Suggestions on Foreign Pharmaceutical Enterprises Dealing with China’s Drug Centralized Procurement -Taking the First Batch of lmplementation Results as an Example

Li Yunlong，Ning Bowen，Yuan Hongmei

(School of Business Administration，Shenyang Pharmaceutical University，Shenyang 110016，China)

Abstract Objective To analyze the impact of the first batch of centralized drug procurement on foreign pharmaceutical enterprises since the national centralized drug procurement policy has brought great impact on pharmaceutical market，and put forward some suggestions on their marketing transformation in China.Methods Firstly，the documents of the drug centralized procurement were studied，and then the sales figures before and after the implementation of the policy were retrieved from MiNET.At the same time，the relevant business adjustment information of foreign pharmaceutical enterprises was collected for analysis.Results and Conclusion The sales of related products of foreign pharmaceutical enterprises have dropped sharply，so they have stripped off these products and reduced their staff.It is suggested that foreign pharmaceutical enterprises should adjust the structure of sales team，strengthen the layout of the market in the county，and accelerate the introduction of innovative drugs to cope with centralized drug procurement.

Keywords:centralized procurement;foreign pharmaceutical enterprise;drug price;marketing;reform

High drug price has always been a serious problem in China’s medical and health system since China carried out the reform and opening-up.The government has taken measures to reduce drug prices several times，but with little effect.On the one hand，imported drugs occupy the biggest share with high prices in China’s medical market by virtue of product advantages.On the other hand，the quality of generic drugs of domestic drug manufacturers is uneven，and they have no market competitiveness.In 2018，the pilot program of centralized drug procurement organized by the government started.Since then，the national centralized drug bidding procurement(hereinafter referred to as centralized procurement)policy has been implemented.Its purpose is to provide patients with high quality and low-price drugs，which can better meet the patients’ medical needs.

This paper focuses on the marketing impact of foreign pharmaceutical enterprises one year after the implementation of drug centralized procurement.Firstly，the innovation of the centralized procurement policy is studied，and the operation status of foreign pharmaceutical enterprises in China is reviewed.Then，the marketing impact of foreign pharmaceutical enterprises after the centralized procurement policy is summarized.Finally，specific suggestions are put forward for foreign pharmaceutical enterprises in China on products，personnel，and marketing strategies.

1 The current research on centralized drug procurement at home and abroad

The policy of centralized drug procurement has been one of the hot topics in the field of medicine.The research on centralized drug procurement in developed countries and regions such as Europe，the United States and Japan is quite early with abundant results.William，et al.(2018) found that 68% of public hospitals in the United States adopted Group purchasing organizations procurement model in 2000，and its largest organization accounted for more than 30% of the drug market in the United States[1].Ding Sai’er (2014) analyzed the drug purchase mode in the UK and found that the public hospitals in the UK adopted the centralized drug purchase mode for non-patent drugs.For the purchase of patent drugs and social pharmacy，independent purchase mode was taken by the government，and the price of drugs was determined by the medical insurance institutions[2].Yu Si’an (2014) studied the current mode of drug procurement in Japan and found that its centralized procurement mode was not established completely.There is no centralized purchase of drug catalog，and medical institutions have rights in drug selection[3].Chen Pingyu (2017) summarized the process，characteristics，and experience of drug procurement in Singapore.Public hospitals adopted the method of centralized procurement and independent procurement，which were divided into two groups，east group and west group.The government gave them certain autonomy to organize the centralized procurement[4].After the national drug centralized procurement pilot program was released in 2018，the research on the impact of the policy on the interests of all parties by Chinese scholars has also started.Tan Qingli，et al.(2020) searched the notice and winning results of centralized procurement in“4+7”pilot cities issued by the government website，and used SWOT model to analyze the policy content.They found that the centralized drug purchase policy is an important result of medical reform in China，which is an effective means to eliminate the gray area of medical market and explore the separation of medical families[5].Shi Long，et al.(2020) explored the mechanism of government and market role in centralized drug procurement，displaying the role of market from three dimensions:drug price，medical service price，and doctor’s salary.They analyzed the regulatory mechanism of the government from the perspective of“release”“management”and“service”.Finally，they suggested that measures to solve the problems of over medical treatment and payment should be taken to optimize the allocation of medical resources[6].He Rui，et al.(2020) analyzed the factors influencing the price reduction of the purchase with quantity based on game theory.Under this model，they found that the more the number of declared enterprises have lost their biddings，the lower the price limit would be.Therefore，they suggested that the number of qualified enterprises to participate the bid should be higher than the number of enterprises that can be selected when formulating the purchasing policy，and the upper and lower price limit should be set to specify the agreed purchase quantity[7].Shu Xi，et al.(2019) analyzed the influence of different policies on pharmaceutical enterprises，hospitals，and patients from the perspective of stakeholders of centralized drug procurement through literature retrieval and comparative analysis.They proposed that the government should play a leading role in the procurement.Meanwhile，it should pay attention to the survival space of enterprises and establish a reasonable hospital assessment system to improve the drug safety supervision[8].

