What factors hinder the scale and frequency of M&A deals in Vietnam's pharmaceutical industry?

Compared to both the number and scale of M&A transactions in a year, Vietnam's pharmaceutical M&A market is still too small and lacks the depth of a market that develops the core of proprietary drug technology, the pharmaceutical industry – where R&D (Research and Development) products are the driving force of the market and have decisive value. to the transaction and the transaction value is in the billions of US dollars.

 

 

Foreign-invested enterprises almost dominate the Vietnamese pharmaceutical market[1], especially in the development of brand name drugs and original brand name drugs. Meanwhile, domestic pharmaceutical companies are not "salty" in investing in product R&D, which is one of the factors that make Vietnam's M&A market less attractive in the eyes of international investors.

1. The gap between Vietnam's pharmaceutical market and the world

1.1 Global pharmaceutical M&A landscape

On a global scale, Mergers & Acquisitions (M&A) in the pharmaceutical industry is a complex strategic mechanism designed to address research and development gaps and optimize product portfolios. Large international deals (mega-deals), typically worth more than $1 billion, are often driven by the ownership of Intellectual Property (IP), pending patents, and especially the value of the drug in the research and development/drug pipeline value (pipeline value).[2]

In a global environment, deal valuation is determined by the potential to generate exclusive cash flow in the future. As a result, large deals often use premium multiples based on the market monopoly of upcoming or patented products. The absence of such innovative and monopolistic incentives in the target market is the fundamental reason for the disparity in transaction size between the Vietnamese pharmaceutical market and the pharmaceutical market in developed countries.

1.2 Vietnam's pharmaceutical market is a potential market in the future

Vietnam has long been identified as an attractive pharmaceutical market in the ASEAN region. With a population surpassing 100 million and income levels increasing, the demand for medicines, dietary supplements and cosmetics is growing strongly. The Vietnamese government has also implemented policies to encourage investment in the pharmaceutical industry, including tax incentives and infrastructure improvements.

However, when considering the current state of the deal, large-scale M&A deals are rare. Although the health and pharmaceutical industries still attract investor attention, as shown by accounting for $184 million of the total $529 million[3] invested  in recent startups, the majority of these deals are still focused on retail, supply chain or generic drug companies.  

A notable exception in terms of size is the acquisition of a 64,81% stake in Imexpharm Pharmaceutical Joint Stock Company (IMP) by Livzon Pharmaceutical Group (China). This transaction is estimated to be worth more than 5,730 billion VND (equivalent to about 220.6 million USD).[4] This deal proves the ability of Vietnamese pharmaceutical companies to attract capital with production capacity that meets international standards (such as European GMP). Even so, this value is still only a fraction of the billions of dollars in IP acquisitions taking place in the world's developed pharmaceutical market.  

1.3 The difference between the pharmaceutical market in Vietnam and the world[5]

Differences in core dynamics have led to significant differences in the way and scale of M&A valuations between Vietnam and the global market.

Multinational pharmaceutical corporations (MNCs) when conducting M&A in Vietnam often focus on Market Access or Capacity Acquisition, such as factories with WHO-GMP, EU-GMP, or PIC/S-GMP certification.

In contrast, the global M&A dynamic is the search for assets with high intrinsic value, namely IP and R&D. Intellectual property has the potential to generate exclusive cash flow over many years, allowing for superior valuation. When trading in Vietnam is primarily based on tangible assets and current operating performance (EBITDA), transaction value is severely limited. This confirms that  the drive to seek Market Access in Vietnam, despite generating significant deals such as Imexpharm and Livzon, is still less sustainable and less valuable  than the Value Creation (R&D) drive of developed markets. This is one of the direct reasons why Vietnamese transactions are often scaled small.

