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RESEARCH INDEXI. Overview

II.Production

III. Consumption

IV. Supply chain of Vietnam ‘s pharmaceutical industry

V. Conclusion

REFERENCES

p. 4 1. Gobalp. 5 2. Vietnamp. 5 3. Forecast

p. 16 1. Suppliers Of Raw Materialsp. 19 2. Pharmaceutical Manufacturersp. 20 3. Outsourced Processing Companies Franchised Productionp. 21 4. Distribution System

p. 23

p. 23

p. 6 1. Local productionp. 7 2. Trade

p. 11 1. Pricep. 13 2. Marketp. 14 3. Business Location



IndiaPharmerging countries

ChineRussia

BrazilOther Asian countries

South KoreaEU5

CanadaJapan

US

33

96

121

179

180

321

323

375

420

644

892

0 200 400 600 800 1000 1200 1400Drug spent per capita Population

Source: IMS Health, FPTSCorrelation between drug spent per capita (USD) and population

(million people)

2. VIETNAMAccording to BMI’s research data, the total market size of Vietnam’s pharmaceutical industry reached USD3,320 million in 2013, up 17% from USD2,840 million in 2012Decision Resources Group finds that Vietnam is currently one of the fastest growing pharmaceutical markets in Southeast Asia, recording a growth rate of nearly 17 percent and exceeding $3 billion in size in 2013. It is expected to grow at a rate of more than 20 percent through 2017. According to Business Monitor International, Vietnam ranks 13 of 175 countries for the fastest growing global markets in drug spending.According to Vietnam’s Ministry of Health (MoH), the country has 140 private hospitals and close to 900 public hospitals. Of the private hospitals, six have foreign investments totaling close to $95 million.The Vietnamese government is making its own investments in healthcare infrastructure. In its 2013 budget, the MoH established funding for new facilities (and upgrades to aging facilities) in rural and disadvantaged areas. According to the MoH, it has invested $2.5 billion in healthcare infrastructure improvements since 2009. All of this makes Vietnam an attractive market for foreign pharmaceutical companies, who continue to enter the country in growing numbers.

According to data provided by the Ministry of Health (MoH) Vietnam, imported drug accounted for more than 50% of the domestic demand in year 2012 and 2013

3. FORECASTGlobal Data in its recent economic forecasts have expected the value to increase continually over the next six years reaching a net worth of US$8 billion by 2020, representing a Compound Annual Growth Rate (CAGR) of 15.4%. This rapid growth of pharmaceutical market in Vietnam is attributed to the key factors including expanding population in the country and Vietnam effort in introducing the New Health Insurance Law.

I.OVERVIEW1. GLOBALIn the 2004-2013 period, the global drug spent has achieved a steady growth of an average 5.8% per year from USD455 bn in 2004 and subsequently reaching USD717 bn in 2013. According to EvaluatePharma, total global drug spent will reached USD900 bn in 2018. Average growth rate during 2014-2018 period will be around 5.7% per year. That is to say the average growth rate of patent drugs will be 5.5% per year, compared with that of generic drugs - about 7.1% per year.With their combined total population of about 3.7 bn (making up above 50% the world’s population), India, China and other pharmerging countries are bound to be booming markets in the near future. As projected by IMS Health, proportion of drug spent from pharmerging countries will rise from 20% in 2011 to 30% of total drug spent in 2016.



1000

0

-1000

-2000

-3000

-4000

-5000

0-500-1000-1500-2000-2500-3000-3500-4000

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f

Export value (US$mn) Import value (US$mn) Trade balance (US$mn)

Source: Business Monitor International (BMI)Pharmaceutical trade

Import is still high. Vietnam imports over 60% of domestic demand. Vietnam keeps on importing a huge quantity of both generic and prescribed drugs from worldwide exporters. Total value of pharmaceutical products in Vietnam in the period of 2008 and 2013 have increased steadily and have the potential to develop much more in the future. In 2013, it reached over USD 1.8 billion compared to USD 1.7 billion in 2012 and only USD 864 million 5 years ago. The average growth rate was recorded at 18% from 2008 to 2013 according to General Statistics Office data.