Through analyzing the existing domestic and foreign literature，it is found that the previous research on the quantity purchase focused more on the efficiency of public management and the operation of hospitals，which lacked the marketing of pharmaceutical companies，especially foreign pharmaceutical enterprises.In this paper，the foreign pharmaceutical enterprises are taken as the research object to study the impact of the drug centralized procurement on these enterprises in detail.Besides，we also explore the way of marketing transformation of foreign pharmaceutical enterprises in China.

2 Current situations of foreign pharmaceutical enterprises in China

Since the reform and opening-up，multinational pharmaceutical enterprises have entered the Chinese pharmaceutical market.They not only provide many high-quality innovative drugs for Chinese patients，but also bring many unprecedented new elements such as advanced enterprise management experience，international top scientific research talents，and mature production supervision mode.

On August 2，1980，Otsuka Pharmaceutical Co.，Ltd.was established in China，which officially marked the opening-up of China’s pharmaceutical market.In the next 30 years，the world’s top 30 multinational pharmaceutical companies have established branches and offices in China.Foreign pharmaceutical companies became big winners in the past“two-envelope”centralized procurement mode.Because of their advantages in technology，they can often get the highest score of similar varieties.This enables them to win the bid even if they offer a higher price in the commercial bid.Therefore，they can achieve high profits.It is a unique phenomenon in China’s drug market that many original research drugs with expired patents are sold in hospitals at high prices，occupying most of the market share at the same time，but they face no patent cliff.Fig.1 shows the performance of China’s top 8 foreign pharmaceutical companies in 2019.The growth rate of revenue of all 8 companies in China is higher than that of the world.

Fig.1 Top 8 growth rate of foreign pharmaceutical enterprises in 2019

3 Interpretation of centralized drug procurement policy

On November 15，2018，the joint procurement office (hereinafter referred to as joint procurement)composed of pilot areas officially issued a document to conduct centralized procurement bidding for 31 public medical institutions in 11 cities (hereinafter referred to as 4+7 cities) such as Beijing，Tianjin，Shanghai，Chongqing，Shenyang，Dalian，Xiamen，Guangzhou，Shenzhen，Chengdu，and Xi’an.Different from the previous centralized drug procurement policy，this bidding innovatively introduced the factor of“agreed purchase quantity”.Table 1 shows the agreed purchase quantity of 31 varieties.The total amount of the agreed procurement is 16 354 973 million minimum packaging units.Among them，the maximum purchasing volume is 293.8 million tablets of amlodipine oral and regular-release dosage form 5 mg，156.7 million tablets of atorvastatin oral normalrelease dosage form 20 mg，and 183.2 million tablets of clopidogrel oral regular-release dosage form 25 mg.The purchase scale of three varieties exceeds 100 million.Once the enterprise’s drugs pass the conformity evaluation and certification，they can directly obtain a certain number of drug orders from the government.Public hospitals will use 60%-70%of the bid winning products.For enterprises，they can save a lot of circulation costs，such as the costs for sales promotion team.Their winning products can directly obtain the qualification of different provinces and cities.Therefore，enterprises can focus on improving the quality of drugs，without worrying about sales，which also reduces medical corruption.For the buying party，the medical insurance office can obtain low-cost and high-quality drugs by bidding for a variety of drugs，which fundamentally reduces the prices.Foreign pharmaceutical enterprises that sell original research drugs will face a dilemma.In the public hospitals，the market share of original research drugs has always occupied an absolute majority，even in some hospitals of the big cities only the original research products are sold and they have no generic drugs.Once foreign drug enterprises fail to win the bid，they will face the loss of 60%-70% of drug market in hospitals.If they want to win，they must compete against many generic manufacturers in the price war，and the profit will decrease more.

