By Robert Hall
With an economic potential still largely untapped, the Greater Mekong Region (GMR) should be front and center in the plans of any pharma, medical device, or biotech organization looking to expand its market in Asia. The GMR is a natural economic area bound together by the Mekong River and includes the countries of Cambodia, Peoples Republic of China (PRC, specifically Yunnan Province and Guangxi Zhuang Autonomous Region), Laos, Myanmar, Thailand, and Vietnam. This vast catchment area covers around 2.6 million square kilometres and has a combined population of over 325 million.
The region can be viewed as the last major industrialization zone in Asia. The first was Japan in the 1950s, followed by the Newly Industrialized Economies (NIEs) in the 1980s, the Association of Southeast Asian Nations (ASEAN) in the 1990s, and the juggernaut that is China from 2000 onward.
China Is Not The Only Show In Town
While parts of China and Thailand are situated in the Greater Mekong Region, they are at an advanced stage of economic development. Both are experiencing steep wage inflation and rising costs, which eat into margins.
Geographic diversification is important for obvious reasons such as market share, mitigating risk, and avoiding putting all your corporate eggs in one basket (albeit a rather large China-shaped basket). Vietnam, Cambodia, Laos, and Myanmar have thrown open the doors to international business in recent years. Foreign pharma and medical device companies that have taken the plunge early, many of which are mid-tier multinationals, are reaping the rewards in terms of market share.
The largest of the four emerging Mekong economies is Vietnam, which has a population of 94 million. Since moving away from a centrally planned economy, the country has lifted itself out of poverty and is now a lower-middle-income economy. Vietnam’s economic rise has been extraordinary, and China is the only country in Asia that has grown faster since the year 2000. GDP growth is around 6.5 percent per annum and is predicted to hold at this rate to 2020.
Vietnam has so far been more open to foreign investment than its near neighbors, though they are also becoming more open. This openness has enabled Vietnam to rapidly transform, gaining more technology, intermediate products, and value-added services.
Midrange multinational pharma and medical device companies have set up operations in Vietnam, where they are finding a less competitive market and more straightforward regulation than in much of the rest of the Asian region. The big global players across life sciences such as J&J, Medtronic, Roche, and Abbott have been expanding in Vietnam in recent years, but there is room and appetite for additional providers.
Part of the attraction for foreign investors is the interesting demographics at play. The country has a faster-growing population than most countries in Asia. The median age of workers is 28 years old (in China it is 40). Vietnam also has a very high literacy rate at 94 percent (the global average is 86 percent), and the country has a high proportion of women in the workforce at 73 percent (the global average is 50 percent).
The government has created a politically stable environment and has invested significantly in upgrading infrastructure and facilities for Vietnam’s imports and exports. This means the physical challenges of getting your product into the country and distributed to market are much less than they were five years ago.
Wind the clock back 10 years, and foreign investors were expecting a big surge in pharma and medical device spending in Vietnam. Fuelled by population growth and rising incomes, this increased spending on therapies seemed inevitable. Unfortunately, it didn’t materialize, at least not right away. At the time, the Vietnamese people weren’t willing to spend much on health and well-being, and there was a real lack of information on available medical services. Coupled with a chronic lack of qualified medical professionals, the spending surge was delayed.
Today it is a very different picture. Spending on private healthcare in Vietnam has grown 241 percent over the last decade. Vietnam’s healthcare spending now makes up a rather healthy 7.2 percent of GDP, the highest in the ASEAN region.
This new demand for medical services is only going to grow. The government is investing significantly in medical facilities, and there is a long way to go before it is fit for its population size. The biggest obstacle for foreign pharma companies is the Vietnam Ministry of Health’s (MOH) policy to favor domestic drug manufacturers. The MOH wants domestic drug companies to account for around 70 percent of the market, which squeezes the space for pharma multinationals. Many observers consider this 70 percent target unsustainable in the long term as the domestic R&D and production capability is a long way behind that of the leading international pharma companies.
Pricing has been an issue for foreign pharma companies that face a domestic market still predominantly buying low-priced unbranded generics. In the past, foreign providers have been put off by the Vietnam market due to this demand dominance of cheaper unbranded products. However, this is starting to change as altering demographics (e.g., higher proportion of women in work and a population shift from rural to urban) fuel income rapid growth, and the demand for branded therapies are opening up opportunities for foreign providers of branded, higher quality pharmaceuticals and medical devices.
Vietnam: The Fastest Growth In Asia
Vietnam drug stocks in domestic players showed huge gains in 2016; Domesco rose 141 percent at one point during the year, DHG Pharmaceutical (the largest pharma company in Vietnam) was up by 44 percent, and Traphaco (the second largest) had risen by 76 percent. This strong growth underpins the attractiveness of the sector and the foreign major players in pharma and medical devices want a larger slice of the market. The pharma market is forecast to increase from USD 4.2 Billion in 2015 to USD 7.2 Billion by 2020 and maintain double digit growth through 2025 according to BMI Research. The industry will keep growing at around 10 to 15 percent a year, said Chris Freund, founder of Private Equity specialist firm Mekong Capital Ltd.
Foreign majors that have an established operation in the country such as Sanofi and J&J have reported strong growth in 2016. J&J reported a growth of 25 percent for their pharmaceuticals division and growth of 15 percent for their medical devices business.
With a young, growing population (75 percent born after 1975), higher incomes, and longer lifespans, the market size and opportunities for foreign pharma and medical device companies are growing at a faster rate than other Asian markets.