II. PRODUCTION

1. LOCAL PRODUCTIONLocal pharmaceutical production accounts for nearly half of Vietnam’s drug needs. Most of local products are low-cost generics produced by about 170 pharmaceutical companies in Vietnam. Almost ten percent of them are foreign investors, with another four percent operating under joint venture agreements. To boost domestic production of higher-quality drugs, Vietnam has recently encouraged manufacturers to obtain Good Manufacturing Practice (GMP) certification. However, so far only about one-third of Vietnamese pharmaceutical companies have got GMP certification.

There has been a growing interest among foreign drug companies in establishing production and sales facilities in Vietnam. For example, in 2012 Japan’s Nipro Pharma Corporation invested $250 million into a manufacturing plant for new drugs and medical equipment.The facility will specialize in high quality, low-priced injected drugs for export into developed countries, including Japan. Other pharmaceutical companies are buying shares in their Vietnamese counterparts. In 2012, the Netherlands based Stada

Service Holding bought a 25 percent stake in a Vietnamese drug maker called Pymepharco. The transaction brought Stada Service Holdings’ total share to 49 percent.

Finally, many foreign pharmaceutical companies are partnering with Vietnamese drug makers for manufacturing and distribution. In 2010, for example, GlaxoSmithKline signed an agreement with leading Vietnamese pharmaceutical company Savipharm. Under the agreement, GlaxoSmithKline is responsible for marketing authorization, technical support and quality control (including the upgrading of Savipharm’s quality control systems), while Savipharm is responsible for both manufacturing and distribution.

2. TRADEImport and Export Performance: Large deficit trade balance



Export Is WeakThe pharmaceutical export of Vietnam still faces the barriers of prices and export policies.

2000

1500

1000

500

0

302520151050

Import of pharmaceutical products in Vietnam 2013

2008 2009 2010 2011 2012 2013

8641,243

1,4831,790 1,880

Import of pharmaceutical products (million USD) Growth(%)

2326

13

19 21

5

FranceIndiaKoreaGermanySwitzerlandItaliaUnited KingdomBelgiumIrelandThailandUSAChinaAustraliaOthers

14.49%

12.98%

8.43%

7.97%

23.17%

5.25%4.93%4.2%3.83%

3.62%3.28%

3.21%2.41%

2.32%

Vietnam pharmaceutical imports by countries 2013Source: General Department of Vietnam Customs

Source: ICE processing of General Statistics Office data

Pharmaceuticals are imported maily from France, India and Korea. Although the price of medicines imported from France is higher than that of domestic products, French medicines are still more rational compared with other markets. Regarding Indian market, due to cheap labor and plentiful raw material sources, Indian pharmaceuticals are competitive in term of price.

Firstly, according to Price Management Department, the annual average export price of Vietnam is 20%-25% higher than other countries in the region such as India and China. The high price is caused by the fact that Vietnam pharmaceutical industry has to import main materials while those two countries can manage this matter in-house. Secondly, product registration process still faces many difficulties of time consuming. In order to bring products to new markets, companies must send registration form, application form and product sample for testing. This process takes up to 2 years.

However, export performance is gradually becoming better as export revenues have increased over the years. By 2013, Vietnamese companies has exported to countries including Myanmar, Laos, Cambodia, India, Hongkong, Philippin, Malaysia, and more than 20 countries in Africa. BMI forecasts that export continues to grow rapidly and reaches USD250 million in 2017. This is based on the assessment of some potential markets in Africa since 70% of demand in African countries can only be met by import, as WHO said. Primary products needed including medicines for malaria and diarrhea and vaccines are those products that Vietnamese companies can produce.



III.CONSUMPTION

According to the data provided by the Ministry of Health (MoH), the market size of Vietnam’s pharmaceutical industry was estimated to be USD2,775 million in 2013, boasting a 10-year CAGR of 16%. Out of this amount, only USD1,300 million represented drugs that were domestically produced. Currently, because of the country’s outdated technology infrastructure and the domestic population’s strong preference for foreign medicines, drug imports account for more than 50% of the domestic demand.

