Chinese Puzzle

"Greed is universal. But in China, it is especially dangerous because of the lack of regulations and enforcement," says Wang Fei-ling, an expert in Chinese policy at Georgia Institute of Technology. "That combination creates rampant corruption, which is the most serious problem China faces."

It's not hard to think of examples of the sort of thing Wang is talking about: In the past few years, lead-laced toys, toxic pet food, contaminated toothpaste, and other dangerous products have frightened and angered American consumers, creating an image of China as an entrepreneurial Wild West (or East), where reckless companies boost their profits by foisting poison on the world.

The latest example hits home for pharma. In February, Baxter was forced to recall millions of doses of the anticoagulant heparin—made in China—after nearly 800 people suffered severe allergic reactions and 19 died from taking it. As more facts emerged, the picture grew grimmer: The drug (a biologic manufactured from the intestines of pigs) came from a plant in Changzhou that had never been inspected by FDA. Contamination was discovered. And then, as this magazine went to press, the evidence suggested that a cheap copycat substance was intentionally cut into crude heparin.

Greed may be universal and corruption rampant in China, but this act was a rare thing: a near-perfect crime, distinguished by its exquisite sophistication. Someone bought a common dietary supplement, then tweaked its molecular structure to resemble pure heparin so closely that only advanced techniques, such as nuclear magnetic resonance spectroscopy, could detect it. The look-alike filler is even an anticoagulant—but one that can kill.

The question for the pharma is hair-raisingly obvious. If Chinese counterfeiters have achieved this level of scientific prowess, how is it possible to outsource the manufacturing of drug ingredients to China without incurring massive costs to safeguard the supply chain?

A Crisis of Trust—and Pigs

Last July, the former head of China's State Food and Drug Administration (SFDA) was executed for taking $850,000 from national drug companies in exchange for approving fake and tainted products. More than 100 deaths were traced to drugs he licensed; the actual number is thought to be much higher—during his eight-year tenure, he approved 150,000 drugs.

"I was chief counsel at FDA and in talks with the Chinese government over the safety of food and drugs when that happened," says Sheldon Bradshaw, now a partner with Hunton & Williams. "The negotiations came on the heels of the melamine scandal, and the execution of the former head of the agency that I was talking with was certainly enlightening about how China does things."

The melamine—added to up the protein content of pet food—killed thousands of US dogs and cats last spring, and although it was only one of a rash of "Made in China" recalls, it sparked a special outrage in households nationwide.

The rawness of that memory may be one reason that the execution of the SFDA head fell short of reassuring US consumers. While 88 percent of Americans believe US-made prescription drugs are safe, only 14 percent say the same about drugs made in China, according to an American University survey last September.

While the pet food recall was going on, global health officials were growing alarmed about a mysterious epidemic laying waste to pigs throughout southeastern China, where SARS and bird flu were spawned. As in those health emergencies, the Chinese government for months maintained an information blackout. The epidemic, fueled by a virulent form of "blue ear" pig disease, has decimated China's pork industry, causing steep inflation and growing unrest.

It is also a likely indirect cause of the heparin scandal. According to Guy Villax, the CEO of Hovione, a Portuguese manufacturer of active pharmaceutical ingredients with a factory in Macao, China, the price of exported Chinese heparin more than doubled last summer, suggesting a shortage—most likely due to the pig epidemic. Yet, oddly, the volume jumped as well, a telltale sign of counterfeiting. "The shortages drove prices up, and that created an opportunity to make profits," Villax says. "So greed comes in."

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."

Inspection: The Impossible Mission

When SFDA announced on March 19 that China was to blame for the heparin contamination, it answered certain outstanding questions for anyone who'd been following the story.

But the most remarkable aspect of the announcement was its very occurrence. Any attempts at a cover-up seemed to have been dropped. Instead, one day after the New York Times beat FDA to the punch by identifying the contaminant and indicating that counterfeiting was the probable cause, the Chinese agency publicly took responsibility. The press conference was attended by a throng of Chinese and foreign reporters—and were even permitted to ask questions! The appearance of transparency was a revelation.

