How important is tendering for the pharmaceutical business?

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.