New tendering law challenges foreign pharma producers

On November 26 2013 the National Assembly passed the new Law on Tendering, which came into force on July 1 2014. The new law (which replaces the 2005 Law on Tendering) relates to state management of the tendering process and governs the responsibilities of concerned parties as well as tendering activities.

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

Extent of preferential treatment

Before the enactment of the new law, no clear preferential treatment was given to domestic drugs under Vietnamese law. The only minor mention was Article 16 of Circular 1/2012/TTLT-BYT-BTC (January 19 2012), pursuant to which the relevant authority gave priority to 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 criteria for selecting the winning bid was based on both the price and quality of the pharmaceutical products. No other preferential treatment existed.

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

As a direct impact, the law now prohibits those offering tenders from providing imported drugs if there are domestic drugs available that 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 (June 26 2014), which guides the tendering selection provisions in the new law, states that if any tenders are ranked equally after applying all preferential treatments, the tender that involves higher domestic production costs and uses more local employees will prevail.

As an indirect impact, the law sets a preferential treatment regime for participants in domestic and international tenders. This does not apply only to pharmaceutical players. Participants in domestic or international tenders to supply goods in which domestic production costs account for 25% of production or more will receive preferential treatment. For the supply of services, foreign tenderers in partnership with domestic tenderers which give 25% or more of the work value of the tender package to domestic tenderers will receive preferential treatment.

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

Ambiguity in new law

While the term ‘domestic pharmaceutical products’ is used extensively in the law, a clear definition has not been provided. As domestic products are given preferential treatment, the law’s ambiguous system of classification is problematic. The number of disputes concerning the precise classification of ‘foreign’ pharmaceutical products which are partly produced (eg, packaging) in Vietnam has already increased considerably.

Decree 63/2014/ND-CP (which guides the new law) fails to address this matter, despite commentators previously stating that it was a pressing issue that had to be addressed. The lack of clarity has led to industry-wide uncertainty as to whether foreign pharmaceutical products processed in Vietnam should be considered domestic pharmaceutical products, thereby creating roadblocks in tendering activities.

Comment

As the protectionist provisions of the law come into force, foreign pharmaceutical players are expected to face greater obstacles in building a presence in Vietnam. This comes at an inconvenient time, when the number of drugs imported by domestic pharmaceutical companies is increasing. It also comes at a time when the government is increasing its efforts to promote foreign direct investment into the economy.

Together with the already stringent restrictions against foreign pharmaceutical players in Vietnam, the new law seems to pave the way for an environment that fosters an almost monopolistic position for 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 increases, the only real winners in this industry are domestic players. However, as the industry’s competitiveness is lessened, the losers will be not only foreign players, but also the Vietnamese economy as a whole.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

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