Vietnamese authorities have lifted a cap on foreign ownership of a third domestic pharmaceutical company, Domesco, as the government encourages increasing privatisation of the healthcare sector, according to local media reports.
Implications | Although Vietnam's State Securities Commission (SSC) has previously lifted foreign-investment ceilings on two Vietnamese drug makers, Domesco is the first to receive approval for 100% foreign ownership. |
Outlook | Given the very strong foreign appetite for Vietnam's rapidly growing healthcare sector, further opening of the sector to investment is expected as private investors target rising demand from the country's growing middle class and health insurance reform. |
While Vietnam's State Securities Commission (SSC) has also previously lifted foreign-investment ceilings on Vietnamese drug makers DHG Pharmaceutical and Imexpharm Pharmaceutical, Domesco Medical Import Export – the country's third-largest listed drug maker – is the first such company to receive approval for 100% foreign ownership, according to Vietnam News.
The SSC's decision comes after foreign holdings in domestic pharmaceutical companies reached their previous investment ceilings. CFR International (Chile) currently holds a 45.9% stake in Domesco – close to the company's former limit of 49% foreign investment. In addition, foreign investment in Traphaco (Vietnam) stands at approximately 46%.
According to the source, investment in local Vietnamese healthcare companies has yielded a return of approximately 46% to date in 2016; this makes the pharmaceutical industry one of the country's fastest-growing sectors, boosted by demand from Vietnam's growing middle class.
For instance, DHG Pharmaceutical reported 15% growth year on year (y/y) in interim net profit of VND300 billion (USD13.5 million); Domesco earned net profit of VND81 billion for the same period, up 21% y/y; and interim net profit rose 27% y/y and 37% y/y for Traphaco and Cuu Long Pharmaceutical, respectively.
According to IHS Markit Life Sciences, healthcare spending in Vietnam is forecast to grow at 9.3% this year, and 8.6% in 2017 to reach VND302,654 billion in the latter year (source: IHS Markit Healthcare Forecasts Q3 update, July 2016). In addition, pharmaceutical sales in Vietnam are forecast to grow 10.8% in 2016 and 10.0% in 2017 to USD2.2 billion in 2017, driven by greater access to healthcare due to to health insurance reform, as well as growing spending by the country's middle class (source: IHS Markit World Industry Service, July 2016).
Outlook and implications
The announcement marks a significant milestone: although Domesco is not the first domestic Vietnamese drug maker to receive approval to lift its foreign-investment holding ratio, it is the first such firm to have its cap on foreign investment removed entirely, allowing for 100% foreign ownership. However, the SSC's decision does not necessarily come as a surprise, given the government's increasing overtures to foreign investment in Vietnam's healthcare sector to relieve bottlenecks and funding gaps (see Vietnam: 4 January 2016: Vietnam designates healthcare as one of 17 sectors open for foreign investment).
Given the very strong foreign appetite for Vietnam's rapidly growing healthcare sector, further opening-up of the sector is expected (see Vietnam: 24 June 2016: Oversubscribed IPO of MoH unit Vietnam Pharmaceutical raises USD19.6 mil.). The encouragement of foreign private investment is not expected to be limited only to domestic pharmaceutical companies, but also to apply to hospitals and other healthcare service providers, in inland as well as urban regions (see Vietnam: 20 April 2016: AME International invests USD14.2 mil. in Vietnam's Hai Duong General Hospital). However, while the financial incentive for foreign private investors is strong, there is also a likelihood of red tape causing inefficiencies as former state-owned healthcare players, for example, migrate to a more privatised model. Over the longer term, however, strong fundamentals are expected to increase the trend towards privatisation of Vietnam's healthcare sector, with industry competition expected to rise.