The following comparison frame illustrates the differences in strategy and pricing:

M&A motivation	Global markets	Vietnam market	Consequences (Trade size)
Core Values	Owning Intellectual Property (IP), Biotechnology, drug monopoly development.	Market Access, Manufacturing Capacity Generics (GMP Facilities).	Vietnam focuses on present value (EBITDA); The world market focuses on future value (Pipeline Value), leading to low valuation of Vietnamese businesses/markets.
Valuation	Often use Premium Multiples based on Pipeline and IP.	Using lower multiples, focusing on tangible assets and current operational efficiency.	The transaction size of the Vietnamese market is smaller. The transaction size of deals in the world is up to billions of US dollars per transaction
Main objectives	Overcoming R&D "gaps"; Optimize your product catalog.	Geographical expansion (operating markets); Supply chain optimization; Search and acquire companies with production capacity at cheap prices.	Investors focus on the Market Access strategy  instead of Value Creation.

 

2. The operating model of Vietnam's target companies limits the scale of transactions

The intrinsic factors of Vietnamese pharmaceutical enterprises play an important role in significantly reducing the valuation value, thereby leading to a low M&A transaction size.

 

Imexpharm Pharmaceutical Joint Stock Company. Source: Securities Investment News

 

2.1 Vietnam's pharmaceutical industry has not focused on investing in R&D

The essence of Vietnam's pharmaceutical industry is to focus on the production and distribution of generic drugs, traditional medicines, or dietary supplements[6]. Many leading pharmaceutical companies such as Hau Giang Pharmaceutical (DHG), Traphaco, and Mekophar are mainly active in this field. Although some businesses such as SaVipharm have achieved European GMP certification and developed more than 250 products in 11 treatment groups, the strategic focus has not shifted to breakthrough new drug research.  

The global pharmaceutical R&D process requires significant investment in the study of disease-related genes, proteins, and enzymes and the analysis of pathogenesis towards personalized treatment. Vietnamese companies currently lack R&D projects capable of creating long-term monopolies. Due to the lack of breakthrough IP and drugs in the research and development process that are capable of generating long-term monopoly cash flows, Vietnamese companies cannot claim high valuation multiples like biotech companies or inventive drug development companies. M&A value is therefore limited by tangible assets and current operating cash flows, resulting in low transaction size.

2.2 Challenges in the quality of assets and operating standards of the target company

The acquisition of factories that already have international GMP certification (WHO-GMP, EU-GMP, PIC/S-GMP) is a great opportunity, helping investors save costs and start-up time. However, foreign investors face operational risks and ongoing compliance requirements for industries that require strict compliance such as pharmaceuticals.

In the pharmaceutical industry, where quality standards and production systems must comply with near-absolute levels, investors need to thoroughly assess their ability to maintain international standards. Uncertainty about compliance levels, as well as differences in quality management culture, significantly increase post-M&A costs.

2.3. Differences in accounting and corporate governance standards

Another structural barrier that reduces valuation scale is the disparity in accounting and governance standards. Vietnamese pharmaceutical companies often face difficulties in perfecting the management and accounting accounting system. This ambiguity creates serious discrepancies and risks in the financial due diligence of the target pharmaceutical company.

Internal financial data may not be reliable or difficult to compare directly with international standards such as IFRS or US GAAP. This makes it difficult for foreign investors to accurately determine the performance of business units or allocate costs accurately. When it is not possible to quantify the true effect due to asymmetrical information and flaws in the management accounting system, investors are forced to apply a greater risk fee. The application of this risk fee directly reduces the size of the valuation that investors are willing to pay, thus limiting the potential trade size.

3. Some legal obstacles when carrying out M&A activities

The complexity of the regulatory framework and due diligence risk are the main factors that increase transaction costs and risks, leading to a decrease in the frequency of successful M&A executions in Vietnam.

3.1 Restrict distribution permissions

In terms of policy, Vietnam has opened its doors to allow foreign investors to own 100% of shares in pharmaceutical companies from 2021, according to Decree 31/2021/ND-CP and WTO commitments. This has removed the barrier of foreign ownership limits.

However, regulations on pharmaceutical sales and distribution still create operational barriers. Although a foreign-invested enterprise (FIE) has the conditions to manufacture drugs and can be licensed to do business exercising the right to wholesale distribution of goods, the specific restrictions regarding complete control of the distribution chain, especially retail, remain vague or complex.

