Foreign Investors Get Tariff Breaks on Pharmaceuticals

Vietnam is an attractive market for pharmaceuticals, with the country importing around 60 percent of total demand for this product. The development of this sector is forecast to attract $100 million of investment throughout the industry and increase the pharmaceutical market value by up to $27.6 billion, according to accounting firm KPMG.

The EU-Vietnam FTA (EVFTA) is expected to open the pharmaceutical market even further to EU businesses, bringing in new investment inflow for the foreseeable future. To learn more about the benefits of the EVFTA on the pharmaceutical industry, a webinar was conducted on how investors can qualify for preferential tariffs for the pharmaceutical industry.

Pharmaceutical Industry Potential

Vietnam is currently undergoing economic and demographic transformations that provide great potential for its healthcare and pharmaceutical industry. The COVID-19 outbreak certainly dampened economic activity in Vietnam, but it is unlikely to reverse ongoing socioeconomic changes. Rather, health stands firmly as the top priority and concern for both the Vietnamese people and the government.

Vietnam’s pharmaceutical industry is the second-biggest product imported from the EU into Vietnam – and contributes to people’s health and socioeconomic status. Vietnam spends 7 percent of its GDP on health with the average person spending approximately $69 on pharmaceutical products.

Drivers for Growth

Vietnam has a fast-growing middle class and an aging population. It is expected that by 2038, 20 percent of Vietnamese people will be over 60 years old. As people get older, rising health concerns become a factor increasing the need for medical care and pharmaceutical products.

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Domestic firms mainly produce simple medications and generic drugs. Domestic firms also lack research capability as well as the capability to invest in new compounds. Partnership with foreign firms will further help in attracting high-tech manufacturing and producing specialized medicines and products for the local population as well as export markets.

Import and Export Markets

Vietnam’s largest pharmaceutical import markets are the EU, India, the US, and South Korea while export markets are the ASEAN region, Japan, Cyprus and the US. Most EU investors source raw materials in the EU, ship it to Vietnam and manufacture or process the product before re-importing back to the EU.

Emerging Opportunities

About 71 percent of import tariffs have been eliminated after the EVFTA came into force. Emerging opportunities from non-tariff barriers include improvement in intellectual property rights and direct pharmaceutical imports – so EU investors are now allowed to establish a company to import pharmaceutical products and sell to local distributors or wholesalers.

EU investors are also allowed to build warehouses and carry out clinical research and trials. As per the EVFTA, Vietnam will also align with international standards on pharmaceuticals which means that products already certified in the EU will not require additional testing and certification in Vietnam, thus reducing time and costs in the Vietnamese market.

Vietnam has committed to open pharmaceutical-related bidding packages in a number of central and local state agencies including: Vietnam’s social insurance program, the Ministry of Health, the Hanoi and Ho Chi Minh City Department of Health, and 33 other hospitals.

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Despite these opportunities, foreign-invested companies are still prohibited from distributing drugs in Vietnam and are only permitted to conduct wholesale and retail activity with non-pharmaceutical supplements in the form of tablets, capsules, and powder. In marketing terms, for the promotion of drugs, FIEs cannot promote drugs used for human treatment, except for promotion among drug traders or distributors.

Market Entry Strategies

There are three recommended market entry strategies. The first one is to invest in Vietnam as a form of drug importer, the second is to operate a manufacturing company through an M&A and lastly, the third is participate in pharmaceutical-related bidding packages of certain central and local state agencies.

Investors are advised to set up a trading company to benefit from preferential treatment which is a low-cost option. A trading company allows a company to source in Vietnam and resell in Vietnam and maintain quality control. In order to establish a trading company, investors are required to obtain an import license along with other certifications, obtain proof of origin for EU pharmaceutical products, and export to Vietnam.

Investors will also need to apply for a certificate of satisfaction of conditions (CSC) and certificate of goods storage practice (GSP) for importing into Vietnam. EU exporters are required to use the Registered Exporter System (REX) to show proof of origin of a product.