Tendering has become a global trend and one of the most frequently used procurement methodologies outside the U.S. Presently, at least a quarter of pharmaceutical sales are made through some form of tendering. But tender processes are complex and far from standardized across countries, making it highly difficult to understand and manage. In addition, it’s a constantly evolving framework with changes that can arise at any time, such as the use of the eForm in the EU. And whether you are informed by your global tender network or by government-issued penalties does not necessarily change the game.
For most companies, the risk of price referencing tenders is still unclear. Given the overall situation, it’s not surprising that governments are thinking about referencing their tender prices. This post focuses on this issue. We’ll define the two referencing threats and what can be done to manage risks.
Real IRP Risk
Tender bid prices are usually below the list price and in some cases, equal the net price level. This is the first and main difference with standard IRP rules. Countries will reference a price that is not the exact list price. Instead, it is less than the list price. This critical difference should force companies to have some form of governance over tender bid price.
Ultimately, there are two primary risks with tendering price:
- Formal reference rules involving a tender price
- Informal reference rules involving a publicly available tender price
Some countries, such as Colombia, are formally referencing the tender price of another country to setup the list price. If this sounds like mixing net and list prices, it is: the tender price in Mexico will impact the list price in Columbia. The rule is known and can be incorporated in an IRP simulation, so long as the data is available to the pricing team. This is the first risk of spillover for tender prices.
The second risk is not that easy to quantify, nor is it formal. The risk arises when tender prices are made public. It’s well-known that most Nordic countries’ tender prices are public. For the public, this transparency is valuable. But it also means foreign governments can use it to setup the limits of a list price negotiation. This risk is far more difficult to incorporate into an IRP simulation. It’s not formally detailed anywhere. That said, companies need to make sure they are managing this risk. And it may create a huge spillover effect, across Europe and potentially worldwide.
How to Fight IRP Risk
It’s easy to avoid formal IRP risk. Companies should manage the tender price of referenced countries as a list price. Pricing policies should incorporate the fact that a tender price in Mexico should be within the boundaries of the list price in Mexico; otherwise, there will be an expensive spillover effect. Given that, presently, the list of countries formally referencing tender prices is small. Expect a manageable workload for the pricing team from analysis through approval.
The second risk, the informal one, is again more difficult to tackle. The number of countries with a public price is much higher than the number of countries formally referencing tender prices. This reduces the opportunity to manage publicly available tender price as a list price. And it may be impossible for your tender organization lead to manage all those tenders. Other rules should be leveraged to minimize the risk.
More subtle rules should be implemented: a one size fits all rule cannot be used. Instead of trying to list countries that have a publicly available price, a proper tender governance should be implemented.
Similarly to what can be done in global price management, rules should be based on tender volume, types of products, the absolute price value, or percentages of the list price. Your ideal set of rules must be company specific and will depend on the number of tenders, product portfolio, type of tenders relevant to the therapeutic class, and the emphasis on sales in your organization.
The ultimate goal is to calibrate rules that would minimize risk, while not overloading management or the analytics team. Since timing is crucial, not all tenders should flow through a complex set of approvals: it would be impossible to meet the country and tender specific deadlines. For example, if a small open procedure for a northern county in Sweden needs COO approval, it’s foolish to waste management and analytics teams’ time.
Overall, IRP doesn’t create systematic risk — yet. It is still limited to a few countries, which formally reference each other. The informal referencing system is the true headache; and there is no magic solution. Proper tender management governance is key in this nebulous realm.
If you want to learn more about referencing linked to tendering or governance, feel free to reach out to Ruven Eul.