If SFDA scored points for openness late in the game, the US FDA mostly suffered from its own efforts at openness. Perhaps the worst hit came when FDA reported that contrary to its own rules, it had OK'd the Chinese plant without any FDA inspector ever having set foot in it. Agency officials did, in fact, visit a Chinese plant, but it was the wrong one—confusion over the similar-sounding names.

Licensing a factory that it had never inspected—and that now was a key link in a supply chain scandal—put FDA in the stocks. A very public blame game followed. The House Energy and Commerce subcommittee on Oversight and Investigation fired off angry letters and scheduled yet another FDA hearing. The media and the blogosphere piled on, pointing fingers alternately at FDA, Baxter, and the Chinese plant, SPL. However, the New York Times and the Wall Street Journal, in particular, distinguished themselves with aggressive investigations that did far more than any other source to discover the real story. In this context, FDA, Baxter, and SPL said as little as possible—not an approach to inspire confidence.

Suddenly, FDA's capacity to inspect foreign drug firms was a burning issue. Both the General Accounting Office and FDA's Science Committee had issued recent reports on the subject arriving at the same conclusion: The agency was so absurdly short of staff and resources that it had, for example, inspected only 7 percent of the 3,249 foreign drug manufacturers by the end of 2006. At that rate, FDA would need 48 years to inspect each plant just once. Faced with this impossible mission, the agency had developed a risk-based priority list for inspections. Yet priorities were not always clear. Over the past five years, FDA has inspected half of India's 299 plants making drug for US import, compared with about 12 percent of China's.

But in reality, staff and resources are consumed by the mandate to inspect plants as part of the NDA approval process, leaving little capacity for post-approval inspections. "If you haven't been in a plant for the last two or three years, you don't have any clue what's going on," said a congressional source familiar with investigative work into the FDA. "They could be running monster truck rallies on the plant floor, and we wouldn't know about it."

SFDA, meanwhile, moved to wash its hands of accountability. The agency announced that foreign-owned plants manufacturing drug materials for foreign import were entirely responsible for ensuring their legality, quality, and safety. This not-my-problem policy, SFDA claimed, conformed to international practice. But Natasha Leskovsek begs to differ. "It is certainly not prevailing practice for the home government to tolerate the making of unsafe products for export," she says. "By responding this way, SFDA is raising questions about the quality of their manufacturing—and threatening business." Later the agency backpedaled, pledging to help safeguard supply chains, she added.

Sheldon Bradshaw saw SFDA's announcement less as skirting responsibility than as an awkward move to preempt any finger pointing. "The Chinese are very image conscious, particularly with their hosting the Olympics," says Bradshaw. "They were going to pains to point out that this was not their screw-up."

Cooperation? Or Not?

Both FDA and SFDA were going to pains to emphasize how closely they were cooperating on the heparin investigation.

This was curious. On February 28, FDA announced that despite conditions indicative of lousy QC and GMPs, there was no smoking gun in the already-shuttered SPL plant in Changzhou. Agency inspectors were heading upstream in the supply chain, to the consolidators and suppliers, including the rural mom-and-pop workshops. Some experts say, given the shortage of pig intestines due to the "blue ear" epidemic, these operations currently provide wholesalers with as much as 70 percent of China's crude heparin.

Reporters from both the Times and the Journal had already gone upstream, filing stories from makeshift household workshops where men and women in aprons and gloves hand-process pig intestines into pulp for raw heparin and sausage casing. Photos testified to their unsanitary conditions. As for QC, one of SPL's wholesalers told the Times that his firm had never been inspected and that he, in turn, had no right to inspect "the pigs or intestines or facilities" in the small villages where he purchased much of his crude heparin. "We are not the government," he said.

