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Foreign pharma losing ground in Vietnam

A pharmacist serves a woman in a Vietnamese pharmacy. Foreign pharmaceutical players fear the good days of double-digit growth in Vietnam may be over.

Vietnam has been a strong source of double-digit growth for foreign pharmaceutical and medical device companies over the past decade. However, fears are growing among European and American executives that the good times may be coming to an end.

     Roland Berger, a strategy consultancy, pegged the growth rate of the pharmaceutical and device markets at just below 14% in 2013-2014. This would have been welcomed anywhere else, but in Vietnam, where foreign companies have been used to 17% and even 20% growth rates for the better part of a decade, the numbers are a cause for concern. Indeed, if compared to the projected growth rate of Vietnam's overall health care market, which Business Monitor International put at between 16% and 17% for 2014, the pharmaceutical and medical device markets seem to have underperformed by a large margin.

     How can this be explained? During a series of interviews in Vietnam last year by health care business consultancy Rubicon Strategy Group, foreign pharmaceutical and device executives, public hospital administrators and others focused on a shift in power from Vietnam's specialized drug and health care oversight bodies to local government people's committees and accusations that they have granted public hospital tender contracts to politically connected local manufacturers and companies.

     Such allocations of contracts, reportedly made behind closed doors and outside the official tender process, have been to the tremendous detriment of foreign pharmaceutical and device companies, which count on public hospital tendering for well over 90% of revenues. Public hospitals have suffered too, because they are forced to work with local manufacturers which may not have the capacity to deliver contracted drug shipments, let alone produce dependable drugs and devices.

     The regulatory environment in Vietnam is generally chaotic and sharp changes in policy are often discounted as temporary phenomena. But the shift in power to national and local political committees has the potential to upset market gains by foreign pharmaceutical and device companies and it is this trend that lies at the root of foreign health care executives' fears for the future of the Vietnamese market.

     European and American pharmaceutical companies, organized under the umbrella of the European Chamber of Commerce's pharmaceutical committee, known as the "Pharma Group," are now in talks with national government representatives to secure fairer market rights for their products. They are also seeking to persuade the government to implement the country's delayed commitment to the World Trade Organization to grant foreign pharmaceutical manufacturers full import and distribution rights.

     The Pharma Group's lobbying strategy has been to align the government's goals for health care development with the capabilities of Pharma Group companies to help those goals become reality. Four areas of government focus have been identified: Promoting the development of local industry; providing high-quality health care and medicine; facilitating affordable, cost-effective health care; and achieving universal access to medicine and care.

     These objectives require the creation of centers of excellence in regions with low health care access; co-development of epidemiologic and health outcome studies and preventive medicine programs; provision of global best practices for budget allocation and medicine reimbursement policies; and joint efforts with government experts to track health care and pharmaceutical outcomes and assist strategic planning by state agencies.

     Vietnam also needs to develop a high-standard national drug safety monitoring system, including training partnerships to promote good manufacturing and pharmacy practices. Its pharmaceutical and drug manufacturing regulatory bodies need to bring regional and international experts to Vietnam to collaborate on training, education and policy.

Local rule

But it is not clear that the most important government stakeholders are present at the negotiations with the Pharma Group, or at any other lobbying efforts organized with national officials. This is because Vietnam's government operates in a highly decentralized manner and even the best intentions of national level negotiators and regulators can be foiled by local political interests.

     Any pressure put on national government officials is likely to be ineffective unless it can be brought to bear locally. In other words, even if the Pharma Group or others succeed in convincing the national people's committee that certain concessions need to be offered for foreign health care companies, there is no guarantee that local people's committees will follow suit.

     For example, the government's "Vision 2030" program, signed into law in January 2014, details a national development plan and sets out objectives for how the local pharmaceutical industry is to be developed. Vision 2030 is generally positive towards multinational pharmaceutical companies, acknowledging the need for such companies to be incentivized to introduce the innovative products that Vietnam's quickly modernizing society needs.

     Unfortunately, the decentralized structure of Vietnam's government system puts many sub-national authorities at odds with the development goals of Vision 2030, because their economic targets are often different from those set by Hanoi. The implementation of Vision 2030 may be a national priority, but its local implementation is guaranteed only in so far as it services the immediate goals of local people's committees.

     A contrasting approach that has been shown to be effective is the local lobbying efforts by Japanese companies, which take advantage of strong diplomatic ties between Japan and Vietnam. One public hospital executive interviewed for our study claimed that every major public hospital in Vietnam was built with strong financial support from the Japanese government.

     This sort of far-sighted investment in Vietnam's early development seems to have provided Japanese companies with lines of sight into local government operations that European and other Western companies can only dream of. One medical device executive from Japan said that his company's plan for dealing with the recent turmoil in the public tendering process was to have more frequent contact with local ministry branches and people's committees; he did not feel that the changes in tender allotment behavior would pose a significant threat to operations.

     In spite of the success of Japanese companies in pursuing a unique form of self-advocacy, the national government has to come to a strong political consensus about the direction of the country's health care sector development if pharma and medical companies are to capture the market's potential.

     Moreover, it has to be willing to take steps to protect that consensus against the sub-national government interests that seem to be pulling the sector in different directions. Ultimately, the national government's ability to develop a vision that sub-national governments follow will be the key for continued successful development of the market.

     At the same time there is plenty of room for pharmaceutical and medical device companies to implement strategies to push forward growth. The chaos of the Vietnamese market reflects the reality that administrators and government leaders are still in learning mode. 

     Savvy multinational companies will concentrate resources on the development of these relationships to understand the challenges these officials face and turn these insights into training platforms designed to add value to the relationship. That is a strategy that has proven successful for Japanese companies.

Damjan DeNoble is a partner at Rubicon Strategy Group, a health care business consultancy that focuses on Asia.

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