[COLUMNIST] Restructure the medicine procurement and supply chain ecosystem

EMIR Research highlighted issues and risks in the drug procurement and supply chain ecosystem, particularly for the products under the Ministry of Health’s (MOH) Approved Product Purchase List (APPL), in a prior publication titled “Problems with Monopolies in Medicine Procurement and Supply Chain” dated April 18, 2023.

Industry players, think tanks, experts and politicians have raised concerns regarding the apparent “monopoly”, pointing to Pharmaniaga’s exclusive concession to supply products under the APPL programme.

The existing arrangements may carry with them inherent risks and an unfavourable business landscape—potentially affecting medicine and medical products supply security and the ability to optimise supply guarantees for the government at the best cost for the taxpayers.

Despite this, it has been reported on April 18, 2023, that Pharmaniaga’s concession has been extended, for what could be another 10 years, though sources (at the time of writing) are inconsistent on the matter.

In this article, EMIR Research presents the risks surrounding Pharmaniaga’s role and its financial situation and key recommendations to create a more competitive, transparent and fairer procurement and supply chain ecosystem for all parties.

PN17 Status of Pharmaniaga

It is worth noting that Pharmaniaga has been performing well. As far as being able to carry out its role as the logistics and distribution concessionaire, MyCC reports Pharmaniaga as a company with extensive warehouse and logistics facilities.

Pharmaniaga claims to have 14 pharma-grade warehouses and distribution centres in strategic locations and manages a fleet of more than 300 vehicles and 500 all-local employees in its logistics and distribution businesses.

In the March 30 press release, Pharmaniaga stated that it completes more than 450,000 deliveries annually across all modes achieving over 98% of the KPIs score as set by the MOH.

Therefore, many of these gripes from the medicine and medical products suppliers arise not due to weakness in Pharmaniaga’s capabilities, but due to Pharmaniaga Berhad’s recent classification under the Practice Note 17 (PN17) of the Main Market Listing Requirements of Bursa Malaysia.

This came as a result of a reported RM607.32 million worth of net loss for the financial year end of 2022 (FY2022) largely due to uncleared Covid-19 vaccine stocks.

Risk of Medicine Supply Disruptions

The PN17 classification may impact Pharmaniaga’s credit facility and the financial troubles have ripple effects throughout the supply chain.

For example, it could be hard for Pharmaniaga to provide a payment guarantee of when a payment can be made after stocks have been delivered by the suppliers. This is a big issue for vendors as they would need working capital to continue operations and production.

In the face of increasing losses, suppliers may even choose to opt-out from fulfilling the delivery of products, even if this means facing contractual penalties.

The problem is compounded by the fact that Pharmaniaga is the only authorized player bridging the suppliers and the MOH in the APPL market. The existing exclusive concession deal awarded to Pharmaniaga prevents APPL products to be supplied directly to the MOH.

The MOH must address the matter to avoid a potential boycott/public strike by the suppliers as the risk is a shortage of crucial medical supplies and pharmaceutical products at MOH facilities, consequently leading to other problems such as public unrest or societal panic.

Extending the concession could improve Pharmaniaga’s access to credit facilities and this could be a way for the government to assist the financially-troubled group but it does not address the ongoing issues—potential unfairness in deals with vendors and the MOH, unfavourable/uncompetitive business ecosystem and higher supply disruption risk arising from the reliance of a single player.

Recommendations

The bottom line is to ensure a continuous supply of medical and pharmaceutical products at the best price, which could be achieved by having transparent and competitive multiple supply channels. An overhaul of the procurement system is needed.

The general recommendation is for the MOH and the government to urgently review Pharmaniaga’s PN17 classification and the supply chain for APPL products from the perspective of supply disruption risk.

General solutions may include the ability to supply directly to MOH, starting with a temporary opening of the concession for multiple players to compete so that suppliers have better options.

The competition helps drive fairer and more favourable supply contracts between the wholesaler/distributor and the vendors, simultaneously addressing the objectives of supply sustainability and price.

Specific recommendations include (but are not limited to):

1. Declaring PN17 of Pharmaniaga as an emergency, enabling the switch to a direct supply of APPL products via an open tender system. Note this is assuming MOH or its facilities are able to handle direct supply. This could be doable as Malaysia has precedence in the temporary shift to direct supply during the Covid-19 pandemic;

2. Phase-by-phase switching to direct supply. Taking into account two factors, namely the recently reported extension of the concession and that a direct supply may require the MOH to have the necessary infrastructure, systems and manpower, the shift towards direct supply will have to be done in phases. The present concession should be reviewed for a shorter duration and for specific regions where the role of a specialised distributor and storage will remain, at least initially, depending on the local infrastructure of a particular location. For example, the northern and southern regions, and Sabah and Sarawak would likely still require third-party logistics and storage facilitation, particularly if it involves specialised storage. Over time, the MOH should move towards the ability for vendors to supply directly, requiring the MOH to have its own facilities instead of relying on a private contracted party—removing a layer of cost and boosting supply security. The recently extended concession agreement must be reviewed to reflect this;

3. The MOH to form an emergency task force to address this pressing issue;

4. Open up the supply of APPL products beyond central purchase by MOH (for example, direct supply for the LPO market at the institutional level); and

5. To review and improve the registration process for medicines, to significantly shorten what could easily take between 6-12 months.

Conclusion

Pharmaniaga is the largest locally-owned pharmaceutical company, with Pharmaniaga Manufacturing Bhd. as Malaysia's biggest local controlled medicines manufacturer.

It is clear that Pharmaniaga is a capable Malaysian company and there could be strategic, economic and socioeconomic reasons to justify government intervention or financial assistance. This is a separate discussion not covered in this article but it is clear that it does not necessarily mean a continuation of the same arrangements.

It was reportedly said that the concession extension was due to Pharmaniaga’s GLC status, making it the government’s responsibility to help the company. However, the suggested task force must review how the decision to continue the concession will address these ongoing issues and take the necessary mitigation steps.

The apparent “responsibility” to assist Pharmaniaga from the perspective of being a GLC must be weighed and analysed (cost-benefits, short versus long-term impacts etc.) carefully and transparently against the overarching responsibility to address issues that may affect the government, taxpayers and businesses.

In other words, the government has to consider its bigger obligations to the nation than its responsibilities to a GLC.

The bottom line is to ensure a sustainable supply of medical supplies through multiple, competitive and transparent channels to ensure the best terms and prices can be achieved.

The potential savings are also significant.

Former finance minister Lim Guan Eng reported in 2019 that the “monopoly” costs the government more the RM1.1 billion annually, while the Galen Centre for Health and Social Policy chief executive officer Azrul Mohd Khalib was reported in 2019 to have said that the MOH could benefit with up to RM36 million annually by allowing suppliers to negotiate and bid directly to the MOH.

The increased competition might drive Pharmaniaga to even greater heights while the government and the taxpayers benefit from better prices and a higher number of medicines supply channels.

A win-win for all parties.

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Dr Rais Hussin and Ameen Kamal are part of the research team of EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.