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Why the TPP is good news for foreign drugmakers in Vietnam

02 December 2015 Sophie Cairns

Of the 12 Asia-Pacific signatory countries to the Trans Pacific Partnership (TPP), Vietnam's pharmaceutical sector is expected to see the fiercest competition. A combination of soaring growth, slashed pharma import tariffs and patient preference for foreign drugs means that the TPP is good news for foreign drugmakers, but a threat to local manufacturers.

Vietnam's pharmaceutical market is forecast to grow by approximately 20% per year until 2017. Tariffs on pharmaceutical imports into Vietnam will also be reduced to 0% (from 2.5%) when the TPP is implemented.

All this paints a very appealing picture for multinational pharma. At the moment, Vietnam's approximately 300 local drugmakers account for more than 85% of market volume. However, imported pharmaceuticals have a total market share of 60-70%. Despite the government's attempts to wean domestic firms off imported raw materials, pharma imports to Vietnam are expected to continue growing as demand for healthcare outstrips the rate of progress in homegrown R&D. As the majority of Vietnam's local drugmakers are small-scale and in need of R&D investment with limited resources, this has resulted in decreasing competitiveness and at times questionable product quality. This indicates that the arrival of the TPP - and a growing number of major foreign competitors - is likely to force a lot of local players out of the market.

Increasing foreign competition in Vietnam's pharmaceutical sector is likely to make itself felt through a number of pressure points. Perhaps the most well-publicised consequence of the TPP will be the extension of intellectual property rights for overseas pharma, from five to ten years, which is expected to delay domestic firms from producing new treatments. Given that the majority of Vietnam's drugmakers manufacture generics, this will present a major challenge to local industry.

Second, procurement of pharmaceuticals in Vietnam will be organised publicly, according to General Director of Hanoi CPC1 Pharmaceutical, Nguyen Thanh Binh. This would give multinational pharmaceutical firms equal status to domestic firms at auctions, putting the latter at a disadvantage due to their relative lack of competitiveness. Small size also means their ability to absorb short-term losses in order to offer a competitive price in tenders is more limited in comparison to multinationals.

Third, industry sources point to a lack of cohesiveness among Vietnam's pharmaceutical firms, which are mostly small in scale, but only rarely cooperate or form alliances to leverage their combined market share during negotiations. This lack of will to lobby or act collectively means local firms have less sway in the face of well-organised pharmaceutical lobby groups such as PhRMA, which was instrumental in pushing for the TPP's implementation.

Another point, and perhaps the hardest one to alter, is Vietnamese patients' preference for imported pharmaceuticals. Foreign-made drugs are typically seen as of better quality than locally-made drugs, an image which the Vietnamese government is trying to change with its periodic crackdowns. This personal preference is expected to grow rapidly, driven by Vietnam's rising affluence, ageing population and increasing rates of chronic diseases which require innovative treatments.

What happens next? Given the increasing competition from overseas, local drugmakers who have the resources will upgrade manufacturing facilities to meet international standards. For example, DHG Pharmaceutical has built a new manufacturing facility, while Hanoi Pharma has constructed a new production line for plastic injection tubes.

However, as Vietnam's government grapples with higher costs for national health programmes and vital medicines post-TPP, there will be increasing opportunities for the private healthcare and pharmaceutical sector. In March, Vietnam called for "drastic measures" to foster the development of private healthcare services in the country to combat patient overload at public hospitals. Given this backdrop and the country's growth prospects, the TPP is expected only to fan competition hotter and significantly alter Vietnam's pharma market landscape.

Sophie Cairns is a senior life sciences analyst for IHS
Posted 3 December 2015

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