VIETNAM’S DRUGCONSUMPTION IN 2012

VIETNAM’S DRUGCONSUMPTION IN 2013

Imported drugs 54% Imported drugs 53%

Domestically produceddrugs 46%

Domestically produceddrugs 47%

USD2,601million

USD2,775million

Source: Ministry of Health (MoH), VPBS research

1. PRICE

Drug prices in Vietnam are comparatively high; 12 times higher than international reference prices. Drug consumption per capita in Vietnam is also climbing. In 2010, the typical Vietnamese citizen spent $104 annually on pharmaceutical products. This compared to $148 in China and $51 in India. Per capita spending on drugs in Vietnam should more than double by 2015. That increase is fueled by a richer and older society and by an expansion of the country’s national health insurance system. Today, 65 percent of Vietnam’s 93 million people are covered by the national system. That number is projected to reach 90 percent by 2020.

18

16

14

12

10

8

6

4

2

0

2000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2.9

13.2

13.8

5.4 4.9 5.1

8.9

6.1

3.4

5.7

16.3

Price index volatility ofPharmaceutical products and USD

Pharmaceutical Price Index

USD (previous year = 100) (%)

Average pharmaceutical prices still rise annually at the average rate of 7.7%. This is due to the increase of national CPI together with the increase of major costs such as raw materials, wages and electricity and water prices.



However, according to the Drug Administration of Vietnam, domestic medicine prices have not changed as much as imported medicine prices. This can be explained by the following reasons:(1) The devaluation of Vietnam Dong against US dollar.(2) This could be due to tacit agreements between foreign manufacturers and domestic importers. For example, the branch of GSK in Vietnam had agreements with companies in the country to raise the price up to 4-5 times more than the original price.

76453210

25

20

15

10

5

0

2009

2010

2011

2012

2013

2014

2015

2016

2017

Pharmaceutical Sales (USDbn)Growth (% y-o-y)

Prescription drugs sales (US$bn)Growth (% y-o-y) (US$bn)

20092010

20112012

20132014f

2015f2016f

2017f

US$bn8

6

4

2

0

Pharmceutical sales

Sales value of prescriptionand OTC drugs

Vietnam pharmaceutical industry concentrates on domestic market. Especially, revenues generated from medical facilities account for 70%

OTC 26.5% Medical facilities 70.48%Exports 3.02%

Market shareSanofi DHG TRA

5.8% 4.95% 2.37%

The number of medical facilities and drugstores in Vietnam

2010 2011 2012 2013

Hospitals 1.030 1.040 1.042 1.069

Regional polyclinics 622 620 631 636

Nursing hospitals 44 59 59 60

Clinics 11.028 11.047 11.049 11.055

Instituitional health stations 710 710 710 710

Other facilities 33 30 32 32

Retail drugstores 42000 N/A 57000 N/A

The number of drugs sold in drugstores in Vietnam is quite high (50-60%). However, since medicines sold in drugstores are common medicines and tonic with lower prices than specific medicines prescribed through hospitals, then in terms of revenue, medicines at drugstores take up only 26.5% of market share. In 2012, there were about 57,000 drugstores in the country, which means that every 10,000 people, there were 6.3 drugstores.

Source: VietinbankSc

2. MARKET



3. BUSINESS LOCATION

According to statistics from Ministry of Health, pharmaceutical manufacturing companies mainly focus in two cities, namely Ho Chi Minh city that takes up 50% of the number of enterprises) and Hanoi that accounts for 30%.The rest of 20% belongs to An Giang, Can Tho, Nam Dinh and Phu Yen. The concentration of factories leads to the concentration of distribution. In small provinces, the number of drugstores of enterprise is also smaller.

Therefore, According to the development plan of pharmaceutical industry, Ministry of Health encourages enterprises to build factories in areas that have not had any pharmaceutical manufacturing companies such as High Land and Northern Mountainous area.

