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Is the Government really capable of achieving the objective of 50% self-sufficiency in pharmaceuticals by 2025, as envisioned by then President, Prime Minister Mahinda Rajapaksa? Are the State Ministry of Pharmaceuticals Production, Supplies and Regulation and SPMC hitting the final nail on the coffin of local pharmaceutical manufacturing just to serve their self-fulfilling agenda?
By a Special Correspondent
Recently, the Daily FT revealed how Sri Lanka’s State pharmaceutical manufacturer and relevant authorities placed profits before people, discussing the State Pharmaceutical Manufacturing Corporation’s (SPMC) joint ventures with manufacturers with foreign ownership.
This amoral enterprise of vested SPMC management undermines efforts of genuine local manufacturers to produce 50% of domestic requirement by 2025. But these vested parties wield immense influence, so much so the State Ministry for Pharmaceuticals seems to have given tacit approval. These actions compromise integrity of regulators and genuine investors, whilst threatening public spending and invaluable human lives.
In this issue, we delve into findings of the Auditor General’s reports of 2018 and 2019 that deliberate procedures of SPMC and its Joint Venture partners, as well as current shenanigans within the SPMC; seemingly with blessings of the relevant State Minister.
Disregard of Cabinet and process
The Auditor General’s report of 2018 on the SPMC and its joint ventures found that invitations for expressions of interest in October 2015 were sent prior to receiving Cabinet approval for such undertaking. The Report finds “documents prepared for submission of proposals for commencing joint ventures with the Corporation had not been approved by the Project Committee and the Cabinet-appointed negotiation committee, respectively”.
SPMC Management’s response to this finding is vague and simply states Cabinet approval was sought on public-private partnerships in 2015, and provides no specific details. The Auditor General asserted that prior approval should have been obtained and action taken as per Government guidelines.
The report also found that a committee to open proposals received for initiating joint ventures was not appointed and no reports had been prepared. Thereby, information relating to the date of opening bids, time, number of proposals received and “investors who had submitted proposals” could not be obtained. Furthermore, SPMC formed agreements with 17 investors, but only seven investors had submitted Expressions of Interest, the Auditor General found.
SPMC responded there was “no necessity to appoint a committee for opening proposals because proposals received to initiate joint ventures were merely expressions of interest only, and there was no financial or technical value”. However, to date billions of rupees in public funds have been spent on these dubious institutions.
Quality a matter on paper
To brand these venture partners ‘dubious’ is deliberate. These venture partners won tenders to supply the state sector with improbable propositions. Later, they were found providing inferior medicines unfit for consumption to the Sri Lankan public, and often upon inquiry no such company or supplier existed then.
Possibly, to circumvent such issues of quality, the Auditor General noted SPMC must offer technical assistance to its partner, and for that purpose 10% of shares of the investor’s business should be issued to the SPMC. However, 12 items of drugs worth Rs. 1.06 billion had been purchased from two companies that had failed to comply with this directive. Neither did SPMC offer any quality control or technical assistance for these products, which were sold to the Medical Supplies Division. The SPMC subsequently responded that approval for vesting shares was only received in June 2019, demonstrating the management had acted contrary to procedure.
“Out of the drugs which were supplied from joint ventures during the year under review, quality had been tested in only one item of drugs,” the Auditor General reported of the SPMC. Up to 300 different drugs are supplied annually by this institution and consumed by the public for the purpose of health.
Drugs procured through joint venture partners are sold under the SPMC logo, and it is critical to ensure quality to safeguard the trust and value attached to this state institution by consumers. But as alluded to above by the Auditor General, there exists a degree of doubt about the corporation’s commitment to quality.
No respite despite concerns
The 2019 report by the Auditor General sheds further light on misconduct at the SPMC. The report finds whilst the committee had recommended SPMC enters into direct agreements with producers of relevant pharmaceuticals, “the Chairman of the Corporation had entered into a tripartite agreement with a local manufacturer and an interim institute for manufacturing and supplying of surgical consumables”. The SPMC notes these tripartite agreements were cancelled in May 2020, but not before scores of substantial transactions and payments had been made.
It is imperative to note this odious procedure is not an event restricted to the term of the current Government. It begun during the tenure of the ‘Yahapalana’ Government and pervaded the current regime albeit at a much larger and more calculated level. There is now a concerted effort to portray the functions of these ‘joint ventures’ as compliant with Government policy, perhaps blindly supported by the State Minister.
