05 December 2018 - Authored by:David Shen
On 15 November 2018 the Joint Procurement Office (JPO) published its Paper on Centralized Drug Procurement in “4+7 Cities” (the Paper) which launched the national pilot scheme for tendering with minimum procurement quantities. The pilot scheme will be carried out in 11 cities: Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu and Xian, which together represent the lion’s share of the Chinese drug market.
The Paper listed 31 drugs for this pilot scheme together with an intended quantity commitment for each drug. The manufacturers and importers of the drugs are invited to bid to supply the drugs to public medical institutions. During the following 12 months, public hospitals must prioritize their drug purchasing from the successful bidder until the quantity commitment has been satisfied.
The Paper details the conditions and processes for the pilot scheme.
- Conditions for tendering
The drug being offered for tender must belong to one of the following categories:
- an originator drug or a reference listed drug used for generic consistency evaluations (the GCE) designated by the National Medical Products Administration;
- a generic drug that has passed the GCE; or
- a generic drug approved under the new classification for chemical drugs.
The tenderer must also ensure that its annual production and sales capacity can satisfy the intended minimum quantity requirement.
- Two-stage tendering process
A two-stage process is used to determine the successful bidder. For each drug, the lowest bidder will become the preliminary candidate. If two or more companies offer the same lowest price, the JPO will determine which one becomes the preliminary candidate, taking into account each company’s sales of the drug before the tender. The company that offers the second lowest price will become the backup candidate in the event that the preliminary candidate cannot satisfy the quantity requirement.
In the second stage, the JPO will decide whether it accepts the preliminary candidate’s offering price. If three or more companies have tendered during the first stage, the market is considered competitive. The JPO will generally accept the price and the tender will end by awarding the contract to the preliminary candidate. If only one or two companies have entered the tender, the JPO will compare the reduction in the offering price from the lowest price at which the drug was sold in the 11 cities during the previous year. The JPO will accept the price if the drug’s price reduction ranks in the top seven of the 31 drugs. If not, then the JPO will further negotiate with the preliminary candidate to agree on a price before awarding the tender. In this case, it is not clear what would happen if the JPO and the preliminary candidate cannot agree on the final price. We suspect the JPO will have the discretion to go to the backup candidate or procure the drug via other means.
The pilot scheme for tendering with minimum procurement quantities represents the latest government attempt to rein in drugs costs and reduce the price of drugs. Under the existing drug tendering system, a company must win a tender to sell its drugs to public hospitals, but the hospitals make no minimum purchase commitments. In contrast, the new scheme provides for a considerable quantity guarantee. The 11 pilot cities make up nearly one-third of the national market. According to the People’s Daily, the quantities listed in the Paper amounted to 60-70% of the quantities of those drugs purchased by hospitals in the 11 cities in 2017.
The pilot scheme may result in a sharp drop in drug prices for these 31 drugs. In light of the quantity commitment, manufacturers may be more willing to cut their prices to win a tender. Unlike the existing two-tier tendering system, in which originators sometimes do not directly compete with the generics, the originators will likely lose most drug tendering opportunities because of the price differentials, at least for the 31 drugs in the 11 cities. The pilot scheme is likely to accelerate the replacement of originator drugs with generics. Additionally, under the pilot scheme, a pharmaceutical company may have less incentive to deploy a large number of medical representatives to promote its drugs, given the guaranteed purchase quantities.