Vietnam pharmaceuticals healthcare report q3 2014

21 Table: Prescription Drug Market Indicators, Historical Data And Forecasts Vietnam 2010-2018.. 23 Table: Patented Drug Market Indicators, Historical Data And Forecasts Vietnam 2010-201

Q3 2014 www.businessmonitor.com

VIETNAM

PHARMACEUTICALS & HEALTHCARE REPORT

INCLUDES 10-YEAR FORECASTS TO 2023

Healthcare Report Q3 2014

INCLUDES 10-YEAR FORECASTS TO 2023

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2014

Business Monitor International

© 2014 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

Political 11

Economic 12

Business Environment 13

Industry Forecast 14

Pharmaceutical Market Forecast 14

Table: Pharmaceutical Sales, Historical Data And Forecasts (Vietnam 2010-2018) 15

Healthcare Market Forecast 16

Table: Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 19

Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 19

Table: Private Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018) 20

Prescription Drug Market Forecast 21

Table: Prescription Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 22

Patented Drug Market Forecast 23

Table: Patented Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 24

Generic Drug Market Forecast 25

Table: Generic Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 26

OTC Medicine Market Forecast 27

Table: Over-The-Counter (OTC) Medicine Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018) 29

Pharmaceutical Trade Forecast 30

Table: Pharmaceutical Trade Data And Forecasts (Vietnam 2012-2018) 31

Table: Pharmaceutical Trade Data And Forecasts local currency (Vietnam 2012-2018) 32

Other Healthcare Data 32

Key Risks To BMI's Forecast Scenario 33

Macroeconomic Forecasts 34

Economic Analysis 34

Table: Foreign Direct Investment By Country Of Origin (Top Five) 38

Table: Vietnam - Economic Activity 39

Industry Risk Reward Ratings 40

Asia Risk/Reward Ratings 40

Vietnam Risk/Reward Ratings 46

Rewards 46

Risks 46

Market Overview 48

Industry Trends And Developments 50

Epidemiology 50

Healthcare Financing 52

Hospital Sector 54

Private Healthcare Sector 56

Healthcare Insurance 58

Healthcare And Pharmaceutical Reform 60

Research And Development 62

Biotechnology Sector 63

Clinical Trials 67

Regulatory Development 69

Regulatory Regime 69

Pharmaceutical Advertising 70

Intellectual Property Environment 71

Corruption 75

Pricing Regime 75

Reimbursement Regime 80

Pricing And Reimbursement Developments 81

Competitive Landscape 84

Pharmaceutical Sector 84

Domestic Industry 85

Foreign Industry 88

Traditional Medicines 90

Pharmaceutical Distribution 91

Pharmaceutical Retail Sector 92

Table: Key Aspects Of Good Pharmacy Practice In Developing Countries 93

Company Profile 94

DHG Pharmaceutical 94

Traphaco Pharmaceutical 96

Vietnam Pharmaceutical Corporation (Vinapharm) 98

Vietnam OPV Pharmaceutical Co 101

Vietnam Pharmaceutical Joint Stock Company (Ampharco) 103

Vidipha Central Pharmaceutical Joint Stock Company 106

Pfizer 108

Sanofi 110

Novartis 114

Merck & Co 116

GlaxoSmithKline 118

Demographic Forecast 120

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 121

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 122

Table: Vietnam's Key Population Ratios, 1990-2020 123

Table: Vietnam's Rural And Urban Population, 1990-2020 123

Glossary 124

Methodology 126

Pharmaceutical Expenditure Forecast Model 126

Healthcare Expenditure Forecast Model 126

Notes On Methodology 127

Risk/Reward Ratings Methodology 128

Ratings Overview 129

Table: Pharmaceutical Risk/Reward Ratings Indicators 129

Indicator Weightings 130

BMI Industry View

BMI View: Extensive bureaucracy and a lack of human resources in regulatory agencies are the two key

reasons for the market barriers that innovative pharmaceutical firms face in accessing Vietnam's

pharmaceutical market Despite these obstacles, we maintain that overreliance on imported

pharmaceuticals will ensure pharmaceutical firms' presence in the market over our forecast period

