Vietnam pharmaceuticals healthcare report q3 2013

Industry ForecastPharmaceutical Market Forecast Vietnam's pharmaceutical market was valued at VND59,214bn US$2.84bn in 2012, a 18.2% year-on-year y-o-y increase in local currency terms..

Q3 2013 www.businessmonitor.com

VIETNAM

PHARMACEUTICALS & HEALTHCARE REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Healthcare Report Q3 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2013

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BMI Industry View 7

SWOT 9

Political 11

Economic 12

Business Environment 13

Industry Forecast 14

Pharmaceutical Market Forecast 14

Table: Pharmaceutical Sales Indicators, 2009-2017 15

Healthcare Market Forecast 16

Table: Healthcare Expenditure Indicators, 2009-2017 18

Table: Healthcare Governmental Indicators, 2009-2017 19

Table: Healthcare Private Indicators, 2009-2017 19

Prescription Drug Market Forecast 20

Table: Prescription Drug Sales Indicators, 2009-2017 22

Patented Drug Market Forecast 23

Table: Patented Drug Market Indicators, 2009-2017 24

Generic Drug Market Forecast 25

Table: Generic Drug Sales Indicators, 2009-2017 26

OTC Medicine Market Forecast 27

Table: OTC Medicine Sales Indicators, 2009-2017 29

Pharmaceutical Trade Forecast 30

Table: Exports And Imports Indicators, 2009-2017 31

Other Healthcare Data 32

Key Risks To BMI's Forecast Scenario 33

Macroeconomic Forecasts 35

Economic Outlook 35

Table: Vietnam - Economic Activity 38

Industry Risk Reward Ratings 39

Asia Pacific Risk/Reward Ratings 39

Vietnam Risk/Reward Ratings 44

Rewards 44

Risks 45

Market Overview 46

Industry Trends And Developments 48

Epidemiology 48

Healthcare Financing 52

Hospital Sector 53

Private Healthcare Sector 54

Healthcare Insurance 55

Healthcare And Pharmaceutical Reform 58

Research And Development 60

Biotechnology Sector 60

Private Healthcare Sector 64

Healthcare Insurance 66

Healthcare And Pharmaceutical Reform 68

Research And Development 70

Biotechnology Sector 71

Clinical Trials 74

Regulatory Development 76

Regulatory Regime 76

Pharmaceutical Advertising 78

Intellectual Property Environment 79

Corruption 82

Pricing Regime 82

Reimbursement Regime 86

Competitive Landscape 90

Pharmaceutical Sector 90

Domestic Industry 91

Foreign Industry 93

Recent Pharmaceutical Industry News 95

Traditional Medicines 95

Pharmaceutical Distribution 97

Pharmaceutical Retail Sector 97

Foreign Industry 99

Recent Pharmaceutical Industry News 100

Traditional Medicines 100

Pharmaceutical Distribution 102

Pharmaceutical Retail Sector 102

Foreign Industry 105

Recent Pharmaceutical Industry News 106

Traditional Medicines 106

Pharmaceutical Distribution 108

Pharmaceutical Retail Sector 108

Table: Key Aspects Of Good Pharmacy Practice In Developing Countries 110

Company Profile 111

DHG Pharmaceutical 111

Traphaco Pharmaceutical 113

Vietnam Pharmaceutical Corporation (Vinapharm) 115

Vietnam OPV Pharmaceutical Co 118

Vietnam Pharmaceutical Joint Stock Company (Ampharco) 120

Vidipha Central Pharmaceutical Joint Stock Company 123

Pfizer 125

Sanofi 127

Novartis 130

Merck & Co 132

GSK 134

Demographic Forecast 136

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 137

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 138

Table: Vietnam's Key Population Ratios, 1990-2020 139

Table: Vietnam's Rural And Urban Population, 1990-2020 139

Glossary 140

Methodology 142

Pharmaceutical Expenditure Forecast Model 142

Healthcare Expenditure Forecast Model 142

Notes On Methodology 143

BMI Industry View

BMI View: Vietnam's pharmaceutical and healthcare sectors are set to see strong growth, albeit from a low

base, given our bullish outlook on the economy and expectations for the population's affluence to rise In addition, the government is committed to implementing universal healthcare coverage The plan, while ambitious, will provide growth opportunities for pharmaceutical firms As the scheme is implemented, patients will have increased access to medical services Nevertheless, we highlight that a key downside risk

to our view is the existence of rampant corruption.

Headline Expenditure Projections

■ Pharmaceuticals: VND59,214bn (US$2.84bn) in 2012 to VND69,151bn (US$3.31bn) in 2013; +16.8%

in local currency terms and +16.6% in US dollar terms Forecast broadly in line with Q213.

