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Pharmaceutical tendering will stay as key procurement approach for pharmaceutical products, especially for hospital products but also in outpatient settings for generics/biosimilars or other segments of products with low differentiation.

All stakeholders are recognizing the opportunities (i.e. substantially lower prices) and risks (shortages, quality, choice of therapy, etc.) of efficient tendering. We should expect a reduction of the ‘winner takes all’, ‘lowest price’ tenders, however customers will keep searching for the best balance between low price and sustainable high-quality supply.

The pharmaceutical industry is communicating the risks of tendering and tries to differentiate their offers so that their products remain competitive even after loss of patent protection. What the industry fails to recognise is that the most formidable factor in tendering (aggressive bidding) is under their control. We found the enemy – it is us.

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

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.

From the epoetin market situation came the idea to develop a pricing game. An early version was developed and used within J&J. In 2011 a new version of the game was developed that allowed adaptation of the variables of the game so that it could be used for many more situations. This version has been played over 50 times by key account managers, tender experts and market access professionals from 11 different corporations.

The participants are split into competitive teams that are bidding for the business of six hospitals. The market changed overnight into a mandatory ‘winner takes all’ market, where each hospital is tendering for full volume. The hospitals differ in volume needs, incumbent player(s) at the start of the game and price sensitivity. Participants know or can estimate these characteristics from the short descriptions of the hospitals. The game is pre-programmed on award conditions, threshold to switch (if any), and growth rates by customer. Each product has a set attractiveness to the customers, an element which cannot be influenced in the game. As the game continues, teams split into new teams, e.g. to role play a new entry of a branded or generic competitor, and more and more competitors are offering for the same set of customers. There are three to six rounds of bidding, and after each round the teams immediately receive the results of their bids to prepare for the next round. Awarding is pre-programmed, hence not dependent of the way the participants behave in the game.

The pricing game is most telling when it is played several times under the same conditions, by different players. Figure 1 shows the real results of two typical outcomes of the game: in the red game we see significant slower price erosion than in the blue game. However, simulated market conditions were similar and purchasing decision making was pre-programmed to be identical. This illustrates a key point of price competition: while the authorities or individual customers set the conditions to allow price competition, it is the competitive behaviour of the teams that will define the intensity of price erosion. Participants regularly comment after the game that the simulation is very illustrative for the real environment. So, we may conclude that for a market with low differentiation between the products and for ‘winner takes all’ conditions, competitive behaviour is a key driving factor for price erosion.

The game has been played by participants from Asia, Middle East, Western Europe and Eastern Europe, including Russia. Although there was adequate participation from each geography, we could not observe differences in pricing behaviour. We could however recognise the impact of corporate culture, with clear barriers to strong and fast discounting in some companies and a drive to market share in others. However, in all games the end net prices after six rounds of tendering in a market with low differentiation, two incumbents, one new entry, and one biosimilar were 75-88% lower than the starting prices, just above the cost of goods of the cheapest producer (set at 10% of starting price).

Although the results of the pricing game look dramatic, they are very close to what is happening in the real world. Indeed, hospital tendering was named as the main cause to reduce epoetin and filgrastim prices with reductions of up to 89% in Norway for both filgrastim and epoetin alfa, whereas discounts for use outside the hospitals were 50% for filgrastim and only 25% for epoetin alfa.²² Filgrastim reached more than 90% discounts in some French hospital tenders, whereas retail prices were only 10-15% below list price.²³

So, in this simulated tendering ‘winner takes all’ environment, we found substantial price erosion, leading to very low net prices after just few rounds of tendering. The speed of price erosion is function of the number of competitors, aggressivity of the players, and the lowest cost of goods in the game.

The first recombinant human erythropoietin (epoetin alfa) was developed by Amgen and launched in Europe by J&J affiliates under the brand names Eprex® and Erypo® in 1989. This was followed shortly after with the launch of epoetin beta (Genetics Institute, Boehringer Mannheim) under the brand name Recormon®. Epoetinbeta was reformulated and re-launched as Neorecormon® by Roche in 1997.¹⁶

Epoetin alfa was the first biologic with large budget impact, global sales in 2000 were already over $3.5 billion.¹⁷ While there were differences between the brands (e.g. packaging¹⁸ and pain on injection¹⁹), there were no reports on differences in clinical efficacy.²⁰ In most countries, epoetin is available as a hospital product and hence the situation was ideal for purchasers to introduce tendering as procurement method for the product.

Where possible, the subject for the tender was described as epoetin/erythropoietin/ ATC code B03XA01, creating a direct competitive tendering situation between the J&J and Roche brands. In other markets such as Italy, tendering was performed per brand and the outcome was used to guide therapeutic choice.

Tendering in health care has been recommended as a procurement process for support services such as cleaning and catering in several markets since the early 1980s.³

However, the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) was already using tendering for joint bulk purchasing of essential drugs since 1978.⁴ The Jamaica Commodity Trading Company covered most of the pharmaceutical needs for the public health sector through an international tendering system, with 665 awards given in the 18 months following January 1988.⁵ At the end of the previous millennium, tendering was endorsed as the preferred procurement process for pharmaceutical products by international institutions such as the World Health Organisation⁶ and the World Bank⁷.

