Strategic Research on Pharmaceutical Enterprises’Participation in National Drug Centralized Procurement

Yang Dianzheng，Xu Wenxiu，Qi Yun，Yang Yue

(1.School of Business Administration，Shenyang Pharmaceutical University，Shenyang 110016，China;2.International Food and Drug Policy and Law Research Center，Shenyang Pharmaceutical University，Shenyang 110016，China;3.School of Pharmaceutical Sciences，Tsinghua University，Beijing 100084，China)

Abstract Objective To study the influence of national drug centralized procurement policy on pharmaceutical enterprises manufacturing generic drugs and original drugs，so as to provide a reference for them to make different strategic choices.Methods Through the literature research on the related policies and the bidding data，the national drug centralized policies were studied systematically.Combined with the bid-winning price and price reduction range of the winning enterprises in the three rounds of centralized procurement，their difficulties，strategic choices and the winning factors were investigated.Besides，a model was established to clarify the optimal price of enterprises in the process of drug procurement.Results and Conclusion The strategic choices of enterprises in participating national drug centralized procurement are influenced by many factors such as the market share of the original varieties，active pharmaceutical ingredients (APIs) and cost.Therefore，corresponding strategies should be formulated according to the characteristics and interests of enterprises.

Keywords:drug centralized procurement;pharmaceutical enterprises;game;strategy

In 2018，the National Healthcare Security Administration was formally established.It is fully responsible for the market circulation of drugs and pricing，bidding，procurement，and payment of pharmaceutical instrument.In order to cope with the increasing balance pressure of medical insurance fund and effectively control the growth of drug cost，the“4+7”procurement policy with volume was introduced.Therefore，the second price increase of drugs became history，and the domestic drug price formation mechanism entered a new round of adjustment period.Under the background of the promotion of national policies on the consistency evaluation of centralized procurement and generic drugs，the market share and profit of the enterprises whose varieties enter the listed drug centralized procurement will be affected no matter whether the drugs win the bidding or not.Based on the above issues，this study analyzed the strategies adopted in the bidding and procurement process of different types of enterprises to clarify the influencing factors.Then we could provide a reference for enterprises’strategy selection in the process of drug centralized procurement.

1 The influence of national centralized drug procurement policy on pharmaceutical enterprises

In the pharmaceutical industry chain，enterprises bear the huge pressure brought by the national centralized drug procurement policy.In addition to the increasing pressure of drug price reduction，the business ecology of enterprises has undergone great changes as well.As for pharmaceutical enterprises，marketing is the top priority and everything revolves around marketing.Once the market share and marketing change，the research and development，production，management，performance evaluation，and incentive assessment of the enterprise should be adjusted accordingly[1].National centralized drug procurement has different effects on different enterprises.This study will analyze the impact of the centralized procurement on original drug makers and generic drug enterprises，bid-winning enterprises and unsuccessful bidders，and domestic enterprises and foreign enterprises.

1.1 Influence on original drug enterprises and generic drug enterprises

In the first batch of 25 drugs centrally purchased by the government，22 were generics，accounting for 88%.Generic drugs are substitutes that have the same active ingredients，dosage form，route of administration and therapeutic effect as the original drug，which can reduce medical costs and improve the availability of drugs.The policy of encouraging both creation and imitation is generally adopted internationally.In the United States that owns half of the world’s innovative drugs，the prescription volume of generic drugs accounts for about 90%.Many countries in Europe and East Asia also encourage generic drugs to replace original drugs[2].The centralized procurement policy will greatly cut the profit of the intermediate link of generic drugs.Therefore，the model of low-price from factory and low-price in hospital will become the mainstream.Generic drug enterprises will gradually return to their reasonable profit margins and continue to operate in a mode of small profits but high turnover.In the future，the quantity of products，cost control，and pharmaceutical technology of generic drug enterprises will become their core competitiveness.As a result，the number of enterprises in the whole generic drug industry will be greatly reduced，and the industry concentration is expected to be enhanced.

