Category Archives: Product Safety

Corruption And Consolidation In China Pharma

This Bystander has been struggling to put the corruption investigation into GlaxoSmithKline in to a broader context. The U.K.’s largest drugsmaker stands charged with paying up to 3 billion yuan ($488 million) in bribes to prop up its sales and prices in China.

There is clearly more to all this than a simple matter of corruption — if indeed there has been that. For one, the number is relatively small on a global scale. The pharmaceuticals industry is well known for buttering up those who can prescribe its products. In the U.S., drugsmakers spent more than $24 billion in 2012 marketing drugs to doctors, according to a survey by Cegedim Strategic Data. Another, by Deloitte, found that more than one in three American doctors accepted food, entertainment or travel from the pharmaceutical industry, while one in seven accepted consulting or speaking fees. Chinese doctors, to whom payments is a common practice, would need the extra on the side more than their U.S. counterparts.

A sweeping tour of the horizon of China’s healthcare market shows the country facing a tripling of its annual healthcare costs to $1 trillion by 2020. (The forecast comes from the consultancy McKinsey.) Its citizens increasingly expect access to affordable health care as a right of passage into the ranks of middle-income countries — and they are increasingly getting the expensive-to-treat diseases of urban middle-class lifestyles. To reign in its present and future costs, Beijing, like India and Brazil, is imposing price controls on drug makers (particularly the western multinational pharmaceutical companies that are increasingly looking to emerging markets for the next phase of their growth), and encouraging the development of a domestic generics industry.

At the same time, it is toughening up on regulatory enforcement. In recent weeks, it has launched a crackdown on illegal medicines by the State Food and Drug Administration, and started its broadest investigation to date in to prices. Some 60 domestic and multinational drugs company have been asked to supply data. That the National Development and Reform Commission (NDRC) is conducting this audit suggest there is a high-level policy initiative behind it.

Then there is the widening corruption probe into the industry. Two non-Chinese nationals have been detained, including a well-respected consultant linked to GlaxoSmithKline. Four Chinese working for the company have also been detained. Two Chinese nationals working for AstraZeneca have been questioned by police, and 39 Chinese hospital staff in Guangdong are to be punished by the health ministry for taking bribes from drug companies.

GlaxoSmithKline first denied the charges against it. Then it said that some local executives may have broken some local laws and acted in contravention of company policies. (Wednesday’s scheduled announcement of the company’s quarterly financial results may provided a clearer picture.) At this point, we are in no position to make a judgement either way. This may be a case of one man’s marketing expenses being another’s bribes. It may simply be a case of a company being in the wrong place at the wrong time. Or there may indeed have been corporate malpractice and the company is guilty as charged.

As we say, we have no idea at this point. We do, though, take note of a Reuters analysis that eight of the world’s top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets. At least two companies to our knowledge have made settlements under the U.S.’s Foreign Corrupt Practices Act involving payments in foreign markets including China. We understand more cases are pending.

Beijing may well be using GlaxoSmithKline as a stick to beat other western pharma multinationals, who are seen as giving a new — and expensive — lease on life in developing economies to their blockbuster drugs that are coming off patent in the U.S. and Europe. China has had some success in beating down prices in the food industry. Nestle, Danone and most recently Fonterra announced price cuts after Beijing launched an investigation into the dairy industry. GlaxoSmithKline is already hinting it will be passing some cost savings along in lower prices.

As Dan Harris noted on his China Law Blog, China cracks down on foreigners for political reasons whenever the economy slows. This time, the stars may have aligned to give it a motherlode of benefits: championing lower drugs prices for its citizens by standing up to foreign multinationals, and advancing its policy agenda for developing the domestic industry.

Biomedical  is identified as one of China’s strategic industries under the current five-year plan. This covers a broad range of healthcare businesses from medicines and vaccines to medical devices, diagnostics, and even traditional Chinese medicine. Collectively, these are expected to account for 8% of China’s GDP by 2015 and for 15% by 2020, up from 5% in 2010.

The government also is encouraging rapid consolidation of the some 7,000 small Chinese pharmaceuticals producers  that exist today; it hopes that the top 100 pharmaceutical companies will account for 50% of total pharma sales in the country by 2015, and the top ten wholesalers for 95% of drug distribution.

