Chinese Puzzle - Pharmaceutical Executive


Chinese Puzzle

Pharmaceutical Executive

A Catastrophe Waiting to Happen

No large-cap contacted by Pharm Exec for this story would comment on any aspect of the heparin case. But some industry insiders are calling it the canary in the coal mine. Gail Cassell, Lilly's VP of scientific affairs, says, "Unless the deficiencies [in this case] can be addressed rather urgently, this is not the last such situation. We will have more of them."

Others call for an outright ban on pharma outsourcing to China until Beijing reforms its regulation and enforcement. "This has become a public health issue," says Michael Santora, an associate professor of business ethics at Rutgers Business School. "The US needs to carve out drugs from our trade negotiations with China until it cleans up its act."

But many analysts and investors say that given the rate of China's economic boom, the government is making progress in taming its entrepreneurial Wild West. "China is at a crossroads in terms of market share in outsourcing," says James Meadows, a partner at Hunton & Williams. "They're exactly where India was 15, 20 years ago. They need a legal structure and enforcement to establish accountability, and the government is working toward that."

"Heparin has fewer Chinese controls than the steak you or I eat in our US or EU restaurant, which can be traced back to the actual animal," Huvione's Villax says. But, as he points out, China manufactured heparin—"a complex natural product made from animals and administered by injections to weak patients, and, therefore, a catastrophe waiting to happen"—for 30 years before the catastrophe arrived. He attributes that record of success entirely to the quality control (QC) and good manufacturing practices (GMPs) enforced by the manufacturers themselves.

Says Sheldon Bradshaw: "China realizes that if it becomes a pariah in global trade, that would have a devastating impact on its economy." China also realizes that the drug industry is too profitable a partner to risk losing. "They probably feel they have an economic—if not a moral—imperative to get their act together," Bradshaw says.

Trouble in the World's Workshop

Pharma is equally aware of how profitable a partner China promises to be. Long known as the world's workshop (or sweatshop) for its cheap labor and raw materials, China is already by far the world's largest producer of pharmaceutical ingredients. According to Credit Suisse, in 2005, China had 14 percent of the $31 billion global market for higher-level APIs; by 2010, that share is due to hit 25 percent.

With the large-caps under intense pressure to rationalize their costs, outsourcing to China and India has become a business mantra. An even more practical reason is the growing competition for share in specialized markets like oncology and "the shift from small molecules to biologics," Joel Tune, then general manager of BioPharma Solutions, told Pharm Exec in 2006. "Small companies lack the infrastructure, while large pharma's impressive manufacturing capacity is for oral formulations." If you're going to start from scratch, go east—and cheap.

Along with both nations' growing economic muscle, their explosion of scientists and other specialists has opened the door not just to manufacturing but to clinical trials and R&D. The fact that China and India boast the world's two largest emerging drug markets, however far off, is gravy.

Yet given the Chinese knack for making even Barbie dolls dangerous, consumers aren't exactly crazy about the prospect of moving drug production there. Last September, after one of its execs told the Times of London that AstraZeneca expected to outsource all of its manufacturing, mainly to China and India, the firm had to backpedal fast to avert a firestorm of criticism. Yet Pfizer, GlaxoSmithKline, and Bristol-Myers Squibb all have ambitious plans to expand into China; building their own plants, they say, will keep QC and GMP up to home standards.

The angry din of hostility and suspicion that greets unsafe Chinese products is never louder than when medicine is at stake. An example: As Pharm Exec was going to press, Wall Street Journal's Health Blog ran a story headlined "China Confirms It's the Source of Heparin Contamination." It received 65 comments in one day, including many calls for a Chinese boycott and accusations of a plot to poison Americans. And Journal readers are not known to be wing-nuts.

"Many Americans have a fear and loathing toward China," says Robert Kapp, the founder of the US-China Business Council. "These get whipped up by reports of China as an emerging superpower threatening our jobs and security—or dangerous drugs like this one. But given the tremendous increase in the volume of its exports, I don't think there are so many problematic products."

Natasha Leskovsek, a partner at Heller Ehrman, has a similar take. "There is risk whenever you outsource manufacturing," she says. "There were serious incidents in Puerto Rico that were the subject of compliance agreements over the past decade. We shouldn't get too high on ourselves."


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