Secondly, over the past couple of years serious concerns were expressed over quality and preferential pricing given to products from SPMC joint ventures. When local pharmaceutical manufacturers raised this issue, vested parties moved to reduce prices to appear on par with accredited local products.
For instance, the SPMC and ‘joint venture’ partners supply Losartan Potassium Tab BP 50mg at Rs. 2, whereas the price of locally manufactured quality product is Rs. 1.65. The national requirement of Losartan Potassium was approximately 200 million tablets in 2019. Accordingly, the loss incurred by the Medical Supplies Division on Losartan Potassium alone would be around Rs. 70 million.
Daily FT also saw documents submitted by one SPMC joint venture to the Pricing Committee of Ministry of Health in 2020. In the detailed costing provided by the party, the declared cost of Active Pharmaceutical Ingredient (API) is 40% higher than costs declared by an accredited local manufacturer for the same product. Ignoring this glaring discrepancy, the MSD procured products manufactured from the SPMC ‘joint venture’ with the resultant loss of more than Rs. 100 million of public funds.
This is facilitated by top management of SPMC who endorse costings provided by joint venture parties. It was also noted no supporting documentation had been submitted by SPMC ‘joint ventures’ to the Pricing Committee for validation of API and production costs. As a result, SPMC ‘joint ventures’ are allowed a free hand to quote higher prices by the Pricing Committee, enabling them to exceed agreed profit ratio of cost + 20% as allowed to other local manufacturers.
Why does the Pricing Committee turn a blind eye on such malpractices that bleed public finances? Why is the SPMC Chairman allowed to sit on the Pricing Committee that reviews pricing documents submitted by the very institution he represents? Who are the ultimate beneficiaries are of these scams?
Whither our people?
The second Auditor General’s report in 2019 once again highlights non-issuance of shares by joint ventures to the SPMC, despite transactions worth billions of rupees taking place with SPMC again providing little or no quality control or technical assistance on products. Questions were raised in both reports over profits margins, which as per recommendation should be 20% over production cost of pharmaceuticals. The Auditor General recorded instances with 23.15% profit margin on top of production cost, and a staggering 115% mark up for surgical consumables.
To this the SPMC management responded: “Action will be taken not to occur such instances again, the tripartite agreement was cancelled, and such purchasing will not be done from such intermediaries from now on. A committee had been appointed by the Corporation to study this methodology in future with transparency and it was planned [sic] to refer to the pricing committee after rigorous study by the said committee. There was an opportunity to save a huge amount of money to the country and create number of new job opportunities because joint ventures are more profitable to the country.”
The response from SPMC management draws significant interest and scorn. It speaks of initiatives to save money for the country with local manufacturing, when it is demonstrated the Corporation is assisting dubious institutions masquerading as local manufacturers to supply substandard drugs and send billions of public rupees out of the country!
SPMC’s joint ventures have come at the expense of local pharmaceutical manufacturing industry, which has invested billions to build quality manufacturing capacity. SPMC’s joint ventures with foreign agents are undermining local enterprises that do in fact provide employment for thousands of Sri Lankans, and provide quality pharmaceuticals at a lower price.
Money matters, not agreements
On 1 February, SPMC Chairman Dr. Uthpala Indrawansa wrote to State Minister for Pharmaceuticals Channa Jayasumana, requesting SPMC manufactured drugs receive priority in the order allocation process at Medical Supplies Division (MSD) of Ministry of Health.
Through this, the SPMC Chairman purportedly opened a backdoor for favoured ‘joint venture’ partners to benefit from priority State procurement for products falsely claiming to be made by SPMC. Furthermore, SPMC went on to propose new provisions that eats into product allocations granted to local manufacturers as defined in the Guaranteed Buyback Agreement, which is valid until 2024. This letter was endorsed by the State Minister, and Secretary to the State Ministry Rohitha Uduwawala. How a State Minister can on a whim change conditions of a legally-binding agreement formally executed between the State and accredited local manufacturers of medicines is questionable.
Industry sources informed the Daily FT that widely used products such as Metformin 500mg, Omeprazole 20mg, Hydrocortisone Acetate Ointment 1% w/w 15mg, Hydrocortisone Cream 1% 15 mg, Miconazole Nitrate Cream 2% 15 mg, Glicazide MR Tab 30mg, Sitagliptin Tab 100mg are not manufactured by SPMC, but instead by these so-called joint venture companies. In addition, industry sources allege both the Chairman and the State Minster regularly intervene on behalf of SPMC ‘joint venture’ companies to obtain priority clearances for their products by “falsely” using the manufactured by SPMC tab. This practice has posed an existential threat to local manufacturers whilst misappropriating public funds and misleading leadership in the country at the same time.