■ Healthcare: VND199,197bn (US$9.55bn) in 2012 to VND227,558bn (US$10.89bn) in 2013; +14.2% in

local currency terms and +14.0% in US dollar terms Forecast upgraded due to receipt of new data from the World Health Organization

Risk/Reward Rating:

Vietnam's Pharmaceutical Risk/Reward Rating (RRR) score for Q313 is 50 out of the maximum 100 in ournewly improved RRR system The country scored above average for some indicators and sub-indicators,including overall market expenditure and sector value growth, pensionable population Consequently, withthis moderate score Vietnam is ranked 12th behind Thailand but in front of Indonesia out of the 18 keymarkets in Asia Pacific

Key Trends And Developments

■ In June 2013, Daiichi Sankyo's subsidiary, Kitasato Daiichi Sankyo Vaccine, and the Japan

International Cooperation Agency (JICA) began technical co-operations to produce the first rubella combined vaccine in Vietnam

measles-■ In April 2013, the Vietnamese health ministry issued Circular No10/2013/TT-BYT, modifying andsupplementing several articles of Circular No 02/2007/TT-BYT on conditions for the drug business Theamendment circular is intended to bring about various new regulations on conditions for the drug industryunder Decree No 89/2012/ND-CP, executing the Law on Pharmacy 2005 Under the amendment

circular, the Provincial Department of Health shall be authorised by the health ministry to providecertificates, such as a good practice certificate, if foreign-owned enterprises' businesses are in drugsproduction, drugs maintenance, drug testing or import of drugs The amendment circular wasimplemented from May 14 2013

■ The Drug Administration of Vietnam (DAV) has banned the advertisement of nutritional supplementsfrom April 26 2013, due to the chaotic state of the advertising system In an interview with local

media Hai Quan in October 2012, Nguyen Thanh Phong, deputy director of DAV, stated that while theagency reviews such advertisements, preventing violations is difficult, as some advertising agencies arenot registered with the authorities.

BMI Economic View: Vietnam's real GDP growth came in relatively weak at 4.9% year-on-year (y-o-y) in

Q113, missing Bloomberg consensus of 5.2% by a significant margin The latest GDP print has fuelledconcerns that the economic recovery could be losing momentum as the government races to restructure thebanking sector and reassure investors that a banking crisis can be avoided Although we acknowledge thatuncertainties over the build-up of bad debt in the banking sector could continue to weigh on investorsentiment and undermine efforts by the government to reignite growth, this is typically the final saga of acredit cycle Furthermore, we have witnessed encouraging evidence that an economic recovery in thecoming quarters remains on track

BMI Political View: The Communist Part of Vietnam (CPV) is set to face increasing pressure for political

change over the coming decade We view political reforms for a more balanced and democratic politicalsystem as a crucial element in driving the country's economic growth over the long run, and we expect theCPV to allow limited reforms to be introduced gradually in the coming years

SWOT Analysis

Strengths ■ Significant growth potential, given a large and growing population

■ The government's commitment to developing the health sector

■ Sizeable local generic drugs sector, which is being encouraged by the government

■ Strong traditional medicines segment with potential to improve the non-prescriptiondrugs market in the longer term, as long as sufficient investment in extractiontechnologies can be found

Weaknesses ■ One of the least developed pharmaceutical markets in Asia, with low per capita

spending on drugs

■ Counterfeit drugs account for a significant amount of market consumption

■ No bioequivalence requirement in place for locally made generic medicines

■ Little distinction made between prescription and over-the-counter drugs, with mostmedicines available without a prescription

■ Complex drug pricing policy biased towards local drug producers

■ Import-reliant market, especially in terms of high-tech products and activepharmaceutical ingredients, which makes it vulnerable to currency movements

■ Underdeveloped primary care services and a shortage of trained pharmacists arecontinuing to hamper access to medicines and product market penetration

■ Population concentrated in rural, rather than urban, areas, preventing access tomodern drugs and encouraging dependence upon traditional medicines

■ Opportunities ■ The Association of South East Asian Nations (ASEAN) harmonisation initiative,

including the adoption of Western regulatory standards such as InternationalConference on Harmonisation and World Health Organization guidelines

SWOT Analysis - Continued

■ Introduction of five-year exclusivity for clinical dossier data encouraging based multinationals

research-■ If investment can be found for technological improvements, then there is greatpotential in the traditional Chinese medicine market, in addition to fledgingbiotechnology

■ Full WTO membership improving the trading climate and potentially, in the longerterm, redressing pharmaceutical trade issues

■ Requirement for domestic companies to comply with international goodmanufacturing practices should boost exports

■ Threats ■ Government resistance to aligning patent law fully with international standards

deterring multinational sector expansion

■ Need to resolve infrastructural and power supply issues, as well as higher educationprovision, before higher levels of foreign direct investment can be expected

■ The government is increasingly interfering in the industry, protecting indigenous firmsthrough the use of legal trade barriers, which will affect competitiveness

■ Pharmaceutical price inflation threatens to put medicines out of reach of poor andtherefore limit market volume growth

■ Legalisation of parallel imports negatively impacting performance of patented drugs

■ New health insurance legislation decreasing patients' access to medicines

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop into a full-on challenge of undemocractic rule

■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2012

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 14.0% in 2010

Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ■ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

■ The government will in spite of the current macroeconomic woes, continue to moveforward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 29% of the population to more than 50% by the early2040s

Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growthand fails to root out inflationary pressure, it risks prolonging macroeconomicinstability, which could lead to a potential crisis

■ Prolonged macroeconomic instability could prompt the authorities to put reforms onhold as they struggle to stabilise the economy

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, andbeyond

Weaknesses ■ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

■ Vietnam remains one of the world's most corrupt countries According toTransparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123out of 176 countries

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and theliberalisation of the banking sector This should offer foreign investors new entrypoints

Threats ■ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

■ Labour unrest remains a lingering threat A failure by the authorities to boost skillslevels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast

