What happens in Indonesia now?
Any pharmaceutical product not being made in Indonesia must obtain a compulsory license, according to a recent new regulation adopted in Jakarta. While joint venture with a local partner is required for investors doing business in pharmaceutical sector in Indonesia, this compulsory licensing regulation has deterred foreign investment and no one wants their intellectual property stuck in the hand of their local partner. Lack of foreign investment, Indonesia has to face with challenges in establishing a knowledge-based economy due to technological expropriation.
Vietnam pharmaceutical market potential
Vietnam has a population of more than 90 million people, with its average age of 29. The Universal Healthcare Coverage in Vietnam is with 73% of the population with regards to essential health services, relatively high compared with other countries in the Western Pacific region. Vietnam's generic penetration in tendering and ex-manufacturer prices of producers is with 97%. On the other hand, the accessibility of new pharmaceuticals is still low. Only 6% of recent launched pharmaceuticals in the last 3-7 years are available in Vietnam, thus, the value (22%) and the volume (4%) share of producers is among the lowest in APAC area. This is leading to outbound medical tourism with an estimated amount of USD2 billion a year.
According to the United Nations Fund (UNFPA), although Vietnam is still in the golden population period, the population has started aging since 2017. In a World Bank's report, this aging process will not last very long, i.e., around 15 years and be completed by 2040. Aging population together with growing income among the Vietnamese people and a steady economic growth in recent years has led to potentially more demand for healthcare services.
Expenditure for the healthcare constituted 7.5% of the GDP (USD16.1 billion) and is expected to increase to 12.5% between 2017-2021. Between 2016 and 2020, sales of pharmaceutical are predicted to grow the fastest at 10.5%, compared to medical devices and private healthcare spending, which will grow at 9.3%and 7.2% respectively. Spending on pharmaceutical products per capital will double in 2020 (USD 85) and USD 163 in 2025, with average growth of 14%/year, according to Business Monitor International.
Medical devices are estimated to grow from US$ 981 million in 2016 to US$ 1.4 billion in 2020, while private healthcare spending is predicted to grow from US$ 6.6 billion in 2016 to US$ 8.7 billion in 2020.
Legal certainties as a result of the Comprehensive Trans-Pacific Partnership (CPTPP) and the EU – Vietnam Free Trade Agreement (EVFTA)
On 8 March 2018, the CPTPP was finally signed in Chile and officially takes effect since 30 December 2018. The effects of the CPTPP promise great benefits for pharmaceutical sector in Vietnam. The CPTPP is targeting to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100%. With the National and Most-Favored Nation Treatment principle, the CPTPP is ensuring a fair competition, which will attract new foreign investment, also in the pharmaceutical sector.
Furthermore, the investors gain some securities due to prohibition of expropriation, so that, Vietnam cannot expropriate intellectual property rights from pharmaceutical companies. However, the EVFTA will also ensure certain growth for the pharmaceutical sector in Vietnam. For instance, Article 14.2 Chapter 2 of the agreement requires Vietnam to create and implement legal instruments to allow foreign establishment in Vietnam. In addition, this Article also requires Vietnam to allow foreign invested enterprises to sell pharmaceuticals legally imported by them directly or through distributors or wholesalers who are not required to have a Good Storage Practice (GSP) certificate or directly. If the Vietnamese legislation is responsible for certification requirements and process, the EVFTA creates real influence as it encourages establishment of foreign enterprises and their extended scope of activities. Lastly, the EVFTA is removing all additional requirements for all pharmaceuticals, biologics and drugs.
Additionally, both the CPTPP and the EVFTA offer further protection for investors in Vietnam. The Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability for investors. Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. In relation to the CPTPP, the scope of the ISDS was reduced by removing references to "investment agreements" and "investment authorization". The final settlement is binding and enforceable without question from the local courts regarding its validity.
The second instrument is the Government Procurement Agreement (GPA). The GPA in both agreements mainly deals with the requirement to treat bidders or domestic bidders with investment capital and Vietnamese bidders equally when a government buys goods or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain confidentiality of tenders. The GPA in both agreements also requires its parties assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, create an effective regime for complaints and settling disputes, etc. This instrument will ensure a fair competition and projects of quality and efficient developing processes.
Think no more of Indonesia – Come to Vietnam!
Vietnam has been proven a very attractive destination for foreign investors in pharmaceutical and healthcare sector. In particular, in 2016 and 2017, Vietnam witnessed a number of M&A deals in the sector where foreign investors accessed the market by taking over existing big local enterprises. These deals include Abbott taking over 51.69% shares in DOMESCO Medical Import-Export Joint Stock Corporation after its purchase of two factories producing Western medicines in Vietnam – Singapore Industrial Zone in Binh Duong. Taishi Corporation also became Hau Giang Pharma Company's shareholder by owning 24.4% of its stakes. In September 2016, Vinapharm cooperated with Sanofi Corporation to produce and market Sanofi's products in Vietnam.
In contrast, Indonesia – a country not a member to both the CPTPP and any FTA with the EU, is actively driving out biopharmaceutical and other sophisticated ventures. In its recent regulations, Indonesia requires the compulsory licensing of any pharmaceutical product not being made in the country.
It is then clear that Vietnam is creating a biopharmaceutical sweet spot in the region!
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.