JV partners – the who and the how
Who are these joint venture partners? Much of the agencies registered in Sri Lanka consist of foreign partners mostly from China and India. Much of the local directorship in these companies have family members of the same household appearing across multiple companies, incorporated between 2013 and 2019.
The Daily FT has in its possession a copy of one such signed agreement between the SPMC and a joint venture partner, which reads: “SPMC shall purchase the minimum quantity of Schedule Products per year from XXXX in such quantities as specified in Schedule 2 for a period of 15 years from the date of execution of this agreement.”
This agreement was signed in 2018. The Government in 2015 presented the local private sector a 10-year guaranteed buy-back period, to boost local production to 50% of domestic requirement. Within just three years it reneged on the buy-back agreement with the local industry and is instead presenting dubious businessmen 15-year long contracts assuring purchases with minimum quantities. How could a local industry ever hope to grow when government and its institutions do not honour the very agreements they execute?
“The parties may (also) agree on an annual increase of the quantities of Schedule Products to be purchased by the SPMC under this Agreement subject to minimum quantity guaranteed,” the agreement further adds. In the case of inability to supply, the joint venture partner also has the right to source products or its generic equivalent from another manufacturer in Sri Lanka approved by SPMC and supply the balance amount under the same terms and conditions. Effectively, the ‘joint venture’ partner is allowed to buy product at a lower price and sell to SPMC at a predetermined price which is usually higher than the real value; all without actually manufacturing a single tablet.
Also, the said agreement adds: “In the event of a drop in demand for a Schedule Product, the SPMC shall have the power to add products to XXX product portfolio by an amendment with no less than 04 months advance notice in order to ensure that XXX would receive payment, at a minimum, an amount equivalent to the quantity guaranteed.”
An astute reader will always probe the question, why SPMC is guaranteeing volumes only for a select set of private companies under the guise of joint ventures, at the expense of accredited private sector manufacturers. This begs the question, did Prof. Senaka Bibile establish the State pharmaceutical manufacturer to swindle the public? Definitely not, but this is what current officials who manage this once august state enterprise are doing without any shame.
Games people play
Furthermore, according to recommendations made by the Official Committee appointed by the Cabinet, joint ventures should only be established with companies which manufacture drugs, but SPMC has contracted private companies which only do distribution, the Auditor General found.
It was also confirmed during inquiry that cost sheets presented by such company to SPMC were not accurate and did not include actual cost of production by the original manufacturer. But, the SPMC still chose to proceed with the contract. The Certificate of Good Manufacturing Practice and the license for manufacturing surgical consumables too had not been obtained by these organisations from the National Medicines Regulatory Authority.
The charges against the SPMC Management are manifold and critical in nature, highlighting grave concerns over misuse of public funds and utter disregard for public health. This is notwithstanding the severe blow to local industry, employment, export potential, national reputation and the burden it heaps on our balance of payments position.
COVID-19 vaccine production fiasco
This debacle has now spilled over to handling of COVID-19. Recently, media reports highlighted an initiative to manufacture COVID-19 vaccines in Sri Lanka though a ‘joint venture’ between a local company and the Chinese company manufacturing Sinovac vaccines.
In a letter dated 13 June, Chairman of Kelun Lifesciences, a joint venture company of SPMC, wrote to State Minister Channa Jaysumana, demanding guaranteed minimum purchase order of 13 million doses of Sinovac vaccine, even before manufacturing agreements have been finalised. Kelun Lifesciences in this letter also informs the State Minister that Sinovac Biotech will only engage in business with a partner who is a Government entity, or one with a collaboration with a Government entity, thus setting the stage for priority entry into COVID 19 vaccine manufacturing for Kelun Lifesciences and SPMC.
Going further, Chairman, Kelun Life Sciences informs the State Minister if the price of the vaccine “is disclosed to the public or spoken about in the public” the commercial agreement between relevant parties “will be subject for termination and they will take legal action”.
Notwithstanding the unholy commercial terms of engagement for vaccines to be made by Kelun Lifesciences and their business associates, the State Minister who seems to have given tacit approval to these demands has been promising millions of doses of locally-manufactured Sinovac vaccine to the people of Sri Lanka from July this year.
