs
used in 13,268 drugs manufactured in Vietnam in 2011. This means that Vietnam has to
import at least 300 APIs each year from international markets for its domestic
production activities.
APIs manufactured in Vietnam, though few in numbers, must compete fiercely in price
with those imported from neighboring countries. In an interview given in July 2013, Ms.
Dang Thi Kim Lan, Vice President of Mekophar Chemical Pharmaceuticals JSC, stated
that APIs manufacturers in India and China always set their prices one-notch lower than
Vietnams in order to maintain their market shares. Ms. Lan pointed out that foreign
manufacturers are also backed by the strong political and financial supports from their
governments, either in the form of preferential tax rates or that of direct financial
subsidies. In 2013, China was Vietnams largest supplier and accounted for more than
half of Vietnams total import of medicinal raw materials, followed by India (16%) and
Austria (6%).

158
169
187
176
261
308
-10%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013
Growth USDmn Import of raw materials Growth
Vietnam has to import at
least 300 APIs each year
from the international
markets for its domestic
production.


Countries that export raw materials to Vietnams pharmaceutical sector (2013)

USD in thousands Import values
China 160,404
India 50,807
Austria 19,357
Spain 14,203
Germany 8,894
Italy 6,622
France 6,337
South Korea 4,317
Switzerland 4,273
Britain 3,377
Others 29,860
Total 308,451

Source: Ministry of Industry and Trade (MoIT)

With regard to the production of traditional medicines, Vietnam has to import
approximately 70% of the raw materials (herbs and herbal extracts) from China each
year, even though the country is home to approximately 4,000 types of medicinal plants,
yielding between 10,000 and 20,000 tons of herbal products each year. There are three
main reasons behind this apparent paradox:
Lack of large-scale farming projects: The growing and harvesting of medicinal herbs
in Vietnam are fragmented, and typically organized at the family or commune levels.
The small regional distributors or foreign merchants will usually procure the goods
directly from farmers and then distribute them to the domestic buyers. Chinese
merchants will usually acquire raw plants from farmers in Vietnam, process them in
China, and then sell the extracts or processed-plants back to the domestic firms at
much higher prices.
Concerns over the quality of home-grown products: In a study conducted in early
2013, the National Institute of Drug Quality Control of Vietnam discovered that 60%
of the samples obtained from government-owned traditional-medicine clinics fail to
meet the required standards. Some of the samples had been mixed with sand,
cement and other toxic ingredients.
Under-developed technological infrastructure: Herbal extracts are one of the main
ingredients that go into the production of traditional medicines. However, Vietnams
current technological infrastructure is inadequate to perform the chemical
extractions of certain high-value medicinal herbs (e.g. aloe wood). This inevitably
leads to the countrys export of these raw herbs and import of their extracts from
the more developed countries.
We believe that Vietnams strong reliance on foreign countries for the sourcing of raw
materials is one of the key reasons why international pharmaceutical companies have
not been enthusiastic about setting up production facilities in Vietnam.

China
52%
India
16%
Austria
6%
Spain
5%
Germany
3%
Others
18%
USD308
million
For the traditional medicine
segment, Vietnam has to
import approximately 70% of
the raw material needs from
China.


Domestic medicines: an uphill battle against imported products
Western medicines consistently accounted for about 90% of the industrys total market
share. According to the MOHs Decision 3886/2004/Q-BYT, all domestic pharmaceutical
manufacturers must obtain WHO-GMP certification from the MoH by the end of 2010.
However, by the end of 2013, there were only 120 companies complying with this
requirement of the total number of 183 firms.
Market shares of drugs per therapeutic use (2010)


According to BMI, sales of the patented drug segment will achieve a CAGR of 14.9%
from 2013 to 2017, and account for between 21% and 23% of the entire market during
that period. Compared to generics drugs, patented drugs demand much higher prices
due to high R&D expenditures and their production being guarded by the legal patent
protection rules.
Sales forecast for generic drugs Sales forecast for patented drugs

Source: BMI
Source: BMI

Alimentory &
metabolism
20%
Anti-infectives
19%
Cardio-vascular
16%
Respiratory
9%
Central nervous
system
12%
Musculo- skeletal
3%
Oncology
3%
Others
18%
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Growth USDbn
Generic drugs Growth
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Growth USDbn Patented drugs Growth