Consolidation  has been used in a variety of other industries from coal mining to solar power as a way of  improving the productivity of an industry, developing technological capabilities to move it up the value chain, and tackling industrial safety and product quality concerns, a persistent issue across a range of industries. Product safety is a particularly pressing concern for the pharmaceuticals industry, which, like the food industry, has had problems with tainted and counterfeit products.

Beijing is also fostering the emergence of large generic-drug companies, which as India has shown it, is key to holding down drugs costs in the long-term. It is pushing local generics makers to partner with multinationals, to invest more in R&D, and to develop specialities in generics and biosimilars.

That is also a way of tying the multinational drugmakers more closely to the Chinese industry, and to bring their pricing practices  more under the authorities’s sway. No multinational wants to be blacklisted in China, still the global industry’s great hope for its future. Most are deepening or expanding their presence in the country through such partnerships. Beijing is taking every opportunity to see that that is being done on its terms, not theirs.

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Synutra Again In Eye Of Storm Over Infant Formula And A Baby’s Death

This may turn out to be nothing, or not. Nasdaq-listed Synutra International is again under investigation for its infant formula. First involved in the melamine-tainted baby formula scandal in 2008, in 2010 its formula was accused of triggering sexual precocity among baby girls, though the health ministry found the allegations to be baseless. Now it is products have been reported to be the cause of the death of a baby boy in Jiangxi.

Liang Zhang, the company’s chairman and chief executive, has denied that Synutra’s products were responsible (full statement), and welcomed the investigations now being conducted by provincial and local authorities. All local distribution of Synutra’s baby formula has been sealed. The boy died last Saturday after drinking the formula. His twin sister was hospitalized but survived. The company’s shares fell 25% on the news, but have since regained half that in New York trading.

Product safety scandals just won’t go away. Last month, Mengniu Dairy said it destroyed dairy products found to have contained a cancer-causing fungi. The dairy industry is still under the long shadow caused by the 2008 melamine-laced powdered baby milk scandal in which at least six children died and nearly 300,000 fell ill.

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For All The Tea In China

Unilever, the soaps to Slim-Fast packaged consumer goods group, has a well-established presence in China for both its international and local brands. It has had a global R&D headquarters in Shanghai for a couple of years. Earlier this year, it became the first European multinational to issue renminbi-denominated bonds. So the discovery of unusually high levels of toxic rare earths in a batch of one of its Lipton brand teas is a poke in the eye for it, albeit one that  a number of multinationals, including Wal-Mart and Johnson & Johnson, have experienced recently.

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) says that in a check of 58 brands of oolong teas around the country, it found 19 samples in which traces of rare earths were higher than the permitted 2 milligrams per kilogram. In Lipton’s case, it was 3.2 milligrams per kilogram; the highest concentration found was 5 milligrams per kilogram in a tea from Fujian. Lipton’s sample, a 50 gram box of Iron Goddess of Mercy tea, was tested in Anhui.  (AQSIQ news release).

Oolong tea producers sometimes add fertilizers containing rare earths to the soil as they are believed to enhance flavor and raise yields of oolong teas. A parallel test by AQSIQ of 90 black teas turned up no higher than permitted concentrations of contaminants, and the only two samples that failed appear to have done so for passing themselves off as higher grades of tea than they really were.

Excessive fertilization risks transmissions of toxins in damaging concentrations to tea drinkers. Unilever has said it believes its offending oolong tea picked up its trace amounts from the soil; and that it wasn’t a case of adulteration during production. The batch in question, which was produced last January, has already been recalled and destroyed, the company says.

AQISQ officials in Sichuan, who have been investigating tea production there since September, say some local producers were adding substances such as lead, chromium, talc and glutinous rice paste to their teas. Slipshod, unhygenic and ill-regulated production has emerged as a common theme behind many of the product safety concerns that have been such a touchy issue with consumers since the deadly melamine-tainted infant formula scandal of 2008. Beijing has made strides in improving food and product safety quality controls, but the sheer size of China’s food and consumer goods industries – and the persistence of cosy links between local companies and officials – makes it an overwhelming task for regulators. For political reasons, Beijing has been reluctant to allow the growth of grass-roots consumer movements to share the load, just as for other political reasons, the odd pop at multinationals – Lipton is the only well-known foreign-owned brand fingered this time –  is irresistible to show that there are no clean hands anywhere, so to speak.

