Big Pharma in Ransom Tender

Price fixing, collusion, tender fraud, extortion, organised conspiracy, racketeering, profiteering, misgovernance, antitrust and stifling of small competitors. These are some of the economic crimes that are synonymous with some big pharmaceutical companies enjoying lucrative public contracts in South Africa.

 uSpiked Investigative Team can now produce circumstantial evidence proving the skulduggery of some big players in the pharmaceutical industry.

Litha Pharma (Pty) Ltd., Fresenius Kabi South Africa (Pty) Ltd., Pharmacare Limited, Ranbaxy SA (Pty) Ltd., Austell Laboratories (Pty) Ltd, Pharma Dynamics (Pty) Ltd., Equity Pharmaceuticals (Pty) Ltd., Sanofi - Aventis SA (Pty) Ltd and Sandoz South Africa (Pty) Ltd…  these are some of the companies that should be put under the spotlight to explain their conduct in public procurement processes.

"Take it all..."

Deep data processing and analysis by our team has revealed an organised scheme involving companies that deliberately out-bid competitors in public tenders, only to approach the National Department of Health a few months later seeking upward adjustments of their prices.

The suppliers in the cases we have so far identified focus on essential medicines, which the State desperately needs in public health facilities. Some of the essential medicines include HIV, TB, diabetes and hypertension drugs.

To seemingly naïve department officials, when a supplier requests to increase a specific unit price by R2.00, it does not seem much. But when the price hikes are tallied against the total awarded quantities, the bill can accrue to millions of taxpayers’ rand.

How do the companies get department officials to agree to the increases?

The next stage of big pharma’s trickery involves creating artificial shortages of drugs, which they mostly blame on lack of Active Pharmaceutical Ingredients (API). And if the gods play along, there would be some turbulences in the forex markets.

Our investigations factored in the issue of foreign exchange and the availability of APIs or lack thereof. Still, what emerged is a well-organised operation that would have made the 20^th century American crime boss Al Capone green with envy. Big suppliers routinely and deliberately under bid smaller suppliers who refuse to play ball. A few months after the awards of various contracts, a shortage of specific contracted products occurs. Clinics around the country start reporting stock-outs. Doctors in government facilities, desperate to save their patients, start issuing prescription scripts destined for private pharmacies, and woe unto patients who can’t afford. 

Under pressure from all quarters, the national health department does whatever it takes to ensure the much-needed drugs are made available. From our analysis, this is the period conspiring suppliers swoop in demanding the price hikes. It is metaphorically a gun point scenario for the department because it would be tricky to call for fresh tenders to address the stock-outs problem.

One indication that the claimed shortages are mostly artificial is the fact that private pharmacies have the same medications that suppliers refuse to source for public health facilities as per their contracts.

The big pharma scam does not quite unravel if the various contracts are examined in isolation. To unpack the complexities, uSpiked team run the assessment using a combination of data and records availed by the National Department of Health and then isolated the activities of individual players.

For instance, Khadija Jamaloodien, the health department’s National Director for Affordable Medicines signed off on Contract No. HP03-2015CHM on August 28, 2015. To a casual looker, the seven benefiting suppliers would wrongly be perceived to have been the lowest bidders, hence the R263 million contract.

We revisited Contract No. HP03-2013FP, which preceded the current one, signed off on September 3, 2013 by a director only identified as Hzeeman. Our system easily recognised grossly suspicious activities of Litha Pharma (Pty) Ltd.

Litha is as big as they come. It is not some run-of-the mill pharmaceutical or what Julius Malema would call a mickey-mouse operation. The company is a wholly-owned subsidiary of the global pharmaceutical giant Endo International Plc. that came to be as a result of a management buyout from DuPont Merck in 1997.

In the 2013 contract, Litha was awarded the privilege to supply one million pieces of Item No. 9, (Levonorgestrel 1.5 mg) or otherwise known as the ‘morning-after contraceptive pill’, at a winning bid of R15.50 per unit. By April 2014, Litha had applied and obtained permission to adjust its unit price to R17.0928. As we stated in our report published last year, this adjustment cost the public coffers a further unexplainable R1.598 million, an upward adjustment of about 10%.

Litha’s price adjustment was still questionable even after we factored in the contractually allowed foreign exchange risk factors. According to our data analysis, on September 3, 2013 when the contract was signed off, the Rand/Dollar exchange rate was at ZAR10.277 to the dollar. As of April 1, 2014 when the 10% adjustment was authorised, a dollar was exchanging at ZAR10.565, a fluctuation of merely 3% in the forex. In essence, Litha Pharmaceuticals and its parent company, both unregistered financial services providers, made a cool 7% in the forex market.

Unfortunately for South African taxpayers, Litha was far from being done screwing with the pharmaceutical tender process. When the department called for bids under Tender No. HP03-2015CHM, the company placed a bid for the same morning after pill at R14.75 a pill, an amount that was lower than the April 2014 adjustment and even lower than its 2013 bid of R15.50. This extremely low amount assured the success of its bid – no supplier could beat that low price.

It was an ingenious bid. In our report last October, we  casually predicted that Litha would approach the Department this year for another price hike: “…adjustment of prices is so routine and accepted that come next year, Litha Pharma and other suppliers will likely petition the department to increase the prices of contraceptives.”