The separation between production capacity and comprehensive retail/wholesale distribution channel control significantly reduces the strategic appeal of an entire value chain acquisition. If a multinational corporation (MNC) is unable to optimize profits through end-to-end supply chain control, it will shift its strategy. This complexity is responsible for reducing the frequency of total control M&A deals. Instead, many MNCs choose strategic cooperation or joint venture models, such as the IHH Healthcare Singapore deal with FPT Long Chau[7]. This partnership allows MNCs to leverage local market understanding and mitigate the legal/operational risks associated with direct control of the entire distribution chain.  

3.2 Legal due diligence risks

Legal Due Diligence (LDD) is an indispensable step to assess all potential legal risks in the M&A process. In Vietnam, LDDs face systemic difficulties that increase costs and the risk of transaction disruption.  

The main issues include information about the target business that is difficult to authenticate. The process of reviewing documents, data, and interviewing the person involved aims to understand whether any legal issues will arise in the future. However, legal conflicts, often related to compliance with specialized pharmaceutical regulations, permits, or land use rights, are the leading cause of the breakdown of the negotiation process. This high LDD risk prolongs negotiation time, increases transaction operating costs, and directly reduces the frequency of successful M&A transactions.

3.3 Challenges in protecting intellectual property rights

Although Vietnam's legal framework for intellectual property (IP) protection has been enhanced, enforcement remains challenging. Weakness in IP enforcement significantly reduces the incentive for foreign investors to M&A fledgling R&D companies or transfer high-end technology.

Investors are concerned about the risk of IP infringement and unfair competition from counterfeit or generic goods being produced earlier than expected. This reduces the size of the valuation they are willing to pay for IP assets or new technology, and makes them more cautious when participating in M&A deals based on R&D value, as well as technology transfer in the process of cooperation with Vietnamese pharmaceutical companies.

 

 

4. Some recommendations to promote M&A transactions in the pharmaceutical industry in Vietnam in the coming time

To optimize investment strategies in the Vietnamese market, institutional investors and foreign investment funds need to adopt a prudent approach and diversify forms of market participation:

Firstly, shifting the focus of appraisal

Instead of focusing only on financial due diligence (FDD), investors need to prioritize investing strongly in legal, tax, and operational compliance aspects,... Continuous compliance quality assessments, especially international GMP standards, are extremely important to accurately assess the cost of post-M&A integration.

Second, the strategic cooperation/minority purchase model should be prioritized for the time being

Due to the barriers to controlling the entire distribution chain and the high LDD risk, a strategic cooperation model, such as the IHH-Long Chau deal, is a viable option to exploit the market potential without the legal and operational risks associated with 100% control.

Third, manage risks from the State's divestment activities

For transactions involving state capital, it is necessary to establish a more flexible initial valuation, reflect the actual cost of risk, and prepare resources to deal with lengthy complex administrative procedures. In the process of participating in the auction and bidding for shares of state-owned pharmaceutical companies, foreign investors should have close advice from a professional law firm specializing in conducting M&A transactions in the pharmaceutical industry in Vietnam.

In addition, in order for Vietnam's pharmaceutical industry to attract high-value M&A transactions on a global scale, systemic reforms are needed to increase the value of targeted assets and minimize post-merger risks. From this, regulators should encourage listed pharmaceutical companies to adopt more advanced management accounting standards and enhance the transparency of financial data. This will help reduce information asymmetry and risk fees, thereby raising the valuation that international investors are willing to pay. As well as the State needs to create a clearer and more uniform legal framework on the right to distribute drugs of FDI enterprises. Enabling more efficient integration of the value chain from manufacturing to retail will increase the attractiveness of full acquisitions and promote large-scale M&A deals in Vietnam. And last but not least, strengthening IP enforcement is necessary to motivate Vietnamese companies to invest in R&D and develop proprietary products. Once asset value is enhanced by IP, M&A transactions will shift from a production capacity acquisition model to a future value acquisition model, leading to a significant increase in transaction size and a strong incentive for foreign investors to seek out the Vietnamese pharmaceutical market.

Lawyer Nguyen Van Phuc

HM&P Law Firm