Vietnam Pharmaceutical Industry Investment strategy

By: Vinh Nguyen

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

PESTLE Analysis
Politics Economics Social Technology Law Environment

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Pestle - politics
Strengths The Communist Party government appears committed to market oriented reforms necessary to double 2000's GDP per capita by 2010, as targeted. The one-party system is generally conducive to short-term political stability Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia Opportunities The government recognizes the threat that corruption poses to its legitimacy and has acted to clamp down on graft among party officials Vietnam has allowed legislators to become more vocal in criticizing government policies. This is opening up opportunities for more checks and balances within the one-party system Weaknesses Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent

Threats Vietnamese dissidents are seeking external help, especially from the US. This could complicate Vietnam-US relations, with Washington having criticised Hanoi over its restrictions on religious freedom Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party state will probably be unsustainable
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Pestle - economics
GDP Growth Rate
10.00% 8.40% 8.20% 8.48% 6.23%

8.00%
6.00% 4.00%

6.90%

7.10%

7.30%

7.80%

2.00%
0.00% 2001 2002 2003 2004 2005 2006 2007 2008

Source: www.gso.gov.vn

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Strengths Vietnam has been one of the fastest-growing economies in Asia over the past five years, averaging growth of 8.0% a year The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses Vietnam suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to external shocks. The fiscal picture is clouded by considerable 'off-the-books' spending The heavily managed and weak dong currency reduces incentives to improve quality of exports and also serves to keep import costs high, thus contributing to inflationary pressures Threats Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government fails to curb inflation, it risks prolonging macroeconomic instability, which could lead to a potential crisis Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilize the economy

Opportunities WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition The government will continue to move forward with market reforms, including privatization of the state-owned enterprises sector and liberalizing the banking sector

Urbanization will continue to be a long-term growth driver. The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

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Pestle - social
Population 88.00 86.00 84.00 82.00 80.00 78.00 76.00 74.00 85.19 86.16 83.10 84.15

78.68

79.72

80.90

82.03

2001

2002

2003

2004

2005

2006

2007

2008

Source: www.gso.gov.vn

In the past 8 years, Vietnam population has grown 1.14% per year. Currently, Vietnam population is in the top 14th in the world and top 3 in ASEAN (Indonesia and Philippines ranked 1 and 2 respectively) and is expected to reach 93.7 million people in 2015.
Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Pestle - technology
Vietnam has signed many BTA agreements with foreign countries such as Indonesia, Bulgaria, US, Koreafor technology transfer. All pharmaceutical companies required to meet GMP-WHO

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Pestle - law
Advertising IP Counterfeit Drugs

Regulatory issues Price controls

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Pestle - environment

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Porters 5 forces - entry barrier

HIGH Entry to this industry is extremely challenging. Expenses for R&D in studying new product are considerable. Medicines are of importance, which affect people health, even life of patients. As a result, medicines need clinical study and approval from the government drug administration. Moreover, the drug registration and patent protection also set barriers to new comers Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com Vinh

Porters 5 forces bargaining power of supplier

HIGH Most of the local manufacturers do import semi-finished products then to label with their brands and distribute to professional and patients. Most of suppliers are multinational pharmaceutical companies. After WTO accession, the power of supplier will be reduced thanks to multiple suppliers with competitive price.
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Porters 5 forces bargaining power of buyer

LOW As pharmaceutical products are necessary products which relate to life and death, the demand for such products is un-avoidable and normally not negotiable.

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Porters 5 forces substitution

LOW Demand for medicine is in-evitable and unsubstitutable

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Porters 5 forces competition

HIGH
This means that in the area of pharmaceuticals Vietnam has been or will be reducing its import tax to an average of 2.5% within five years of the accession. In addition, the domestic pharmaceutical industry should also see improvements as counterfeit activity and intellectual property theft is clamped down on. This should therefore improve competition in the local marketplace, with pharmaceuticals expected to become much more competitive in the long term. Local consumers should benefit from this competition in terms of product quality improvements, price reductions and a wider product choice.
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Vietnam Pharmaceutical And Healthcare Industry SWOT S of approximately Significant growth potential, given a population

