Is the pharmacy chain franchise model in Vietnam feasible?

Vietnam's pharmaceutical retail market is witnessing a period of strong growth and transformation. Needing to scale up quickly, market-leading pharmacy chains such as Pharmacity, FPT Long Chau, and An Khang are all pursuing a strategy to expand their retail store system nationwide. The common goal of these businesses is to occupy a larger market share and penetrate both large cities and rural areas.

The question arises whether the franchise of pharmacy chains in Vietnam is practically feasible?

These large chains are currently operating under a self-managed and self-operated model to ensure brand consistency and quality. By spending trillions of VND to open their own chain stores, instead of using traditional franchises, these large corporations show that they are willing to incur high capital costs to maintain uniformity and strict quality control. This implicitly indicates that, for pharmacy chains, priority is given to accuracy, high expertise, and absolute brand reputation. However, the question arises whether the franchise of pharmacy chains in Vietnam is practically feasible?

Pharmacy chain franchise model

Franchise is a legal business activity in Vietnam and is specified in detail in the Commercial Law and guiding documents. Decree 35/2006/ND-CP is a document detailing franchising activities in the territory of Vietnam. This activity involves the transfer of the right to use trademarks, business systems and industrial property objects.

The pharmacy franchise model has proven successful on a global scale. The concentration and characteristics of the pharmaceutical franchise market vary by region: North America has a high concentration with the dominance of large chains; Europe is more fragmented with a combination of large chains and independent pharmacies; and Asia is witnessing rapid growth and increasing concentration as major chains expand. Typical international brands such as Guardian Pharmacy, PharmaChoice (Canada), and The Medicine Shoppe (USA) are all good examples of brands that provide effective franchise business models that support independent pharmacies to grow.

The above international franchise models show that it is necessary to distinguish between comprehensive pharmaceutical franchises (including prescription and over-the-counter drugs) and hybrid models that focus on Healthcare goods, cosmetics and personal care products (Medicare). This distinction has important implications for the legal requirements for franchising activities.

Feasibility of the pharmacy chain franchise model

In terms of legal basis, franchising is a legal business activity and is governed by Vietnamese law. However, the pharmaceutical business is a business line with specific conditions, subject to the strict regulation of the Law on Pharmacy and current guiding documents.

The key point that determines the feasibility of the pharmacy franchise model is the ability of the Franchisor to ensure that GPP standards are maintained[1] and professional liability control at franchised points of sale. This is a core opposition between the decentralized business model,  decentralized (franchise) and the pharmaceutical industry's strict and centralized quality control requirements.

For the franchise model to succeed in this area, it must be sophisticatedly structured to thoroughly address the barrier of quality control and liability.

Contradictions in the legal framework for pharmaceutical franchising and management

Regulations on franchising activities

Franchising activities in Vietnam are guided in detail by Decree 35/2006/ND-CP, which clearly stipulates relevant conditions and procedures. In terms of contracts, the parties have the right to agree on the term and cases of early termination of the contract. This gives flexibility to the establishment of business partnerships.

Notably, any part of the franchise contract related to the transfer of the right to use industrial property objects (such as trademarks, logos) is subject to the law on industrial property. This ensures that the Franchisor's pharmaceutical brand is protected and used in accordance with the registered standard.

Regulations on pharmaceutical business

Pharmaceutical business is a strictly regulated field to protect public health. All pharmacies operating in Vietnam must meet the Good Pharmacy Practice (GPP) standards according to the roadmap and regulations of the Ministry of Health. In order to be granted the Certificate of Eligibility for Pharmacy Business, establishments must meet many strict requirements: facilities must meet standards (counters, medicine cabinets, storage areas), the list of drugs for business must be clearly declared, and most importantly, there must be a pharmacist with a university degree or higher in charge of professional responsibility.

Professional liability is a legal element that cannot be compromised. The person in charge of the main profession at the pharmacy must have a pharmacy practice certificate, with a minimum of 2 years of practice at establishments recognized by law. This regulation requires the Franchisor, if it wants to expand under the franchise model, to have a mechanism to control and ensure that Pharmacists at franchised pharmacies meet the full qualifications and expertise, and to regularly update new regulations from the Ministry of Health and the Drug Administration.

Source: CafeF

Legal conflicts between franchising activities and pharmacy chains

The core legal contradiction arises from the way the Pharmacy Law defines a pharmacy chain as a system of pharmacies of an establishment that organizes a pharmacy chain, operating under a unified quality management system under the same trade name. This regulation requires the pharmacy chain to be under the unified management and administration of an organization.

The traditional franchise model, as defined by the Commercial Law, creates a Franchisee as an independent legal entity. This legal entity is autonomous in terms of capital, business activities and has separate legal responsibilities, although subject to the standards of the Franchisor. This legal entity is not a unit established by the "enterprise (Franchisor) and directly conducts business".

This conflict implies that if a large chain such as FPT Long Chau or Pharmacity switches to the traditional franchise model (legal ownership division), they may lose the ability to be recognized as a pharmacy chain in the strict legal sense of the Ministry of Health. This affects the uniform quality management and accountability of the entire chain to the pharmaceutical regulatory agency.

Legal risks when franchising pharmacy chains

In the pharmacy franchise model, professional legal risk is the biggest barrier. Although the Franchisor provides the brand and system, the highest liability for the sale of the drug and compliance with the GPP still rests with the Specialist Pharmacist with a Certificate of Practice at the point of sale.

If the Franchisee violates professional rules such as arbitrarily selling prescription drugs, failing to ensure storage quality, or failing to update new regulations from the Ministry of Health, the Franchisor's reputation and brand will be seriously affected. Due to the specific nature of the pharmaceutical industry, the consequences of violations can lead to revocation of licenses and administrative or criminal sanctions.

This issue requires the franchise contract to be built much more strictly than the general provisions of the Commercial Law. There should be provisions that focus on thorough compliance with the Pharmaceutical Law, in which the Franchisor must have the right to inspect, supervise, and intervene in-depth when detecting signs of professional or quality violations.

In general, in Vietnam, the pharmacy chain model is quite tightly regulated for the operating unit from financial capacity, to specific professional capacity. Therefore, allowing pharmacy chain franchising will face many challenges. In addition to being difficult to ensure uniformity, there is a great risk when the pharmacy chain develops uncontrollably will directly affect the health of consumers. Therefore, the current regulations almost "lock" the implementation of this business model in Vietnam. This has once again been affirmed by the Ministry of Health, specifically the Drug Administration that: "In ensuring that pharmacy chains and pharmacy chains operate in accordance with the provisions of the Law on Pharmacy, the franchising is not appropriate, and does not fully implement the responsibilities of the establishment organizing the pharmacy chain in accordance with the provisions of the Law on Pharmacy".[2]

Lawyer Nguyễn Văn Phúc

HM&P Law Firm

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