SHANGHAI - While China implements a centralized tender system for essential drugs nationwide, the government also faces strong pushback from industry, which is questioning whether the current tender model is purely price competitive at the expense of quality. Following a product quality issue from a traditional Chinese medicine company that won essential drug tenders in several provinces, China's regulatory authority may consider modifying its approach.

After the governor of Anhui province was promoted to deputy director of China's National Development and Reform Commission, China began to implement a nationwide drug tender model similar to Anhui province's system. The Anhui model awards a single supplier for each drug on the Essential Drug List, setting up a winner-take-all bidding process (Also see "In China, A Province's Drastic Price Cut Model Is Being Modified To Fit A Nationwide System: A Look At The Anhui Model" - Scrip, 7 April, 2011.).

Almost all companies can pass the basic technical quality review under the bidding process, and so the tender has turned out to be a competition based primarily on price, Bin Li, managing director at Morgan Stanley's Hong Kong office, said in an earlier interview.

Provinces that have followed the Anhui model - 11 out of the 13 provinces that have issued EDL tenders this year - produced winning prices that were 40-60% lower than NDRC's ceiling retail price, and 30% lower than the most recent tender prices. In provinces such as Shanghai that did not use the Anhui model, price cuts were much smaller, Li said in a May 25 research note.

Quality Issue Triggers Reexamination

During an onsite inspection in April, China's State FDA and Sichuan's Provincial FDA found that Sichuan Shuzhong Pharmaceutical violated good manufacturing practices requirements by using impure materials for its red sage root tablet and isatis root granule, which are both listed on the EDL.

SFDA suspended Shuzhong's TCM production and revoked its GMP certification.

Suzhong Pharma, which generated revenue of RMB 2.5 billion ($385 million) in 2010 and has 2,300 employees, won many EDL tenders, including Anhui, Sichuan, Shandong and Heilongjiang provinces, all of which implemented the Anhui model.

"This is an example of the kind of product safety problem that can be caused. In order to cope with rising raw material costs and extremely low tender prices, some drug manufacturers have to reduce cost, thus potentially compromising the drug quality," Morgan Stanley's Li said. Li still expects the Anhui model to be adopted by the remaining provinces that have yet to conduct EDL tenders, but he questioned whether the Anhui model will be used in the next round of EDL tenders.

"We think these negative events could force the government to abandon or revise the Anhui model for the next round of tenders for EDL drugs," Li said.

Under pressure, NDRC's Sun Zhigang, who designed the Anhui Model, said May 26 the government will "perfect the TCM tender and procurement process," local media 21st Century Business Herald reported.

Anhui Model and Non-EDL

Six pharma company associations - including the China Pharmaceutical Industry Research and Development Association, China Pharmaceutical Enterprise Association, China Pharmaceutical Industry Association, China Association of Traditional Chinese Medicine, China Quality Association for Pharmaceuticals and China Nonprescription Medicines Association - issued an announcement May 24 to express their concerns about the Anhui model.

Multinational pharma companies are also concerned and will lobby the government to revise the tender model.

"The conception of the Anhui model is ideal; however, its execution stills need some improvement," Alex Zuo, spokesman of the R&D-based Pharmaceutical Association Committee, which represents Big Pharma in China, said in an interview.

RDPAC suggested raising the criteria for technical reviews and setting minimum prices for bids.

"Given there is a big difference in product quality, the excessive emphasis on low prices may result in a greater risk in quality. ...We expect the Anhui model can be perfected," Zuo said.

Industry executives reacted strongly to the Anhui model's implementation, even from companies with minimal EDL exposure, Deutsche Bank's Jack Hu wrote in a May 28 note.

Last year, EDL drug sales accounted for 9-10% of total drug sales in China.

The Deutsche Bank analyst said the strong pushback from industry is due to a fear that the Anhui model may expand to the other 90% of the market, leading to much larger price erosion.

But differentiated drugs with exclusive manufacturers or suppliers and no direct generic competition may not be hit by the Anhui model, according to Morgan Stanley's Li.

-Dai Jialing (j.dai@elsevier.com)

China Reviews Essential Drug Pricing Model After GMP Violations From Multi-bid Winner

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