China moves to take centralized procurement nationwide

China's Joint Procurement Office will expand its pilot program for centralized procurement of generic and off-patent originator drugs nationwide, a move that could further cut prices of the 25 drugs in the program.

Under the pilot program announced late last year, manufacturers that have passed equivalence testing offered pricing discounts in exchange for guaranteed market share, and contracts were awarded to the lowest bidder.

Guidelines released Sept. 1 required bid prices to be below winning bids in the pilot region, setting the stage for additional price cuts. In the pilot program, winning bidders agreed to average price cuts of 52%, with discounts as high as 90% for the antiviral entecavir (see "China Releases Final Results of Centralized Procurement Bids").

In an analyst note, Goldman Sachs' Ziyi Chen said nationwide expansion could increase procurement volumes by as much as 15 times for some drugs.

Unlike the pilot program, which identified a single winner for each drug, the national guidelines allow one, two or three winning bidders with the lowest prices for each drug to gain a total of 50%, 60% or 70% of market share, respectively.

It would be "too risky to have a single winner nationally," an analyst who requested anonymity told BioCentury. Allowing multiple winners helps ensure supply by diversifying the risks of drug quality issues, he said.

For drugs with no more than two winners or three winners, contract lengths will be one or two years, respectively, with a possible one year extension.

If there are multiple winners for a drug, each will gain market share in different regions, with manufacturers sequentially selecting provinces to supply, beginning with the lowest priced manufacturer. Pilot program winners gained market share in all covered cities.

When there are three winning manufacturers, each could therefore gain 18-29% of the total market share, according to Chen, providing an incentive for market leaders to cut prices to gain priority for province selection and maintain market share.

When there are more than three bidders, "it will become quite competitive," said the unnamed analyst, adding that losers may be shut out of 70% of the market for three years and have to compete with MNC originals for the remaining 30%.

However, Chen wrote there may be lower incentives for price competition for drugs with fewer than three qualifying manufacturers.

Bernstein's Shan He added in an analyst note that low-cost manufacturing and compounds with minimal competition due to early approval or difficult manufacturing will be key strategies for winning bidders.

The pilot program has already put a dent in some multinational company revenues and may incentivize pharma to accelerate development of innovative therapies in China (see "Why China’s 4 + 7 Policy is Good News for Innovative Drug Developers").

Only two winning bids in the pilot program were from MNCs: AstraZeneca plc (LSE:AZN; NYSE:AZN) won a bid for lung cancer drug Iressa gefitinib at a 76% discount, and Bristol-Myers Squibb Co. (NYSE:BMY) won the bid for hypertension drug Monopril fosinopril with a 70% price cut.

AZ's 2Q19 Iressa sales grew 1% over 2Q18 in emerging markets, which includes China. The company said in its 1H19 results it anticipates "challenges" for Iressa in 2H19 due to the pricing impact of centralized procurement.

Pfizer Inc. (NYSE:PFE) lost the bid for generic Lipitor atorvastatin, with the winning bid resulting in an 83% price cut. Lipitor’s 2018 international sales were nearly $2 billion, driven largely by strong demand in China. Pfizer's Upjohn unit reported that implementation of the pilot program in March drove a 20% drop in 2Q19 China operating revenues over 2Q18. Pfizer is spinning out Upjohn and merging it with Mylan N.V. (NASDAQ:MYL).

The deadline to submit bids is Sept. 24. Chen said the system could be implemented by January of next year with a second batch of drugs added to the program that year.

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