Currently, all drugs that contain patented APIs are manufactured abroad and must be
imported for local consumption. As such, added fees such as imported tariffs (5% at the
moment), transportation costs and under-the-table dealings severely erode their
affordability in the market. Within this segment, patented specialty drugs, such as those
treating the central nervous system, musculoskeletal oncology diseases, will exhibit
strong growth as unhealthy life styles (e.g. smoking and drinking) and toxic
environment conditions are on a steady rise in Vietnam. According to the MoHs data,
around 150,000 people contract cancer each year in Vietnam, with the mortality rate
standing around 50%. Considering the shift in disease profiles discussed at the
beginning of this report, the patented drug segment will be a very lucrative market in
the upcoming years.
Local pharmaceutical companies in Vietnam, however, are not keen on investing in R&D
in order to develop new patented drugs due to the huge expenditure and long time
horizon usually associated with the development of a new drug. According to a study
conducted in 2011 by InnoThink Center for Research in Biomedical Innovation, a United
States-based think tank, it costs at least USD3.6 billion and a period of five years in
order to develop a new drug. At the moment, pharmaceutical companies in Vietnam are
content with producing generic drugs and only hold patents for the trade names of their
products, but not for the drug formulas. For example, Traphaco JSC only holds the
patent for Boganic, the trade name of its liver-function supplement drug.
At the moment, pharmaceutical production in Vietnam is still limited in term of offerings
as most local companies choose to produce similar products to minimize business risks.
According to data provided by the DAV, at the end of 2011, 524 APIs were used in the
domestic production of 13,268 pharmaceutical products (averaging 25 products per 1
API) while 927 APIs were present in 15,552 imported medicines (averaging 16 products
per API). The domestic companies manufacture mostly generics and low-value drugs,
such as antibiotics, and painkillers while the high-value specialty drugs (e.g. oncology,
diabetes medication) are usually imported. Vietnam offers strong potential for the
generic market due to the countrys consumer purchasing power being quite low in
relation to the pricing of the patented drugs. However, in this category, the local
pharmaceutical market is also dominated by foreign products.
Countries that export drugs to Vietnam (2013) Vietnams import of pharmaceutical products

Source: Ministry of Industry and Trade (MoIT)

Source: General Statistics Office (GSO)

France
13%
India
13%
South
Korea
9%
Germany
8%
Switzerland
6%
Italy
5%
Britain
4%
Belgium
4%
United
States
4%
Thailand
3%
Others
31%
USD1.9
billion
864
1,097
1,243
1,483
1,790
1,880
0%
6%
12%
18%
24%
30%
0
400
800
1,200
1,600
2,000
2008 2009 2010 2011 2012 2013
Growth
USDmn Import of pharmaceutical products
Growth
The majority of local
companies produce similar
products in order to avoid
commercial risks. The R&D
for new patented drugs is
currently not the main
strategic focus.


The dominance of the imported generic drugs is the result of several factors:
Local preference: Both local purchasers and doctors have a strong preference for
imported products. The general perception in the market is that domestic drugs are
manufactured from outdated production facilities with dismal quality control.
Unfair regulations of promotion activities: Promotion expenses for domestic
pharmaceutical companies are curbed at 15% of annual revenues (per MOHs
regulation), while foreign pharmaceutical firms are allowed to spend up to 30% for
this activity. As such, it is common for foreign companies to organize all-paid-for
overseas conferences for local doctors and their families in order to promote their
products, with the unstated real purpose actually being sight-seeing and shopping.
Unscrupulous practices: Doctors and pharmacists enjoy much higher sale
commissions and (under-the-table) kickbacks when they prescribe foreign products
to patients. According to unofficial estimates, these commissions and kickbacks, the
most common form of which is wholesale discount, can amount up to 30% of the
drugs full prices.
Lax import policies: Vietnams regulations are extremely lax toward imported
pharmaceutical products. Currently, in order to sell their products in Vietnam,
foreign pharmaceutical companies need to provide cost, insurance and freight (CIF)
pricing, certification of quality from the country or origins and a small application
fee of approximately USD200. The MoHs local review process does not require any
local testing for the bioequivalence and bioavailability of the drugs. Meanwhile, in
order for the domestic companies to export their products abroad, they have to
submit elaborate clinical testing results and undergo strict scrutinizing from the
foreign countries regulatory bodies.
Vietnams policies for pharmaceutical imports appear quite lacking compared to
neighboring countries. Indonesia, for example, severely limits the import of generic
drugs for which domestic alternatives are available; while Thailand requires that all
foreign drugs must undergo domestic clinical testing before they can be distributed to
the mass population. In 2011, approximately 3,000 trading licenses were granted to
imported drugs in Vietnam as compared to only 26 in Thailand.
Recent investigations, however, have discovered that imported pharmaceutical products
do not always mean higher quality as compared to the domestically produced
medicines. For example, in December 2013, the DAV revoked the licenses for the
distribution of Roxley 150 (Roxithromycin 150mg) produced in India, and Tatumcef 2g
(Ceftazidim) produced in Taiwan.
The over-the-counter (OTC) segment, by definition, comprises drugs that patients can
purchase without doctors prescriptions. The products in this category typically include
vitamin supplements, common flu medicines, pain relievers and traditional medicines.
In Vietnam, patients usually purchase medicines based on advice obtained from clerks
working in drug stores and friends, rather than from pharmacists and from
appointments with doctors. Moreover, as Vietnams consumers gradually gain more
health-awareness, they become more confident toward the self-medication approach,
especially in the case of the low-income population. However, a downside associated
with this trend is the increasing abuse of antibiotics among Vietnamese people.
According to a 2010 study published by Karolinska Institute, 71% children with mild
respiratory infections are being given antibiotics. As a result, nearly 70% of the bacteria
carried by people living in urban areas of Vietnam are resistant to penicillin.
The generic segment is
currently dominated by
imported pharmaceutical
products.


