The Effect of Centralised Procurement on Pharmaceutical Marketing and Innovation: Evidence from China

Abstract

We assess how centralised procurement affects pharmaceutical marketing and in- novation by evaluating the impact of a centralised procurement programme in China through which the Chinese government centralized price negotiation and purchase of pharmaceutical products. Using differences-in-differences methodology, we exploit the exogenous variation of firms’ drug exposure to the centralised procurement’s drug lists before the programme’s initiation to identify the programme’s impact on firm-level marketing and Research and Development (R&D) spending. We source proprietary firm-level drug portfolio and expenditure data from IQVIA and Compustat North America, respectively. The findings reveal that firms exposed to the drug procurement list increase quarterly marketing and R&D spending by USD 409 thousand and 486 thousand (or by 11.2% and 17.6%), respectively. Further analysis suggests that the magnitude of such impacts increases with market (demand) size and competition at later R&D stages (i.e. the drug registration and subsequent stages). In contrast, competition at the early R&D stages (i.e. clinical trial stage) increases the magnitude of R&D spending while lowering marketing spend- ing. R&D spending reduces substantially when firms face no competition both at the clinical and marketing stages. Our results challenge the recent claim by pharmaceutical companies to the US government that enabling centralised procurement will hamper innovation and highlight the crucial effect of competition in preserving innovation under centralised procurement. In the context of China, where market- ing expenses are indicative of bribery activities, our findings also underscore that while competition at the marketing stage plays a crucial role in reducing prices, it also has an unintended consequence of promoting bribery.

Keywords: centralised procurement, pharmaceutical, innovation, marketing, market size, competition