Pharmaceutical Market Forecast

Vietnam's pharmaceutical market was valued at

VND59,214bn (US$2.84bn) in 2012, a 18.2%

year-on-year (y-o-y) increase in local currency terms

Over the forecast period to 2017, BMI expects

pharmaceutical consumption to reach

VND117,802.3bn (US$5.89bn), equating to a

compound annual growth rate (CAGR) of 14.7% in

local currency and 15.7% in US dollars Over the

extended forecast period to 2022, the CAGRs will be

slightly, remaining in double digits

Inflation will be a major factor in these high nominal

market growth rates Nevertheless, our forecast for

GDP-beating drug market growth underlines our

view that there is considerable scope for increased

pharmaceutical consumption in a country where per

capita drug expenditure is just US$31.60 This,

combined with an expanding population, higher

levels of health awareness and increased access to

pharmaceuticals, creates a strong base for market growth assuming the required resources are put into

healthcare sector development However, pricing remains a concern, due to a lack of controls and regulatorybias against foreign products

Additionally, some have blamed unscrupulous practices by pharmaceutical companies and prescribers forpharmaceutical expenditure being higher than necessary However, it is not just companies that bribe

Vietnamese healthcare professionals Patients pay doctors and nurses to avoid waiting lists and receive

above-average care Those on low incomes that cannot afford 'gifts' for staff members have to use

overcrowded facilities and rely on relatives to complement the provision of care

In fact, according to a survey by the Vietnam Union of Science and Technology Associations (VUSTA)published on the VietNamNet Bridge website in September 2009, gifts - which we interpret mostly as cash,but can also be physical goods - accounted for 9% of the cost of a health check-up The research was

Pharmaceutical Market Forecast

2009-2022

Pharmaceutical sales, US$bn (LHS) Pharmaceutical sales at CER, US$bn (LHS) Pharmaceutical sales, % of GDP (RHS)

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 0

5 10 15

2 2.25

f = BMI forecast CER = constant exchange rate Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press

performed through interviews with 140 people in rural and urban areas who had visited public and privatehospitals over the previous six months Interestingly, 'medications/examinations/tests' only accounted for53% of expenditure It is not clear how the remaining funds were spent.

Vietnam's regulators faced their greatest challenge with the country's entrance to the WTO at the start of

2007 Foreign enterprises have been given the right to open branches in Vietnam and to import medicinesdirectly, although they will still be barred from distributing their products As part of its membershipapplication, Vietnam pledged to set import duties at less than 5% for pharmaceutical products and drugtariffs are expected to average just 2.5% within five years of accession

The liberalised environment could cause problems for Vietnam's small drug production sector

Nevertheless, while the government originally called on firms to adopt GMP standards by the start of 2010,the deadline was extended to the end of 2010 However, in August 2008, it was revealed that companies thatdid not have accreditation could come up with provisory regulations Firms not planning to establish GMPstandards must either shift to other sectors or produce traditional medicines, the latter being an area withproblems of its own, as many traditional drugs are incorrectly labelled and dispensed by unqualified

practitioners According to Savipharm, the country has 108 factories compliant to GMP-WHO, few plantscompliant to EU and Japanese GMP as of November 2011 Meanwhile in January 2012, United

International Pharma Company became the first company with a facility that is compliant with the

Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme (PIC/S) GMPstandards

Table: Pharmaceutical Sales Indicators, 2009-2017

Pharmaceutical Sales Indicators, 2009-2017 - Continued

Healthcare Market Forecast

BMI has revised its health expenditure forecast for

Vietnam, following the publication of new data by

the World Health Organization (WHO) in Q213 We

forecast that the sector will reach a value of

VND579,243bn (US$29.0bn) by 2022 Through to

2017 and 2022, the sector is projected to grow at

local CAGRs of 12.2% and 11.3% respectively

(13.1% and 11.7% in US dollar terms)

Over the long term, Vietnam's healthcare sector is

forecast to grow in accordance with its strong

economic growth However, we highlight that rising

healthcare expenditure does not necessarily equate to

quality healthcare provision According to the

General Statistics Office of Vietnam, the number of

hospitals increased by approximately 3% from 1,030

in 2010 to 1,059 in 2011 Despite the increase, the

number of hospital beds and doctors per 1,000

people stayed flat - at 2.01 and 0.71 respectively

Healthcare Expenditure Forecast

2009-2022

Health expenditure, US$bn (LHS) Health expenditure at CER, US$bn (LHS) Health expenditure, % of GDP (RHS)

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 0

10

20

7

6.5 6.75 7.25

f = forecast CER = constant exchange rate Source: BMI, World Health Organization (WHO)

Moreover, despite a double-digit growth in healthcare expenditure, the country has yet to address the risingburden of communicable diseases such as tuberculosis, AIDS and hand, foot and mouth disease Much ofthis increased expenditure will be on health infrastructure, which remains basic in many rural areas Overthe longer term, this is likely to result in greater access to basic medicines.

