CFA Investment Research Challenge Student October 3rd 2012

DHG Pharmaceutical company

Business Description
DHG pharmaceutical is the largest pharmaceutical manufacturers in Viet Nam in terms of revenue
with a total turnover of VND2490bn in 2011 with a large distribution network, according to the
company. It is primarily engaged in producing generic drugs like antibiotics (contributing 43,09% to the
company’s 2011 revenue), food supplement such as vitamins, and cosmetics. DHG currently owns 87
licensed products, of which 30 have been put into production.

Founded in 1974, DHG Pharma was formerly 2/9 Pharmaceutical Factory, belonged to Health
Department of Viet Nam Southwest. DHG Pharmaceutical Joint-stock Company was officially operated
in 2004 with the initial charter capital of VND80bn. It held its Initial Public Offering in December 2006.
Its head office as well as the main factory is in Can Tho with total output in 2011 of 4,07bn units of
product.

The company aims to increase capacity over the next few years, most recently with a new factory under
construction in Tan Phu Thanh industrial park, which will double capacity to over five billion units hen
completed in 2012. In addition, the company continues entering the traditional medicine segment by
investing in herbal raw material production and expanding its herbal products portfolio.

Industry Overview and Competitive Positioning

Solid foundation for further growth

Vietnam is earmarked as pharmerging market. IMS Health has classified the “pharmerging markets” in
three tiers, with the third including Thailand, Indonesia, the Philippines, Vietnam… The Vietnamese
pharmaceuticals market had total revenues of VND38,902billion (US1,89 billion) in 2011, representing
to a good evolution potential, with an anticipated growth rate of about 20% per year for the next five
years , which is expected to drive the market to a value of more than US2 billion in 2012 and US3,56
billion in 2015.

CPI growth rate of pharmaceutical – health group is less volatile than total CPI growth rate (5.4% vs
18.6% in 2011), the flourish of pharmaceutical industry is not affected much by the fluctuation of
conomic cycle, which is an advantage of this industry.
% SHARE IN ASIA
Stable development due to increasing consumption and production

Indeed, the Vietnamese population just starts to consider healthcare expenses. The country counts 90
million inhabitants (as for 2011 estimates), which grow by 1.04% per year. Yearly healthcare expenses
account only for US27.69 per person. The increasing demand of consumers has motivated
pharmaceutical industry’s production (total output in 2007 increased by 26%, compared to 2006). In
2011, domestic manufaturing value increased by USD0,25bn, equivalent to 27,8% compared to 2010.

Low localization speed of materials

The source of materials depends too heavily on foreign countries with the largest proportion of import
materials from China (25%) and India (21%).

Pharmaceutical

The proportion of imported materials value in the total revenue of the industry is still extremely high and
there is no signs that it will decline in near future(1). By far, 80% of materials are imported due to the
competitive price, which leads to a huge risk in exchange rate that in turn affects trading.

1
Herbal medicine

Roughly 80% of materials are imported from China but most of them are under uncontrol of the
Vietnamese authority. This leads to a huge suspect in the quality of product due to a very cheap price
and no census from the Ministry of Health. Vietnam has a high potential to produce indepently materials
for herbal medicine. With the rising value of herbal medicine, there are more areas for medicinal plants;
however, this process seems to be relatively slow. In the short term, Vietnam will keep depending on
Chinese supply to produce this product line.

Uncompletely exploited distribution network

Vietnam has a nationwide distribution system, which is divided into two main channels: Treatment and
Commercial channels with a ratio of 20:80 (13506 hospitals – 53478 private drugstores and retailers).

Treatment channel is a tough market for pharmaceutical companies where foreign firms have more
advantages than domestic firms. Commercial channel takes up 80% of the distribution system, but most
retailers do not comply with the minimum requirements and have improper storage facilities, just 51
GSP (Good Storing Practice) warehouses in July 2010. This leads to an increase in the proportion of
counterfeits (0.03% in 2001 to 0.17% in 2010), which are a burning issue of Vietnam.

In addition to the two main distribution channels, currently, some pharmaceutical companies are
building up their own distribution systems by establishing distribution centers, pharmacies and through
cooperation with regional pharmaceutical companies.

Predominance of prescription, generic drugs and increasing

trend of traditional medicines
Prescriptions pass OTC medicines

The growth of the prescription medicines market will outpace that of the OTCS, mainly due to the influx
of expensive patented products from abroad and increasing demand for sophisticated drugs.
Demographic and environmental trends will be some of the key drivers of the prescription market in
Vietnam. Respiratory problems, including asthama and chronic obstructive pulmonary disease (COPD),
are on the rise, partly due to the high prevalence of smoking and partly due to poor air quality.

Local manufaturers take advantage of genegics

Generics probably continue to dominate the market in volumn terms, the forecast value should reach
US$3.52bn in 2020 (55.8% of the total market). Vietnam offers strong prospects for generic market
growth due to low consumer purchasing power. However, a number of obstacles still remain, such as
belief that generics are inferior to patented products and in many cases, they are not that much cheaper
than patented counterparts.

Natural extracts in traditional drugs are more favourable

Traditional medicines make up only 0.5% - 1.5% of the production value. By exploiting its natural
resources, which comprise more than 4,000 herbal plants, Vietnam can help to kick-start its local drug
manufacturing sector. Traditional pharmaceutical market is forecasted to thrive due to the habit and
using natural product trend. However, without investment in appropriate extraction technologies,
traditional medicines cannot be produced on a large scale.

Competitive landscape: Challenges for domestic companies

The value of pharmaceutical market of Vietnam has been rising in recent years, which benefits domestic
and foreign producers alike. With the two main drawbacks of dependence on imported materials and
popularity of small- or medium- sized enterprises (SMEs), domestic pharmaceutical sector has coped
with many abroad rivals, especially after Vietnam acceded to WTO.
The price control policies

Imported drugs are not regulated by this price control policy.For this reason, domestic pharmaceutical
companies lose their self-control in price and their policies are not effective as foreign ones; however,
the medicine price remains stable.

Competitive edge of domestic manufaturers

Vietnam’s drug industry comprises around 178 producers (up from 165 in 2009), only one third of
which are certified as GMP-compliant. Despite significant cost advantages and the fact that all the top
five pharmaceutical companies hold GMP, GSP and GLP certificates, domestic drugs are already losing
their current 50% share of the market to their foreign equivalents, which are perceived to be of higher
quality. In recent years, the Vietnamese government has done much to try to improve the
competitiveness of the domestic drug sector, including the planning of 5 new production plants, 3 state-
owned manufacturing facilities and 2 research centers.

Decreasing FDI and technology transfer

FDI has reduced in the recent years due to global economic downswing, while currently running projects
appear to have slowed down. This may be attributed to the fact that foreign companies would prefer to
seek out local suppliers than construct their own plant in the country, despite the increasingly favorable
policies toward foreign companies’ operations. There also have been technology transfers into the
domestic market, remarkably the Swiss drugmaker Roche’s decision of choosing Vietnamese
manufacturers to produce the generic version of the anti-bird flu drug Tamiflu (oseltamivir) in 2009
during the swine flu outbreak, and The Hanoi University of Pharmacy’s production Russia-discovered
Fludon H1 (arbidol) starting in 2010.