Generic-branded drug competition and the price for pharmaceuticals in procurement auctions

Paulo Arvate (School of Business - FGV), Klenio Barbosa, Sao Paulo School of Economics - FGV and Dante Gambardella, Samaritano Hospital discuss Generic-branded drug competition and the price for pharmaceuticals in procurement auctions.

ABSTRACT: This paper studies the effects of generic drug’s entry on bidding behavior and participation of drug suppliers in procurement auctions for pharmaceuticals, and the consequences on procurers’ price paid for drugs. Using an unique data set on procurement auctions for off-patent drugs organized by Brazilian public bodies, we find that some branded drug suppliers leave the auctions in which there exists a supplier of generics. However, the remaining ones lower their bidding price in a presence of generics in an auction. Due to a fierce price competition between generic and branded suppliers, the price paid for pharmaceuticals reduces by 7 percent in auctions in which a generic’s supplier participates vis-à-vis auctions without generics. As a result of such generic-branded competition, we find no statistical difference between bids and prices paid for generic and branded drugs. To overcome potential estimation bias due to generic’s entry endogeneity, we exploit variation in the number of days between drug’s patent expiration date and the tendering session. The two-stage estimations document the same pattern as the generalized least square estimations find. This evidence indicates that generic competition affects branded supplier’s behavior in procurement auctions differently from other markets.