Accordingly, these factories will focus on manufacturing generic medicines and prioritize the use of pharmaceutical products that have raw materials available in the region. Regarding the regions that have many factories such as HCM city, Ministry of Health orient to manufacture various kinds of specific medicines and high-tech medicines.

Source: VietinbankSc

IV. SUPPLY CHAIN OF VIETNAM ‘S PHARMACEUTICAL INDUSTRY

International

Vietnam

InternationalManufactures

InternationalDistributors

Wholesalers Importers FDI logisticscompanies

FDIManufactures

DomesticManufactures

Distributors

ForeignRepresentative

Offices

Registrantcompanies

Public PrivateHospitals, Health Stations, Clinics

Retail MedicineOutlets

USERS

Support (delivery, promotion)Possessive

Product lineMandated importation



1.SUPPLIERS OF RAW MATERIALS

According to the statistics from General Department of Vietnam Customs, Ministry of Health and Drug Administration, 90% of raw pharmaceutical materials are foreign imports. China and India are two largest source of imported medicinal raw materials that achieved 51.4% and 18.3% of the total import value in 2013 respectively.

China

India

Austria

Spain

Germany

France

Italia

Sweden

Korea

57%

18%

7%

5%

3%3%

2%2% 2% 1% 0%

Vietnam pharmaceutical material importsby countries by 2013

Source: Vietnam custom

Herbal raw materials: according to Drug Administration and Ministry of Health, up to 90% of herbal raw materials in Vietnam are imported from China given the fact that they are in short supply due to our climate constraints making herb planting impossible in Vietnam. The remaining 10% are popular herbs known as artichoke, Polyscias fruticosa, Licorice, Leonurus japonicus, and Phyllanthus urinaria, to name just a few.

The dependence of gross profit in input raw materials

Input prices, as typical of pharmaceutical industry, usually account for between 50% and 80% of COGS. Therefore, the difference in input prices tremendously affects gross profit margins of each company.

Assume revenue 1000 VND bn Costs also include other items

such as:Packaging costs ( in some cases higher than the cost of raw materials), Depreciation expenses, transportation

Average gross profit margin 45%

Cost of goods 550 VND bn

Raw materials take up 60% of COGS

Raw materials’ difference -30% -20% -10% 0% 10% 20% 30%

Cost of goods 451 484 517 550 583 616 649

Gross profit margin 55% 52% 48% 45% 42% 38% 35%

Raw materials take up 80% of COGS

Raw materials’ difference -30% -20% -10% 0% 10% 20% 30%

Cost of goods 418 462 506 550 594 638 682

Gross profit margin 58% 54% 49% 45% 41% 36% 32%

Source: FPTS



2. PHARMACEUTICAL MANUFACTURERSThe entire country has approximately 178 drug manufacturers (about 100 pharmaceutical companies, 80 traditional drug manufacturers and above 300 drug-manufacturing units). Most of them focus on popular drug lines rather than specialty drugs that require sophisticated technology. As a result, overlapping production among domestic companies occurs only within a small market segment. On the other hand, valuable specialty drug market is dominated by foreign companies. In Vietnam, drug manufacturers can be classified into smaller groups according to criteria below:

Classification by ownership: Classification by product segments:

Companies with foreign owned capital (FDI).Domestic pharmaceutical companies

High-quality productsPopular products

Classification by sales strategies: Noticeable drug manufacturing companies:

Rapid growth as a result of network and marketing investmentsSustainable growth as a result of substantial investments in drug qualityOthers

DHG Pharma: the largest pharmaceutical manufacturer in Vietnam.Imexpharm: a high-quality pharmaceutical manufacturer specializing in injectable antibiotics.Domesco: a company with its strength in manufacturing cures for cardiovascular, diabetes and obesity, etc.Traphaco: the largest herbal drug manufacturer in Vietnam.Pymepharco: a pharmaceutical manufacturer featuring high-quality products Bidiphar 1: a pharmaceutical company with cancer production line



3. OUTSOURCED PROCESSING COMPANIESFRANCHISED PRODUCTION

OutsourcingAccording to the definition of Ministry of Health of Vietnam, outsourcing a processing company involves having it undertake one, a few or the entire drug manufacturing procedures (including receiving raw materials, processing, packaging and labeling).This type of manufacturing is relatively popular in Vietnam and is usually happens between mall-scale and large-scale drug manufacturers. Quality in drug processing practices often fluctuates wildly and heavily depends on the ordering party.