Table 1 Agreed purchase quantity of the first batch of varieties

Continued Table 1

4 The influence on foreign pharmaceutical enterprises after the implementation of centralized drug procurement

On December 17，2018，Shanghai Sunshine purchasing platform released the Notice on Publishing the Results of 4+7 Cities’ Centralized Drug Procurement，in which the bidding results of the procurement with volume were published.Table 2 shows the information of 25 successful varieties.Among the 25 selected varieties，only 3 foreign pharmaceutical companies won the bid，with a bid winning rate of 12%.The average bid winning price of the 25 selected varieties dropped by 52%，with the highest drop of 96.14%.The average bid winning price of Chengdu Beite’s tenofovir fumarate dipyrifor tablets in past three years was 459 yuan/box，while the successful price in this centralized purchase was 17.72 yuan/box.The average bid price of entecavir dispersible tablets of Zhengda Tianqing in past three years was 395.92 yuan/box，while the winning price was 17.36 yuan/box，a decrease of 95.62%.There were 4 varieties that had a decrease rate of more than 80%，such as rosuvastatin calcium tablets of Jingxin pharmaceutical，whose price reduction rate was 81.55%.Among the three varieties with the largest purchase volume，amlodipine 5 mg，clopidogrel 25 mg，and atorvastatin 20 mg had the reduction rates of 59%，58% and 78%，respectively.They all exceeded the average reduction rate of the other 25 varieties.Therefore，the drugs with high sales volume will have a large reduction in price.

Table 2 List of selected varieties in the first batch of procurement with quantity

4.1 The sales volume of original research drugs decreased significantly，particularly in hospitals

The sales information of 25 varieties of related original research drugs in domestic hospitals in 2017，2018 and 2019 was obtained from Menet.As can be seen from Fig.2，the top 8 foreign pharmaceutical companies had a year-on-year sales growth of 12.56%in 2018.In March 2019，the 4+7 cities began to implement the procurement with volume，these top 8 foreign companies had a year-on-year sales growth of -7.38% in 2019.The data in the table is the annual sales of each company，and the 4+7 pilot procurement had only 11 cities involved，and other cities were not affected.Even so，the sales of foreign companies in these 11 cities reduced their sales in the whole market to -7.38%，which showed the influence of purchasing with volume.Among them，Squibb Pharmaceutical Co.，Ltd.was the company that had the largest decline，with an increase of -26.01%.Analysis of the reasons for the decline showed that its viral hepatitis drug bolutin (entecavir) in the first catalog of procurement with volume failed to win the bid，resulting in a rapid decline in market share.

Fig.2 Top 8 sales trend of foreign pharmaceutical enterprises in centralized procurement

The performance of each sales channel is different.Fig.3 shows the sales performance of different channels of urban hospitals，community hospitals，county hospitals，and township hospitals.Fig.4 and Fig.5 show the proportion of sales channels in 2018 and 2019，respectively.First，the proportion of sales in urban hospitals decreased from 63.96%in 2018 to 59.47% in 2019，but 10.38% in 2019.It dropped 9.37% in community hospitals in 2019 and 9.25% in 2018，with a growth rate of -2.40% compared with that of 2018，which is higher than that of the overall hospital sales of -7.38%.However，the sales proportion of county hospitals increased from 21.53%in 2018 to 25.16% in 2019.The sales growth rate was 12.64% year-on-year，with the highest growth rate of four sales channels.The sales contribution of township hospitals in 2019 was 6.00%，with a growth rate of 10.14%，which was second only to county hospitals.

Fig.3 Sales amount of each channel

Fig.4 Sales proportion of various channels in 2018

Fig.5 Sales proportion of various channels in 2019

But the retail shows no ups and downs.As the implementation of the procurement policy is in hospitals，the retail pharmacies are not limited by the policy.Some people in the industry predicted that there would be a spurt growth in retail sales，which could bring unprecedented development opportunities[9].But from the actual situation，although the retail sales have increased，they are far from reaching the expected level.Fig.6 shows the three-year retail sales figures of Top 8 companies.The results show that in 2019，the retail sales increased by 8.13% year-on-year，and the sales accounted for 8.90%.In 2018，the retail sales also increased by 2.94% year-on-year，accounting for 8.01%.