With regard to the traditional medicine segment, we note that great opportunities
abound if Vietnam is able to attract or initiate investments into the countrys extraction
technologies and into large-scale farming projects for local medicinal herbs. As
mentioned above, Vietnam is home to approximately 4,000 types of medicinal plants,
yielding between 10,000 and 20,000 tons of herbal products each year.
Thanks to the encouraging key-drivers observed above, BMI forecasted that sales for
this segment will achieve a CAGR of 15.9% for the period from 2013 to 2017.
Distribution channel: of maze and matrix
According to the MOH, in 2011, there were 10,250 private pharmacies, and a total of
44,000 drug retailers in the public and private sectors. On average, there was one drug
retailer for every 2,000 people in Vietnam in 2011. In addition, there are currently
approximately 1,200 companies (comprising 300 foreign and 900 local companies)
engaging in the distribution of pharmaceutical products in Vietnam.
Pharmaceutical spending as percentage of total healthcare spending (2009)

Source: OECD Health at a glance: Asia Pacific 2012

Vietnams unorganized and heavily fragmented distribution network, in combination
with the countrys inadequate price-control regime, is the one of the few main reasons
why drugs prices are quite high in Vietnam. Indeed, pharmaceutical spending as a
percentage of total healthcare spending was highest in Vietnam as compared to
selected neighboring countries in 2009.
Given the multitude of distribution links between various market participants, it is not a
surprise that drug prices can be pushed up substantially before they reach the hand of
the individual patients. According to the unofficial statistics provided by various news
sources, retail prices offered to end users can amount to three or four times the
wholesale prices obtained from the drug manufacturers.

9%
18%
18%
35%
41%
43%
44%
46%
47%
51%
0% 10% 20% 30% 40% 50% 60%
Malaysia
Singapore
Indonesia
Philippines
India
China
Thailand
Myanmar
Bangladesh
Vietnam
Drug prices in Vietnam are
being pushed up
significantly because of
both under-table dealings
and the labyrinth-like
distribution channels.


Distribution channels of pharmaceutical products in Vietnam

Source: VPBS

At the wholesale level, there are two forms of enterprises: drug distributors and flea-
market wholesalers. Flea-market wholesalers purchase their merchandises both from
drug distributors and directly from the drug manufacturers. Currently, there are four
main flea markets for drugs in Vietnam, with two located in Ho Chi Minh City (District 1
and District 10) and two in Hanoi (Ngoc Khanh Street and Lang Ha Street).
Drug market Ngoc Khanh Street, Hanoi Drug market District 10, Ho Chi Minh City

Source: VPBS collected

Drug distributors prefer to sell to the flea-market wholesalers because the latter are
financially capable of paying in full upon the delivery of goods, whereas credit terms of
several months are not uncommon when the distributors make sales to hospitals,
private clinics, pharmacies and drug retailers. Since flea-market wholesalers also make
sales to private clinics and pharmacies, the relationship between distributors and flea-
market wholesalers is more or less the combination of both converging and diverging
commercial interests. However, its worthy to note that the flea-market wholesalers are
the notorious sources of counterfeit medicines since they purchase drugs both from the
official sources (i.e. drug manufacturers and distributors) and the unofficial ones (e.g.
individual drug sellers).

Domestic / Foreign
manufacturers
Domestic / Foreign
distributors
(1,200 companies)
Wholesaler at flea markets
(4 main markets)
Pharmacies / Drug retailers
(54,250 stores)
Hospitals
(1,180 facilities)
Private clinics
(no statistic)


Genuine (left) vs. counterfeit (right) antibiotic drugs an example


This is a growing concern for the domestic consumers as it is becoming increasingly
hard for patients and doctors to differentiate between genuine and counterfeit
medicines. According to a study conducted in September 2012 by the Institute of Drug
Quality Control of Ho Chi Minh City, it was discovered that 71 out of 571 sampled drug
items (or 12.6%) were counterfeit products.
With regard to drug distributors, there are about 1,200 companies working in this role,
out of which approximately 300 are foreign firms and the rest are domestic ones.
According to several news sources, it would appear that the top three drug distributors
in Vietnam are Zuellig Pharma, Mega Products and Diethelm Vietnam. These news
sources indicated that these three foreign companies together account for 50% of the
total market shares of drug distribution.
Notable distribution companies in Vietnam
Foreign pharmaceutical firms with
representative offices in Vietnam

Companies Country
Zuellig Pharma Singapore
Diethelm Vietnam Switzerland
Mega Products Thailand
Central Pharmaceutical Company No. 1 Vietnam
Central Pharmaceutical Company No. 2 Vietnam
Hoang Duc PM Supplies Company Vietnam
Tedis SA France
East Asian Medicine Trade Company Ltd Vietnam
ATM Pharma Vietnam
Quan Son Pharmaceutical JSC Vietnam

