The immunity of pharmaceutical producers to economic contraction makes their stocks a wise choice for the buy-and-hold investor.

Vietnam’s domestic pharmaceutical manufacturers are thriving.

Hau Giang Pharmaceutical Joint Stock Corp. (DHG), for one, saw its sales revenue for the first eight months of 2009 climb by 14 percent year-on-year.

This was after the country’s largest publicly traded drug maker announced a 36 percent increase in first-half net profit to VND93.5 billion (US$5.24 million).

The growing demand for better healthcare is behind the sector’s outperformance in the marketplace and hence the share market.

In the strongest growth since 2002, domestic pharmaceutical sales last year were up 25.4 percent to more than $1.4 billion.

Vietnamese companies made half the medicines sold in Vietnam in 2008, a year when their productive output value rose 19.1 percent to $715 million.

The nation’s medicine market grew 20-29 percent in each of the last several years. Indeed, per capita annual spending on healthcare is tipped to reach $25 by 2015, more than four times the figure in 2001.

Nguyen Hai Son of FPT Securities views pharmaceutical stocks as defensive and therefore ideal for the conservative investor.

“Their profits are consistent and satisfactory. They don’t skyrocket like, say, real estate stocks, but then they barely retreat when the stock market plunges,” Son told Thanh Nien Weekly.

The pharmaceutical industry has built-in resistance, a characteristic that has not escaped the notice of foreign investment funds operating in Vietnam, he said.

Boost from the inside

It’s not rising healthcare demand alone that is boosting the industry.

Strategic research and development, restricted product lines to reduce direct competition, proper quality control, effective marketing and efficient distribution also play vital roles.

As evidence of their commitment to quality, the top five revenue earners hold certificates of Good Manufacturing Practice (GMP), Good Laboratory Practice (GLP) and Good Safety Practice (GSP).

Since Vietnam’s economy rebounded in the second quarter, most pharmaceutical companies have made use of low-interest loans to hone, diversify and expand production.

It takes time to make a difference through improved product quality, so they rely a lot on distribution to boost the bottom line, according to Hoang Viet Phuong of Saigon Securities Inc. (SSI).

Indeed, marketing and distribution account for most of their expenditure, Phuong said.

Tidbits of good news

At present, DHG along with Domesco (DMC) and Imexpharm (IMP) are trading with price-toearnings ratios of around 12, a number that stacks up well against the market average of 18.

Industry analysts are tipping the P/Es of both DMC and IMP to drop to 11 by next year.

Son of FPT Securities thinks value investors should snap up any pharmaceutical stocks that seem to be lagging their brethren and the market in general, for example DMC and DHG.

In keeping with expectations, several producers listed on the Ho Chi Minh Stock Exchange are planning to issue more shares to finance new factories that should start up next year.