The country's low per capita health and pharmaceutical expenditure highlights the population's poor access

to healthcare services and low affordability levels for medicines - particularly high-value drugs Thisrepresents a short-term challenge for pharmaceutical firms, but over the long term we believe economicdevelopment will aid growth in the pharmaceutical and healthcare sector Our country risk team remainsbullish about the Vietnamese economy as it forecasts strong economic growth through to 2022

In the meantime, the government has outlined plans for the investment of up to US$1.5bn in the

pharmaceutical manufacturing sector over the next 10 years to reduce reliance on imports The money is to

be used for a variety of programmes, including upgrading technology to meet GMP standards, the

development and expansion of the pharmaceutical supply network to poor and remote areas, the

establishment of joint ventures (JVs) with foreign players and achieving a greater percentage of domesticpharmaceutical demand

The government's intention to invest in the development of its biotechnology sector is likely to act as acatalyst for wider industry reform, in particular concerning patent protection However, local drug

production is still weak and incapable of meeting domestic demand, although local regulation reform on aconsiderable scale is expected to attract foreign investment In some sectors, such as vaccines, considerableprogress has been made to increase Vietnam's self-sufficiency, with the country now producing sufficientmeasles vaccines domestically to meet national demand

To help make further progress, the government has outlined plans to invest US$241mn in eight projectswithin the local drug manufacturing industry This will include the construction of four pharmaceuticalplants in the next four years The authorities aim to have 80% of domestic demand met by local producers

by 2020, up from around 50% currently

Table: Healthcare Expenditure Indicators, 2009-2017

Table: Healthcare Governmental Indicators, 2009-2017

Source: BMI, WHO

Table: Healthcare Private Indicators, 2009-2017

Prescription Drug Market Forecast

The market figures for prescription and

non-prescription sectors are blurred by a lack of any

proper distinction between the two In fact,

according to some drugstores, only 20-30% of

patients buy drugs with a prescription Only

medicines that cause dependency, such as

benzodiazepines, are routinely refused sale without a

prescription Antibiotics are the most popular drug

sold without a prescription This has resulted in

worrying levels of antibiotic resistance For

example, nearly 70% of bacteria carried by people

living in urban parts of Vietnam are resistant to

penicillin

Nevertheless, the growth of the prescription

medicines market will outpace the growth of OTCs,

mainly due to the influx of expensive patented

products from abroad and increased demand for

sophisticated drugs Additionally, tighter regulations

in the pharmaceuticals sector as a whole are likely to lead to the introduction of stricter dispensing

guidelines with the good pharmacy practice (GPP) recommendations coming into force in 2011

By 2017, we forecast that prescription medicines will be worth VND87,833bn (US$4.4bn) at consumer

prices, posting a CAGR of 15.1% in local currency terms (thus somewhat above the wider pharmaceuticalmarket) In percentage terms, at this point, prescription drugs will account for 74.6% of the total market,from 73.3% in 2012, driven by expanded access to formal healthcare in rural areas

The retail price of both essential and non-essential pharmaceuticals continues to rise; a situation that could

be partially explained by Vietnam's high headline rate of inflation, which is pushing up the cost of raw

materials Manufacturers have attributed the rises to foreign currency increases However, there are

accusations that foreign drugmakers collude with local distributors to keep prices high, while some

distributors may pay doctors commissions to ensure they prescribe their drugs Research published in

September 2009 in the Southern Med Review reports that medicine prices in Vietnam are high, both for

Prescription Drug Market Forecast

2009-2022

Prescription drug sales, US$bn (LHS) Prescription drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 0

5 10

72 74 76

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press

patented and generic drugs, and that regulation is required to control mark-ups One other method ofkeeping prices to reasonable levels is through controlling the volume of drugs on the market.

Hospitals remain the primary source of healthcare, a factor that will continue to boost the demand forprescription pharmaceuticals, especially given the government's programme to modernise and expand thenumber of hospitals in the country Additionally, the government's longer-term programme to privatise keysecondary institutions is likely to have a beneficial effect on market values At present, only around 19-20%

of all hospital drugs are sourced locally, according to official figures In Q409, the DAV announced thatdomestic pharmaceutical companies were aiming to meet 60% of the market's demand by 2010

Demographic and environmental trends will be some of the key drivers of the prescription market inVietnam Respiratory problems, including asthma and COPD, are on the rise, partly due to the high

prevalence of smoking and partly due to poor air quality Manufacturers of drugs in the respiratory

therapeutic category will, therefore, have considerable room for expansion over the coming years Similarly,increased incidence of cancer, diabetes and hypertension among the Vietnamese population will providescope for drugmakers to expand

One therapeutic area that has strong potential is oncology In Vietnam, around 150,000 people a yearcontract cancer and mortality rates are very high, standing at around 50% By 2010, cases were expected toreach 200,000 per year, with 100,000 fatalities The most common cancers are lung, liver and stomach Part

of the problem is high smoking levels, with Vietnam having the highest prevalence rates among men in theworld Diabetes is another therapeutic area with potential for growth Lifestyle changes influenced by theWest mean the incidence of the disease has increased considerably, especially among young people, andmany sufferers do not realise they suffer from diabetes until complications occur

Moreover, prescribing patterns seem to be influenced by economic considerations, with drug companiespaying commissions to doctors who promote certain types of product The HCMC authorities conducted aninvestigation into the practice, with findings revealing that a number of doctors were in receipt of more thanVND500mn (US$26,300) each month The investigators looked into the prescribing of Merck & Co's

hepatitis drugs - namely PegIntron (interferon Alfa-2b) in 50mcg and 80mcg dosages, with commissions

reportedly being in the region of 10% to 30% of the drugs' cost Joint monthly revenues for the two drugsare reportedly in excess of VND6bn (US$315,000) In September 2012, Nguyen Thi Kim Tien echoedsimilar view stating that prescribers receive 'commission' from foreign pharmaceutical firms therefore manyprescriptions contain expensive medicines

Local industry representatives claim that large firms can therefore gain an upper hand as they can afford topay higher commissions, although doctors' relationship with companies also have a role to play in theirdecisions Moreover, despite the existence of hospital medicine councils - which are in charge of makingprescribing suggestions and supervising prescribing patterns - many doctors can still suggest different types

of medicines to their patients Patients have also stated that commissions are widespread