Pandemic of profits over people
Besides the preposterous financial demands made from the State by this ‘joint venture’ partner, industry experts that spoke to Daily FT are of the opinion even a fill-finish operation of a vaccine, if done to highest international standards, will take a considerable length of time to begin commercial production. Bottling of vaccines is a very sensitive exercise that needs to be supported with long stability data. Therefore, this process could even take longer than 12 months.
Furthermore, it is reported Kelun Lifesciences is a manufacturing facility built for intravenous products not vaccines. However, considering the past events of SPMC and its ‘joint-venture’ partners, one must not be surprised if financial transparency and due process required for vaccine manufacturing are ignored. Accordingly, if public health is of secondary importance to the SPMC and Government, Sri Lanka will become a packing destination for the Chinese vaccine that has the lowest efficacy against COVID-19.
Is this the reason decisions to pre-order vaccines were continuously delayed despite numerous requests for vaccine pre-orders by both Astra Zeneca and Pfizer from September/October 2020? Were the prices quoted by Astra Zeneca and Pfizer at $ 5.00 and $ 6.75 per dose respectively too low for the State Ministry? Was there a sinister plan to delay availability of good quality vaccines in order to ‘create’ a shortage to facilitate procurement of Chinese vaccines at a much higher price to line individual pockets?
How many more COVID 19 patients and deaths do we need before this new ‘joint venture’ packs Sinovac vaccines in Sri Lanka? How long will it take Kelun Lifesciences to manufacture 13 million doses to expected international standards after obtaining regulatory clearances? More importantly, what is the price at which Kelun Lifesciences is going to supply Sinovac to the State Ministry under the proposed buyback agreement, and how will they compare with international purchase prices?
Worryingly, highly-respected international media houses reported that countries like Indonesia, Mongolia, UAE and Bahrain, which vaccinated majority of their populations with Chinese vaccines, especially Sinovac, are now planning to offer a third booster dose of another type of vaccine (e.g. Pfizer) due to breakthrough infections among fully-vaccinated people. Is this an alarming signal on Chinese vaccines? Only future studies and scientific data can answer this important question. But, for now, we need to ask the question, can Sri Lanka afford a third dose, in case the same scenario of UAE, Indonesia and Bahrain are repeated in Sri Lanka?
Role of Government and future of local pharma
How can successive governments allow such malicious enterprises to thrive within its own fold? How can it sit quietly as State machinery proceeds to poison the very people it has sworn to protect? How is it not concerned of the billions of rupees lost as Sri Lanka grapples with its worst economic crisis since independence? Does the Government really not care? Why are officials of the State Ministry for Pharmaceuticals and SPMC, who are responsible for the serious violations highlighted in the Auditor General’s report, not held accountable?
As a business-focused publication, it interests us how the Sri Lankan governments that called and paved the way for local investment in this sector from 2015 onwards have effectively reneged on their agreement to buy-back genuine local pharmaceutical produce. Despite numerous representations by the Chamber of Pharmaceutical Manufacturers Association to the State Minister for Pharmaceuticals and other officials no concrete steps have been taken to correct these injustices and corrupt practices.
The Government merely watches as local industry crumbles under the weight of overcapacity. What is the message that we as a destination is giving to the global community of investors? Any number of investor forums would not matter unless policy decisions are respected and due process is followed at ground level to cement confidence amongst investors.
As stated previously, these ‘joint ventures’ were initiated with privileged patronage during the previous regime, and the practice permeated to the current regime backed by more powerful individuals abusing titles and associations with high office. It is a burden to be borne by the people of Sri Lanka; for how much longer it remains to be seen.
The facts highlighted above as well as in our previous article clearly suggest that the future of local pharmaceutical manufacturing industry is gloomy. The so-called ‘Joint Ventures’ of SPMC will continue to receive priority over the genuine local pharmaceutical manufacturers. This will jeopardize the competitive landscape for local pharmaceutical manufacturing, and make room for further corruption. The bad experiences of the local private sector can haunt the dreams of the government intending to establish dedicated pharmaceutical manufacturing zones in Millawa, Oyamaduwa and Hambantota. Who will want to invest in a country where private sector does not receive a level playing field?
Is the Government really capable of achieving the objective of 50% self-sufficiency in pharmaceuticals by 2025, as envisioned by then President, Prime Minister Mahinda Rajapaksa? Are the State Ministry of Pharmaceuticals Production, Supplies and Regulation and SPMC hitting the final nail on the coffin of local pharmaceutical manufacturing just to serve their self-fulfilling agenda?
