Privatization of Israel's Coronavirus Fight Leads to Questionable Contracts, Higher Prices

TheMarker investigation raises questions about key contracts, such as the one to run the Health Ministry's logistics center

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File photo: An Assistant is seen conducting research for a coronavirus vaccine in a laboratory in San Diego, California, March 17, 2020.
File photo: An Assistant is seen conducting research for a coronavirus vaccine in a laboratory in San Diego, California, March 17, 2020.Credit: BING GUAN/ REUTERS

Two weeks ago, an Israeli businessman came to the Chaim Sheba Medical Center at Tel Hashomer for a meeting with officials from the government’s Coronavirus Command and Control Center. The agenda: Medical gear used to treat coronavirus patients that Israel imports at a cost of millions of dollars.

“I told them we could be producing these products in Israel,” he recalled. “I wanted to see how we could bring the knowhow needed to make the products here.”

Local production isn’t just about business – it would better enable officials to supervise quality and control prices. Yet in recent weeks there have been reports about bizarre deals Israel has been making with foreign suppliers through shadowy intermediaries without competitive bidding.

“I saw that they weren’t really interested,” said the businessman, who like most of those who agreed to speak to TheMarker, asked not to be named for fear of angering the Health Ministry or logistics center, with whom they do business.

“At the end of the meeting there was no summing up of the discussion and no minutes. I don’t like meetings without minutes. I looked around the room and realized that it’s a secretive organization,” the businessman said.

“I still don’t get what’s so secret about manufacturing coronavirus equipment in Israel, why we’re spending so much importing things we could make here more cheaply and why this isn’t a higher priority. If they took the matter seriously and not as a secretive body, a lot of Israeli industrialists, even those working overseas, would contribute to the task,” he said.

The center is Israel’s main logistics body in the fight against COVID-19. It’s responsible for collecting and warehousing supplies, managing the supply chain and ensuring supplies reach hospitals and other institutions.

Because the Health Ministry doesn’t have the expertise, management was given in May to a little-known private company called J&K Experts. The contract was given to the company with little publicity, but it involves big sums of money – a 1.66 billion shekels ($490 million) procurement budget to be spent over three months (and J&K was given an option to extend the contract by 60 days).

Dr Karina Glick checks a medical ventilator control panel at a ward at Samson Assuta Ashdod University Hospital in the southern Israeli city of Ashdod, March 16, 2020.
Dr Karina Glick checks a medical ventilator control panel at a ward at Samson Assuta Ashdod University Hospital in the southern Israeli city of Ashdod, March 16, 2020.Credit: AFP

The government committee that awards exemptions for competitive bidding was told by Orit Efrati-Lev, the Health Ministry’s head of procurement, that J&K was chosen because it “has rich experience in logistics.”

Although the company’s website says its managers do have 20 years of experience managing big systems in Israel and Hungary, according to the Companies Registry, J&K was only formed last year. Its CEO, Noam Yaacov, was a career army officer whose last role was coordinating procurement for military intelligence with the Defense Ministry and Prime Minister’s Office.

In May, the Health Ministry promised to re-open the contract to run the logistics center this time with competitive bidding. But with the J&K contract due to expire in another week, no tender has been issued. “In the midst of a second [coronavirus] wave, replacing the contractor could lead to a significant impairment in the center’s functioning,” the ministry explained in a statement.

J&K hadn’t commented by press time.

The logistics center managed by J&K isn’t the only coronavirus-related activity that has been privatized. Two weeks ago, Health Minister Yuli Edelstein announced that he was spending 4 billion shekels to conduct 60,000 coronavirus tests daily via two private labs that had been awarded the work.

It’s an expensive way to conduct the testing. TheMarker has learned that the first company, AID Genomics, which is supposed to operate a lab together with My Heritage, is offering to pay lab workers 18,000 shekels a month, compared with 8,000 paid at public sector facilities.

Ilex Medical and Neopharm Group are reportedly trying to recruit lab workers with salary offers at least double what the public sector labs pay.