Table: Prescription Drug Sales Indicators, 2009-2017

Patented Drug Market Forecast

Value development of the patented drugs segment

and consequently the overall prescription segment

-will be hampered by the government's plan to

contain pharmaceutical costs through restrictions on

advertising and the request that hospitals and

medical professionals give preference to

domestically produced drugs, as well as the fact that

most of the insured now incur some sort of

co-payment Moreover, a number of high-value drugs

are due to come off patent in the coming years

Nevertheless, the price increase evident since the

start of 2011 may take the value of the prescription

and patented markets beyond current estimates By

2022, we expect the patented drug sector to reach

VND36,961bn (US$1.85bn), but represent a lower

percentage (18.51% versus 22.7% in 2012) of the

total market Over the 2012-2022 period, patented

drugs are expected to post a CAGR of 12.7% in local

currency (13.6% in US dollars term), slightly below the rate of the overall market development

Counterfeit drugs will continue to have a detrimental impact on patented drug sales over the forecast period,despite the government's efforts to the contrary The global economic slowdown has fuelled demand forcheaper drugs, and counterfeit medicines are prospering as a result Supported by the WHO, police, customsand regulatory officials in the country have begun to coordinate their activities, although little can be done

in terms of enforcement without greater commitment to IP rights as well as more stringent penalties for

1 2

20

17.5

22.5 25

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press

Speciality medicines, such as central nervous system (CNS) and cardiovascular drugs, are expected to bethe key growth area, while an increase in cancer, diabetes and hypertension will also generate productdemand However, the basic nature of consumption is illustrated by the continued strong showing ofantibiotics and alimentary/metabolism products The need to contain the HIV/AIDS epidemic and relatedhealth problems will boost the antiretroviral sector, while the prevention of swine flu and similar diseasescontinues to drive the growth of anti-flu drugs.

Table: Patented Drug Market Indicators, 2009-2017

Generic Drug Market Forecast

Although the overall generic drug market is sizeable,

standing at around VND29,982bn (US$1.44mn) - or

approximately 51% of the overall market's value - in

2012, most products were actually low-quality

copies of unproven bioequivalence The Ministry of

Health is stepping up its efforts to address the

problem by enlisting the help of medical

professionals in the country, in a bid to improve

generic usage and the utilisation of domestically

made products in hospitals and clinics

Additionally, entrance into the WTO should result in

dubious copy products gradually being purged from

the market, as the country brings its IP regime in line

with TRIPS However, given the notoriously poor

standard of IP enforcement in the country, these

illicit products will continue to have a sizeable

influence in the near future

Overall, generic products are likely to continue dominating the market in volume terms and we forecast thevalue of the sector should reach VND114,501bn (US$5.73bn) in 2022, accounting for over 57.3% of thetotal market (up from the calculated 50.0% in 2011) Vietnam offers strong prospects for generic marketgrowth due to low consumer purchasing power However, a number of obstacles still remain, such as a

widespread belief that generic drugs are inferior to patented products and that in many cases, they are notthat much cheaper than patented counterparts They are also not as widely available as they could be

In the meantime, the legalisation on parallel imports, which must be cheaper than locally produced drugs,will increase the pressure on companies to compete on price and should also have the impact of breaking updistributor-led monopolies Similarly, the policy of publishing drug prices on the DAV's website should alsoinstil further competition into the market and will allow hospitals to make more informed purchasing

2.5 5 7.5

0 50 100

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press

Table: Generic Drug Sales Indicators, 2009-2017

OTC Medicine Market Forecast

Despite the blurred distinction between prescription

and non-prescription products, OTC healthcare has

been achieving relatively robust value growth in the

last few years The value of OTC sales is likely to

reach VND48,263bn (US$2.41bn) in 2022, up from

VND15,794bn (US$760mn) in 2012 At the same

time, the sector's share of the total market as a

percentage is expected to fall to 24.2%, from 26.7%,

due to the rising value of the prescription sector and

more expensive imports, but also due to stricter

dispensing controls

Key drivers of OTC market growth will be mostly

limited to volume, as consumers become better

educated and more confident about self-medication

OTC drugs will also benefit as consumers spending

power increases, and - in the case of the low income

population - they may well turn to OTCs and

traditional medicines to seek cheaper alternatives to

patented drugs

Another factor affecting the growth of the self-prescription market is that manufacturers import the bulk ofraw materials and APIs, which disadvantages segments such as vitamins and analgesics, especially giventhe local currency depreciation compared with key sources markets like China, Japan and South Korea In

H109, the price of analgesic Salonpas - which is used to treat neck and back pain - increased twice.

Meanwhile, the prices of some 20 eyewashes produced by US-based Alcon rose by 8%.

