'Buy China' In Procurement Schemes - Should You Worry?
Executive Summary
A recent trade group report points to a rising and alarming "Buy China" trend in procurement rounds in the country. Although largely in medical device bidding, it may potentially affect the pharma sector, an analysis from the recent “4+7” centralized bidding scheme show.
As the People's Republic of China celebrates the 70th birthday of its foundation and President Xi Jinping vows to strengthen communist rule, many are worrying that any increased dominance of state-owned enterprises (SOEs) will put international companies at a disadvantage, just at the time the government is expanding centralized procurement schemes to more health products.
The SOE has a long history in China and although many SOEs have now transformed into holding companies, many still enjoy a controlling market share in certain industry sectors such as financial services, civil engineering and education.
Despite a relatively lower presence for SOEs in the pharma and medical device areas, roughly 70% of respondents to a recent survey conducted by the EU Chamber of Commerce in China (EUCCC) said SOEs were present in the health product sector. 18% of pharma respondents saw SOEs controlling at least 50% of the market.
In effect, the dominant role of SOEs has been at the core of trade barrier arguments made by the US Trade Representative under its annual Special 301 investigation, which cited the influence of SOEs 124 times in its March 2018 report. Many Chinese SOEs and government-backed investment companies were also named and subject to more scrutiny under the Committee on Foreign Investment in the United States review.
“While winning a public procurement bid in China when competing against an SOE can be an incredibly difficult proposition for any company, the legal distinction drawn between foreign and domestic companies puts foreign enterprises at a further disadvantage," warned the EUCCC's new Business Climate Report, released on 24 September in Beijing.
'Buy China' Favoring Local Firms?
There are already signs of a trend of hospitals being encouraged to buy products from domestic companies in the medical devices sector, which may potentially spread to the pharma industry.
During the latest expanded round of the “4+7” drug procurement scheme covering major cities, the bidding results announced on 25 September showed a move towards even lower prices than in the previous round. One of the bid-winning drug products, risperidone from Qilu Pharmaceutical Co. Ltd., was priced at just CNY0.05 ($0.007) per tablet, while an amlodipine product from Sinopharma Rongsheng was CNY0.06.
The extreme low prices not only forced international drug makers to aggressively slash their pricing to compete but also pushed other domestic firms to further reduce their already low prices.
Tellingly, Qilu was formerly a state-owned enterprise until it transformed into a stock-holding company, and Rongsheng is a subsidiary of Sinopharm Group Co. Ltd., a huge state-owned and publicly listed group.
Interestingly, Qilu also bagged the second-highest total number of winning bids among all 4+7 participants, scoring for seven out of 25 products.
Despite these statistics however, the government is explicitly promoting fair competition. A 2017 State Council document (No.5) stated that products manufactured by foreign companies in China "will be treated equally in public procurement bids." Still, “many local procurement policies include a provision that hospitals are encouraged to buy domestically-made medical devices as long as they meet quality requirements, and even explicitly stipulate the purchase of 'domestic brands,'" noted the EUCCC report.
Nevertheless, in the medtech sector, the bidding authority in Shenzhen designated specific ratios for domestic brands in its latest procurement round for CT and MRI machines. The city bordering Hong Kong in August required hospitals to procure 30% (seven) of their CT units and 40% (10) of MRI units from domestic manufacturers. These are defined as non-foreign owned enterprises nor joint ventures with domestic firms.
How To Remain Competitive
In the pharma procurement scheme, multinationals either need to match the prices of domestic firms or offer another competitive advantage to win, industry observers say.
Sanofi, for one, decided to cut its prices to compete, lowering the level of Plavix (clopidogrel) to below the previous winning price offered by Shenzhen Salubris Pharmaceuticals Co. Ltd. The French group subsequently won the bid for the 75mg tablet formulation.
During the latest 4+7 round, makers of six products didn’t lower prices but still managed to win bids. One of these was the lung cancer drug Iressa (gefitinib) from AstraZeneca PLC, which along with Qilu was one of only two companies to have passed official bioequivalence testing for a gefitinib product. The foregoing of a winner takes all system in the round also allowed both the companies to win.
Similarly, fosinopril had only one non-originator bidding company that had cleared bioequivalence testing Zhejiang Huahai Pharmaceuticals Co. Ltd., who with originator Bristol-Myers Squibb Co. won bids. BMS has held over 80% of the market for the hypertension drug.
As the government is expected to continue to roll out centralized procurement schemes, and amid shrinking market shares and the rising cost of non-participation, price-matching or other unique competitive advantages will need to be pursued.
Meanwhile, the EUCCC called in its report for “competitive neutrality” that ends the distinction between foreign and local ownership and offers a level playing ground.
“During the procurement process, the government should give priority to patients' clinical needs, and conduct evidence and value-based procurement,” the European group stressed.