A coronavirus ward in Beilinson Hospital, Petah Tikva, central Israel, April 26, 2020.
A coronavirus ward in Beilinson Hospital, Petah Tikva, central Israel, April 26, 2020.Credit: Tomer Appelbaum

Although the Health Ministry has barred private labs from raiding public labs to hire staff, a source told TheMarker that most of them are in fact headhunting senior personnel. “The absurdity is that the government labs could be increasing the rate [of tests] and conduct 40,000 every day, but instead of making use of a national resource, they’re privatizing services at high cost,” said the source, who spoke on condition of anonymity.

In response, AID Genomics said: “The opposite is true. The company works in complete transparency with the Health Ministry, even in regard to recruiting employees, although it isn’t obligated to do, and acts in accordance with the ministry’s procedures.”

Ilex only commented that it is “growing and hiring staff.” Neopharm said it was abiding by hiring guidelines and rejected job applications from public sector lab employees.

The lab contracts were awarded through competitive bidding, but one of the contenders suggested that the playing field wasn’t really level. The Health Ministry, the source said, gave bidders only a week’s notice to prepare their offers, which he suspects means that some knew the terms in advance.

After bidding was closed, the ministry extended the deadline and then changed some basic conditions, including the minimum annual turnover bidders had to have and the addition of a requirement to place a 10 million shekel deposit.

In defense of the tender, a ministry official told The Marker, “Our goal was to reach 60,000 tests a day by November. To get there, we sometimes had to be aggressive. We needed to work quickly so we set tight timetables. But we realized the market had difficulty coping with this … so we delayed [the bidding].”

In another incident, A., an executive with an importer that has worked with the Health Ministry for 20 years, said his company found a product used in coronavirus testing was suddenly cut out of the procurement process.

“Until now, our product had met everyone’s satisfaction. But more recently it’s become apparent to us that the Health Ministry thought that we’re importing the wrong product. Why? I don’t know. The State of Israel decided that there would be a different sole supplier.”

That supplier got approval to import the device from China, while A.’s company was bringing the same thing from a factory in Europe. “It’s true that at the start we were having trouble bringing in big volumes. Maybe that’s what caused them to make their decision, but I don’t understand why they needed to have a single supplier.””

A similar thing happened in connection with purchasing test kits. At the start of March Sarel, a company that manages the Health Ministry’s procurement, approached Biological Industries about manufacturing the kits. Together with another company, Novamed, Biological Industries had been the ministry’s main supplier of testing kits.

The ministry informed them of its requirements and the two worked together to develop the kits. Two weeks later, an 11.3 million shekel order for a million kits was placed with Biological Industries.

But as the two firms got to work and were spending money expanding their manufacturing capacity, they began hearing rumors that the ministry had contracted without competitive bidding with another company, called LR, to import as many as $7.7 million worth of kits.

What worried the two manufacturers even more was that the publicly stated reason for exempting LR from competitive bidding was the claim that the locally made kits were not good enough.

Who made that decision? It’s not clear.

According to the company page on the Alibaba website, the Chinese company, Lingen Precision Medical Products, that supplies LR with the gear has a relatively small manufacturing facility in Shanghai that only exports 9% of its output. In April, a small number of the kits in the state of Washington showed signs of contamination and were all recalled, although it was not believed the problem affected their reliability.

The Lingen kits cost the same approximately 11 shekels as the locally made kits. Since LR was exempt from a competitive tender it did not have to beat the local price, but under normal circumstances the rules would require it to have priced its kits at least 15% lower to get the contract.

LR itself operates mainly in the fields of infrastructure and water in Africa, Russia and China and in the past was involved in arms deals. Its medical unit is involved mainly in developing hospitals in Africa and Ukraine and a joint Israel-Chinese medical training initiative. It’s also working with Jerusalem to create a shared workspace center for biotech startups.

A scientist prepares samples during the research and development of a vaccine against the coronavirus disease (COVID-19) at a laboratory of BIOCAD biotechnology in Saint Petersburg, Russia.
A scientist prepares samples during the research and development of a vaccine against the coronavirus disease (COVID-19) at a laboratory of BIOCAD biotechnology in Saint Petersburg, Russia.Credit: Anton Vaganov/ REUTERS

A source close to the company said those health-related businesses made it an appropriate candidate to get the testing-kit contract. Still, it’s not clear how LR was able to win an exemption from competitive bidding.