Headline Expenditure Projections

■ Pharmaceuticals: VND69,297bn (USD3.30bn) in 2013 to VND80,680bn (USD3.92bn) in 2014; +16.4%

in local currency terms and +19.1% in US dollar terms Forecast unchanged from previous quarter

■ Healthcare: VND222,374bn (USD10.57bn) in 2013 to VND254,491bn (USD12.37bn) in 2014; +14.4%

in local currency terms and +17.0% in US dollar terms Forecast reassessed 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 49.1 out of the maximum 100 inour newly improved RRR system The country scored above average for some indicators and sub-

indicators, including overall market expenditure, sector value growth and pensionable population

Consequently, with this moderate score, Vietnam is ranked 12th behind Thailand out of the 19 key markets

in Asia Pacific

Key Trends And Developments

■ In June 2014, CEO Tan See Leng stated that Malaysian hospital operator IHH Healthcare is focusing onexpanding further in emerging markets like China, Vietnam and Myanmar The company will particularlyfocus on China as Beijing is moving to ease curbs on foreign investment in joint venture hospitals inorder to improve its healthcare system, according to Leng The company will explore both organic andinorganic growth opportunities in Myanmar and Vietnam,

■ In May 2014, the Vietnamese health ministry reported a shortage of vaccines, due to companies reducingthe amount of vaccines imported in 2014 The companies could not sell the vaccines they had imported in

2013 The nation has two immunisation programmes: the national immunisation programme andimmunisation services The ministry supplies 11 free vaccines, including vaccines that preventtuberculosis, diphtheria, polio and whooping cough, under the national immunisation programme

■ In April 2014, the Drug Administration of Vietnam found that pharmaceuticals manufactured by severalIndian companies are Not of Standard Quality (NSQ), and has banned these firms from supplyingproducts to Vietnam According to news source DNA India at least 45 Indian pharmaceutical firm such as

Medley Pharmaceuticals, Marck Biosciences, UMedica Laboratories and Marksans Pharma are

now unable to supply their products to the South East Asian country In addition to the Indiancompanies, nine pharmaceutical companies from South Korea, two from Bangladesh, two from France,

and one from the US, Philippines, Pakistan, Indonesia, Germany, Cyprus and Canada were also bannedfrom supplying drugs to Vietnam.

BMI Economic View: Vietnam's external sector will remain stable over the coming years, as a combination

of strong macroeconomic dynamics, the ongoing de-dollarization of the economy and subdued inflationarypressures result in broad exchange rate stability Moreover, we highlight that strengthening trade dynamics,combined with rising foreign direct investment - on the back of significant improvements in the businessenvironment - will continue to bolster the country's external accounts

BMI Political View: Vietnam's political outlook is stable, and we see room for substantial reform over the

coming years, particularly with regard to the business environment Moreover, Vietnam is increasinglyopening up to the international community, which will be good for longer-term development That said,Vietnam has a poor record in terms of human rights protection, and there continues to be a lack of freedomfor the press and media

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

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 continue to weigh on public acceptance of the one-party

system, and street demonstrations to protest economic conditions could develop 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 20.7% in 2012

Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy

vulnerable to global economic uncertainties The fiscal deficit is dominated bysubstantial spending on social subsidies that could be difficult to withdraw

■ 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 and the upcoming ASEAN AEC in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnameseenterprises 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

VND69,297bn (USD3.30bn) in 2013, a 17.0%

year-on-year increase in local currency terms Over the

forecast period to 2018, BMI expects

pharmaceutical consumption to reach

VND139,832bn (USD7.06bn), equating to a

compound annual growth rate (CAGR) of 15.1% in

local currency and 16.5% in US dollar terms Over

the extended forecast period to 2023, the CAGRs

will be slightly lower, but will remain in double-digit

figures

Inflation will be a major factor in these high nominal

market growth rates However, we highlight that

there is considerable scope for increased

pharmaceutical consumption in a country where per

capita drug expenditure is just USD35.94 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 intohealthcare 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 bribeVietnamese healthcare professionals Patients pay doctors and nurses to avoid waiting lists and receiveabove-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

2009-2023

Pharmaceutical sales, USDbn (LHS) Pharmaceutical sales constant exchange rate, USDbn (LHS) Pharmaceutical sales, % of GDP (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