Cambodia has a population of 15 million, yet it operates a very open economy with very low tariffs and a relaxed regulatory regime. Over 90 percent of its exports are goods manufactured, and this drove GDP growth to 7 percent last year. This growth has helped Cambodia start to climb out of poverty and toward lower-middle-income status.
The country’s population is young, with estimates that a staggering 40 to 50 percent are under 15 years old. A boom in the birth rate in the 1980s and 1990s, huge population shifts from rural to urban living, and no census carried out since the 1960s make government planning a little chaotic.
However, despite the challenges, Cambodia is a country on an upward curve. Healthcare spending makes up 5.8 percent of GDP and is increasing in a high-growth economy.
Infrastructure remains a bigger problem than in Vietnam, but that is changing, and the country has an appetite to improve its economy and quality of life. Opportunity is certainly here for foreign pharma and medical device companies, but it will remain a challenge to identify and hire an experienced team that can gain access to the market properly. The right hiring strategy and investment in training will be key in what is a country with a tiny pool of proven industry talent.
With a population of just 6.5 million, Laos plays the smallest part in the GMR. The domestic market is very small, which understandably dissuades much foreign investment.
For foreign investors, gaining a major foothold in the Laotian pharma and medical device market remains a big challenge for the near future. This stems from much of the population’s entrenched use of traditional medicines.
This is not to say that spending on health is not increasing. In 2015 spending on healthcare was at USD $111 million and is predicted to rise to USD $275 million by 2025. This represents an annualized growth rate of an impressive 9.5 percent.
However you look at it, Laos will always be a small market, but there are opportunities here, especially in the cheaper value medical device segment.
Myanmar has been fascinating to watch recently. Its first freely elected government in more than half a century has coincided with an impressive GDP annual growth rate of 8.5 percent. It is rich in natural resources, and this is fueling economic growth.
Myanmar has a population of 51 million that is young and has a high literacy rate. The government, legal system, and people are very open to change and foreign investment.
The single biggest obstacle to further foreign investment is Myanmar’s infrastructure, which is lacking, to say the least. The issues are many and include electricity capacity unable to meet demand, limited mobile and communications coverage, low government investment in social infrastructure and services, and a road and rail network in desperate need of upgrade. Significant upgrades are at various stages of planning, seeking PPP (Public Private Partnership) investment or already under construction. Market analysts who watch this region believe Myanmar will be the next Vietnam in terms of economic opportunity, and foreign investors in for the long haul should see strong returns. (e.g., foreign pharma companies from India that have entered the market early in Myanmar, including Sun Pharma, Dr Reddy’s and Cipla, have gained significant hold on the market share.)
While the economy is growing at an impressive rate, and health spending is increasing, it is expected by industry observers that the government healthcare system will face challenges with growth and funding in the coming years. The private sector will likely plug much of the gap, and we have already seen strong revenue growth from private hospitals and foreign diagnostic and medical device providers.
Where To Place Your Chips
Among the volatile and unpredictable emerging markets throughout Asia, Vietnam and Myanmar have shown strong growth in their economies and appetite for pharma and medical devices. They are very different countries at different stages of economic and political development, but both are on a similar upward trajectory. Thus, Vietnam and Myanmar represent two of the most exciting countries in Asia where companies can make a huge impact on quality of life while also broadening their market.
Vietnam is certainly the established emerging market force with good infrastructure, a regulatory environment ready for foreign investors, and a population with an appetite for pharma and medical device goods and services. Establishing partnerships/joint ventures with domestic players should provide the market-entry point that will get around Ministry of Health’s restriction on foreign drug companies and avoid much of the red tape involved in setting up a wholly owned subsidiary. To build an effective partnership or JV, a strong business development team with connections on the ground is essential.
Myanmar represents more of a challenge, but its demographics, willingness to embrace change, and rapidly changing landscape offer companies a chance to get a significant foothold in the next big Asian growth story. Myanmar will be the next Vietnam, and with the right strategy, it will be exciting for any pharma or medical device company to venture into this market. Foreign companies with patience should see strong returns over time here and have the opportunity to bring positive change to many people’s lives.
Building A Talented Leadership Team Is A Challenge
Experienced industry talent in the emerging Mekong Delta countries is scarce, and companies regularly compete for the best. With a more mature market, Vietnam has the lion’s share of higher-quality experienced pharma and medical device professionals. Building a commercial team with good distribution networks hasn’t been easy, but it is possible for companies with a strong brand that are willing to be flexible.
Leadership-level talent of the right calibre to take on a general manager or senior role in a foreign major -pharma or medical device company is few and far between. A lot of companies have sent overseas trusted talent from within the company to lead the business at the country GM level.
Foreign companies that have performed better than their competitors have found a good blend in the make-up of their management teams. They’ve internally transferred one or two key individuals from overseas and hired locally from direct competitors, academia, and government. This approach has delivered better local knowledge and market access, built key supply chains, and smoothed relationships with the regulators and government.
Now Is The Time
While significant challenges remain for much of the Greater Mekong region, its high population size and appetite for a higher quality of life make it a compelling case for expansion. The business opportunities for the pharma and medical device sector are certainly interesting, and those companies that take the plunge now with the right strategy and team in place should reap the rewards.
Robert Hall is based in Hong Kong and is the managing director of Ardent Search. Ardent is an executive search firm specializing in hiring leaders across pharma, medical devices, and biotech throughout the Asia Pacific Region.