Nevertheless, despite these setbacks, vitamins and dietary supplements are one of the fastest growing

segments of OTC healthcare in Vietnam, with analgesics remaining the best sellers Single vitamin

supplements have become common household products in the country, while high generic penetration inthis area has helped to make the products affordable to the majority of consumers In fact, according to

survey conducted by market research firm AC Nielsen in partnership with the Association of the European

OTC Medicine Market Forecast

2009-2022

OTC medicine sales, US$bn (LHS) OTC medicine sales, % of total sales (RHS)

2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 0

1 2 3

0 50 100

f = BMI forecast Source: BMI, Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press

Self-Medication Industry (AESGP), consumers in Vietnam (at 45% of the total) are among the most likely

to take an OTC drug for a minor ailment as soon as symptoms are present

Market research also established that it is common for people in Vietnam to ask the advice of unlicensedpharmacists or friends when choosing a medicine, rather than seeing a doctor and receiving a prescription.Concern surrounds pharmacists who offer customers prescription-only medicines over the counter, which inthe case of drugs such as antibiotics, can lead to resistance if they are overused Like many other Asiancountries, branding and advertising is becoming increasingly prevalent in Vietnam's OTC sector

Meanwhile, BMI believes that there is great potential for Vietnam's traditional medicines (TM) sector as

long as the government can attract investment in extraction technologies, reduce Vietnam's reliance onimporting raw materials and in turn bring down the retail prices of such products With more than 4,000medicinal herbs and plants in the country, there could be myriad applications in the consumer health sector,which would boost the overall OTC market value

However, the government will also have to improve regulation of the sector It is estimated that up to 70%

of traditional medicines are fakes imported into the country, while many Chinese medicine clinics

investigated by government inspectors during H209 were found to stock poorly labelled goods and manypractitioners lacked professional training Presently, the MoH only allows around 15 herbal brands to besold in Vietnam, although the market is saturated with unlicensed offerings BMI believes that in the

coming years, the MoH will increase its reliance on TM and the cultivation of Thuong Hoang, a mushroomthat has been used traditionally to treat cancer, is a positive step in the right direction

In February 2011, Deputy Prime Minister Nguyen Thien Nhan stated that the government wants to continue

to nurture the traditional medicine sector and drafted a plan that aimed to modernise traditional medicine by

2020 under decree 2166/QD-TTg

Table: OTC Medicine Sales Indicators, 2009-2017

Pharmaceutical Trade Forecast

Vietnam is highly reliant on pharmaceutical imports

Latest data from UN Commodities Trade Database

(UNComtrade) showed that the country imported

VND32660bn (US$1.6bn) worth of pharmaceuticals

in 2011 while exporting VND1,304bn (US$63.1mn)

worth of products in the same period Given that its

pharmaceutical sector is still in its infancy, we

expect such reliance on imports to continue

Between 2012 to 2017, we forecast that

pharmaceutical exports and imports will see local

CAGR of 26.3% and 14.7% respectively (26.4% and

15.7% respectively in US dollars terms)

Local production accounts for around half of

Vietnam's pharmaceutical consumption, but only a

tiny fraction of this is currently exported According to the UN Comtrade database, key export destinationsinclude Germany, India and Nigeria Meanwhile, India will continue to be one of the key providers ofpharmaceuticals to Vietnam, boosted by volumes, although producers from France and other developedmarkets also feature heavily in the import mix

The government aims to increase its drug exports, with Deputy Health Minister Cao Minh Quang

announcing in November 2009 that - given that Vietnam had recently become self-sufficient in terms ofmeasles vaccine production - the next step is to look towards exporting these vaccines We expect increasedharmonisation with international GMP standards to provide a major boost for exports by those

manufacturers with sufficient capital to make the necessary investments A further positive for the domesticindustry is reports that the government is looking to increase FDI by multinationals

Like firms from regional neighbours Bangladesh and Pakistan, Vietnamese drug makers are targetingmarkets with low barriers to entry South East Asian countries such as Laos and Cambodia are primetargets, while African states are growing in popularity Meanwhile, the Middle East and the CIS have bothbeen touted as potential future customers for Vietnamese-made pharmaceuticals

The above strategy is exemplified by Mekophar Chemical Joint-Stock Company Building on an existing

distribution relationship, the drugmaker has entered into an agreement with Nigeria's Neros

Pharmaceutical Trade Forecast

2008-2017

Pharmaceuticals to build a manufacturing plant in Africa Mekophar also exports medicines to the

Democratic Republic of the Congo, Myanmar and Russia

In the meantime, as a greater proportion of Vietnam's vast population become consumers of

pharmaceuticals, various state agencies are looking for local producers or Vietnamese subsidiaries offoreign firms to increase output rather than relying on imports For example, the health ministry is

facilitating this goal by improving the legal framework for setting up medicine manufacturing businesses.While progress has been made, much more needs to be done to maintain and improve the operating

environment for such goals to be realised According to the Vietnam Pharmaceutical Researchers'

Association, it is imperative that Vietnam continues to observe intellectual property rights as defined by theWTO In addition, the organisation is asking that the government engage in more dialogue with the

industry, to ensure the effective implementation of policies For the time being, we expect imports tocontinue dwarfing exports, increasing the negative trade balance to around US$3.5bn by 2017

Table: Exports And Imports Indicators, 2009-2017

tical

exports

(VNDmn) 759,012.03 931,944.31 1,304,090.92 1,656,354.09 2,090,866.24 2,596,716.86 3,244,373.71 4,058,353.07 5,113,417.37 Pharmaceu

tical

exports

Exports And Imports Indicators, 2009-2017 - Continued

f = BMI forecast Source: BMI, United Nations Comtrade Database DESA/UNSD

Other Healthcare Data

The vast majority of hospitals in Vietnam are large state-owned facilities that are frequently overcrowdedand generally offer only basic services A growing number of private facilities offer advanced services, butmany local people on high incomes still travel abroad for healthcare The most common destinations areSingapore, Thailand and Hong Kong It is estimated that approximately 30,000 Vietnamese citizens leavethe country for healthcare treatment each year, at a reported cost of over US$1mn

