A rise with all its concomitant worries

18-Feb-2020 Intellasia | The SaigonTimes | 6:02 AM Print This Post

The Wuhan coronavirus has given a new lifeline to the group of pharmaceuticals. However, not all of them are as really rosy as some seem.

While the whole stock market of Vietnam has been grappling with a negative sentiment echoed by the Wuhan coronavirus epidemic which makes stocks bearish across the board, pharmaceuticals are exceptions. Many have seen their prices soaring. Since trading sessions resumed on the bourses after the Lunar New Year, this group of stocks experienced some sessions with strong rises although they have been corrected recently. All in all, prices of the stocks in the group have gained about 5%, quite contrary to the common trend of the stock market whose VN Index, its key indicator, shed 4.9 percent of its value.

Pymepharco (PME)’s stock price rally took place in the context that the company had just announced the Q4 business results. They indicated a positive trend in which Pymepharco reported a rise of 16.9 percent in revenue year-on-year. After cost deduction, the company’s after-tax profit rose by 19%. Likewise, Imexpharm (IMP) reported its after-tax profit jumped by 31.7%.

However, the results were not so positive in other drug firms. DHG Pharmaceutical Joint Stock Company (DHG), Domesco (DMC) and Hataphar (DHT) saw a modest profit growth in the last quarter of 2019. Precisely, DHG’s after-tax profit in Q4 was only 0.6 percent higher year-on-year, failing to compensate for the plunge in Q3 and making the company’s whole-year profit drop by 3 percent from the year-earlier period. The after-tax profit growth in Q4 of DMC and DHT was 0.3 percent and 1.4 percent year-on-year, respectively. Meanwhile, at DBD, its after-tax profit in Q4 fell by 0.3 percent from the year-earlier period. The mother company at

Vinaphar (DVN) recorded gross sales of only VND10.5 billion in Q4, a fall of 17.6 percent year-on-year. DVN’s diving sales coupled with rising costs considerably eroded its after-tax profit by a staggering rate of 61.6%, which reached only VND8.4 billion.

Although their profit has moved sideways or even fallen, the prices of pharmaceuticals still rise. This situation indicates that the hike of pharmaceuticals comes mainly from market expectations that drug companies may soon generate hefty profit due to the soaring demand of medical supplies and medicine amidst the coronavirus epidemic. The positive mood may to a certain extent be well founded because the virus outbreak would increase citizens’ expenditure on health care and diagnoses. Many drug companies are manufacturing medicines relevant to the ongoing epidemicsuch as antibiotics, pain-killers, fever-reducers and respiratory drugs aside from functional foods.

One should bear in mind, however, that the ratio of these above medications may vary considerably from one drug company to another when it comes to the profile of products, sales, the quality of the related factories and distribution networks.

Be prudent

Pharmeceuticals have long been deemed as defensive stocks as they relate to special products of health. People’s spending on their health care will go hand in hand with the improvement of their income. The majority of drug and medical device companies in the market are financially healthy and supported by a strong cash flow. The expectations of their future nevertheless may vary substantially because the nature of the difficulties they are facing is a world apart.

The first factor to take into account is that drug companies heavily depend on imported materials which always tend to fluctuate due to unstable import costs, volatile foreign exchange rates and uncontrollable market prices. A close look at statistics obtained from the general Department of Vietnam Customs would show that in 2018, China was Vietnam’s biggest import market for pharmaceutical materials, making up some 64 percent of the total import sales, followed by second-place runner India with only 17%. The heavy reliance on imports in the context of rising import prices was one of the reasons for the falling profit margin of pharmaceuticals, such as IMP. DHG. DMC and DHT, to name but a few.

As far as the business in the market is concerned, the bidding for the ethical drugs (ETC) channel currently accounts for 70 percent of the drug market share. This segment mainly consists of imported drugs as only very few local drug firms can meet relevant qualifications. Next comes the price competitiveness in the backdrop of a stringently tightened drug bidding market. Meanwhile, the over the counter (OTC) market, which traditionally is the main source of income for many drug companies, has recently shown signs of deceleration.

Furthermore, over the time, a host of local pharmaceutical firms have come under the spotlight of mergers & acquisitions (M&A) deals done by foreign investors, such as Taiso eyeing DHG, Abbott investing in DMC, or Stada Service Holding B.V. investing in PME. The M&A trend is expected to extend. Foreign partners, who are financially and managerially strong, are boosting their investment to gain bigger market shares and will soon further intensify local competition.

The above points may indicate that the differentiation among pharmaceuticals has been and will be out there in the near future. The new hike triggered by the corona virus outbreak may help them reap bigger profitability. However, not all the pharmaceuticals available in the market are the same. One should therefore be prudent with his or her investment decision.

As regards the impact of the Wuhan coronavirus epidemic, primarily, several stocks will enjoy some short-term benefitspharmaceuticals of companies mainly dealing with OTC-related channels, such as DHG, DHT and IMP (with antibiotics); and DBD and OPC (with antiseptics). It takes more time to assess the potential of drug firms embracing the ETC channel, though.



Category: Business, Vietnam

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