Prof. Ella Mendelson, who heads at Sheba-Tel Hashomer Medical Center’s Central Virology Laboratory, received samples of the Lingen kits for inspection but in an SMS message, obtained by TheMarker from one of the local producers, she said that they were not “tested for long-term stability or sterility.”

The source also said the kits imported by LR meet Israeli standards and that company representatives conduct daily inspections of Lingen’s production lines. The Washington recall came before Lingen began manufacturing for Israel, and the Health Ministry has been inspecting them before they are distributed to health care providers.

Biological Industries is suing the Health Ministry and LR over the issue of the exemption from competitive bidding. The court has refused to grant an interim injunction because the contract is already being fulfilled.

The ministry and LR have yet to respond to the allegations, but in a statement the ministry termed the decision to purchase the LR kits as strategic, to ensure adequate inventory and that it continues to support local industry.

About a month-and-a-half ago, the Health Ministry issued a call for companies to survey serological tests of the coronavirus. Serological tests detect the presence of viral antibodies in the body and a survey of them can be used to estimate the rate of infection in the population. But even as the call was issued, tens of thousands of expired serological tests were already lying in ministry warehouses.

At the end of April, the ministry had purchased 2.4 million of the kits, about two million of them from Abbott Laboratories, at a cost of $10 per test. The Abbott portion of the contract was awarded by the Defense Ministry to Ilex Medical without competitive bidding.

The order surprised many in the health care system. Only a month earlier, the Health Ministry had said it wasn’t interested in purchasing serological testing kits. Even though a contract was signed just a month later, the tests that were being acquired hadn’t received U.S. Food and Drug Administration clearance, nor had they been validated by Israeli laboratories.

“As a rule, kits are given for testing at Prof. Mendelson’s central lab at Sheba, which gathers the data and decides what kits to buy. This time, that didn’t happen,” said a source in the laboratories field.

After weeks of delays from the time the kits were purchased, the Health Ministry announced the start of a national survey involving 70,000 people – but that was just a week before the kits’ July 1 expiry date. According to one source, Ruth Yishai, the Health Ministry’s director of laboratories, has instructed labs to use expired tests in the meantime.

Meanwhile, the Health Ministry has refused to say how many of the expired kits it has in its warehouses or how many of the 2.4 million kits it has used to date. Estimates are that less than half the Abbott kits have reached Israel and that only 5% have been used.

Ilex is delaying supply of the remaining kits to avoid a situation win which they expire before they are used. Most of the kits that are already in Israel have an official expiry date of mid-December, according to a Ilex executive, who asked not to be named.

More generally the company had this to say in a statement: “Our job is to provide the tests. We are not responsible for the number of tests actually performed. Validation is the responsibility of the Health Ministry, which has written a complex and strict protocol.”

It noted that in April, when it won the contract for the serological tests, there were two companies in the world that had received FDA approval for such kits.

Sources have questioned the price Israel is paying for the Abbott kits. “The maximum price paid for good serological kits is $2.50 each with a shelf life of 15 to 18 months – and there are a lot of these available,” said one source. “A country wants 50,000? They’re there. You want a million? They’ll supply you. Buying two million tests, some of which have expired even before they’ve been checked by a lab, is ridiculous.”

In response, a Health Ministry source said that at the time it was conducting negotiations on the contract the price it paid was the best that could be obtained.

Another official elaborated. “In March and April we were under immense pressure and we had very little knowledge,” he said. “Today we’re in a different place. The bottom line is that there’s no shortage of laboratory tests, no shortage of sampling kits and no shortage of support equipment.”

As for the logistics center, the Health Ministry said in a statement that it was operating according to rules and regulations, including those about hiring and issuing tenders.

“The [center] rejects all the allegations made in the article. Unfortunately, some of the allegations arise from business interests that aim to malign it through the newspaper reports,” the Health Ministry said.

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