Rising through the pharma ranks by focusing on a niche segment

In the last few days, Phan Van Hieu, the 40-year-old chairman of CVI Cosmetic and Pharmaceutical JSC (CVI Pharma) – a young player in the Vietnamese pharmaceutical industry – and his team have been negotiating with Bao Long Herb Medical Group to complete the acquisition of a 70 per cent stake in Bao Long – a powerful herbal brand.

“Owning about 100 remedies, Bao Long will be a stepping stone for us to boost our footprint by combining remedies of 1,000 years of traditional experience with high-tech oriental medicine,” he told VIR.

This is the second mergers and acquisitions (M&A) deal at CVI Pharma in the last two years, following the 2017 deal in which Japan’s Daiwa-SSI acquired 20 per cent of CVI’s stakes.

In Vietnam, the market is divided into two segments: the segment of competitive drugs with a value exceeding VND1 trillion ($44.25 million) each, which is dominated by leading drug makers, and the niche segment, which covers drugs that are subject to less competition, with a value of several hundred billions of dong (several millions of US dollars) each.

With the new investment, CVI Pharma is betting on the niche market.

Adventures of success

Looking at the 2009-2018 period, when Vietnam witnessed around five M&A transactions in the pharmaceutical industry, as shown in the Top 100 list announced recently by AVM Vietnam, CVI Pharma’s two deals proved the company’s superior performance compared to the market.

CVI Pharma is currently enjoying the fruits of the M&A deal with Daiwa-SSI. It has reported fruitful business results in 2017, with an on-year rise of 60 per cent in revenue and 40 per cent in profit. In the first half of 2018, the company’s revenue rose by 50 per cent to VND140 billion ($6.19 million).

“All our operations are now more transparent, with improvements in corporate governance,” said Hieu.

In 2013, Hieu and a friend decided to quit their well-paid jobs to venture into new grounds in the pharmaceutical industry. “We faced many difficulties at the time. We decided to focus on less competitive and specific drugs to establish ourselves in this highly competitive market,” he recalled.

Five years ago, the local pharmaceutical market was already dominated by powerful Vietnamese pharmaceutical companies such as Domesco (DMC), Hau Giang Pharmaceutical JSC, and Traphaco (TRA), which made high-revenue herbal drugs, such as musculoskeletal drugs and others, which are valued at over VND1 trillion ($44.25 million), their mainstay market.

CVI Pharma forged its own path by applying scientific research and co-operating with scientists and research institutions to bring nano-technology to produce lower-revenue and low-risk products from Vietnamese herbs, including products for stomach and acne treatment, aiming to serve the over-the-counter (OTC) segment.

“After several months of research and trials, we introduced the first product – Nano curcumin – in late 2013, when we almost ran out of funds. We were extremely worried, as we would have gone bankrupt if the product had failed to attract customers,” Hieu reminisced. “Fortunately, Nano curcumin was highly welcomed in the market and sold like hotcakes. At the time, nano-technology was in its initial development stages. CVI Pharma was one of the pioneers of nano-technology production.”

CVI Pharma’s success continued when it entered the next development stage in July 2016, as Hieu met an old friend who proposed a co-operation with Daiwa-SSI Fund. “At first, I did not agree, because I was afraid the big changes would have a negative impact on the company. I gave the issue much thought and then decided to stop negotiations three months later. However, my Japanese friends’ enthusiasm and friendliness changed my mind and I eventually agreed to resume negotiations in November 2016,” Hieu recalled.

2017 marked a new milestone for CVI Pharma, as Daiwa-SSI decided to acquire 20 per cent of the company. With this partnership, CVI Pharma ventured further into the field of high technology. “The Japanese fund would help us connect with potential Japanese and Taiwanese partners, enabling us to approach new technologies and export products to these markets,” he added.

Ambitious targets from M&A deals

CVI Pharma is now concentrating its efforts on constructing a high-tech factory costing nearly VND300 billion ($13.27 million) on an area of 1.1 hectares in Hoa Lac Hi-Tech Park of Hanoi, planning to put it into operation in late 2018.

This factory focuses on nano-technology, making it the most modern herbal production facility in Vietnam, tapping into the government’s development policies for nano-technology.

“We will ensure that our products meet international standards, thus allowing us to penetrate markets like Japan, South Korea, China, and Taiwan, as well as others in Southeast Asia,” said Hieu.

Now going into a new M&A transaction with Bao Long, CVI Pharma is gathering energy to raise the value of its herbal products, thus increasing its prestige and market share.

CVI Pharma now has a distribution network spanning 63 cities and provinces, with a portfolio of 12 products, including six key products such as Nano curcumin.

With an annual growth rate of 30-50 per cent, the company now has nearly 9,000 drugstores as regular customers.

One of the top 20 OTC drug makers in terms of revenue, CVI Pharma will continue to focus on the OTC market in the future. CVI Pharma’s targeting of this niche market is a smart choice amidst big players increasingly focusing on the lucrative ethical drugs (ETC) segment sold through the hospital system.

At present, in the local pharmaceuticals market, the main distribution channel is the hospital system, with ETC drugs accounting for around 70 per cent, while the rest of the market is OTC drugs.

CVI Pharma plans to sell more stakes in the future to serve its development plans, including the launch of an initial public offering in the next three to four years and listing on the stock market, thus becoming one of the 10 largest drug producers in Vietnam within the next five years, with revenue of VND1 trillion ($44.25 million).