5 10 15

0 1 2 3

f = BMI forecast 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 plants compliant 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, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical sales, USDbn 2.056 2.425 2.837 3.295 3.923 4.602 5.341 6.167 7.062 Pharmaceutical sales, USDbn, % y-o-

y 20.17 17.91 17.01 16.16 19.05 17.29 16.06 15.48 14.52Pharmaceutical sales, VNDbn 39,316 50,082 59,214 69,297 80,680 93,549 107,960 123,342 139,832 Pharmaceutical sales, VNDbn, % y-o-

y 29.09 27.38 18.23 17.03 16.43 15.95 15.40 14.25 13.37Pharmaceutical sales constant

exchange rate, USDbn 1.870 2.382 2.816 3.295 3.837 4.449 5.134 5.865 6.650Pharmaceutical sales, USD per capita 23.1 27.0 31.2 35.9 42.4 49.3 56.7 64.9 73.8 Pharmaceutical sales, % of GDP 1.82 1.80 1.82 1.93 2.01 2.08 2.14 2.20 2.23

Pharmaceutical Sales, Historical Data And Forecasts (Vietnam 2010-2018) - Continued

Healthcare Market Forecast

In December 2013, we upgraded our forecast for

private health expenditure due to the government's

plan to raise hospitals fees between 2014 and 2018

This quarter, we have slightly upgraded the

healthcare expenditure forecast due to the receipt of

actual 2012 data from the World Health

Organization (WHO) We now forecast that the

sector will reach a value of VND769,394bn

(USD40.18bn) by 2023 Through to 2018 and 2023,

the sector is projected to grow at local CAGRs of

13.9% and 13.2% respectively (15.3% and 14.3% 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

in 2012 was 963 Meanwhile, the number of hospital beds and doctors per 1,000 people stayed flat - at 2.01and 0.65 respectively

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

Healthcare Expenditure Forecast

2009-2023

Health spending, USDbn (LHS) Health expenditure constant FX rate, USDbn (LHS) Health spending, % of GDP (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

20 40 60

0 2 4 6 8

f = BMI forecast Source: BMI, WHO.

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 2023

In the meantime, the government has outlined plans for the investment of up to USD1.5bn 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 USD241mn 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

In a workshop help by Vietnam Ministry of Health in August 2013 in collaboration between MedicalExcellence Japan and Japan's Ministry of Economy, Trade and Industry, the two countries reiterated Japan'ssupport towards Vietnamese healthcare through investment in three hospitals including: Bach Mai Hospital,Hue Central Hospital and Cho Ray Hospital

In an interview with local media, Vietnam News, Pham Le Tuan, deputy minister of health, stated thatpublic hospital fees will increase progressively until 2018, in line with Decree 85/2012/ND-CP In 2012, thegovernment increased the prices of three out of seven cost elements incurred by patients, which include thecost of medicines, chemicals, consumable materials, electricity, water, equipment maintenance and others.Under the plan developed by the Ministry of Health on increasing hospital fees, this will cover the

remaining four out of seven cost elements (beds, medical equipment, salaries, and other hospital operationcosts) These four elements were previously covered by the government.

Timeline Of Hospital Fees Increments

■ 2014: Hospital fees charged to patients will include the bed cost for inpatient services and part of the cost

of their surgery

■ 2015: Fees will include medical equipment used for patient treatment, hospitals' management andoperating costs and 20-30% of hospital staff's basic salary at provincial hospitals in mountainous regions,central highlands and district hospitals in Ha Noi and Ho Chi Minh City

■ 2016-17: Part of the hospital fee will be used to pay basic salary cost for staff at provincial hospitals,central government hospitals and district hospitals in two major cities of Ha Noi and Ho Chi Minh City

■ Post-2018: full cost recovery policy for medical services will be implemented across the board

The deputy health minister believes that with these increments in fees service quality will improve

considerably, as hospitals will be dependent on patients He added that 'more patients mean more money forhospital and their staff.' We highlight that this is potentially regressive as patients will have to shoulder theburden of healthcare costs due to low funding from the government In addition, we see a risk of

overcharging by hospitals if the implementation of these increments is not properly regulated Conversely,hospitals may also not generate sufficient revenues despite the implementation of the regulation In August

