China aims to cure its drugs lethargy

The world's most populous country has suffered setbacks in its pharmaceutical industry, but things are changing.

The words "made in China" have been linked to consumer scare stories in many sectors, with reports of sub-standard toys, contaminated food products and, perhaps most alarmingly of all, unsafe drugs.

A contaminant in supplies of the blood thinner heparin sourced from China was linked to 81 deaths in the US several years ago, although Chinese officials said the contamination may have taken place in the US. China itself has seen similar scares.

The pharmaceutical sector's reputation in the world's most populous nation also took a blow when corruption at the highest level was uncovered - and punished without compromise.

In mid-2007, China executed Zheng Xiaoyu, the former head of the State Food and Drug Administration, after he admitted taking millions of yuan in bribes to approve drugs.

But while acknowledged to be facing difficulties, China's pharmaceutical sector is nonetheless undergoing furious expansion and the consolidation that experts have long said is needed for standards to improve.

The average growth rate in domestic revenue over the past decade has been 20 per cent, according to a report released by the research arm of the investment bank Rodman & Renshaw.

Last year sales totalled US$138 billion (Dh506.88bn), a rise of 19 per cent on 2008. This year, growth is projected to be 33 per cent, with the sector expected to achieve turnover of $184bn.

"There is huge market potential for the development of this industry," says Liang Yimin, a senior official with the Food and Drug Administration of Jiangxi province in south-eastern China.

Parallel to its rapid growth has been a trend for this vast, sprawling sector- that features much product duplication between companies - to undergo mergers and acquisitions, as well as closures, thus reducing the number of operators.

But with about 7,000 pharmaceutical companies in China, the sector remains fragmented.

Mr Liang says Jiangxi, like other provinces, is focused on further consolidation.

"By mergers and acquisitions, we'll restructure the whole industry here," he says.

"We'll encourage the enterprises to reach to the international stage and increase our competitiveness."

Spurred on by the authorities, which introduced stricter manufacturing standards in 2004, Chinese drug makers are investing in high-technology plants to replace outdated facilities where quality control is inadequate.

"There is certainly a lot of demand [for new plants] in the market, especially in the last one or two years," says Thomas Herrman, a project manager with the German company Industry Planning and Organisation, known as i+o, which has built pharmaceutical plants in China.

"It's driven by the Chinese government. They know about the problems and want to encourage companies to modernise to fulfil the local standards, if not the foreign standards."

As well as enjoying a huge and growing market locally, China's pharmaceutical manufacturers are big players in the export of bulk drugs - pharmaceutical raw materials.

More than 90 per cent of US imports of some antibiotics originate in China. Last year, China's drug exports were worth $16.6bn, having risen by more than 20 per cent annually on average for most of the previous decade.

This export of active pharmaceutical ingredients has raised quality control concerns in the US amid recognition that it is impossible for the US Food and Drug Administration (FDA) to inspect all overseas facilities to guarantee quality. The situation has been described in the US media as "a prescription for disaster".

In November 2008, however, in an indication of the importance of China's drug export industry, the FDA opened posts in Beijing, Shanghai and Guangzhou to carry out checks on medicines, medical devices and food products.

Although making and exporting active ingredients by the container load, China has a less impressive record when it comes to pharmaceutical innovation.

A mere 5 per cent of revenue is spent on research and development, compared with 25 per cent in the US.

Too many companies, according to analysts, remain focused on producing the low-cost generic drugs instead of investing in innovation. China's lack of intellectual property rights protection has been seen as hampering research in the industry, too, although experts say the situation is improving.

Much of the pharmaceutical innovation in China has been conducted not by the country's own thousands of firms but by foreign giants. Countless internationally renowned companies, among them GlaxoSmithKline and Roche, have moved research and development operations to China. Many more have production and sales facilities in the country.

"For the time being, China will only export raw Chinese herbs and active ingredients," says Steven Du, the Shanghai general manager for SGS, a Swiss-based company that carries out drugs testing for Chinese firms.

"It's linked to the quality of the local manufacturers … quite a lot of them are not up to the international standards."