Franchised productionThis is an advanced form of outsourcing with franchisers being large foreign drug corporations that aim to manufacture their own drugs in Vietnam at lower cost than imported drugs. Such drug products are very affordable in Vietnam and their quality is still as reliable as patent drugs.

Meanwhile, franchisees have to satisfy every requirement on factories, manufacturing qualification and storage, etc. Franchisers, in return, will transfer their technological know-how to franchisees (under the conditions of the confidential contracts). Prices of such drug products will be 30% lower than those of patent drugs. The most significant difference, however, between outsourcing a processing company and franchising is drug quality. Some companies with their strength in franchised production in Vietnam are Imexpharm, Pymerpharco, Savipharm, Bidiphar, OPV, etc. Profit margin of outsourcing ranges from 1% to 10% depending on its complexity. Profit margin of franchised production ranges from 20 to 30%

Domestic/ foreignmanufacturers

Domastic/ Foreigndistributors

(1,200 companies)

Pharmacies/ Drug retailers(54,250 stores)

Hospitals(1,180 facilities)

Private clinics(no statistic)

Wholesaler atflea markets

(4 main markets)

4. DISTRIBUTION SYSTEM

Under Vietnamese law, Foreign Invested Enterprises (FIE) are not allowed to distribute pharmaceutical products in Vietnam. Therefore, foreign drug companies generally turn to Vietnamese distributors to sell their products on the Vietnamese market.

With regard to drug distributors, there are about 1,200 companies working in this role, out of which approximately 300 are foreign firms and the rest are domestic ones. According to several news sources, it would appear that the top three drug distributors in Vietnam are Zuellig Pharma, Mega Products and Diethelm Vietnam. These news sources indicated that these three foreign companies together account for 50% of the total market shares of drug distribution.

Distribution channels of pharmaceutical products in VietnamSource: VPBS



Notable distribution companies in Vietnam

Companies Country

Zuellig Pharma Singapore

Diethelm Vietnam Switzerland

Mega Products Thailand

Central Pharmaceutical Company No.1 Vietnam

Central Pharmaceutical Company No.2 Vietnam

Hoang Duc PM Supplies Company Vietnam

Tedis SA France

East Asian Medicine Trade Company Ltd Vietnam

ATM Pharma Vietnam

Quan Son Pharmaceutical JSC Vietnam

Foreign pharmaceutical firms with representative offices in Vietnam

Companies Country

Glaxo Smith Kline United Kingdom

Astra Zeneca United Kingdom

Pfizer United States

Bristol Mayer Squipp United States

Merck Shape & Dohme United States

Bayer Germany

Schering AG Germany

Roche Switzerland

Pierre Faber France

Solway Netherland

Source: VPBS collected



V. CONCLUSION

With the situation as it is, Vietnam remains a promising destination for drugs exporters, particularly those specializing in prescribed products. Making a joint venture with local pharmaceutical producer could obtain certain advantages on marketing development, products registrations, production and distribution.

Vietnam’s health care system is a mixed public-private system. However, the healthcare system has been slow to develop. Around 30,000 Vietnamese people travel abroad annually to seek treatment in foreign hospitals at cost of more than USD $1 billion.

REFERENCESBusiness Monitor InternationalGeneral Statistics Office (GSO)VPBS Vietnam Pharmaceutical industryFPTS Pharmaceutical sector reportVietinbankSc Industry Report- Vietnam Pharmaceutical Industry April 2014Vietnam Pharma Update April 2014, Tilleke & GibbinsGlobal DataMinistry of Health (MoH)IMS HealthGeneral Department of Vietnam CustomsDrug Administration of Vietnam (DAV)ICE processing of General Statistics Office data

1.2.3.4.5.6.7.8.9.10.11.12.



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