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Tendering for Low Cost Generics in Australia

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An Australian federal government committee recently proposed, as a cost-saving measure, the introduction of sealed-bid competitive tendering to exclusively supply the Pharmaceutical Benefits Scheme (PBS) with specific generic medicines. A similar plan involved an open tender to supply generic products below a government set price, also linked with a reduced patient co-payment as an incentive. These proposals represented an opportunity to encourage the price of generic pharmaceuticals to move closer to the marginal cost of production - a process that could be subsequently applied to innovative (or brand-name) patented medicines in a therapeutic class with many competitors. This article examines these tendering proposals, particularly in relation to the potential for increased involvement of generic pharmaceutical manufacturers in the Australian market. Centralised purchasing through tendering for specific generic products has many potential advantages for the PBS;

It would: • allow the PBS system to use cost-effectiveness evaluation linked with their power as largely the sole buyer of medicines in Australia to leverage lower prices; • make prices paid to manufacturers (and other suppliers) more transparent; • give manufacturers (and other suppliers) enhanced certainty over demand than current fluctuating arrangements with wholesalers; • create a negotiating lever to facilitate entry of new generic manufacturers into a more competitive market; • reduce the likelihood of “actual” and “artificial” (“speculative”) supply shortages and facilitate longer and more efficient production runs; • reduce price fluctuations; and • open the door to tendering for innovative products where numerous competitors exist in a therapeutic class. A key benefit of the tendering mechanism is that it will provide a good means for the government and its cost-effectiveness evaluators to gain an understanding of the marginal cost of production for specific PBS-listed medicines. This would be especially true if PBS tenders were in the form of first-price sealed-bid auctions, in which bidders provide a secret bid.

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