Well, our prediction came true. By February 2, 2016, Litha had applied and was granted permission to adjust the price for Levonorgestrel by 27%, from R14.75 to R18.77. This adjustment must have helped the company to recover the discounted offer that had ensured it won the tender. No matter how many times uSpiked Team reworked the data, there was no way to justify the huge escalation.

Data does not lie: fraud in contraceptive tender

Alongside Litha were Fresenius Kabi South Africa (Pty) Ltd., and Pharmacare Ltd. (a former trading subsidiary of Aspen that has since been acquired by Litha Pharma]. Fresenius Kabi and Pharmacare were allowed to upwardly adjust their prices by 17% and 3% respectively.

Records obtained from the National Department of Health by our team indicate the remaining three suppliers; Bayer (Pty) Ltd., MSD (Pty) Ltd., Mylan (Pty) Ltd. and Triton Enterprises cc all left their prices at the contracted amounts.

The other group of suppliers of essential medicines can be found in Contract No. HP01-2015TB for various tuberculosis drugs.

French company Sanofi S.A. is one of the world’s largest pharmaceutical companies. Some platforms rank it as the fifth largest by prescription sales. Its local trading subsidiary is Sanofi-Aventis (Pty) Ltd. In the R940 million tuberculosis medicines tender awarded at the beginning of October 2015, the company bagged a R669 million of the split contract.

With all the financial instruments available to this behemoth plus the numerous patents under its belly, one would expect it to supply all the contracted nineteen items without any glitches. But that has not been the case. In the STOP STOCK-OUT’s list of the essential drugs in short supply at various public health facilities, there are five TB drugs that were contracted to Sanofi-Aventis (Pty) Ltd, namely Rifinah, Rifarfour, Isoniazid 100mg, Rifampicin, INH 300/150 56 Tablets, and Rifafour E-275.

While we acknowledge that there could be other possible reasons for the reported shortages of drugs at public health facilities, we find it disturbing that within three months of accepting the October contract, Sanofi’s executives were approaching Jamaloodien seeking permission to adjust their prices.

According to data and records at our disposal, Sanofi and six other TB medications suppliers have each approached the department at least three times between November 2015 and May 2016. In all the instances, they requested a few rands here and there which Jamaloodien duly approved.

As of now, the hike received by Sanofi has ballooned its contract for TB medication by an enviable R102 million.

We contacted Sanofi-Aventis to provide us with justification for the R102 million hike within months of winning the tender.

In an email response, Prudence Selani, the head of communications at Sanofi passed the buck to the national department of health; “As part of risk sharing mechanism between Suppliers and the DOH, DOH created a tender price adjustment formula which is depended (sic) on two main factors (i) changes in exchange rate  (ii) the percentage component cost within the molecule price (stated upfront in the tender bid) that is directly affected by exchange rate fluctuation.”

She added; “The objective is not to increase supplier margins, but to share risk in a volatile forex environment and to ensure sustainable competition and supply. The adjustments can either go up or down.”

The problem with Sanofi’s response is that our analysis of various available data and records shows no instances where prices have been adjusted downwards. Besides, there is no real proof of any risk sharing as all the adjustments favour the suppliers and never the tax payers.

From Sanofi’s local base in Midrand, we moved across Gauteng Province to Centurion’s Tugela House, the local headquarters of the scandalous Ranbaxy (S.A) (Pty) Ltd – now owned by Sun Pharmaceutical Industries Ltd.

Ranbaxy Laboratories Ltd. became notorious in 2008 for filing false reports to drugs regulatory authorities around the world and for its dodgy pharmaceutical testing schemes - for at least thirty of their products - yet the company continues to do business with the National Department of Health. What are the chances that the various products Ranbaxy has been supplying to the South African public are of questionable quality?

South Africa’s Medicines Control Council is not the only impotent regulatory body when it comes to examining the ‘drugs’ being hawked by companies like Ranbaxy. According to a report by Financial Times, the European Medicines Agency didn’t bother to find out why Ranbaxy readily agreed to pay a $500 million fine to the US Justice Department.

Usual suspects top the list of unscrupulous suppliers

Like Sanofi, within months of the TB medication contract being awarded and accepted by the suppliers, Ranbaxy sought and obtained an escalation that stood at 31% of their original contract value. Of the escalations we have identified, Ranbaxy’s tops the list followed closely by Litha with 27%.

Whatever the rationale, there must be something terribly wrong with the entire tendering process. If the global events precipitating supplies are so general, why didn’t the same affect Dr. Reddy’s Laboratories (Pty) Ltd and Biotech Laboratories (Pty) Ltd. on this particular contract? Or why haven’t the escalation percentages been uniform?

Our team contacted Dr. Reddy’s to find out why the company did not increase its prices. Two executives said the company’s major concern when tendering for public contracts is the ability to deliver at quoted prices, rather than the offers from competing bidders.

According to one trade expert, bidders know the duration of contracts and if a supplier fails to factor in market forces and turns to consumers for bridge finances, it is corruption.

Editorial: Thugs in Lab Coats

Our excavation continues…