87.4mn Domestic manufacturing facilities operated by multinationals offering a base on which further sector development could be built The governments commitment to developing the health sector Sizeable local generics sector Strong traditional medicines segment with potential to improve the nonprescription drugs market in the longer term Domestic companies being forced to comply with international manufacturing standards (GMP), at a considerable expense Underdeveloped primary care services continuing to hamper access to medicines and improved product market penetration Multiple market barriers including the lack of freedom for foreign companies to operate freely in Vietnam

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Vietnam Pharmaceutical and Healthcare Industry SWOT - W

One of the least-developed pharmaceutical markets in Asia, with low per capita spending on drugs Patent law notably below international standards Counterfeit drugs account for a significant amount of market consumption Little distinction made between prescription and overthe-counter (OTC) drugs, with most medicines available without a prescription Complex drug pricing policy biased towards local drug producers Import-reliant market, especially in terms of high-tech products and active pharmaceutical ingredients (APIs), which makes it vulnerable to international currency movements

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Vietnam Pharmaceutical and Healthcare Industry SWOT - O

The ASEAN harmonization initiative, including the adoption of Western regulatory standards such as ICH and WHO guidelines Introduction of five-year exclusivity for clinical dossier data encouraging research-based multinationals The end of the price freeze has the potential to boost values despite a possible fall in volumes Radical restructuring of the pharmaceutical industry with an emphasis on foreign investment and biotechnology Improvements in pricing and regulatory environments to boost foreign company interest and investment in the country Recently ratified WTO membership to improve the trading climate and potentially, in the longer term, redress some pharmaceutical trade issues

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Vietnam Pharmaceutical and Healthcare Industry SWOT - T

Government resistance to aligning patent law fully with international standards deterring multinational sector expansion The government increasingly interfering in the industry, protecting indigenous firms through the use of legal trade barriers With a notably fragile regional economy, Vietnam is increasingly susceptible to regional and global economic fluctuations The legalization of parallel imports negatively impacting performance of patented drugs
Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Market size
Value of domestic supply and demand
Supply Demand

1,600 1,400 1,200 1,000 800 600 400 200 0

1340

1,114
726 395 475 818 561

1,000

422 170 200

451 241

520 305

625

2001

2002

2003

2004

2005

2006

2007

2008e

Source: Vietnam Department of Pharmaceutical Management

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Market Segmentation

Source: Business monitor Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Market Growth

Health expenditure per capita

140 129.80 100.00 120 108.30 100

89.10

80 57.30

70.60 8.09 9.96

12.08

10.00

60

46.60
40 37.60 31.00 4.00

50.90 4.43

6.32
5.05

3.20
20 2.58

0
2004 2005 2006 2007 2008 2009 2010 2011 2012

1.00

Healt expenditure

Health expense per capital

Source: WHO Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Market share: Top 20 Corporate

2004 1 CUM 1 QTR 1
GLAXOSMITHKLINE
BMS NOVARTIS

Share

Growth

EI

Mill Unit

Mill Pack

20.9
14.1 12.2

5.4% 3.6% 3.1% 2.7% 2.6% 2.5% 2.2% 2.2% 1.9% 1.7% 1.7% 1.6% 1.6% 1.4% 1.3% 1.3% 1.3% 1.3% 1.1% 1.1%

20% 17% -1% 17% 18% 43% 23% 29% 15% 33% 20% 46% -1% 20% 3% 17% 15% 30% 53% 51%

101 98 84 99 99 120 104 109 97 111 101 123 83 101 87 99 97 109 128 127

101 88 86 97 90 81 22 21 34 13 109 51 60 28 25 417 29 42 172 3

4 6 8 5 4 2 2 2 5 1 3 2 1 1 1 14 2 1 4 1

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 3 5 4 6 7 8 9 10 12 11 14 13 15 18 17 16 19 22

SANOFI
AVENTIS SERVIER
ROCHE

10.3
10.1
9.9
8.7

PFIZER J&J ASTRA ZENECA UNITED PHARMA FOURNIER

8.7 7.4 6.6 6.5 6.4

IC VIETNAM BOEH. INGEL.

