The vicious circle of tendering
For the customer, tendering can be an efficient tool for lowering prices. However, there are also drawbacks to tendering; one survey of EU purchasers24 yielded the following problems:
- Some difficulties in estimating the necessary quantity of the products needed.
- Tendering procedures demand a lot of expertise and resources.
- For ambulatory care, legal complaints may significantly complicate the set-up of tendering.
- Dedicated tendering teams might be needed.
More recently, purchasers are starting to recognise the risks for supply problems when ‘winner takes all’ is used by larger customers, e.g. through centralised purchasing.25,26
From the company side, tendering may offer a chance to break through the monopoly of an incumbent competitor. The increased transparency and lower risks for fraud that accompany strict legally based tendering processes should also be welcomed. However, the loss of net profit by efficient tendering can be tremendous and make further commercialization unattractive. As a result, this can reduce the number of suppliers which may lead to price increases as well as higher risks for shortages.27
The effect of sharp drops in number of generic suppliers on net prices has been well established in US market: a retrospective cohort study of generic drug prices found a strong correlation between the market competition intensity and price changes, going from −31.7% over 5.5 years in highly competitive segments to +47.4% in case of generic monopoly.28 Elsevier recently surveyed stakeholders, including health plans, PBMs, retail pharmacies, drug wholesalers, manufacturers, and healthcare providers and found over 75% of survey respondents believe that the consolidation of drug manufacturers is the first or second most likely cause for the generic price increases.29 This explains why in January of 2018, a group of 450 US hospitals announced their plans to form a not-forprofit generic drug producing company.30
Several stakeholders recognise the issues and try to make the situation more sustainable. Administrative burden is reduced by using pre-qualifications and electronic bidding systems (e.g. South African NDH).31 Large European purchasers sometimes split contracts between two or more suppliers, if the bids are close to each other, to minimise the risk of shortages and to maintain long-term competition.32
On the industry side, focus is mainly on communicating the risks of tendering: quality risks when lowest price is the dominant criterion, medical risks when substituting one product for another, shortages when ‘winner takes all’ tenders are used, and lack of optimization of medical therapy by treating all patients alike and cutting back on the freedom of choice of the treating physician.33 In the market, companies will try to get out of the ‘winners take all’ and ‘lowest price’ paradigms by using differentiating elements such as advanced administration devices with added clinical benefit.34
What seems to be missing on the industry side is the understanding that price erosion in tendering markets is strongly influenced by industry, so their own behaviour. A good Italian friend, active in tendering for many years, told me once that he would rather win a tender with 1% than with 20% price difference. But in practice, in the real tendering environment, aggressive out of scale price cutting seems to be rather the rule than an exception.
One of the core reasons is that almost all pharmaceutical companies use market share and sales as the most important key performance indicators of commercial and management functions.35 The mindset of commercial and management people in pharmaceutical companies is therefore focused on keeping/obtaining market share and driving sales. Generic companies seem to enjoy playing the game of the customer by deep discounts “because that is expected, and the products are burning a hole in my warehouse”. 36 A simple game in an experimental environment demonstrates this behaviour all too well.