2013, Vietnam News reported that hospitals in Ha Noi ran into problems in applying new hospital fees due

to unclear regulations and staffing shortages

Nevertheless, as a result of these progressive increments, we have upgraded Vietnam's private healthcareexpenditure forecast, as the increased costs will be borne by patients rather than the government Through to

2018, we forecast that private health expenditure will increase at a compound annual growth rate of 14.4%(15.8% in US dollar terms) This growth rate is higher than government health expenditure (13.2%) Wehighlight that the government may spend savings generated elsewhere to boost health services, such asimproving health infrastructure

Table: Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Health spending, USDbn 7.178 8.346 9.286 10.575 12.375 14.294 16.372 18.802 21.517 Health spending, USDbn, %

y-o-y 18.21 16.27 11.27 13.87 17.03 15.51 14.53 14.85 14.44Health spending, VNDbn 137,256 172,398 193,834 222,374 254,491 290,606 330,955 376,049 426,029 Health spending, VNDbn, %

y-o-y 26.98 25.60 12.43 14.72 14.44 14.19 13.88 13.63 13.29Health expenditure constant

FX rate, USDbn 6.527 8.198 9.218 10.575 12.102 13.819 15.738 17.882 20.259Health spending, USD per

capita 80.6 92.8 102.3 115.3 133.7 153.1 173.8 198.0 224.8Health spending, % of GDP 6.36 6.20 5.97 6.20 6.34 6.47 6.58 6.70 6.80

f = BMI forecast Source: BMI, WHO.

Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Govt health spend, USDbn 3.342 3.775 3.953 4.486 5.229 6.011 6.840 7.801 8.853 Govt health spend, USDbn, % y-

o-y 31.29 12.97 4.71 13.51 16.55 14.95 13.80 14.06 13.49Govt health spend, VNDbn 63,893 77,976 82,502 94,345 107,534 122,195 138,267 156,026 175,296 Govt health spend, VNDbn, % y-

o-y 41.04 22.04 5.80 14.36 13.98 13.63 13.15 12.84 12.35Govt health spend, % total health

spend 46.55 45.23 42.56 42.43 42.25 42.05 41.78 41.49 41.15

f = BMI forecast Source: BMI, WHO.

Table: Private Healthcare Expenditure Trends, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Private health spend, USDbn 3.837 4.571 5.334 6.088 7.146 8.284 9.532 11.001 12.663 Private health spend, USDbn, %

y-o-y 8.77 19.14 16.69 14.14 17.37 15.92 15.07 15.41 15.11Private health spend, VNDbn 73,364 94,422 111,333 128,029 146,957 168,411 192,688 220,023 250,733 Private health spend, VNDbn, %

y-o-y 16.84 28.70 17.91 15.00 14.78 14.60 14.42 14.19 13.96Private health spend, % total

health expenditure 53.45 54.77 57.44 57.57 57.75 57.95 58.22 58.51 58.85

f = BMI forecast Source: BMI, WHO.

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 2018, we forecast that prescription medicines will be worth VND104,612bn (USD5.28bn) at consumerprices, posting a CAGR of 15.5% in local currency terms (thus somewhat above the wider pharmaceuticalmarket) In percentage terms, at this point, prescription drugs will account for 74.8% of the total market,from 73.6% in 2013, driven by expanded access to formal healthcare in rural areas

Demographic and environmental trends will be some of the key drivers of the prescription market in

Vietnam 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

Prescription Drug Market Forecast

2009-2023

Prescription drug sales, USDbn (LHS) Prescription drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

2.5 5 7.5 10

0 20 40 60 80

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

One therapeutic area that has strong potential is oncology At an international scientific conference in April

2013, Mai Trong Khoa, deputy director of Hanoi-based Bach Mai Hospital, stated that Vietnam reportsabout 110,000 new cases of cancer annually, with over 73% of patients dying from the disease - one of thehighest rates in the world He added that the average death rate in developing countries is 67.8% while thatfor developed countries is 49.4% In January 2014 a representative from the Vietnam Social InsuranceAgency stated that cancer drugs account for a large percentage of insurance expenses Moreover,

prescribing patterns seem to be influenced by economic considerations, with drug companies payingcommissions to doctors who promote certain types of product The HCMC authorities conducted an

investigation into the practice, with findings revealing that a number of doctors were in receipt of more than

