In the first quarter of 2018, DHG’s in-house sales slid 4 per cent year-on-year, VCSC said, adding that amid stiff competition in the over-the-counter (OTC) channel, DHG still lacks distinctiveness in its products.

OTC or over-the-counter means distributing drugs through drugstores.

“We have not seen enough changes in DHG to overcome the headwinds in the OTC channel.”

DHG’s past success was premised on its market-leading distribution network. However, its sales of in-house products have stalled over the last four years as DHG’s distribution coverage has matured, VCSC said.

Its OTC channel, which accounts for 90 per cent of DHG’s sales, is losing its share to hospitals due to the wide coverage of public insurance and domestic pharmacy players, who are intensifying their efforts in the OTC channel, as they struggle to compete against cheaper imported drugs in the hospital bidding process.

“In the coming years, we will see DHG’s in-house sales grow in a low- to mid-single-digit range, bolstered by sales force expansion to provide better services to the pharmacies,” the company said in its report.

Besides this, VCSC said DHG’s in-house products’ gross profit margin (GPM) is poised to contract in 2018, owing to a sharp increase in active pharmaceutical ingredient (API) prices.

The GPM narrowed by 3.1 percentage points year-on-year to 53 per cent in Q1 of 2018. Given DHG’s inventory period of some 3.5 months, we believe the effect of higher API prices will be even more pronounced from Q2 of 2018, given that the rally in Chinese API prices only started in November 2017.

“As such, we project the in-house GPM will reach 51.8 per cent in full-year 2018, down 3.5 percentage points compared to 2017.

In addition to this, DHG has announced its plan to raise its foreign ownership ratio cap from 49 per cent to 100 per cent, which means that the firm will have to stop its pharmaceutical provision to two foreign partners of MSD and Mega.

Another factor negatively affecting DHG’s profit is taxation.

In Q4 of 2017, the tax authority issued a decision on the calculation of DHG’s tax rate, which resulted in a significant upward adjustment in the company’s effective tax rate, VCSC said.

“DHG’s reported tax rate in Q1 of 2018 was not adjusted in accordance with this tax decision, but this will be rectified in H1 2018 financial statements,” VCSC said.

DHG planned to earn a net revenue of more than VND4 trillion (US$175 million), equivalent to the target set for 2017. However, its pre-tax profit is expected to increase by 6.7 per cent to reach VND768 billion.

The revenue from self-manufactured products will account for VND3.5 trillion and grow by more than 13 per cent compared to 2017.