By May 2010, local press reported that the number of private facilities topped 30,000, including more than

100 private hospitals and more than 5,400 beds, according to a Ministry of Health official To date, some 70private healthcare projects have also received foreign investment Similarly, foreign investors have pouredcapital into the pharmaceutical industry (of more than US$300mn), although none of those projects involvepharmaceutical manufacturing

According to the GSO of Vietnam, there were a total of 956 hospitals in the South East Asian countryduring 2007, up from 842 in 2003 In 2008, the GSO statistics put the number of state-run hospitals at 974,which equates to a hospital:population ratio of 1:88,090, which is low compared with other countries at asimilar level of economic development In 2011, the number of hospitals increased by 3% y-o-y, to 1,059 in

2011 However, the number of hospital beds and doctors per 1,000 population stayed flat - at 2.01 and 0.71respectively GSO statistics show that there were just 1.75 hospital beds per 1,000 population in Vietnamduring 2008 Central hospitals in Vietnam are facing a shortage of beds to the extent that in some hospitals a

single bed is being shared by two or sometimes even three patients The Ministry of Health says thatdemand for beds in provincial hospitals is 115%, while in major cities it is 250%.

According to the Director of Viet Duc Hospital, Nguyen Tien Quyet, the main reason behind such

overloading at central hospitals is the low standard of health staff training at a community level, due towhich a large number of patients are transferred to these central hospitals Each year the health sector needsover 36,000 new health workers but the training system can only provide 24,000, according to the healthministry statements made in June 2008

A year later, in November 2009, overcrowding in hospitals returned to the headlines with Prime MinisterNguyen Tan Dung meeting with other ministers to address the problem Health minister Hguyen QuocTriey announced that Vietnam has only 18 hospital beds per 10,000 citizens and the government wants toraise this ratio to 25 beds, in line with global averages The government views the creation of day centresand increasing the number of family practitioners as a solution to this overcrowding

Key Risks To BMI's Forecast Scenario

The existence of rampant corruption will continue to hinder the country's progress in the pharmaceuticaland healthcare sector, bringing downside risks to its business environment In August 2012, it was revealedthat Vietnam's social health insurance funds are running a deficit, in part due to mismanagement of fund aswell as a result of corruption In March 2012, Doan Van Cuong, an ex-employee of the Can Tho socialinsurance department, made fraudulent claims He used the names of pregnant women and asked forpostnatal assistance worth VND119.5bn (US$5,730), even though these women were not his employees

Inflation will be a major factor in these high nominal market growth rates BMI expected general inflation

to spike at 18.6% in 2011 before dropping back to 5% per annum in the latter half of the 10-year forecastperiod Higher costs of production and the lack of a strict government policy of pharmaceutical pricecontrols makes it likely that retail pharmaceutical prices will rise over the forecast period

Vietnam has been affected in recent months by negative macroeconomic factors, which could have a

knock-on effect knock-on the development of the healthcare sector and knock-on pharmaceutical expenditure Vietnam, likemany of Asia's export-focused manufacturing economies, will remain vulnerable to a downturn in Westernmarkets where much of its output is consumed While economic conditions may put private sector FDIprojects in jeopardy, the trend for government economic stimulus packages has the potential to boost thepharmaceutical sector if government funds are invested in healthcare infrastructure

The Ministry of Health plans to build a new antibiotics plant, introduce incentives to attract foreign

investment and open GMP-compliant facilities courtesy of state-owned producer Vinapharm, which should

serve to boost market development However, the implementation of this programme remains dependent onfinancial resources, with the economy vulnerable to regional and global fluctuations, as well as politicalwill Similarly, the government may accelerate the implementation of its pricing restrictions, as well aspossibly reverse the price increases witnessed to date, which would threaten current forecasts

Risks to export forecasts are mostly to the upside, from the point of view of volumes produced A number

of foreign players have - or are in the process of establishing - export ventures in the country The fact thatsuch facilities comply with international norms will continue to stimulate export potential

The current trend for regional harmonisation provides the ideal background for progress of Vietnam'shealthcare and pharmaceutical industries However, whether such reform can be carried out successfully is amatter for much conjecture given the disorganised state of the sector Nevertheless, Vietnam's WTOmembership since early 2007 is expected to stimulate other similar deals in the region

Macroeconomic Forecasts

Economic Outlook

BMI View: The State Bank of Vietnam's surprise decision to cut its policy rate by 100 basis points from

10.00% to 9.00% suggests that policymakers are under increasing pressure to stimulate economic growth

in 2013 We believe that the latest move will help reinforce government efforts to boost private sector investment Given that money supply growth remains considerably low by historical standards, we believe that the risks of reigniting inflationary pressure remain manageable.