At the same time，the policy will also impact original drugs.In the national negotiation system，the profits of innovative drugs will be significantly reduced，and the valuation system for innovative drug will be rebuilt.However，if the varieties of innovative drugs are moderately priced to meet the urgent domestic clinical needs，they will win a larger market share.

1.2 Influence on domestic and foreign enterprises

At present，the vast majority of domestic enterprises are producing generic drugs，and most of the world’s innovative drugs are developed and produced by foreign enterprises.For a long time，the original drugs of foreign enterprises have not only a big market share but also a high price in the Chinese market.Driven by both price and purchase volume，they have made huge profits in China.However，in the three batches of national centralized purchase，the effect of generic drugs replacing foreign original drugs was obvious，and foreign enterprises did not participate actively.Pfizer’s atorvastatin calcium tablet and amlodipine benzene sonate tablet had more than 60% of the original market share，but after the centralized drug procurement，Pfizer lost at least 1.5 billion yuan.The market share of Sanofi’s irbesartan tablets and irbesartan hydrochlorothiazide tablets was more than 50%，and clopidogrel hydrogen sulfate tablets was about 20%.Due to the impact of the centralized drug procurement policy，Sanofi lost at least 800 million yuan in the market.For foreign enterprises，they have only two options，one is to lower revenues following large price cuts，the other is to abandon the Chinese market.In essence，after the patent cliff of original drugs，the market share of foreign enterprises will shrink greatly because the dividend of original drugs in the Chinese market is against the law of the market.With the arrival of the original drug patent cliff，foreign enterprises have to accept the reduced market share after the price reduction.If they still want the revenue of the relevant original drug，they can only take the initiative to join the centralized procurement.If they think China’s market share has little impact on their business，they have to give up the Chinese market in the end.

However，in the field of innovative drugs，foreign enterprises have more advantages.With their strong overseas research and development capabilities，foreign enterprises can make more innovative drugs.As most innovative drugs are exclusive varieties，they cannot enter the centralized procurement.So they can only enter the medical insurance through negotiation.Due to their high pricing of innovative drugs and high profits，even if they drastically cut the price，these foreign enterprises can get more profits，which puts great pressure on domestic enterprises.Because of the large investment in research and development of new drugs，foreign enterprises have already gained some returns in their domestic market.Since the Chinese market is huge，lowering prices may help them to scale up[3].

1.3 Influence on bid-winning enterprises and unsuccessful bidders

Once an enterprise wins the bid，it can quickly occupy a large market share，and winning the bid means it offers the lowest price.Because the medical insurance bureau promises the procurement quantity，the winning enterprises no longer worry about product sales，which can save a lot of costs of promotion，circulation and other links.In terms of the short-term impact，the winning enterprises can increase their net profit next year，which will not only increase their market share，but also the profit of drug sales.On the contrary，the unsuccessful enterprises only watch other enterprises occupy the market helplessly.Therefore，maintaining the balance between price and market becomes the most critical game in the centralized drug procurement.In the subsequent normal purchase or centralized procurement in other regions，the selected price will become an important reference，forming a strong price linkage.Therefore，there are two ways to maintain the market profit of the unsuccessful varieties for the losing enterprises.First，they can reduce the price to the bidding one or lower than it so as to compete with other competitors in the remaining 30%-40% of the market.Second，they can work for the next round of centralized procurement bidding.

2 Enterprises’ difficulties in China’s centralized drug procurement system

2.1 Dilemma of consistency evaluation of generic drug enterprises

According to the bid-winning varieties in the first three batches，generic drugs were the main force of national centralized drug procurement，accounting for more than 90% of the total volume.However，the generic drugs participating in the centralized drug procurement must have passed the consistency evaluation，which makes the enterprises face the choice of carrying out consistency evaluation.If enterprises do not carry out consistency evaluation，they will lose most of the market and be at an absolute disadvantage in the market competition once the next batch of centralized procurement catalogue contains their products.If the consistency evaluation is carried out，in the case of multiple bidders，it is hard to secure the bid through price advantage.Once they cannot win the bid，enterprises will lose all the preliminary evaluation investment.