Companies Country
Glaxo Smith Kline United Kingdom
Astra Zeneca United Kingdom
Pfizer United States
Bristol Mayer Squipp United States
Merck Shape & Dohme United States
Bayer Germany
Schering AG Germany
Roche Switzerland
Pierre Faber France
Solway Netherland

Source: VPBS collected Source: VPBS collected

As regulated by Circular 09/2007/TT-BTM and 34/2013/TT-BTC issued by the MOIT and
the Ministry of Finance, respectively, foreign-invested companies are allowed to import
but not to directly distribute foreign drugs in the local market. In compliance with
Circular 34/2013/TT-BTC mentioned above, foreign distribution companies must partner
with local ones in order to push their product downstream. For example, Zuellig Pharma
is the foreign partner of Central Pharmaceutical Company No. 2 (Phytopharma) while
Mega Products formed a partnership with Hanoi Pharmaceutical Company. However, it
is alleged that this kind of partnership only has contractual meaning, since foreign
firms such as Zuellig Pharma are usually involved throughout all stages of the domestic
distribution of pharmaceutical products (e.g. trade facilitation, storage and transportations).
Zuellig Pharma, Mega
Products and Diethelm
Vietnam are the three
largest distribution
companies in Vietnam,
accounting for 50% of
total market shares.


In addition, foreign distribution companies still hold substantial competitive advantages
as compared to their domestic counterparts primarily because of their long-standing
relationships with the foreign pharmaceutical companies and their technologically-
advanced storage infrastructures (e.g. warehouses, transportations). As such, these
foreign distribution companies will remain the key players with regard to the imports of
imported pharmaceutical products, especially specialty drugs, for the foreseeable future.
Within the last few years, several large domestic pharmaceutical companies have been
developing their own distribution channels to gain more control over the commercial
flows of their products. For example, DHG Pharma Corporation has approximately 8,000
distribution centers and wholesale stores throughout the country. Not only does this
distribution system help increase the availability of DHGs products, it also gives the
company more control over their logistics and sale prices.
Hospitals: opaque auction processes
According to the Joint Annual Health Review report published in 2013, the entire
country had 1,180 public and private hospitals with a total of over 200,000 beds,
achieving 25.04 beds per 10,000 patients. Distribution of drugs to hospitals is conducted
through a decentralized bidding process. Once or twice a year, the drug committees at
nationwide hospitals will initiate requests for biddings, to which pharmaceutical firms
and distribution companies can submit their offers. When an offer is chosen, the
contract prices are fixed until the end of the contract.
This auction process is organized separately by each hospital and there is very little, if
any, cooperation between them. Since hospitals are given significant leeway in setting
up and managing their own auction process, corruption and collusion between doctors
and representatives from various pharmaceutical companies are not uncommon. This
corruption usually manifests in the forms of direct bribes to individual doctors,
kickbacks offered to the hospitals or, more subtly, invitations to conferences overseas
extended to doctors families.
A direct result of bidding corruption is that drugs are often sold at vastly different prices
throughout the provinces of Vietnam. For example, in an investigation conducted in late
2012 by the MoH, the drug Perabact (manufactured by Parex Pharmaceutical) was priced
at VND18,000 per unit at hospitals in Dong Thap Province, but costs VND30,000 in those
located in Can Tho Province.
In 2013, in efforts to make the drug auction process more transparent and support the
consumption of domestically produced medicines, Regulation 43/2013/QH13 was issued
by the Ministry of Planning and Investment (MPI) and Circular 36/2013/TTLT-BYT-BTC
(revision to Circular 01/2012/TTLT-BYT-BTC issued in June 2012) was jointly issued by
the MoH and MoF. In essence, Regulation 43/2013/QH13 forbids the submission of
bidding for any imported drugs for which a domestically produced alternative is
available. The alternative must be deemed by the MoH as having the same
bioequivalence, quality and availability as compared to the imported drugs. Circular
36/2013/TTLT-BYT-BTC, on the other hand, specifies in details the scoring system by
which each pharmaceutical product and each bidder should be evaluated during the
bidding process. In addition, Circular 36/2013/TTLT-BYT-BTC and Circular 01/2012/TTLT-
BYT-BTC working jointly to ensure hospital bidding processes must give priority to
pharmaceutical products that offer the cheapest prices while scoring at or above certain
technical base point.
Opaque drug-bidding
auctions in hospitals give
rises to numerous
instances of corruptions
and collusions.
Several circulars have been
issued by the industrys
regulatory bodies in order
to bring drug prices in
Vietnam in check.