Weeks passed. Readers of the news may have imagined intrepid FDA inspectors, led by a closely cooperating SFDA official, trudging unpaved, muddy roads from village to village to interview blood-covered workers. But, in fact, FDA never gained access to the unregulated upstream supply chain.

On March 19, the Times broke the case wide open by nailing down the contaminant. It reported that independent scientists agreed that the look-alike molecule was an apparently meticulously tweaked version of chondroitin sulfate, a cheap dietary supplement made from animal cartilage and widely used in China for joint pain. "A child could tell you it's counterfeiting," Dr. Jawed Fareed, a professor of pharmacology at Loyola University, told the Times. "This is a deliberate act of chemically manipulating a heparin-like substance and mixing it with heparin to increase the yield."

It took FDA only two hours after the Times story appeared to announce the same findings. Dr. Janet Woodcock, veteran head of the FDA's Center for Drug Evaluation and Research, reported that the copycat heparin had been chemically modified, was much cheaper to produce than pure heparin, and did not come from a natural source. Although these facts together almost scream counterfeiting, Woodcock hung tough. "We cannot rule in or out whether this was accidentally or deliberately introduced into the product," she said. "We are investigating how it got in." She also said that further testing is required to determine whether over-sulfated chondroitin sulfate is responsible for the deaths and allergic reactions.

Then she made a special point of praising "Chinese officials' cooperation in this investigation," contrasting it favorably to their stonewalling during the pet food scandal. Visas were sped through, data shared.

But according to one source close to the investigation who spoke on condition of anonymity, Chinese officials were their usual difficult selves, right down to delaying visas: "It was clear from the start that China has a different agenda than FDA in getting to the bottom of this."

Nor does FDA's happy version jibe with Baxter chief science officer Norbert Reidel's pointed plea for access in a Baxter press release that same day: "We're at a critical juncture in the investigation and further progress can be accelerated with the cooperation of the consolidators and workshops."

Wang Fei-ling suggests that it's local officials, not SFDA, who have the different agenda. "The last thing any local government wants is an investigation that will probably implicate them in all sorts of bribes and kickbacks," he says.

But now that the SFDA is in gear, a major criminal investigation will likely push everything else off their agenda.

FDA Without Borders

In early March, it was reported that SFDA was being downgraded and placed under the control of the new, massive Ministry of Health, which will set drug and food safety policies.

Meantime, FDA head Andrew von Eschenbach scrambled to answer his congressional critics by announcing FDA Without Borders, a plan to base FDA inspectors and technical advisers in China, India, the Middle East, and three other regions. He also requested a permanent FDA presence at the US embassy in Beijing and two US consulates in China.

And among a flurry of legislation, the most likely to gain traction is a bill sponsored by Democratic Senators Charles Schumer (NY) and Edward Kennedy (MA) to jack up FDA funding to increase inspections of foreign drug factories. Still, insiders like Sheldon Bradshaw remain skeptical. "The agency will still be woefully underfunded," he says. "Dealing with the hypocrisy of Congress was the most frustrating thing about my tenure as chief counsel. They constantly complain about FDA failures but handcuff the agency by not appropriating sufficient resources."

It remains to be seen what fate will befall whoever is behind the lethal fake heparin. China is know to execute drug counterfeiters whose victims are Chinese while entirely overlooking those responsible for killing foreigners. But with the Ministry of Health in charge and the Olympic on deck, the heparin investigation is likely to break that pattern.

As for pharma and China, CEO Guy Villax's longtime experience keeps him bullish. "China offers an excellent environment for world-class manufacturing," he says. "But because enforcement is inadequate, many rogue players have the opportunity to make vast margins—especially in generic drugs—by putting the lives of patients at risk."

His firm, Hovione, last month purchased 75 percent of Hisyn Pharmaceutical, with development labs in Shanghai and a huge API plant nearby. "Squeeze the price, and you push suppliers into cutting corners and providing substandard product," he says. "But if you encourage high standards and support increased costs, you can expect to collect in a later harvest."