2.2 Strategy selection for enterprises to participate in centralized procurement

In the process of centralized drug procurement，choosing the right strategy is a difficult problem for enterprises.Based on the case of Bayer and Huahai Pharmaceutical，this paper analyzes the strategic factors that influence enterprises participating in national drug centralized procurement.

2.2.1 The strategy of Bayer-the largest price reduction

In the second round of national centralized procurement，there were four companies bidding for acarbose，a drug for diabetes.Apart from Bayer’s drug，the other three companies that passed the consistency evaluation in the domestic market were Huadong Medicine，Luye Pharmaceutical，and Front Pharmaceutical.Among them，Bayer bid with a super low price of 0.18 yuan per piece，Huadong Medicine，Front Pharmaceutical were directly knocked out.But Luye Pharmaceutical survived the bid.In the medical insurance price negotiation completed in November 2019，acarbose also participated.But the winning bidder was Huadong Medicine’s carbopin，whose price was reduced from 2.687 7 yuan/tablet to 1.1 yuan/tablet，a reduction of 59.11%.Although Bayer failed to make a cut in price negotiations，it won the bid at a lower price in a centralized procurement.Bayer acarbose entered China in 1994，so far，its total sales have reached more than 30 billion yuan.China’s market share of Bayer’s acarbose rose from about 45%in 2009 to more than 80% in 2017 in the global market.To maintain its market share in China，its strategy was to use low profit to kick the competitors out of the market.After entering into centralized procurement，Bayer dismissed most of its acarbose sales team and slashed academic promotion to reduce costs.

2.2.2 Strategy of enterprises with the largest bidding quantity in the first two batches of national drug centralized procurement-Huahai Pharmaceutical

Huahai Pharmaceutical is an enterprise that had the largest number of successful bids in the three batches of centralized procurement，winning a total of 15 varieties.First of all，Huahai Pharmaceutical is different from other pharmaceutical enterprises that focus on the domestic market，Huahai Pharmaceutical focuses on the overseas market.The sources of revenue of the enterprise are sales of finished drugs and active pharmaceutical ingredients (APIs)，and its API is the leading one in China.In the cardiovascular field，it is the world’s largest supplier of prima and sartan drugs.In July 2018，the enterprise reported the production of valsartan API contained carcinogens.After checking out the impurities，it took active recall and suspended all valsartan API delivery at home and abroad market immediately.It means its new technology can solve this problem.But its foreign market was seriously influenced.With the release of the national centralized procurement，Huahai Pharmaceutical turned to the domestic market and won some core products in the two batches of centralized procurement.

The strategy of Huahai Pharmaceutical is to seize the Chinese market.It has no sales team in the Chinese market.But due to its leading position in API，it has absolute advantages over other enterprises in cost control，so it uses the strategy of low price and low profit to seize the domestic market.

To sum up，there are many factors that enterprises need to consider in the bidding，and the most important ones are the following.First，the market share of bidding varieties of enterprises is important.Second is the number of competitive enterprises.The more competitive enterprises，the lower the probability of winning the bid will be.It means if there are more competitive enterprises，they should take a substantial price reduction to increase their winning probability.The third is the cost of the enterprise.

3 Strategies for enterprises to participate in national drug centralized procurement

3.1 Rules and the probability of winning the bidding for enterprises participating in national drug centralized procurement

The first batch of national centralized procurement adopted the principle of the lowest price winning the bid.According to the second and third batch of national drug centralized procurement documents，the government set the highest price for each variety.Besides，the effective quotation should not be higher than the ceiling price，and meet one of the following three conditions:(1) The fusing price rule:enterprises offer 1.8 times more than the minimum will be directly knocked out.(2) Defensive price rule:if the price reduction reaches 50% or more，it can avoid being cut off.(3) Price exemption rule:the drug unit whose bidding price is less than 0.1 yuan will automatically be selected.