Pharmacies and retail stores: small and largely unchecked
By the end of 2012, there were approximately 54,000 pharmacies and drug retailers
throughout Vietnam, presenting an average of 6.3 outlets per 10,000 people. In Vietnam,
patients can get over-the-counter access to most drugs without prescriptions at private
pharmacies or drug retailers, albeit usually at higher prices compared to pharmacies
located within hospitals. Despite various rules and measures imposed by the MoH to
counter this, the fact that only few outlets are examined and audited by the MoH each
year means that this phenomenon will likely persist in the foreseeable future.
In addition, the majority of drug outlets in Vietnam are individually-owned and small-
scale in nature. The largest retail chains (e.g. My Chau Pharmacies) boasts between 20
and 30 stores at most. In contrast, drug retail chains in Vietnams more developed
neighboring countries are much larger. Philippine-based Mercury drug retail chains
owned more than 500 stores and accounted for 60% of the countrys total market share
in 2010, according to the retail chains websites.
Staying nimble and small helps Vietnamese pharmacies and retail drug stores to stay
below the regulators radar, which, in turn, allows them to adjust the retail price of
drugs at will. In a survey conducted by students of HCMCs Medicine and Pharmacy
University in mid-2009, drugs prices varied from 10% to 38% across sampled retail outlets.
Rises in costs of pharmaceutical and healthcare products

Note: Base year 2008 = 100%. Source: General Statistics Office

Due to Vietnams strong reliance on imports of both medicines and raw materials, and
the labyrinthine drug distribution channels discussed above, the resultant rises in costs
of pharmaceutical and healthcare products have outpaced the countrys consumer price
index (CPI) in recent years. We noted that price hikes in 2012 correlated with strong
growth in import values of both pharmaceutical products (up 21% y-o-y) and raw
materials (up 48% y-o-y) in that year.
In July 2012, the MoH stated that drugs are being sold in China and Thailand at the price
level one to six times higher than in Vietnam. However, the results of the survey are
considered by many to be unconvincing, because the ministry looked at only 36 over
10,000 imported products available in the market.
Since 2011, there has been a drive by the MoH in order to increase the number of GPP-
compliant pharmacies and drug retail stores in Vietnam. However, according to the
0%
50%
100%
150%
200%
250%
2009 2010 2011 2012 2013 02/2014
CPI Pharmaceutical &
healthcare products and services
CPI of pharmaceutical and
healthcare segments has
outpaced overall CPI in
Vietnam since 2012.


JAHR published in 2013, the GPP compliance rate throughout the country by the end of
August 2012 was only 39%.
Pharmaceutical advertising
In Vietnam, prescription drugs cannot be advertised directly to consumers. However,
these products can be promoted to health officers and doctors via visits by
representatives of the pharmaceutical companies and through conferences and health
seminars. In addition, foreign firms are required to obtain permission from a provincial
health department before holding any conference and that department must be made
aware of any pharmaceutical displays.
Meanwhile, the advertising laws are more liberal for OTC products. Consumer
marketing of OTC products is permitted via magazines and newspapers, as well as
leaflets and brochures. However, in order to be advertised through broader mass media
outlets such as television and radios, pharmaceutical companies must first submit
requests to the DAV for approval.
On the opposite, the DAV has banned the advertisement of nutritional supplements
effective from April 26, 2013 due to the chaotic state of the advertising system. In an
interview given in October 2012, Mr. Nguyen Thanh Phong, DAVs Deputy Director,
asserted that preventing advertising violations was difficult as some advertising
agencies were not registered with the authorities. There is a lack of cooperation
between various regulatory bodies and rule enforcements are weak.

LEGAL FRAMEWORK
Regulatory bodies
The main regulatory authorities in Vietnam are the MoH and the DAV. However, both
agencies often cooperated with other ministries such as the MoF and MoIT in order to
draft and issue regulations concerning the import, trading and distributing of
pharmaceutical products. One example of such cooperation is Circular 36/2013/TTLT-
BYT-BTC, which was jointly issued by the MoH and the MoF in December 2013.
In general, it is a common perception that the regulation of pharmaceutical products in
Vietnam is not sufficiently effective due primarily to vague terms in the regulations
because rule enforcement is not strict enough to prevent violations and corruption. For
example, MOHs Decision 19/2005/QQD-BYT required that all domestic drug-makers
must obtain WHO-GMP certifications by the end of 2010. However, by the end of 2012,
only 120 out of 183 local drug-makers had obtained this license.

By the end of 2012, only
120 out of the 183 local
drug-makers have obtained
WHO-GMP certifications.


Number of firms that obtained GP standards

Source: DAV

In 2007, Vietnam was accepted as a member of the World Trade Organization (WTO).
Through its membership, foreign enterprises have been given the right to open
branches in Vietnam and import medicines directly, although they are still barred from
distributing their products. However, foreign drug distributors are able to participate in
the domestic distribution of medicines through both partnerships with local companies
and other means, such as providing storage and transportation services for local
distribution firms.
Intellectual property protection
Vietnam's accession to the WTO in January 2007 has resulted in the overall
improvement of the countrys intellectual property (IP) legal framework. Specifically, the
country needed to follow and implement IP standards as required by the WTOs Trade-
Related Aspects of Intellectual Property Rights (TRIPS) agreement. For example, one of
the IP standards calls for a 20-year patent term and a five-year market exclusivity of
undisclosed and other test data to be granted for original medicines.
Despite such improvements, there are many shortcomings in Vietnams IP protection
legal framework. IP enforcement is generally viewed as patchy and disorganized in
Vietnam since many agencies can independently decide whether to take action or not or
just refer the complaints to another regulatory body. In addition, the legal system has
little experience in the interpretation and enforcement of patent laws.
Due to the countrys inadequate IP regime, the Pharmaceutical Research and
Manufacturers of America (PhRMA) association listed Vietnam among its closely
watch countries, a status unchanged since 2004. According to the report, PhRMAs
member companies continue to face delays in the granting of patents, which erodes the
terms of patent protections available for innovative medicines. In addition, PhRMA
highlighted various reasons for such delays; the most prominent being insufficient
personnel capacity at the relevant regulatory bodies. The association further suggested
that Vietnam should adopt more effective mechanisms in preventing the infringement of
patents prior to the granting of marketing approval for follow-on products.

