With the opportunity for global pharmaceutical companies to gain new access to the Chinese market presenting itself like never before (see our previous blog posts here and here), significant news broke on December 7, 2018, regarding a newly implemented pilot centralized drug procurement program (the “program”) that will have significant ramifications for global pharmaceutical companies.  Specifically, China just announced the reduction of prices for certain off-patent generic drugs by up to 96%.  Under the program, the government will award a contract to the lowest bidder, who will be guaranteed a sale volume of 60-70% of the total market for a year.  The move is aimed at reducing drug prices and encouraging consolidation in the generic drug industry.  The program will be a significant change in how generic drugs are priced and procured in China.

The framework of the program was established by the Central Comprehensively Deepening Reforms Commission (CCDRC), a governing agency that is directly lead by the Politburo of the Communist Party of China.  The CCDRC has entrusted the Shanghai City Government to implement the program, which covers 11 major cities in China, including Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an.  Together, according to a Chinese news source (“21st Century Business Herald”), the combined healthcare markets from these 11 cities constitute about 30% of the total Chinese market.  Under the program, pharmaceutical companies had the opportunity to submit bids for 31 generic drugs and the contracts were awarded under the following principles:

• When there are three or more bidders, the lowest bidder will automatically be awarded the contract.
• When there are two bidders, the lower bidder will be chosen to further negotiate with the procurement office.  The drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.
• When there is just one bidder, the drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.

Source: “4+7 city Centralized Drug Procurement Manual” (4+7 城市药品集中采购文件), available at: http://www.smpaa.cn/gjsdcg/files/file5737.pdf (in Chinese).

After the bidding, which took place on-site in Shanghai, generic drug manufacturers were awarded contracts for 25 generic drugs with guaranteed sale volume in the 11 major cities in China.  The average price dropped 52%, with the highest price reduction being 96%.  We have translated the drugs that were awarded contracts under the program in a list below.  While many global pharmaceutical companies participated in the bidding process, all but two successful bids came from domestic Chinese drug manufacturers.  Additional information on the generic drug manufacturers who had winning bids and the pricing information can be found online at: http://www.smpaa.cn/gjsdcg/files/file5772.pdf.

It is unclear when this program will be rolled out nationwide and how many generic drugs will eventually be covered.  It is important to recognize that under the program, the only determining factor for a successful bid will be the price.  Thus, as global pharmaceutical companies look to do business in China, the implementation of this program will undoubtedly impact strategies on how to commercialize drug products in China and how to best compete in a bidding war with a domestic Chinese drug manufacturer.

It is also notable that this program has caused significant impact in the Chinese financial markets.  Stocks have reacted negatively thus far.  It will be interesting to see whether the concept of “lowest bid wins” affects the public’s view of the quality of their drug products.   On the other hand, it is expected the program will facilitate the generic drug industry’s consolidation and push more Chinese pharmaceutical companies towards innovative drug research and development.  We will be monitoring the program closely, and particularly looking at whether there are any changes made to the program once rolled out nationwide.

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