Through the analysis of the second and third batch centralized procurement data，compared with the maximum price，we find that the average price reduction is more than 50%.As shown in Table 1 and Table 2，when the price reduction of drugs in the second and third batches of national centralized procurement is less than 10%，the winning rates are both 0.When the price is reduced by 10%-50%，the winning rates are both 54.8%.When the price is reduced by 50%-70%，the winning rates are 76.9%and 69.7%，respectively.The winning rates with a price reduction of more than 70% are 100% and 97.2%，respectively.It can be seen that the greater the price reduction of drugs，the greater the probability of winning the bid.

Table 1 Price reduction rate and winning probability of the second batch of national centralized procurement varieties

Table 2 Price reduction rate and winning probability of the third batch of national centralized procurement varieties

3.2 Quotation strategies of enterprises

In the documents of national centralized drug procurement，the method of enterprise quotation，low price shortlisting and then bargaining is adopted.In other words，the government does not specify the price，but the quotation from the enterprise cannot exceed a certain limit.This way can encourage enterprises to carry out price competition.Although this can avoid the pricing risk of the government，the disadvantages of taking the lowest price are also presented in the past practice.Besides，the price negotiation after shortlisting should have an appropriate reference pricing mechanism.Therefore，the pricing in centralized procurement is a complex game[4].Under this background，there are games between different enterprises，and games between enterprises and the National Healthcare Security Administration，but they are incomplete information static games.A static game with incomplete information refers to that the players do not know the characteristics，strategy，and payment function of other players.But they must act at the same time.Or although they do not act at the same time，the late player does not know the specific actions taken by the first player.There are behavioral games among drug manufacturers participating in the process of centralized procurement bidding.According to the game analysis，drug manufacturing enterprises in the bidding should fully consider the influence of the bidding decision of other enterprises when determining the price.Although each drug manufacturer clearly knows the information of the other party (such as enterprise information，scale，and variety，etc.) in the bidding quotation，it cannot determine the specific quotation and scope of the other party.So in centralized procurement，the bidding quotation of the drug manufacturer is an incomplete information game[5].If an enterprise wants to win the bid in the process of centralized procurement，the quotation for the variety of the enterprise is very important.In the process of centralized procurement，due to the use of various specifications to set the maximum price，the effective quotation should not be higher than the maximum price.In such a fierce competition，enterprises have to choose different pricing strategies.

3.2.1 Declaration strategies of non-competitive enterprises

The strategy of non-competitive enterprise declaration refers to the exclusive declaration of the enterprise or the exclusive conformity with the declaration conditions.At this time，the enterprise should set the bidding price at the highest effective declaration price of the centralized procurement to seek the maximum profits.At the same time，if there is no variety as the sole or as the sole conform to the conditions in the process of the second and third batch of national centralized procurement，after the release of variety list，some enterprises will apply for consistency evaluation，and they may pass it.So，it is difficult for enterprises to have no competitors.

3.2.2 Competitive strategies of multiple bidding enterprises

When multiple enterprises bid，they should consider the probability of winning while pursuing profit maximization，and they often give their optimal offer.This study intends to maximize the profit of the enterprise through the establishment of a model to determine its optimal offer.

Model establishment and hypothesis.

Hypothesis 1:There arendrug manufacturers participating in national drug centralized procurement，i(i=1，2，3...n) refers to the drug manufacturing enterprises in the bidding，and the bidding price of the enterprise isBiunder the condition of information asymmetry.The bidding price of one enterprise is unknown to others，and the probability of the same price offered by enterprises of the same variety is zero.The bidding information of each manufacturing enterprise is independent，and the bidding quotations are valid.The cost of bidderiisCi(including production，circulation，bidding and other costs).

Hypothesis 2:All pharmaceutical manufacturers are rational bidders，pursuing the principle of selfinterest maximization.

Hypothesis 3:Bidderi’s quotation is a function of cost，thenBi=Ci×Ki(Ki≥ 1).