IPSEN HG PHARM ORGANON MERCK KGAA DOMESCO EBEWE

6.1 5.6
4.9 4.9 4.9 4.9 4.2 4.2

Source: VPA & VHA

23

Market share: Top 20 Corporate -Rx

2004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 CUM 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 QTR 1 4 2 3 5 7 6 8 9 10 11 12 13 15 17 14 18 20 16 21
GLAXOSMITHKLINE NOVARTIS SERVIER AVENTIS BMS PFIZER ASTRA ZENECA SANOFI ROCHE FOURNIER EBEWE MERCK KGAA ORGANON GEDEON RICHTER B.BRAUN DOMESCO RANBAXY MICRO LABS OFFICE STADA HG PHARM

16.7 9.1 8.9 8.1 7.5 6.9 6.6 5.6 5.0 4.7 4.2 3.8

Share 7.3% 4.0% 3.9% 3.5% 3.3% 3.0% 2.9% 2.4% 2.2% 2.1% 1.8% 1.7% 1.5% 1.5% 1.4% 1.4% 1.3% 1.3% 1.3% 1.2%

Growth 20% 0% 45% 21% 23% 33% 33% 22% 36% 41% 51% 39% 16% 16% -9% 62% -7% -9% 86% 31%

EI 99 82 119 100 101 110 109 100 112 116 124 114 95 96 75 133 77 75 153 108

Mill Unit 21 65 76 25 23 10 13 52 12 18 3 34 17 31 4 88 20 19 42 84

Mill Pack 2 6 2 2 1 1 1 2 1 1 1 1 1 2 4 2 1 1 1

3.6
3.5 3.3 3.1 3.1 2.9 2.9 2.7

Source: VPA & VHA

24

Market share: Top 20 Corporate - OTC

2004 1 CUM 1 QTR 2
BMS UNITED PHARMA J&J SANOFI IPSEN GLAXOSMITHKLINE BOEH. INGEL. IC VIETNAM ROCHE PHARMEDIC NOVARTIS ROHTO METHO. MEDICAP TRAPHACO OPC (TW26) HISAMITSU HG PHARM DR. E.BOUCHARA AVENTIS PFIZER

Share
6.6 6.5 5.1 4.7 4.4 4.1 4.1 3.8 3.8 3.0 3.0 2.9 2.8 2.6 2.6 2.4 2.3 2.2 2.0 1.8

Growth

EI

Mill Unit

Mill Pack

4.2% 4.1% 3.2% 3.0% 2.8% 2.6% 2.6% 2.4% 2.4% 1.9% 1.9% 1.8% 1.8% 1.7% 1.6% 1.5% 1.4% 1.4% 1.3% 1.1%

11% 20% 12% 12% 1% 21% 1% -6% 10% 16% -1% 137% 66% 13% 31% 4% 4% 23% 7% 16%

96 104 97 97 87 104 87 81 95 100 86 206 144 98 114 90 90 107 93 100

66 109 22 45 23 80 24 48 10 216 22 2 35 99 62 63 333 14 65 10

5 3 3 3 1 2 1 1 1 11 1 2 1 4 4 1 12 1 2 1

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 3 5 4 7 6 8 9 11 12 10 13 14 15 17 18 16 19 21

Source: VPA & VHA

25

Market share: Top 20 Corporate Pharmacy

2004 1 CUM 1 QTR 1
GLAXOSMITHKLINE NOVARTIS BMS SANOFI SERVIER ROCHE AVENTIS J&J UNITED PHARMA IC VIETNAM BOEH. INGEL. PFIZER HG PHARM ORGANON IPSEN FOURNIER DOMESCO MERCK KGAA DR. E.BOUCHARA STADA 6.3 6.1 6.0 5.9 5.2 4.7 4.5 4.5 4.0 3.7 3.6 3.6 3.6 3.4 3.3 7.9 7.7 9.0 8.7 14.5

Share

Growth

EI

Mill Unit

Mill Pack

5.3% 3.3% 3.2% 2.9% 2.8% 2.3% 2.3% 2.2% 2.2% 1.9% 1.7% 1.7% 1.6% 1.5% 1.4% 1.3% 1.3% 1.3% 1.2% 1.2%