The importance of tendering and contracting for the pharmaceutical business is estimated to equate to 25% of total global pharmaceutical turnover.⁸ This number is difficult to check as it depends on what exactly is seen as tendering and contracting, e.g. are the deals made between pharmaceutical companies and strategic customers in the US included? And what about contracts made between health authorities and companies for conditional reimbursement? Are we looking at what sales of the pharma industry has been switched into tendering? The importance of tendering is market and product dependent: some authorities have made tendering mandatory for all hospital products as soon as sales are over a certain minimum level per year; others list which products should be tendered for; several authorities count economic pressure on the hospital budgets will push towards efficient procurement;⁹ tendering for products used in retail is less common and mainly restricted to generics.¹⁰

The impact of tendering on pharmaceutical business is mainly through price erosion. Open tendering, which means all suppliers are invited to bid, results in the lowest prices, especially when many suppliers are interested in the contract.¹¹ A study of tendering in Cyprus found a strong positive correlation between price erosion and availability of generic alternatives. Other drivers of price erosion were tendering by ‘winner takes all’ where there were alternatives available; high prices and high volumes.¹² A study of regional tendering for biosimilars in Italy found a strong correlation between number of competitors and price erosion, with a 40-60% reduction of awarded prices in just two years of tendering for epoetin alfa and filgrastim, respectively.¹³ The introduction of tendering for generics in the Netherlands caused a price drop of 80-90%.¹⁴ Obviously, the risk for price erosion increases with greater purchasing power e.g. through centralised tendering.¹⁵

In conclusion, tendering may have a devastating impact on price, especially when the clients are using ‘winner takes all’ tenders, and competitive products that are not very differentiated from each other i.e. alternatives are available.

The characteristics of tendering differ tremendously between geographies. Tendering processes can be strict, with no contact allowed between customers and suppliers from the tender publication to the final award, or flexible, with negotiation opportunities at multiple timepoints.² The key difference between tendering and contracting is the first step of tendering: the publication of the tender. No publication of a tender means contracting.

A short internal survey within Johnson & Johnson (J&J), 20 years ago, found that while tendering was very common in the medical devices and diagnostics business of the corporation, pharmaceutical tendering was rare. Back then it was chiefly restricted to one product, erythropoietin (epoetin), and only created problems in markets such as Bulgaria, Denmark, France, Hungary, Italy, Poland, Portugal, Romania, and the United Kingdom. Note that epoetin was at that time the most important product on the hospital budget, with stiff competition between Roche (epoetin beta, NeoRecormon®) and J&J (epoetin alfa, Eprex®, Erypo®).

Another project involved interviews with twenty ‘tender champions’ within J&J. This formed a solid basis for understanding the issues that are related to tendering.

Workshops with tendering and pricing specialists, active participation in development of tender strategies for strategic customers, and base research into price competition offered further insights. All these elements were combined in a ‘tendering and contracting’ excellence programme that was rolled out within J&J in the first years of this millennium.

As the pharmaceutical industry faces increasing pressure to integrate sustainability into their operations, the importance of alignment with international and national environmental guidelines becomes pivotal to gain a competitive edge in healthcare tenders.

Having visibility on tender award criteria per product and country is critical to be able to differentiate versus competitors and pro-actively discuss how to optimize tender settings and frameworks to improve attractiveness and sustainability of the market.

Furthermore, developing sustainable practice plans that support compliance and company goals, whilst ensuring they meet tender awarding criteria will enhance market position and differentiate products amongst competitors.

Although many European countries, such as Finland and Poland, still lack environmental sustainability criteria in their tendering processes, and others like Estonia, Lithuania, Portugal, Slovakia, and Slovenia continue to rely solely on price as the main criteria for awarding tenders, numerous governments are beginning to prioritize environmental requirements in their healthcare tendering processes. ¹

The analysis performed by Cube RM also reveals this trend.

One clear example of the influence of environmental sustainability in tendering is the Net Zero Supplier Roadmap from NHS England, that started in 2022 with the requirement that all NHS procurements needed to include a minimum 10% net zero and social value weighting.

The plan, extending beyond 2030, establishes that suppliers will only be able to qualify for NHS contracts if they can demonstrate their progress through published progress reports and continued carbon emissions reporting. ¹⁷

As a result, one of the main challenges pharmaceutical companies face is balancing the increasingly important environmental sustainability practices with the need to remain competitive, especially when price is still the primary criterion for awarding contracts.

Incorporating environmental sustainability into companies’ processes can be a significant undertaking. It requires a comprehensive approach, including changes in manufacturing, supply chain management, and product design. Many of these changes are heavily regulated and resource-intensive, often taking a considerable amount of time to be approved and implemented. However, in the long term, there are numerous benefits that can encourage pharmaceutical companies to go green:

• While implementing sustainable practices may involve initial costs, it can lead to long-term savings. Companies that invest in green technologies, energy efficiency, and waste reduction can reduce operational costs, making their bids more competitive.
• Demonstrating a commitment to environmental sustainability enhances a company’s reputation and builds trust with stakeholders, including healthcare providers, patients, and regulators. This positive perception can influence tender decisions in favour of companies perceived as responsible and forward-thinking.