VND500mn (USD26,300) 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 (USD315,000) 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 Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Prescription drug sales, USDbn 1.497 1.772 2.080 2.424 2.896 3.408 3.969 4.598 5.283 Prescription drug sales, USDbn, % y-o-y 20.50 18.38 17.39 16.55 19.45 17.68 16.45 15.87 14.90 Prescription drug sales, VNDbn 28,622 36,603 43,420 50,982 59,553 69,283 80,224 91,964 104,612 Prescription drug sales, VNDbn, % y-o-y 29.45 27.88 18.62 17.42 16.81 16.34 15.79 14.63 13.75 Prescription drug sales, % of total sales 72.8 73.1 73.3 73.6 73.8 74.1 74.3 74.6 74.8

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

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

2023, we expect the patented drug sector to reach

VND42,723bn (USD2.2bn), but represent a lower

percentage (18.04% versus 22.3% in 2013) of the

total market Over the 2013-2023 period, patented

drugs are expected to post a CAGR of 10.7% in local

currency (11.7% in US dollar terms) - 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 forviolators

Corruption also has a role to play in drug prices, with commissions paid to pharmacists and doctors by salesrepresentatives and distributors to persuade them to prescribe their product to push up the retail price ofmedicines Such practices can only damage the industry as a whole, putting many patented products beyondthe budgets of the majority of the Vietnamese population

Patented Drug Market Forecast

2009-2023

Patented drug sales, USDbn (LHS) Patented drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

1 2 3

0 25 50 75 100

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, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Patented drug sales, USDbn 0.482 0.560 0.644 0.736 0.861 0.991 1.129 1.278 1.434 Patented drug sales, USDbn, % y-o-

y 18.28 16.19 15.04 14.30 16.98 15.17 13.88 13.21 12.17Patented drug sales, VNDbn 9,210 11,560 13,438 15,474 17,702 20,154 22,821 25,561 28,386 Patented drug sales, VNDbn, % y-o-

y 27.06 25.52 16.24 15.15 14.40 13.85 13.23 12.01 11.05Patented drug sales, % of

prescription sales 32.2 31.6 30.9 30.4 29.7 29.1 28.4 27.8 27.1Patented drug sales, % of total

sales 23.4 23.1 22.7 22.3 21.9 21.5 21.1 20.7 20.3

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

Generic Drug Market Forecast

Although the overall generic drug market is sizeable,

standing at around VND35,508bn (USD1.69bn) - or

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

2013, 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 in

theory, 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 VND137,464bn (USD7.18bn) in 2023, accounting for over 58.1% of thetotal market (up from the calculated 51.2% in 2013) Vietnam offers strong prospects for generic marketgrowth due to low consumer purchasing power However, a number of obstacles still remain, such as awidespread 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 an interview with local media VietNamNet Bridge, Vietnam's former deputy Minister of Health, Dr LeVan Truyen, stated in January 2014 that the population is still reluctant to use domestically producedpharmaceuticals Some of the key reasons mentioned include:

■ Several domestic pharmaceutical firms failing to 'provide enough evidence about the effects of theirdrugs compared with imported drugs', consequently 'deepening people's doubt on the effectiveness andreliability of local drugs'

■ Some drugs used in specialised and central hospitals are still protected by patents, preventing local firmsfrom producing them The situation is made worse by free trade agreements that may extend patent terms

Generic Drug Market Forecast

2009-2023

Generic drug sales, USDbn (LHS) Generic drug sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

2.5 5 7.5 10

0 20 40 60 80 100

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

Table: Generic Drug Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Generic drug sales, USDbn 1.015 1.212 1.436 1.689 2.035 2.417 2.840 3.320 3.850 Generic drug sales, USDbn, % y-o-y 21.59 19.42 18.48 17.55 20.52 18.75 17.51 16.92 15.95 Generic drug sales, VNDbn 19,412 25,043 29,982 35,508 41,852 49,129 57,404 66,403 76,226 Generic drug sales, VNDbn, % y-o-y 30.61 29.01 19.72 18.43 17.86 17.39 16.84 15.68 14.79 Generic drug sales, % of prescription

sales 67.8 68.4 69.1 69.6 70.3 70.9 71.6 72.2 72.9Generic drug sales, % of total sales 49.4 50.0 50.6 51.2 51.9 52.5 53.2 53.8 54.5

