Cablegate: South China Drug Makers Differ On Impact of Product Safety

DE RUEHGZ #1049/01 2602341
R 172341Z SEP 07





E.O. 12958: N/A
SUBJECT: South China Drug Makers Differ on Impact of Product Safety

1. (SBU) SUMMARY: Several pharmaceutical companies in South China
appear to have taken steps to improve their quality assurance (QA)
procedures and put them more in line with international standards.
Product safety and integrity problems interestingly are reinforcing
for Chinese companies the need to address IPR violations so as to
protect brands and clamp down on counterfeits and fakes. Drug
Industry executives have also expressed interest in obtaining U.S.
Food and Drug Agency approval for their products, but they claim to
be confused about the approval process - not just in the United
States, but in China as well. END SUMMARY.

Snapshots of Three PRC Drug Companies

2. (SBU) Baiyunshan Pharmaceutical Company: According to Managing
Director Qi Zhaoji, Baiyunshan mainly produces antibiotics and
over-the-counter medications. It also has a Hong Kong-based
subsidiary that specializes in traditional Chinese medicines (TCM).
Founded in 1992 and listed on the Shenzhen Stock Exchange in 1993,
Baiyunshan ranks as China's 25th largest pharmaceuticals company by
sales volume. In August 2007, one of Baiyunshan's 11 subsidiary
companies formed a joint-venture with U.S. Baxter, an American
medical device company.

3. (SBU) Hua Hong Pharmaceutical: Board of Directors Secretary Liang
Song told us that his firm - founded in 1971 and restructured in the
late 1990s - has been transformed from a failing state-owned
enterprise into a multi-million dollar company. Today it is a
household name in China. Hua Hong's TCM products are mostly aimed
at women. The company claims that its most popular product - the
Hua Hong Tablet - is the first oral TCM designed to treat
gynecological inflammation. Hua Hong's market is primarily
domestic, with some exports going to South East and East Asian

4. (SBU) Ranbaxy (Guangzhou) Ltd.: This subsidiary of India's
largest pharmaceutical manufacturer produces active pharmaceutical
ingredients (APIs) which are primarily exported to U.S.-based drug
makers and used in the manufacture of finished drug products such as
antibiotics and cardiovascular medications. The United States
accounted for 80 percent of its sales.

Improving Quality Assurance Procedures or...

5. (U) Two of the pharmaceutical companies visited by Congenoffs
reported that they had strengthened their quality assurance systems
in response to recent media reports about product safety problems.
Baiyunshan implemented a new quality assurance regime in 2006 in
response to several high profile drug scandals in Anhui province
that led to deaths around China. The firm provided detailed
information on its "5 S Quality Assurance System," which mandates
quality control reviews at each phase of production and by each
level of the company. It has also established an independent QA
department and an extensive customer service response system,
including a hotline to report potential quality issues.

6. (SBU) Hua Hong's Liang said that the recent spate of consumer
safety scandals had prompted the company to reexamine its QA
processes. Liang's candid statements were "clarified" by the local
Foreign Affairs Office official, who also attended the meeting with
Congenoff and who averred that Hua Hong had not changed or improved
its QA regime as a result of media reports. Rather, he emphasized,
Chinese enterprises and government officials had "continuously
stressed the necessity of adherence to product safety regulations
and will continue to do so in the future."

Satisfied with Status Quo

7. (SBU) The Ranbaxy executive, in contrast, told us that recent
news had not had an impact on the company's already strict safety
and control procedures. He explained that Ranbaxy Guangzhou had
received Good Manufacturing Practice (GMP) clearance, a standard
introduced by the World Health Organization (WHO) in 1968, ensuring
that products are manufactured and tested in compliance with WHO
prescribed quality standards. The Ranbaxy executive claimed the GMP
audit and certification process is accepted by 90 percent of
countries around the world. In addition, he said 70-80 percent of
Ranbaxy Guangzhou's operating costs go toward monitoring and

GUANGZHOU 00001049 002 OF 002

maintenance of proper air pressure, humidity controls, and air
quality. The executive also said that regulations enforced by
China's State Food and Drug Administration (SFDA) regulations are
quite strict. His facility is regulated by the Guangdong Province
as well as the Guangzhou FDA; they conduct unannounced annual site
over several days.

Quality Assurance Problems Still Persist for Some
--------------------------------------------- ----

8. (SBU) Baiyunshan's Qi Zhaoji told Congenoff that despite its
strengthened QA regime, its U.S. joint-venture partner, Baxter, had
asked the Guangzhou plant to stop production until it could conclude
a thorough investigation to ensure that QA procedures met global
standards. Hua Hong showed Congenoff a flashy media presentation,
which claimed Hua Hong is "refining Chinese medicine in a western
way" by taking old folk remedies and mass producing them with the
help of modern science. However, the factory tour was less
convincing. At one point during the tour, the floor manager firmly
led Congenoff away from a room where a machine was spitting brown
medicine tablets into a dirty plastic bucket and onto the floor.
Conditions in the room clearly did not reflect the modern science
advertised in the media presentation.

Renewed Focus on IPR

9. (U) Baiyunshan managers stressed to us that combating counterfeit
drugs is one of their top priorities, especially in light of
concerns about product safety. To that end, Baiyunshan has a
special office devoted to IPR protection. This office works with
the pharmaceutical professional association, public security bureaus
and other law enforcement agencies. Customers can also use the
customer service hotlines to report counterfeit products.

10. (U) Hua Hong's manager said that concern about counterfeit
products had been heightened due to the risk of unsafe copies. He
said that in July 2007, Chinese drug inspectors from SFDA found four
batches of Hua Hong's most popular medicine - the Hua Hong tablet -
that did not meet nationally mandated safety standards. Further
investigation revealed that the medicines did not originate from the
Hua Hong plant but were instead very convincing fakes.

11. (U) Ranbaxy is known in the U.S. for the high-profile patent law
suit filed against it by Pfizer Pharmaceuticals. The ongoing law
suit resulted in Pfizer's Lipitor drug patent being reduced by 15
months. The Ranbaxy executive informed us that the firm spends
about 10% of corporate sales on research and development and employs
1,200 scientists who work on new drug applications. However, he
noted that there had not yet been any discoveries of Chinese
counterfeit versions of Ranbaxy products.

Seeking Approval in the U.S. and China

12. (U) Baiyunshan and Hua Hong executives both told us that an
important goal for them is to obtain U.S. Food and Drug
Administration (FDA) approval for their drugs. Although one motive
for FDA approval is access to the U.S. market, managers also seem
believe that an FDA "seal of approval" would bring international
legitimacy to their products that could boost sales in China and
elsewhere. However, both firms complained of confusion over the FDA
approval process. Pharmaceutical managers said they would welcome
more communication with the U.S. FDA as well as with U.S.
pharmaceutical associations so as to better understand the path to
FDA approval.

13. (SBU) The Ranbaxy executive, on the other hand, complained to us
about the drug approval process in China, which he said takes too
long. He said the process takes one to two years and blamed delays
on the high volume of applications. He pointed out that China has
4,000 GMP approved pharmaceutical manufacturers each submitting
multiple approval requests per year. Thailand, in comparison, has
only 170.


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