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Safer Food, Trust Me

China’s Communist Party worries greatly that popular distrust of the safety of the country’s food supply may turn into distrust of its right to rule. Ever since the melamine-tainted infant formula scandal of 2008, its administrative might has been directed at calming and cajoling a disconcerted citizenry on this point, with at best mixed results as one tainted food scandal has followed another. The General Administration of Quality Supervision, Inspection and Quarantine (Aqsiq) shut down great swathes of the dairy industry in April. It also said it would continue to step up its inspections, on the lookout for both health risks and officials who turn a blind eye to food safety violations, a significant problem at local level. In addition, the food safety law has been amended to impose harsher punishments, including the death penalty, in such cases.

The result of those investigations has been 2,000 arrests and 5,000 businesses shuttered, mostly all small enterprises. The numbers sound impressive until set against the scale of China’s food industry. Nearly 6 million food producers were inspected. Yet only one in a thousand was found to have been adulterating food with illegal additives? Little wonder that consumers’ confidence that their food won’t sicken or kill them remains so low.

Little wonder, either, that citizens who can afford to are taking matters in to their own hands. The China Law Blog reports processed food being carried across the border from Hong Kong in prodigious volumes, with custom officials apparently turning a blind eye to it’s well-heeled porters; the BBC reports middle-class professionals–lawyers, programmers, teachers and the like–taking to allotments at weekends to cultivate their own fruit and vegetables. Neither development will sit well with a Party that, for all it’s efforts, can’t keep a basic bargain with its people to keep their food supply safe.

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The Political Damage Of The Wenzhou Train Crash

Beijing’s top-level ordering of an investigation into the weekend’s fatal high-speed train crash at Wenzhou hard on the heels of a railways ministry decision to implement a two-month safety review of the whole troubled system reeks of crisis management badly handled by a government on the back foot. The leadership has not faced such public criticism for its handling of a disaster since the 2008 Sichuan earthquake.

Questions are being raised about Beijing’s competence to look after its people, which hits directly at the basis of the legitimacy of its monopoly rule. That is more serious for the Party than the shredding of national pride in the rapid development of a high-speed rail network, already tattered over recent months by the corruption and safety scandals surrounding it, or what looks like an immediate coverup by railway ministry officials by burying the evidence, pretty much to be expected.

The initial reaction of paying off the families of the victims in short order at 500,000 yuan ($77,600) and the sacking of three rail officials, even before rescue operations were complete, reflects an old-school attitude that government is about administration, silencing and punishment that is increasingly out of touch with the expectations of Chinese. So is the instruction to state media to focus on positive stories while the official investigation is carried out. Online discussion, by contrast, has been angry, and about transparency, the quality of economic growth and the value of prestige projects.

Adulterated food, melamine-tainted infant formula, chemical spills in rivers, the most dangerous coal mines in the world: the list of where China falls short in safety seems to grow daily, and the victims are its own. History shows that every industrializing society tends to have one disaster that triggers change in official attitudes to safety. The Wenzhou crash may or may not turn out to be that symbolic moment. But it is significant. High-speed trains are not mass transportation. They are used by the prosperous, urban, middle-class. Criticism by an educated, well-connected section of the population is of particular concern to the Party, as it is from there that any long-term challenge to its monopoly rule is likely to come. That is why the leadership is now scrambling to regain control.

Footnote:  The crash has also inflicted a body blow to China’s hopes to export its high-speed trains and the rails on which to run them. It confirms its critics worse fears of inferior equipment and shoddy construction that no amount of low cost can offset. Japan and South Korea are the likely beneficiaries, a further prick to national pride.

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Lead Poisonings Prompt Nationwide Shut Down Of Battery Factories

We have been reading reports since at least the beginning of this year that battery factories have been closed down because they are causing lead poisoning in children (this one via BBC). Now it appears the situation has deteriorated to the point where virtually the entire industry is being shut down. Bloomberg quotes Xu Hong, head of the lead-acid battery branch at the China Electrical Equipment Industry Association, as saying:

Regardless of the plants’ conditions, they’ve all been shut down, and there is no timetable now to resume operations.