25% 0% 10% 13% 41% 18% 6% 15% 17% -4% 11% 18% 14% 10% -2% 48% 48% 31% 10% 65%

108 86 94 97 121 101 91 99 101 82 96 101 98 95 84 127 127 112 94 142

92 80 79 75 64 19 82 30 100 54 25 15 391 26 20 43 151 32 19 73

3 7 5 4 1 2 4 4 3 1 1 1 13 1 1 1 3 1 1 2

2 3 4

2 3 4

2 4 3

5
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

5
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

5
6 7 8 9 11 10 12 13 15 16 17 14 18 20 19

Source: VPA & VHA

26

Market share: Top 20 Corporate Hospital

2004 1 CUM 1 QTR 1
GLAXOSMITHKLINE BMS PFIZER AVENTIS ASTRA ZENECA EBEWE NOVARTIS B.BRAUN FOURNIER SANOFI ROCHE SERVIER SHIN POONG MSD ELI LILLY J&J ABBOTT MERCK KGAA CIECH - POLFA RANBAXY 1.8 1.5 1.4 1.4 1.4 1.3 1.3 1.2 2.4 2.4 2.2 3.5 3.3 3.1 2.9 2.8 4.1 4.0 5.4 6.4

Share

Growth

EI

Mill Unit

Mill Pack

5.6% 4.7% 3.6% 3.4%

9% 30% 45% 43%

87 104 116 114

9 9 5 9

0.9 1.0 0.7 0.6

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 4 3 5 6 8 9 7 10 12 11 13 17 26 15 21 14 20 19

3.0%
2.8% 2.7% 2.5% 2.4% 2.1% 2.1% 1.9% 1.5% 1.3% 1.2% 1.2% 1.2% 1.1% 1.1% 1.1%

29%
68% -1% -13% 43% 35% 40% 50% 42% 33% -12% 16% 37% 28% 34% 22%

103
134 79 69 114 108 112 119 113 106 70 92 109 102 106 97

5
2 6 4 8 22 3 17 4 1 1 5 0 10 1 2

0.3
0.5 0.8 4.0 0.6 0.8 0.3 0.4 0.2 0.1 0.1 0.4 0.1 0.3 0.4 0

Source: VPA & VHA

27

Market summary
pharmaceutical market is underdeveloped and suffers from poor regulatory and intellectual property (IP) standards Low-cost, locally produced generics - as well as counterfeit products - account for a sizeable proportion of drug consumption due to low consumer purchasing power and an under-funded healthcare system. patients are responsible for financing much of their medical needs pharmaceutical consumption represents only 1.56% of Vietnams GDP (1.18% in 2012). The countrys pharmaceutical is estimated at US$1.1bn in 2007 and US$2bn in 2012 Prescription medicines will remain dominant, with the biggest focus on drugs for the treatment of infectious and chronic diseases Market figures will remain distorted by the lack of a distinction made between prescription and OTC drugs, with most medicines available without a prescription

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Key growth factors Distribution

Vietnamese pharmaceutical distribution channels are divided into two main channels: treatment and commercial, with a ratio of 37:63. Bidding and selling through hospitals is considered a treatment channel, while selling through distribution centers and pharmacies is considered a commercial channel. Currently, some firms are building up their distribution systems through establishing distribution centers, pharmacies and through co-operation with regional pharmaceutical firms. Some companies, moreover, also try to penetrate hospital precincts through bidding. However, the profit margin in this channel is not high because the bidding prices are, in most case, much cheaper than market prices. In the future, the distribution system within the industry will be the key competitive factor. Those companies that can establish and manage their distribution systems effectively will be those who lead the market.

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Key growth factors Macroeconomics

remains an attractive outsourcing destination for many Japanese, South Korean and Taiwanese firms seeking to maintain their cost competitiveness vis-vis emerging Chinese rivals. The interest in Vietnam is still strong among foreign groups such as banks and retailers - looking to get an early foothold on the emerging Vietnamese consumer market. This will lay the ground for a continued rapid economic expansion over 2012-2017, as Vietnam takes its place on the regional stage

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Key growth factors Macroeconomics

Why to invest in Vietnam Pharmaceutical companies

High growth rate 16-17% High population and high birth rate Products are essential given any crisis Local pharmaceutical companies performance in 2008 exceeds yearly target Sustainable EPS growth >< other industry Entry barrier is high => Profit margin is high Low Corporate income tax (20%) Restriction to foreign pharmaceutical companies
Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Thank you
If you would like in-depth analysis, please contact me by email or call +84 9 14 29 39 79

Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com

Reference
www.imshealth.com www.gso.gov.vn www.businessmonitor.com.vn

www.who.org www.tuoitre.com.vn
www.thanhnien.com.vn www.vneconomy.vn
Vinh Nguyen The: vinh@mekongcapital.com or vinhfc@yahoo.com