Restrictions on foreign enterprises investing in the pharmaceutical industry in Vietnam

Pharmaceuticals are currently being evaluated as a potential market that attracts many investors, not only domestic but also multinational corporations from around the world, both inside and outside such industry. However, the foreign investment situation in the pharmaceutical industry is not very optimistic[1]. Compared to other industries and lines, the investment growth rate in the pharmaceutical industry is insignificant, and the investment capital in the healthcare industry in general is even lower than agriculture industry. In this article, HM&P will clarify the restrictions that foreign enterprises investing in the pharmaceutical industry may face when investing in Vietnam.

Permitted to import but do not have the distribution rights

Law on Pharmacy 2016 defines pharmaceuticals are drugs and medicinal ingredients[2]. Drug means a preparation containing active ingredients or herbal ingredients used for prevention, diagnosis, treatment, alleviation of human diseases, regulation of human physiological functions, including modern drugs, herbal drugs, traditional drugs, vaccines, and biologicals[3]. Drug ingredient means an ingredient incorporated into the drug, which may be an active ingredient, herbal ingredient, excipient, or capsule shells used in the manufacture of drugs[4].

Currently, in the Schedule of Specific Commitments in Services in the WTO accession, Vietnam has excluded from the scope of commitments in the distribution services for certain specific products, including pharmaceuticals (excluding non-prescription dietary supplements in the form of tablets, capsules, or powders)[5].

In addition, Vietnam has always reserved the right to distribute pharmaceuticals. Specifically, according to Clause 3 Article 2 and Appendix 3 of Circular 34/2013/TT-BCT[6], foreign invested enterprises in Vietnam do not have the right to distribute pharmaceuticals, specifically in drugs.

In addition, Clause 10 Article 91 of Decree 54/2017/ND-CP[7], which guides Point d Clause 1 Article 44 of the Law on Pharmacy 2016 stipulates:

“Entities have the right to import but are not entitled to distribute drugs and drug ingredients in Vietnam …, except for drugs and drug ingredients produced directly by their own entities in Vietnam…”

According to these regulations, foreign invested enterprises have the right to import drugs and drug ingredients, but they are not allowed to distribute drugs and drug ingredients. The enterprise is only  limited to distributing drugs and drug ingredients only if it distributes drugs and drug ingredients produced in Vietnam by themselves. In this case, if they do not produce directly, foreign invested enterprises have no opportunity to compete with domestic enterprises in pharmaceutical distribution, because they are not allowed to exercise the distribution rights. This is considered to be a significant obstacle to attracting investment deals, as distribution, along with production, distribution is an activity often chosen by investors when investing in Vietnam.

The following activities directly related to the distribution rights are also reserved

i. Transportation, storage, and preservation of drugs and drug ingredients

According to the Schedule of Specific Commitments in Services in the WTO accession of Vietnam and Clause 4 Article 3 of Decree 09/2018/ND-CP[8], distribution includes wholesale and retail activities, sales agency of goods, and franchise activities. However, with respect to the pharmaceutical sector, Vietnam's reservation on distribution services has been expanded to include both storage and transportation of pharmaceuticals. Accordingly, foreign invested enterprises are not allowed to distribute pharmaceuticals, including transportation and storage[9]. Regarding this issue, Official Dispatch No. 43388/QLD-PCD dated March 14, 2018, issued by the Drug Administration of the Ministry of Health on the implementation of Decree 54/2017/ND-CP guiding the Law on Pharmacy, provides the following response:

“Entities which are entitled to import but not entitled to distribute drugs and drug ingredients in Vietnam (including FIEs) are not allowed to engage in activities related to drug distribution, including the transportation and storage of drugs, drug ingredients.”

This content is also consistent with the regulations mentioned in Point c Clause 10 Article 91 of Decree 54/2017/ND-CP.

Besides, the Drug Administration of Vietnam also expresses the view that not allowing foreign invested enterprises in Vietnam to provide drug storage and transportation services is aimed at preventing illegal drug distribution activities in Vietnam, contributing to ensuring medical safety, and moving towards the professionalization of the drug distribution system in Vietnam[10].

According to the above information, foreign invested enterprises in Vietnam are not allowed to transport or store drugs and drug ingredients, except for drugs and drug ingredients produced in Vietnam by themselves. Therefore, foreign invested enterprises that do not produce drugs, drug ingredients can only use the transportation and storage services provided by Vietnamese enterprises. This is also a huge barrier for foreign invested enterprises because the costs of hiring for transportation and storage of drugs and drug ingredients is not cheap.

ii. Other activities directly related to the distribution rights of pharmaceuticals

In addition to the transportation, storage, and preservation of drugs and drug ingredients, Decree 54/2017/ND-CP also stipulates additional activities directly related to the distribution rights of pharmaceuticals that foreign invested enterprises are not permitted to conduct[11], including:

• Selling drugs, drug ingredients, delivering drugs, drug ingredients to healthcare facilities, retailers, individuals, and organizations that are not wholesalers of drugs and drug ingredients;
• Receiving orders for, and accepting payment for, drugs and drug ingredients from health care facilities, retailers, individuals, and organizations that are not wholesale distributor of drugs and drug ingredients;
• Determining and imposing sale prices for drugs and drug ingredients distributed by other pharmaceutical entities;
• Determining distribution strategies and business policies for drugs and drug ingredients distributed by other pharmaceutical entities;
• Developing a plan to the supply of drugs and drug ingredients for healthcare facilities in Vietnam;
• Providing financial support in any forms to organizations and individuals who directly purchase drugs, drug ingredients from enterprises for the purpose of manipulating the distribution of imported drugs and drug ingredients;
• Take other actions related to drug distribution in accordance with the law.

In conclusion, it can be seen that the pharmaceutical sector is very specific and sensitive, can directly affect the health and lives of consumers so the government always reserves the distribution services of drugs, drug ingredients, and other directly related services as listed in the said regulations.

However, these regulations inadvertently become restrictions for foreign invested enterprises. Therefore, foreign invested enterprises or even foreign investors before investing in Vietnam in the pharmaceutical industry need to do thorough research to be able to choose and register suitable lines in accordance with their desire but still ensure to be approved by the provisions of applicable laws.