The State Bank of Vietnam (SBV) cut its policy rate (refinancing rate) by 100 basis points from 10.00% to9.00% on December 24 2012, just days before the General Statistics Office published its preliminaryestimate for GDP growth to come in slightly weaker than expected at 5.0% for 2012 (compared

with Bloomberg consensus of 5.2%) The surprise rate cut came amid growing concerns that mounting bad

debt across the banking sector is deterring banks from issuing new loans to businesses, and that this couldseverely undermine government efforts to reignite economic growth in 2013 From our perspective, themove also suggests that policymakers are under increasing pressure to adopt more aggressive measures tostimulate economic growth in an attempt to stem the growing number of bankruptcies among small-and-medium enterprises (SMEs) and rising unemployment This is closely in line with our view that the

Vietnamese government's economic agenda will remain skewed towards boosting growth in 2013

Recovery On Track

Vietnam - Real GDP, VNDbn (LHS) & % chg y-o-y (RHS)

Source: BMI, General Statistics Office

We are seeing evidence that credit conditions are beginning to improve and expect demand for privatesector credit to pick up gradually in H113 In addition to aggressive monetary policy easing by the SBV, thegovernment has also announced plans to slash corporate income tax rates by two percentage points to 23%

in 2013 We believe that lower lending rates and tax incentives will help to reinforce government efforts toattract foreign direct investment and boost private sector investment over the coming quarters

Inflation Still A Manageable Risk

International organisations including the World Bank and IMF have warned against easing monetary policytoo aggressively, which risks reigniting inflationary pressure Although we acknowledge these risks, wehighlight that the recent rebound in money supply growth remains considerably weak by historical

standards As the accompanying chart shows, prior to periods in which Vietnam experienced very highinflation (2008 and 2011), M2 money supply was expanding at a rate of 33.3% and 46.1% in 2007 and

2010, respectively This compares with M2 growth that came in at a record low of just 6.0% in 2012 and

our forecast for a mild pickup towards 11.0% for 2013, suggesting that inflation is likely to remain

manageable at under 7.0% in 2013

Credit Conditions To Improve In 2013

Vietnam - M2 Money Supply, VNDbn (LHS) & % chg y-o-y (RHS)

f = BMI forecast Source: BMI, State Bank of Vietnam

We acknowledge that the risk of a potential surge in commodity prices in 2013 - especially food prices,which make up around 40% of the consumer price index basket - could turn out to be a wildcard for

policymakers For now, we believe that overall conditions in Vietnam remain in favour of our forecast forreal GDP growth to come in relatively strong at 7.0% in 2013

Expenditure Breakdown

Private Consumption: We expect private consumption to grow at a robust pace of 5.6% in 2013 However,

we note that the risk of a sustained collapse in exports and further bankruptcies among SMEs could

potentially lead to widespread job losses in export-driven sectors Uncertainties over the outlook for

employment could, in turn, prompt households to cut back on spending

Gross Fixed Capital Formation: We foresee a significant pickup in private sector investment growth in

2013 We believe lending rates will gradually ease over the coming months as the effect of recent rate cuts

by the SBV begins to kick in We are also seeing evidence that credit conditions are improving

Accordingly, we expect gross fixed capital formation growth to accelerate from 4.3% in 2012 to 5.9% in2013

Public Spending: We expect total public spending to remain relatively resilient in 2013, expanding at a

respectable pace of 5.4% However, there is limited room for the government to increase spending furtherowing to concerns over the need to finance a potential bailout of ailing state-owned commercial banks

Net Exports: Net exports remain the biggest downside risk to our outlook for the Vietnamese economy,

although we expect external demand to pick up as we head into H113 Vietnam has been recording anaverage monthly trade surplus of US$172mn since June 2012 (resulting in a year-to-date surplus of US

$77mn) and we see the case for a substantial pickup in external demand on the back of a rebound in

regional growth over the coming month However, we believe that China's structural imbalances will return

in H213, becoming a drag on regional growth Accordingly, we still expect exports to expand at a moderatepace of 6.5% in 2013

Table: Vietnam - Economic Activity

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

Nominal GDP,

VNDbn 2 1,658,389 1,980,914 2,536,631 2,950,684 3,361,036 3,813,158 4,301,043 4,832,660 5,422,488 Nominal GDP,

Notes: e BMI estimates f BMI forecasts 1 at 1994 prices Sources: 2 Asian Development Bank, General Statistics Office; 3

World Bank/UN/BMI; 4 General Statistics Office.

Industry Risk Reward Ratings

Asia Pacific Risk/Reward Ratings

Geographic diversification may be a favourable strategy for multinational pharmaceutical companies, but it

is vital that firms recognise both the rewards and the risks present in a market, whether developed oremerging BMI's Risk/Rewards Ratings (RRR) tool, which provides a globally comparative and

numerically based assessment of a market's attractiveness, was established to address this In BMI's Q313

RRRs, the Asia Pacific region scores 54 out of 100, below Western Europe (67), but compares favourablyagainst Americas (51), Central and Eastern Europe (52) and Middle East and Africa (43) regions

For this quarter's update of the Pharmaceutical RRRs, the indicators used to assess the attractiveness of apharmaceutical market are now visible, improving the transparency of the rating system and enabling theidentification of regional or group outperformers across single indicators A market's RRR score is made up

of a sum of the Rewards score (Industry Rewards + Country Rewards) and the Risks score (Industry Risks +Country Risks)

The weight assigned to each subsector (such as Industry Rewards or Industry Risks) shows its influencewithin the final Rewards or Risks score and the final RRR score The Rewards component accounts for 65%

of the final RRR, while the Risks component accounts for 35%

Q313 Asia Pacific Pharmaceutical Risk/Reward Ratings

Rewards And Risks Scores

Source: BMI RRR scores out of 100, with 100 highest.

The Industry Rewards, Country Rewards, Industry Risks and Country Risks subsectors are each made up of

a number of indicators The weighting of each indicator (such as market expenditure which is used to assessIndustry Reward or economic diligence which is used to assess Country Risk) reflects its relative

importance to the pharmaceutical industry and subsequently the relative reward or risk that each factorposes to drug companies