0
32
64
96
128
160
Number of
firms
Good manufacturing practices Good labaratory practices
Good storage practices
Vietnam is listed among
PhRMAs list of closely
watch countries due to the
countrys weak intellectual
property protection regime.


Trans-Pacific Partnership
The Trans-Pacific Partnership (TPP) is a high-standard free trade agreement that
addresses new and emerging trade issues and 21st-century challenges. The TPP
brings together developed and developing economies across the Asia-Pacific into a
single trading community that represents approximately 30% of global GDP. Since
November 2010, Vietnam has been involved in official TPP negotiations together
with New Zealand, Brunei, Chile, Singapore, Australia, Peru, the United States,
Malaysia, Canada, and Mexico. The establishment of TPP, however, could be
delayed into mid- or late 2014 since the most recent 20th formal round of TPP
negotiations did not reach a consensus regarding issues of intellectual property
rights between the United States and other countries.
At the current moment, details regarding TPPs specific clauses are still scarce as
negotiations and revisions are still being made to the agreements. However, one thing
we know for certain is that TPP will require member countries to adhere to much stricter
IP protection standards, especially in the field of information technology and healthcare.
Critics of the TPP have asserted that certain clauses in the TPP might delay the
introduction of affordable generic medicines, which represent much cheaper treatments
compared with patented drugs. While we regard this as a truly valid concern, we also
believe that stronger IP protections in Vietnam will help draw foreign direct investments
into Vietnams pharmaceutical sector. This, in turn, will help improve the countrys
technology infrastructure and increase the market shares of domestically-produced
medicines.
Governments master plans
In January 2014, Vietnams Prime Minister gave his approval to the DAVs Master Plan
for the Vietnamese pharmaceutical industry till 2020. According to the master plan, by
2020, the country aims to supply 20% raw materials for the domestic production.
Domestically produced medicines are targeted to satisfy 80% of the total national
consumption. Domestic supplies of vaccines will be able to meet 100% of the demand
from the national vaccination programs and 30% from the private services. In addition,
by 2020, 40% of domestically produced and imported generic medicines are to be
provided with registration numbers for bioequivalence and bioavailability evaluation.
The master plans regulatory focus is to stimulate preferential policies for the
commercial production, distribution and use of generic, specialty and unique-dosage
drugs, vaccines and biological agents. Restrictions are to be placed on the imports of
raw materials and generic drugs that can be produced in Vietnam. In addition, the
master plan aims to form five distribution centers in the North, Central North, Central
South-Highlands, South East and South West regions of Vietnam.
In the future, the State will look for capital investments from both local and foreign
investors in the form of public-private partnership (PPP), especially those involved in the
construction of production facilities and research centers on bioavailability and
bioequivalence studies.

Vietnams government is
committed toward the
future development of the
pharmaceutical sector.


PHARMACEUTICAL STOCKS ON THE EXCHANGE
Currently, there are 13 pharmaceutical companies listed on the HSX and HNX,
representing 1.4% of the total aggregate market cap of both exchanges.
Over the past 12 months, investors who purchased Vietnams pharmaceutical stocks
have been handsomely rewarded. The 12-month return for the pharmaceutical stock
price index (56.4%) far exceeded that of both VN-Index (14.2%) and HNX-Index (40.3%).
The top-five gainers in this peer index were Domesco Medical Import-Export JSC (DMC),
Cuu Long Pharmaceuticals JSC (DCL), Traphaco JSC (TRA), Imexpharm Pharmaceutical
JSC (IMP) and Pharmedic Pharmaceutical Medicinal (PMC), which yielded 12-month
returns of 116%, 107%, 86%, 76% and 70%, respectively. In addition, among the selected
tickers, only SPM Corporation (SPM) observed a decrease in price over the 12-month
period, although such price depreciation was relatively small as compared to the gains
achieved by the majority of tickers in the peer index.
Our pharmaceutical stock price index was constructed from the tickers shown in the
below table using market-capitalization weighting. For comparative purposes, we have
excluded from this peer index pharmaceutical companies that only distribute but do not
manufacture pharmaceutical products (e.g. Vimedimex Medi-pharma JSC and Ben Tre
Pharmaceuticals JSC) as these companies exhibit different financing and profitability
structures.
VN-Index and HNX-Index versus pharmaceutical stock price index (as of April 2, 2014)