Zhejiang and Guangdong are the two biggest battery-producing provinces, accounting for more than a third of the country’s output. There have been reports of lead poisoning incidents in both places. Plants in Sichuan and Henan, too, have suspended production, Bloomberg says. The BBC adds that more than 100 people around the country have been affected recently by lead and cadmium poisoning. These are likely to be both children living nearby and factory workers. In 2009 and 2010, thousands of children in several provinces who lived near metal smelters or battery factories were affected by lead poisoning.

Industrial pollution from heavy metals and environmental degradation have become highly sensitive social issues. In Inner Mongolia, after a herdsman was killed trying to stop coal mining trucks crossing traditional nomadic grazing pasture and another Mongolian died at a mine protest, it has turned into a full-scale political and security crisis, as the state media blackout testifies.

As with food safety, good intentions at national and increasingly regional level have not turned into effect policy implementation at local level. As with the attempted clean-up of the coal and steel industries before, a clamp-down on illegal lead smelters and hundreds of small, unauthorized electroplating and battery workshops has been underway since mid-month. The China Business News says that the goal is to reduce the number of battery makers to about 300 from the current 1,700.

In mid-May, the Ministry of Environmental Protection warned that “criminal penalties will be imposed upon the heads of the responsible businesses, and local chief officials will also be held accountable for pollution incidents.” The BBC says some 74 people have been detained this year in connection with lead poisonings. We are sure many of these are likely to be officials from local government, local environmental protection and health bureaus now being investigated for lax supervision. We are also sure they won’t be the last.

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U.S. Taxpayers To Make China’s Food Safer?

Three more child deaths from adulterated milk, the poison being nitrite additives in this case (via BBC), underlines how broken China’s food production system remains despite extensive efforts to fix it in the wake of the melamine-tainted infant formula scandal of 2008. The sheer numbers of small subsistence farmers scrabbling to make a living by any means and the prevalence of local officials overlooking transgressions by local cronies further up the supply chain has overwhelmed the endeavors of central government.

Help may be at hand from an unlikely source: new food safety legislation passed in the U.S. in January. The Food Safety Modernization Act (FSMA) tightens the purview of the U.S. Food and Drug Administration (FDA) over imported foods, including inspections at source. In a timely post on the China Law Blog, guest blogger Marc Sanchez, an attorney specializing in food and product safety matters and who writes the Food Court blog, writes:

China is the fourth largest exporter of food to the U.S…..Foreign inspection of Chinese facilities means increase pressure for China to modernize [food production]…China has attempted reform legislation, but its vast food production system remains largely unchanged. If FSMA receives its funding, it will act as a new push for rapid modernization of China’s food safety system. it will place FDA on the ground in China and it will increase border inspection of Chinese food coming into the United Sates. There is no way the FDA can do what the Chinese bureaucracy has been unable (or unwilling) to do, but it can act on China’s pride. China will not want to make the list of countries blocked from being able to export its foods to the United States.

Two comments: First, the U.S. will have to be prepared to fund FSMA foreign food inspections. With budget cutting, not spending, the crie de jour in the U.S. that is not a given. As it is some polls have shown Americans think 15% of the U.S. budget is spent on foreign aid (the actual number is less than 1%) so paying to clean up China’s food supplies, as it will inevitably be portrayed in some quarters of the U.S., will not go over well with some American taxpayers. Second, acting on China’s pride can always be a double-edged sword.

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China Cracks Down On Unsafe Dairies

The improvement in quality standards at China’s dairies have been so patchy since the melamine-tainted infant formula scandal in 2008 that Beijing has moved to close down vast swathes of the industry. Operating licences have been denied for 533 milk producers, nearly half the country’s 1,176 dairies. The General Administration of Quality Supervision, Inspection and Quarantine (Aqsiq) had said in March that all diaries would have to reapply for their licences by July. It says that 107 of the 533 who have lost licences will be allowed to reapply once they have improved their quality controls.

