China's Bad Medicine: The counterfeit drug trade is a problem that Beijing can cure

Roger Bate | 05 May 2009
Wall Street Journal Asia
China has had more than its share of embarrassing -- and in some cases, deadly -- incidents of drug quality. In January this year, two people died and nine were hospitalized after using counterfeit diabetes drugs in Xinjiang province. In 2007 and early 2008, a dangerous chemical was intentionally added to heparin, the widely used blood thinner, to fool quality tests. The allergic reactions caused by the chemical were deemed responsible for at least 95 U.S. deaths. In March of this year, the United Kingdom seized around $745,000 of counterfeit pharmaceuticals that originated in China, authorities said.

Beijing has made ensuring the quality and safety of its drug supply a major goal. But combating counterfeiters in China is a complicated task, mainly because it is an enormously profitable business. According to the World Health Organization, global counterfeit drug sales -- sales of products falsely bearing labels that present them as branded or generic medicines -- may total $75 billion next year. As many as five million Chinese citizens work in the counterfeit market, which includes fake drugs, patent infringement and trademark infringement.

While the Chinese government might not directly participate in drug counterfeiting, it certainly enables the practice, at a minimum by looking the other way. Fines for counterfeiters are as small as 100 to 4,000 yuan ($15 to $580). Considering the potential profits, such penalties are much too small to act as a deterrent. Indeed, drug counterfeiting may be a significant part of the economy. According to Chinese anticounterfeiting expert Li Guorong, General Manager of China United Intellectual Property Protection Center, "Counterfeiting is now so huge in China that radical action would crash the economy overnight [and] even destabilize a government where counterfeit factories and warehouses are often owned by local military and political grandees." While it may be far-fetched to believe a strict clampdown on counterfeiting would undermine the entire economy, it might well harm certain sectors and cities, and would be strenuously opposed by the many thousands who make a great living this way.

Despite these challenges, the Chinese government has made some serious attempts at reform over the last several years. Between 2006 and 2007, the government committed $500 million to food and drug regulation -- more than was spent in the previous seven years combined. During that time, the agency charged with monitoring the drug supply, the State Food and Drug Administration, shut down about 1,000 illegal drug facilities. In July 2007, a former SFDA official was sentenced to death -- and executed -- for taking bribes. Yet more needs to be done.

To start, the legal mechanism for prosecuting counterfeiting needs to be restructured. At present, after a counterfeit product is identified, the company involved generally has to launch its own investigation into the incident and then present a case gift-wrapped to the authorities. Ostensibly this is because insufficient resources have been allocated to investigations, which means authorities can only take on cases that are obviously significant from the outset. Even then the authorities are rarely very vigorous in their investigations, and companies don't allocate enough to gift-wrap all but key cases.

Regulators should be given the resources and authority needed to independently investigate reported cases of counterfeiting -- with or without the offending company's cooperation. Regulators can increase scrutiny of their own, as well. Drug safety rules are not always enforced in a consistent, unbiased fashion. Chinese and overseas media routinely report on cases of SFDA officials facing prosecution for taking bribes to approve untested or substandard drugs. Beijing must step up enforcement against corruption in the ranks of the SFDA.

Even simple steps could have a significant impact: China employs an unreliable government database to register information on drug facilities, including past violations. A more coherent nation-wide system could go a long way toward preventing repeat counterfeit offenders.

Finally, China's intellectual property regime needs to comply with the World Trade Organization's international IP agreement. Notably, China still allows drugs that infringe trademarks and may be substandard to be resold (after repackaging), rather than destroyed. In other areas, China has taken steps on paper to comply with its commitments under the WTO. But not all of these measures are fully implemented.

It's not just China's 1.3 billion citizens that are affected by counterfeit drugs. China has a booming drug-export business which is also plagued by counterfeits. It's in everyone's interests, except the counterfeiters, for the Chinese government to address this issue sooner rather than later.