Hypothesis 4:Bidderiknows that the defined interval ofCiis the uniform distribution function on [0，1].(Reasonableness of hypothesis:since the tender offer belongs to incomplete information game，the game introduces the Harsanyi transformation in the analysis of incomplete information，namely the introduction of a virtual participant“nature”.Nature first determines the characteristics of the participant(i.e.，the cost function)，and the participant knows his own characteristics while other participants do not.After the Harsanyi transformation，the participant’s profit function isU=(B-C) ×Q× Prob (-).Prob (-)is a probability，and the value range of probability is[0，1]，so in the hypothesis，the random variableCiis set to obey [0，1].In practice，when it is impossible to distinguish the possibility of different values of the random variableCiwithin the interval [0，1]，it can be assumed thatCiwill obey the uniform distribution[6].

Building a model.

If enterpriseiwins the bid，Bi＜Bjis needed.The optimal revenue function of an enterprise is:

The defined interval ofCjis a uniformly distributed function on [0，1]，

In the same way，

(1) The bidding enterpriseiknowsCirange for the definition of uniform distribution on [0，1]function，when the drug manufacturing enterprises n becomes more，the greater the enterprises’ tender offer will gradually be close to the cost.Therefore，the cost of pharmaceutical enterprise is vital to win the bid.Pharmaceutical enterprise should control its cost.

(2) The optimal bidding price of a drug manufacturer is related to its original market share.The bigger the market share，the higher profit the original market can bring，and the greater the economic loss once the bidding is rejected.So it will adopt a lower bidding price to ensure the bid.

(3) The optimal tender offer of a pharmaceutical manufacturer is

The partial derivative ofUmax is obtained as follows:

4 Suggestions on pharmaceutical enterprises for the strategy choice in participating in national centralized procurement

Model analysis.

SinceKj≥ 1，for the convenience of analysis，Kiis equal to the first analysis，the quotation formula is:

Through the above analysis，it can be seen that the national centralized drug procurement policy has a great impact on enterprises.This paper proposes the following suggestions for enterprises.

4.1 Objectively analyzing cost，market，quotation based on the results of the first three batches

Assume that the cost of a competing firm is equal to the average level of the industry，i.e.C=0.5.When two enterprises participate in the competition，the optimal offer of the first enterprise isB=0.75，then the price of the enterprise is 150% of the cost，that isi=150%.When the number of enterprises participating in the competition increases to 3，the optimal offer of the first enterprise isB=0.67，then the price of the enterprise is 134% of the cost，that isi=134%.Therefore，the profit of the enterprise is 1/n× 100%.

It can be seen from the above model construction that the optimal tender offer of a pharmaceutical enterprise is related to the its cost，the number of participating enterprises and its original market share.The specific results are as follows.

Enterprises need to objectively and comprehensively judge their own costs.Pharmaceutical enterprises can improve their profits under the condition that the fixed sales amount is unchanged.Then，they should get the quotation through the optimal quotation model.After clarifying the optimal price reduction range and the winning probability of the interval for comparison，they can obtain their winning probability.At this time，enterprises should make their choices.If they are determined to win the bid，they should continue to reduce the price on the basis of the optimal offer.If they think that the winning probability is high，then this offer the best for enterprises.

4.2 Grasping the information of competitors and the market

In the bidding process，knowing the competitor information such as the cost of the varieties will also affect the final result.At present，the competition in the pharmaceutical market is fierce.Due to information asymmetry，knowing more information about competitors means enterprise will have the higher probability of winning the bid.Therefore，drug manufacturers should not only pay attention to the confidentiality of their bidding information，but also grasp the market dynamics and make accurate judgments.

4.3 Making decision to participate in centralized procurement and quickly change the business model

In the process of national drug centralized procurement，enterprises should analyze their own advantages and disadvantages，and then make a decision whether to participate in it.If the enterprise is determined to participate，it should optimize its procurement method and give full play to its advantages.If the enterprise decides not to participate，it should focus on occupying other markets，increasing product development and innovation，and promoting its transformation.