Local governments have been sending resident supervisors into all dairy enterprises to enforce health and safety regulations since last October when new rules came into force tightening the controls over the production and marketing of melamine, a toxic industrial chemical used to make plastics, fertilizers and concrete but which can increase milk’s apparent protein value. Dairy safety regulations had already been tightened in 2008 in the immediate aftermath of the tainted milk scandal that killed six babies, sickened more than 300,000 children and all but closed down China’s dairy exports that year.

Yet batches of contaminated milk and milk powder have continued to turn up (2,334 tones of it as of February). Some came from 2008 supplies that should have been destroyed but which got unscrupulously diverted into a sort of dairy black market. However, the newly announced licence revocations suggests that long-standing suspicions that some dairy farmers were continuing to pad out their milk with melamine were well founded.

Aqsiq says it will continue to step up its inspections, on the lookout for both health risks and officials who turn a blind eye to food safety violations, a significant problem at the local level. The newish food safety law has been amended to impose harsher punishments, including the death penalty, in such cases.

Public concern about unsafe food has been intensified recently by the discovery of illegal chemical additives in pork. The latest food safety scare is shrimp soaked in chemicals to give them more weight. Last month the Office of the Food Safety Commission said as well as dairy products and meats, its inspectors are most concerned about the safety of edible oils, health foods, food additives and alcohol. The Party is most concerned that popular distrust of the safety of food supplies may turn into distrust of its right to rule.

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China Jails Its Melamine-Tainted Milk Activist

On the face of it, the two-and-a-half years jail sentence imposed on Zhao Lianhai for campaigning on behalf of the victims of the melamine-tained infant formula scandal that struck in 2008, is simply bizarre. Zhao, a former editor of a state food safety publication and the parent of one of the 300,000 sickened children, though not of one of the six that died, was convicted of social disorder (via BBC).

The tainted milk scandal all but closed down China’s dairy exports in 2008 and was an embarrassment to the government, particularly domestically. Following an initial cover-up at the local level, central government acted decisively. More than 20 people were convicted in connection with the scandal and at least two sentenced to death. Parents of affected families were offered compensation. Tougher new food safety rules and procedures were introduced last year to restore public confidence in what people were eating and drinking. In September, officials readied a new crackdown on melamine-tainted milk that has still be turning up as the new rules came into force. Just this week, the government said it would become more open with the public with food-safety information.

New regulations from the health and commerce ministries and the General Administration of Quality Supervision, Inspection and Quarantine define what information should be publicized and by which government departments. Previously they have been typically bureaucratically tight-lipped, letting food safety information come out mainly through media reports. But “in many cases, from milk powder to the crayfish, false news was occasionally delivered to consumers and this hurt public confidence in China’s food safety and the government’s credibility,” said Deng Haihua, spokesman for the Ministry of Health, the main government agency in charge of overseeing food safety (via China Daily).

Wherein lies the clue to Zhao’s sentence. The credibility of the government’s ability to take care of its citizens over everything from tainted milk and the earthquake resistance of school buildings to getting richer is an important plank of the platform on which the Party’s legitimacy to govern rests. It was severely tested by the tainted milk scandal and the government’s response to it. Zhao’s efforts to publicize the scandal, organize a parents’ self-help group and to get better compensation for families was seen as saying that the government was falling short in protecting its citizenry. That was a direct political challenge. Party strategists have long feared single-issue pressure groups as a potential threat to the Party’s legitimacy to govern and a possible kernel of opposition parties. Thus even single-person pressure groups are not to be tolerated.

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Lies, Damn Lies And Online Marketing

A leading dairy company, Mengniu, stands accused of organizing a black online PR campaign to smear the product-safety reputation of a rival, Yili. There are, shall we say, several versions of what happened, who was responsible, what documents may or may not be fraudulent, who is under investigation, who has or has not been arrested and even who has been smeared. Mengniu not only denies the charge, but says the accusation is, in turn, defamatory of it. We don’t have any special knowledge with which to disentangle the tale, but it stands as a salutary warning. EastSouthWestNorth has rounded up the coverage. We are not sure you’ll be sure either exactly what happened after reading it, but it is well worth the read none the less.

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