Deal focus: Traphaco wins with the direct approach

In 2013, six years after investing in Traphaco, Mekong Capital encouraged the Vietnam-based pharmaceuticals player to turn its business model on its head. The company relied on wholesalers for 80% of its revenue, but within 12 months they had been abandoned in favor of distributing directly to pharmacies. This freed up $20 million in working capital that was spent on a new factory.

Last week, Mekong sold its 24.99% stake in Traphaco for about $64.5 million, generating a gross multiple of more than 6.3x. During the holding period, the company’s revenue has increased nearly four-fold to around VND2 trillion ($88 million) and net profit has grown six-fold to VND230 billion. Building out the distribution system – Traphaco has expanded from two branches to 24 and now serves 26,000 pharmacies nationwide – and then rethinking it have been major contributing factors.

The latter initiative was the product of work done by a working capital expert and a professor from the National University of Singapore who was assessing volatile pricing on the pharmacy shelf. They concluded that cutting out the wholesalers would free up a lot of capital (replacing 180-day accounts receivable processes with cash on delivery) and give Traphaco more influence over retail pricing.

“This got stability in the pricing of the product, which brought back the brand reputation, and it also uncovered all this cash that previously was sitting with the wholesalers,” says Chad Ovel, a partner at Mekong. “It was the perfect solution.”

The third phase in the improvement program involved corporate governance. Traphaco started out as a state-owned enterprise (SOE) and had been restructured as a joint stock company – ahead of an IPO – when Mekong took its initial 5% stake. By 2015, Traphaco’s SOE status was long past, but part of the accompanying mindset remained. The GP lobbied for an end to practices like awarding contracts to related parties and borrowing money from individuals who were also employees.

The company also entered the third-party distribution business, winning a contract from Sandoz, the generic medicines division of Novartis. This business currently only contributes 5% of overall revenue, but this is expected to grow.

Traphaco stayed in the Mekong portfolio for so long because it was one of the better-performing investments from the Vietnam Azalea Fund, which was established to make pre-IPO investments. However, optimal exit timing was another consideration. The government has raised the foreign ownership limit for many public companies from 49% to 100% and earlier this year two of Vietnam’s largest pharmaceutical companies elected to make this adjustment.

“We hoped that by the time we needed to divest the foreign ownership cap would have increased, allowing us to sell to a foreigner at a premium,” says Ovel. “That wasn’t possible in the lifetime of our investment, but we were able to convince potential buyers that if they took our stake there is the potential for selling on to a strategic investor that might want to take control.”

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• Topics
• Southeast Asia
• Healthcare
• Trade sale
• Vietnam
• Mekong Capital