New tendering law challenges foreign pharma producers

While the new Law on Tendering is expected to afford greater equality among local tender participants (and promote access for small and medium sized enterprises), one concerning change is the law’s promotion of local players in the drug market at the expense of foreign players. The Law on Tendering now explicitly provides preferential treatment for drugs produced domestically, which is expected to have considerable impact on foreign investors active in this burgeoning market.

The extent of preferential treatment for domestic pharmaceutical products under the new law

Prior to the enactment of the new Law on Tendering, there was no clear preferential treatment given to domestic drugs under the Vietnamese law. In fact, the only minor mention was Article 16 of Circular 01/2012/TTLT-BYT-BTC dated January 19, 2012, pursuant to which the relevant authority would give priority to the winning tender for drugs produced domestically (but only for drugs of similar quality and a price no higher than the drugs imported at the time of tender).

Under this circular, the criterion for selecting the winning bid was based on both price and the quality of the pharmaceutical products. No other preferential treatment existed.

However, the new Law on Tendering introduces a protectionist approach, which directly and indirectly adversely affects foreign players in this market. The preferential treatment afforded by the circular  is drastically broadened under the new law – almost to the extent that it drives foreign players out of the market.

As a direct impact, the Law on Tendering now prohibits those offering tenders from providing imported drugs if there are domestic drugs available that can fully satisfy the requirements on medical treatment, price and availability (according to criteria published by the Ministry of Health). To add a further layer of restriction, Decree 63/2014/ND-CP dated June 26, 2014 guiding the tendering selection provisions of the Law on Tendering states that after applying all preferential treatments, if there are tenders that are ranked equally, then the tender that involves higher domestic production costs and using more local employees will prevail.

As an indirect impact, it should be observed that the Law on Tendering sets a preferential treatment regime for tenderers participating in domestic and international tenders. This does not just apply to pharmaceutical players. For the supply of goods, tenderers that participate in domestic or international tenders to supply goods, in which domestic production costs account for 25 per cent of production or more, will be entitled to preferential treatment. For service supply, foreign tenderers in partnership with domestic tenderers, in which domestic tenderers take over 25 per cent or more of the work value of the tender package, will be entitled to preferential treatment.

While these provisions are applied to all industries, among the hardest hit will be those in the pharmaceutical industry.

Ambiguity in the law

While the term, “domestic pharmaceutical products”, is extensively used in the law, a clear definition of the term has not been provided. As these domestic products are given preferential treatment under the Law on Tendering, its ambiguous system of classification is problematic. There has been a notable rise in disputes concerning the precise classification of “foreign” pharmaceutical products for which some of the production stages, such as packaging, are conducted in Vietnam.

The guiding Decree 63/2014/ND-CP fails to address this matter. This is despite commentators previously stating that it was a pressing matter that had to be addressed. The lack of clarity has led to industry-wide uncertainty as to whether these “foreign” pharmaceutical products processed in Vietnam are considered “domestic pharmaceutical products”, thereby creating roadblocks in their tendering activities.

As the protectionist provisions of the Law on Tendering come into force, foreign pharmaceutical players in Vietnam are expected to face greater pressure in building a presence in Vietnam. This comes at an inconvenient time when the number of imported drugs by domestic pharmaceutical companies is on the rise. This also comes at a time when the Vietnamese government has undertaken to ramp up efforts to promote foreign direct investment into the economy.

Together with the already stringent restrictions against foreign pharmaceutical players in Vietnam, the Law on Tendering seems to pave the way for an environment that fosters an almost monopolistic position by domestic pharmaceutical companies. While Vietnam has a competition law regime in place, these provisions effectively compromise their effectiveness in the pharmaceutical industry.

As the demand for life-changing innovations grow ever more important, the only real winners in this industry are domestic players. However, in the bigger picture, as the industry competitiveness is driven out, the losers will not just foreign players, but the Vietnamese economy as a whole.

(*) Partner of LNT & Partners, (**) Associate of LNT & Partners