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

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 VND56,611bn (USD2.96bn) in 2023, up from

VND18,315bn (USD870mn) in 2013 At the same

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

percentage is expected to fall to 23.9%, from 26.4%,

due to the rising value of the prescription sector and

more expensive imports, and 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 growingsegments 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

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

OTC Medicine Market Forecast

2009-2023

OTC medicine sales, USDbn (LHS) OTC medicine sales, % of total sales (RHS)

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f0

1 2 3 4

0 20 40 60 80 100

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

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 be

sold 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: Over-The-Counter (OTC) Medicine Market Indicators, Historical Data And Forecasts (Vietnam 2010-2018)

Pharmaceutical Trade Forecast

Vietnam is highly reliant on pharmaceutical imports

Latest data from UN Commodities Trade Database

(UNComtrade) showed that the country imported

USD1.8bn worth of pharmaceuticals in 2012 while

exporting USD77.1mn worth of products in the same

period Imported pharmaceuticals were mainly from

France (USD235.9mn), India (USD230.5mn), South

Korea (USD164.4mn), Germany (USD143.4mn) and

Italy (USD93.9mn) Meanwhile, the country

exported to countries such as Germany (USD9.7mn),

Nigeria (USD5.6mn), Cambodia (USD5.5mn), Japan

(USD4.2mn) and India (USD4.2mn) Given that the

pharmaceutical sector is still in its infancy, we

expect such reliance on imports to continue From

2013 to 2018, we forecast that pharmaceutical

exports and imports will see local CAGRs of 20.9%

and 15.7% respectively in US dollar terms

Data from UNComtrade do not specify the type of

finished pharmaceuticals traded (i.e whether they are patented or generic drugs) However, given thatVietnam is a developing country with low per-capita pharmaceutical and healthcare expenditure (USD35.94and USD115.34 respectively in 2013), BMI believes that the majority of the drugs consumed in Vietnamare generics imported from overseas BMI highlights this reliance on imported products as a commercialopportunity for foreign drugmakers

However, while the pharmaceutical sub-sector may be growing at a double-digit rate, we caution that not allforeign drugmakers will be able to capitalise on this growth opportunity Doubts regarding drug quality andcounterfeit drug problems are two reasons why people prefer imported products in developing markets such

as Vietnam Consequently, we believe that careful branding and marketing is a vital method by which firmscan capture market share in Vietnam and other developing countries Companies that are able to engagephysicians (through their salesforces), initiate differential pricing policies and launch various corporatesocial responsibility programmes are likely to be seen in a more positive light than those that fail to do so - and are therefore more likely to succeed in Vietnam

Pharmaceutical Trade Forecast

2009-2018

Pharmaceutical exports, USDmn Pharmaceutical imports, USDmn

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f0

2,000 4,000 6,000

f = BMI forecast Notes: Comtrade Code = 3002,3003,3004 Source: United Nations Comtrade Database DESA/UNSD, BMI.

Free trade agreements are seen as an obstacle to the use of domestic drugs due to patent

conditions BMI notes that Vietnam is one of the member countries under the Trans-Pacific Partnership(TPP) Interest groups from a number of countries such as Malaysia, Australia and New Zealand havewarned of potential increases in drug prices, as there could be an extension of intellectual property rightsinvolving pharmaceuticals.Should member countries agree to extend patent terms, all generic drug

companies will be affected

At the same time, the Vietnamese government is keen to increase domestic drug use in the country InDecember 2013, the Drug Administration of Vietnam (DAV) launched a programme to raise awarenessamong doctors, hospital managers and the community on the use of locally produced drugs In addition topromoting local drugs consumption, the government is aiming to implement universal healthcare by the end

of 2014 The country may opt to subsidise more locally made drugs under the scheme, which would bringdownside risks to foreign drugmakers

Table: Pharmaceutical Trade Data And Forecasts (Vietnam 2012-2018)