Price
movement
Stock price
4/2/2014 (VND)
YTD
movement
12-month
return
DHG 135,000 18.4% 58.8%
TRA 86,500 2.4% 85.9%
DMC 44,000 39.5% 115.7%
IMP 60,000 60.9% 76.0%
OPC 63,000 -1.6% 6.8%
PMC 50,000 14.9% 70.1%
DCL 28,800 21.5% 107.2%
SPM 21,800 -18.7% -27.3%
DHT 33,000 40.4% 59.4%
LDP 48,000 27.0% 52.4%
Peer Index 15.6% 56.4%
VN-Index 15.3% 14.2%
HNX-Index 26.3% 40.3%

Source: Bloomberg, VPBS Source: Bloomberg, VPBS

The pharmaceutical stocks have traditionally been regarded as defensive investments,
as the underlying companies operations are not significantly affected by a countrys
economic cycles. As such, pharmaceutical stocks are usually favored by investors who
prefer low-volatility and/or long-term horizon investments. We believe that this is the
main reason why the average trading value of pharmaceutical stocks has been quite
low. The aggregate average daily trading value (ADTV) for the selected pharmaceutical
stocks during the last 12 months only reached VND7.3 billion.
-20%
0%
20%
40%
60%
80%
Pharmaceutical stock price index VN-Index HNX-Index
The pharmaceutical stocks on
the exchanges have exhibited
spectacular 12-month returns.
However, these stocks are
traded with low liquidities.


Average daily trading value for selected pharmaceutical stocks (VNDmn)
From 4/2/2013 to 4/2/2104 (248 trading days)

Source: Bloomberg

We noted that the difference in business structures was the main cause behind the large
fluctuation of gross margins among companies selected in the peer index. Specifically,
firms that have higher shares of revenues coming from the trading (distribution)
operation (e.g. DHT and LDP) will register lower gross margins than those who are more
focused on the manufacturing of pharmaceutical products (e.g. DHG and TRA).
Business results of selected pharmaceutical companies in 2013

Source: Audited and unaudited financial statements of selected companies, Bloomberg

The return-on-assets (ROA) and return-on-equity (ROE) for the selected pharmaceutical
companies appear quite attractive, averaging 12.5% and 19.9% in 2013, respectively. As
of April 2, 2014, the peer index was trading at an average P/E of 12.2x and P/B of 2.1x,
which was below that of VN-Index.
PMC appears to be the most attractive as the companies achieved the highest ROAs and
ROEs in 2012 and 2013. The 2009 to 2013 CAGRs in revenues and net profits reached
16.5% and 23.9%, ranking in the fourth and second place in the peer group, respectively.
PMC was trading at a relatively cheap P/E of 8.4x as compared to the peer groups
average P/E of 12.2x. This stocks liquidity was quite low, registering a 284-day trading
average of VND198 million per day. However, we noted that this risk might not
represent a significant issue for investors who maintain a long-term investment horizon.
1,966
630
1,526
1,131
258
198
1,351
77
114
51
0
500
1,000
1,500
2,000
2,500
DHG TRA DMC IMP OPC PMC DCL SPM DHT LDP
47%
43%
29%
46%
51%
42%
30%
20%
16%
13%
17%
9%
7% 7%
10%
16%
5%
4%
4% 4%
0%
12%
24%
36%
48%
60%
0
2
4
6
8
10
DHG TRA DMC IMP OPC PMC DCL SPM DHT LDP
VNDtrn Market cap Net sales Gross margin (%) Net margin (%)