Fig.6 Top 8 retail sales of centralized drug procurement

4.2 Striping related products

With the increasing influence of the purchasing policy，foreign pharmaceutical enterprises must adjust their products and gradually stripe their products related to the centralized drug purchase to reduce the cost of sales and offset the impact of the decrease of sales revenue on profits[10].On July 29，2019，Pfizer and Mylan jointly announced that they officially signed a cooperation agreement to merge the nonpatent drugs of Pfizer，including Lipitor (atorvastatin)，and Oxomethi (amlodipine benzenesulfonate)and other products.It is taken in the industry as a proactive change in response to the decline of sales brought about by volume procurement.On April 23，2019，Eli Lilly announced it had an agreement with China’s EDDING Pharm Group Company Limited on its official website.EDDING Pharm Group Company Limited would receive the sales rights of Hiklau and Hiker as well as its production plant in Suzhou.The divestiture of these two products is also in response to the expanding impact of centralized drug procurement policy in the Chinese market.Then the company can concentrate its resources and advantages in key areas.

4.3 Cutting sales team

The actual loss of foreign pharmaceutical enterprises under the policy of volume procurement started.In 2018，the state issued the procurement document with volume.After that，some multinational pharmaceutical companies announced their plans to cut sales teams in China.Sanofi’s classic product Plavix (clopidogrel) was sold more than 10 billion yuan in China in 2018.Due to the influence of the policy of purchasing with quantity，at the end of 2019，its promoters were unfortunately informed of the unemployment.Its whole sales and medical teams were dismissed With the compensation scheme(N+5) * average monthly income.The relatively generous amount of compensation can also be regarded as the last comfort for the promotion staff of Plavix.In 2018，AstraZeneca won the bid at a low price for its tumor product Iressa (gefitinib).In the next year，the promotion team of gefitinib was dismissed when the product line was adjusted，and some of its personnel were transferred to other product lines.Those who did not want to adjust their positions had to leave the company.

5 Suggestions on transformation of foreign pharmaceutical enterprises

5.1 Strengthening the promotion of county hospitals and accelerating the layout of retail market

In 2017，the“13th Five-Year Plan for Health”issued by the State Council put forward that the basic medical and health system covering urban and rural residents should be basically established by 2020.The high-speed development of county and township medical market can also offset the impact of the centralized drug purchase policy[11].Foreign pharmaceutical enterprises should actively respond to China’s policies to promote their business in the county hospitals.

The volume purchase policy has combined the market in hospitals with retail sales closely.It is suggested that foreign enterprises should seize this opportunity to layout retail market.Without increasing manpower，enterprises can take the existing hospital sales as the basis to include 10 pharmacies around the hospital，according to the hospital size and grade.Within 5 km around the third class hospital，10 retail pharmacies can be included.As to the second-class hospital，5 retail pharmacies are included within 5 km.3 retail pharmacies around the primary and non-grade hospitals are included in the surrounding 5 km.

5.2 Accelerating the introduction of innovative drugs

In 2018，National Medical Products Administration(NMPA) was established by the State Council.A series of reform measures were taken to accelerate the listing of innovative drugs in China.Multinational pharmaceutical companies are welcome to bring new products and technologies into China[12].It is international practice to recover the R&D costs and make profits by innovating drug sales.Table 3 lists the top 10 best-selling drugs in the world in 2016.Except for the drugs in the coming period (insulin glargine)，and the other nine products are all within the patent protection period.On the contrary，in Table 4，the top 10 foreign drugs sold in China are original research drugs with patent rights.The policy of purchasing with quantity in China aims at the competitive market of generic drugs，but it has no influence on the innovative drugs.Foreign pharmaceutical enterprises can accelerate the introduction of innovative drugs with the help of policy to make up for the business losses of the original research drugs sales beyond the patent period.

Table 3 Top 10 Bestselling drugs in the world in 2016

Table 4 Top 10 Best-selling drugs in China in 2016

5.3 Keeping the sales team and optimizing the staff

Due to excessive verticalization，the sales team of foreign enterprises usually has many levels of structure and overlapping power，so it is necessary to optimize the staffing to adapt to the new external market environment.First，the business should be divided into two independent units according to the clinical and non-clinical functions.The non-business department includes all the personnel without sales functions.Its main responsibility is to cooperate with the sales personnel to get the new product market access and develop product brand.Second，the management of business department should be horizontal to compress the hierarchy.The national sales director manages the sales of related products ina unified way.There is a sales manager under him.He divides the work according to the geographical and cultural characteristics.The manager directly leads the front-line sales colleagues.In this way，he can respond to market changes faster and implement the company’s strategies and activities efficiently.

Although this study systematically analyzes the impact of the first batch of centralized drug procurement，there is still room for further research.In view of the policy of centralized drug procurement，its influence on foreign pharmaceutical enterprises is gradually expanding.Therefore，in the future，we can increase the research data samples to conduct a more comprehensive analysis.