2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical exports, USDmn 77.14 93.77 116.47 141.94 170.53 204.33 242.54 Pharmaceutical exports, USDmn, % y-

o-y 22.17 21.55 24.21 21.87 20.14 19.82 18.70Pharmaceutical imports, USDmn 1,840.89 2,138.42 2,545.83 2,960.58 3,406.47 3,899.60 4,426.63 Pharmaceutical imports, USDmn, % y-

o-y 16.41 16.16 19.05 16.29 15.06 14.48 13.52Pharmaceutical trade balance, USDmn -1,763.75 -2,044.65 -2,429.37 -2,818.64 -3,235.94 -3,695.27 -4,184.09

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

Table: Pharmaceutical Trade Data And Forecasts local currency (Vietnam 2012-2018)

2012 2013 2014f 2015f 2016f 2017f 2018f

Pharmaceutical

exports, VNDmn 1,610,215 1,971,853 2,395,170 2,885,633 3,447,230 4,086,539 4,802,311 Pharmaceutical

exports, VNDmn, %

y-o-y 23.45 22.46 21.47 20.48 19.46 18.55 17.52Pharmaceutical

imports, VNDmn 38,425,213 44,968,828 52,355,067 60,188,602 68,861,822 77,991,928 87,647,320 Pharmaceutical

imports, VNDmn, %

y-o-y 17.63 17.03 16.43 14.96 14.41 13.26 12.38Pharmaceutical trade

balance, VNDmn -36,814,998 -42,996,975 -49,959,897 -57,302,969 -65,414,592 -73,905,389 -82,845,009

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

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 USD1mn

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 USD300mn), although none of those projects involvepharmaceutical manufacturing

In 2012, the GSO statistics put the number of state-run hospitals at 963, which equates to a hospital: millionpopulation ratio of 1:11, which is low compared with other countries at a similar level of economic

development Meanwhile, the number of hospital beds and doctors per 1,000 population stayed flat - at 2.01and 0.65 respectively Central hospitals in Vietnam are facing a shortage of beds to the extent that in somehospitals a single bed is being shared by two or sometimes even three patients The Ministry of Health saysthat demand 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

In August 2013, in bid to tackle overcrowding in central hospitals, the Ministry of Health launched asatellite hospital programme Through to 2015, these hospitals will perform all techniques transferred bycentral hospitals Despite it being a positive aim to ease overcrowding, Nguyen Thi Xuyen, deputy Minister

of Health stated that the programme was already facing difficulties such as shortages of medical

professionals and facilities

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 (USD5,730), even though these women were not his employees

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 Analysis

BMI View: Latest GDP figures show that the Vietnamese economy grew by 5.0% y-o-y in Q114, and we

believe that our 2014 real GDP growth forecast of 5.9% remains in sight Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive.

Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by5.0% year-on-year (y-o-y) in Q114, slightly faster than the 4.9% print registered in the Q113 Although itshowed a deceleration from 6.0% recorded in Q413, we believe that the economy is still on track to hit our

2014 growth forecast of 5.9% in 2014 This would mark a slight acceleration from the 5.4% registered in

2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in

2014 We believe that the economy will be driven by a strengthening of private consumption, continuedforeign direct investment into key areas of the economy, a more robust external sector, and a rebound inmanufacturing activity over the coming quarters That said, trend growth for the Vietnamese economy willaverage a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years

Still-Strong Growth

Vietnam - Real GDP Growth, (% chg y-o-y)

Source: GSO, BMI

A breakdown of the data show that all sectors of the economy witnessed an acceleration in growth over thequarter: agriculture, forestry and fisheries, which accounts for approximately 13% of GDP grew by 2.4% y-o-y in Q114, while the industrial and construction sectors, which account for 40% of GDP expanded by4.7% y-o-y Importantly, the services sector which accounts for the lion's share of the economy at 47% ofGDP, accelerated by a stellar 6.0% in Q114, contributing a whopping 2.8 percentage points of the overallgrowth figure Going forward, we expect that the manufacturing, construction and service sectors willcontinue to do well on the back of policy driven efforts to stimulate growth

Services Taking The Lead

Vietnam - Breakdown of GDP By Component (% chg y-o-y) & Share % (RHS)