Data as of April 2, 2014. Source: Companies financial statements, Bloomberg

Stock price Sale growth Net income growth
Ticker
Market
Capital
April 2
YTD
change
52-
Week
High
52-
Week
Low
FY2012 FY2013
FY09-13
CAGR
FY2012 FY2013
FY09-13
CAGR
VNDbn VND VND VND
DHG DHG Pharmaceutical JSC 8,824 135,000 18.4% 150,000 77,000 17.7% 20.3% 19.2% 16.9% 21.3% 13.3%
TRA Traphaco JSC 2,134 86,500 2.4% 97,500 44,390 31.8% 20.1% 22.5% 31.2% 28.3% 30.8%
DMC Domesco Medical Import Export JSC 1,175 44,000 39.5% 50,500 18,667 11.3% 13.4% 7.6% 12.6% 17.7% 8.6%
IMP Imexpharm Pharmaceutical JSC 984 60,000 60.9% 72,000 29,800 5.4% 3.0% 6.3% 0.0% -21.4% -1.8%
OPC OPC Pharmaceutical JSC 807 63,000 -1.6% 75,500 56,000 23.1% 11.9% 11.0% 10.4% 0.9% 3.3%
PMC Pharmedic Pharmaceutical Medicinal 467 50,000 14.9% 52,800 27,000 14.9% 17.9% 16.5% 14.8% 25.5% 23.9%
DCL Cuu Long Pharmaceutical JSC 286 28,800 21.5% 34,700 12,800 -2.9% 14.3% 5.1% n/a 87.3% -10.8%
SPM SPM Corporation 300 21,800 -18.7% 35,800 19,000 33.5% 4.1% 15.1% 8.6% -69.8% -25.2%
DHT Hatay Pharmaceutical JSC 207 33,000 40.4% 44,000 19,100 7.5% 9.7% 5.5% -12.3% 81.8% 16.8%
LDP Lam Dong Pharmaceutical JSC 163 48,000 27.0% 63,000 30,000 19.8% 9.5% 20.8% -12.1% -8.6% 4.7%
Average 20.5% 16.2% 12.4% 13.0% 7.8% 16.3% 6.4%
Median 20.0% 16.3% 12.7% 13.1% 10.4% 19.5% 6.6%
ROA ROE FY 2013
Ticker
Foreign
owned
FY2012 FY2013 FY2012 FY2013
Net
sales
Gross prof its Net income
Cash
ratio
Current
ratio
Debt to
Equity
% % % % VNDbn VNDbn % margin VNDbn % margin % % %
DHG 49.0% 22.5% 21.8% 31.7% 32.1% 3,527 1,640 46.5% 589 16.7% 76% 217% 6% 14.97x 4.45x
TRA 46.0% 14.2% 16.6% 35.1% 26.3% 1,682 721 42.9% 149 8.9% 77% 232% 15% 15.13x 3.12x
DMC 49.0% 10.7% 11.6% 15.8% 17.8% 1,430 412 28.8% 106 7.4% 15% 184% 17% 11.07x 1.87x
IMP 47.4% 9.2% 7.1% 10.9% 8.5% 842 391 46.4% 61 7.2% 163% 468% 0% 16.51x 1.36x
OPC 16.3% 11.6% 10.9% 17.3% 16.0% 564 286 50.7% 56 10.0% 16% 177% 20% 14.40x 2.23x
PMC 12.8% 27.7% 29.5% 36.1% 39.0% 357 149 41.7% 56 15.6% 133% 350% 0% 8.37x 2.94x
DCL 16.2% 2.5% 5.6% 8.0% 13.3% 699 208 29.7% 36 5.1% 5% 123% 88% 7.70x 1.03x
SPM 5.9% 6.0% 1.7% 10.4% 2.9% 448 91 20.3% 18 3.9% 45% 298% 23% 17.15x 0.44x
DHT 0.4% 4.9% 9.9% 11.7% 19.5% 743 118 15.9% 27 3.6% 27% 163% 73% 7.74x 1.58x
LDP 9.3% 12.7% 10.3% 28.1% 23.6% 463 62 13.4% 18 3.9% 12% 151% 0% 9.08x 2.07x
Average 12.2% 12.5% 20.5% 19.9% 1,076 408 33.6% 111 8.2% 57% 236% 24% 12.21x 2.11x
Median 11.1% 10.6% 16.5% 18.6% 721 247 35.7% 56 7.3% 36% 200% 16% 12.73x 1.97x
Company name
Trailing
P/B
Trailing
P/E


CONCLUSION
We believe that Vietnams pharmaceutical industry holds tremendous potential for
future growth, in spite of numerous structural weaknesses. Indeed, the countrys
growing population, in combination with heightened health-awareness among the
middle-class segment, should provide ample fuel for growth in the domestic
consumption of pharmaceutical products. These positive macro trends will undoubtedly
enable domestic pharmaceutical companies to remain profitable in the upcoming years.
In the medium to long term, we predict that the pharmaceutical industry as a whole will
be further consolidated, although the rate of the consolidation might be moderate.
Domestic drug-makers will pursue mergers and acquisitions (M&A) as a mean to
vertically integrate their operations and to expand their distribution networks. In 2012
and 2013, Traphaco JSC (TRA) had successfully purchased 43% and 49% stake in Quang
Tri Pharmaceuticals & Medical Company and Thai Nguyen Pharmaceuticals & Medical
Company, respectively, in order to increase the number of distribution centers across
the country.
At the same time, we believe that domestic pharmaceutical companies will continue to
allocate budgets for the technical upgrades of their production facilities. These upgrades
will increase the number of domestic companies that meet WHO-GMP standards and
broaden the portfolio of products that can be manufactured domestically.
While we maintain a positive outlook with regard Vietnams pharmaceutical stocks (e.g.
DHG, TRA and PMC), we do not deem the sector attractive enough for foreign investors
to engage in direct capital investment, at least not at the moment. We encourage foreign
pharmaceutical companies to wait for the outcome of the TPP agreements, which
should be finalized this year, before contemplating any long-term direct investment in
Vietnams pharmaceutical sector.


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Barry David Weisblatt
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barryw@vpbs.com.vn

Luu Bich Hong
Director - Fundamental Analysis
honglb@vpbs.com.vn

Nguyen Huu Toan
Research Analyst
toannh@vpbs.com.vn

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