Source: GSO, BMI

Government Policy To Ensure Growth Remains Strong

We believe that government policies aimed at promoting balanced economic growth, improving the stability

of the banking system, diversifying exports, attracting foreign investment and attracting investment ininfrastructure bode well for the economic outlook In terms of promoting balanced growth, we note that theState Bank of Vietnam (SBV) has continued to rein in inflation, which, at 4.8% y-o-y in the first quarter,remains near record lows and well below the central bank's target of around 7.0% The slight deceleration ineconomic activity in Q114, combined with the weak inflation data over the period prompted the SBV to cut

its refinancing rate from 7.0% to 6.5% in March Although we do not expect further cuts this year (see: Downside Risks To Interest Rate Forecast, March 21), the central bank has adopted a dovish tone, and

could step in again should it feel that the economy needs more stimulus With regard to banking sectorreform, the SBV continues to push forward with reforms aimed at improving the stability of the sector andincreasing credit to the economy Two key policies are the reduction in non-performing loans, which

according to Moody's, stands at approximately 15%, as well as offloading bad debt off of bank's balance

sheets and on to the newly created Vietnam Asset Management Company (VAMC) By the end of 2013 theVAMC had purchased approximately US$1.9bn worth of bad debt, and it aims to increase the pace ofpurchases over the coming months Combined, these policies should help stimulate credit growth over thecoming quarters, which will help underpin broader economic activity

External Sector To Boost Growth

Vietnam - Trade Balance (US$mn) & Three-Month Moving Average

Source: GSO, BMI

External Sector To Provide Tailwind

We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity inthe coming quarters From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, whichhelped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend toremain in place Indeed, the Vietnamese government has been making substantial efforts to promote tradeand investment ties with other countries, and we believe it will help underpin exports over the comingmonths A case in point was the fourth round of negotiations between Vietnam and South Korea for abilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations

by the end of 2014 Moreover, Vietnam has been forging very strong trade and investment ties with Japan inorder to attract funding and expertise to invest and develop the country's infrastructure and manufacturingsectors

Table: Foreign Direct Investment By Country Of Origin (Top Five)

Origin Projects Value US$mn Origin Projects Value US$mn

South Korea 76 534 Singapore 20 2,247

Hong Kong 21 265 Japan 50 299

British Virgin 6 239 Taiwan 5 84

Risks To Outlook

Although we believe that the Vietnamese economy is on track to hit our 5.9% growth target, we see

downside risks to this view First, we still forecast an impending slowdown in China, which would weigh

on regional growth in general Second, public sector capital investment and spending was flat y-o-y in Q114and capital investment of the state budget actually contracted by 2.3% y-o-y over the period While we donot see this as a large risk, if public spending were to lag, it could act as a drag on headline growth Lastly,

we highlight that the pace of reforms will be crucial to sustaining economic growth in 2014 and beyond.Failure by the government to restructure SOE's and provide a framework for foreign investors to participate

in the equitisation of these companies in a timely manner could weigh on investment and growth

Table: Vietnam - Economic Activity

2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Nominal

GDP,

VNDbn 3 1,809,149 2,157,829 2,779,880 3,245,419 3,584,261 4,012,848 4,494,845 5,033,220 5,616,366 6,269,265 Nominal

GDP,

USDbn 3 101.6 112.9 134.6 155.5 170.4 195.1 221.1 249.0 280.8 316.6 Real GDP

growth, %

y-o-y 3 5.4 6.4 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4 GDP per

capita,

USD 3 1,152 1,267 1,497 1,712 1,859 2,108 2,368 2,643 2,957 3,309 Population

, mn 4 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95 95.7 Industrial

production

, % y-o-y,

ave 1,5 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemploy

ment, %

of labour

force, eop

Notes: e BMI estimates f BMI forecasts 1 at 1994 prices; 2 Urban Area Only Sources: 3 Asian Development Bank,

General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.

Industry Risk Reward Ratings

Asia 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 or

emerging 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 Q314

RRRs, the Western Europe region scores 67 out of 100, comparing well with Central and Eastern Europe(52), the Asia Pacific (53), the Americas (49) and the Middle East and Africa (42) regions

The indicators used to assess the attractiveness of a pharmaceutical market are now visible, improving thetransparency of the rating system and enabling the identification of regional or group outperformers acrosssingle 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%