Bloomberg News

Sex-Pill Makers Jailed in China’s ‘Whac-a-Mole’ War on Fakes

November 30, 2011

(Updates value of fake drugs seized in 12th paragraph.)

Nov. 18 (Bloomberg) -- China jailed eight sex-pill makers and raided more than 1,400 drug dens this month as the government stepped up its fight to control an estimated $3 billion of fake drugs in the world’s fastest-growing pharmaceuticals market.

China criminalized the manufacture of counterfeit medicines this year and raised maximum penalties to the death sentence to try to contain illegal production in a market that researcher IMS Health estimates will swell 17 percent to $48 billion in the next year. Sales of counterfeits in the country have grown at about 15 percent annually, with about $1.2 billion exported, according to a United Nations report.

Online sales and a growing health-conscious middle class, coupled with the government’s desire to consolidate the industry, is creating “the perfect storm” of fake drugs as some smaller producers turn to unlicensed copies to stay in business, said Kent Kedl, Greater China managing director at Control Risks. Producers including Pfizer Inc. say the illegal sales cost the industry lost revenue and can be dangerous, damaging the reputation of authentic medicines.

“It’s like a game of Whac-a-Mole -- you knock one problem down and bam! Another one pops up,” said Kedl, whose London- based firm gives advice on political and business risks to almost 8 out of 10 Fortune 500 companies.

‘Horrific Crimes’

Less than 1 percent of medicines in developed markets and as much as 30 percent or more in developing countries are fake, the World Health Organization estimates. China and India are likely the biggest suppliers of the counterfeits, which cause 700,000 deaths a year among malaria and tuberculosis sufferers alone, according to the Washington-based International Policy Network.

“It’s one of the most horrific crimes there is, because you’re playing on people’s illness,” said Scott Davis, 53, a former U.S. customs official who heads security in Asia Pacific for Pfizer, the world’s biggest drugmaker.

About 40 percent of China’s estimated 20 billion yuan ($3 billion) sales of counterfeit medicines, health-care products and medical equipment last year were exported, according to the 2010 report by the UN’s Office on Drugs and Crime.

Countering the fakes is a priority for both the U.S. and China, said Chris Hickey, China-based country director for the U.S. Food and Drug Administration, which opened its first overseas office in Beijing in 2008. The biggest problems the U.S. encounters with fake drugs relate to purported pills for erectile-dysfunction, diet and mental illness, FDA Head of Inspection Dara Corrigan said in a Nov. 3 telephone interview during her first visit to China.

Fake Viagra

High on the list is Viagra, Pfizer’s treatment for impotence. The blue diamond-shaped pills accounted for 2.8 percent, or $1.9 billion, of the New York-based company’s revenue last year, according to data compiled by Bloomberg. Counterfeits of Pfizer medicines have been found in 101 countries, said Davis, who listed China, India and Pakistan as known sources of fake drugs.

Pfizer investigators working with police have found drugs with no active pharmaceutical ingredients, or too much, Davis said, in an interview in Hong Kong. Some contained amphetamines, also known as “speed,” or hazardous chemicals.

“They’ll mix anything,” he said. “If they need to get the color right, they’ll take inkjet cartridges and break them open. We’ve seen boric acid, brick dust and road paint.”

16,000 Police

Chinese authorities are fighting back. A 16,000-strong team of police arrested more than 1,770 suspects in 29 areas, seizing an estimated 2 billion yuan worth of counterfeit drugs and packaging materials, the Ministry of Public Security said yesterday. In raids earlier this month, police seized over 65 million pills, some containing iron powder, starch and animal feed.

Under laws amended in February, making fake medicines is now a crime. Authorities previously had to show that products were harmful to human health. Suppliers can be arrested for carrying any quantity after the limit on fines was removed, and those convicted face as much as life in prison or execution.

“Chinese authorities seem to have recognized the need for intensive enforcement over the longer haul,” said Joseph Simone, vice-chair of the China Task Force at the Washington-based non- profit organization International AntiCounterfeiting Coalition. “I felt like I’ve been given a Christmas present.”

The clampdown may take years to control the illegal sales because of the need to coordinate different provincial agencies and the difficulty in tracking supply chains, say drugmakers and health officials.

‘Long Fight’

“Every stakeholder in the battle against counterfeit drugs understands this will be a long fight,” said Sam Zhou, head of Asia security at Sanofi, France’s biggest drugmaker. “We’re pleased to see the issue being taken more seriously.”

There are still regions where the investigation of copyright piracy and counterfeiting remain inadequate, the State Council, China’s cabinet, said on its Web site after an executive meeting chaired by Premier Wen Jiabao on Nov. 9.

The Ministry of Public Security didn’t immediately respond to faxed questions on how far the clampdown is expected to reduce counterfeiting in the country.

“Addressing this issue requires incredible coordination between provinces and ministries,” said Amy Wendholt, who heads the Greater China pharmaceutical practice for public affairs consultancy APCO Worldwide. “A drug may be produced in Jiangsu and sold in Guangzhou. Creating that cross-provincial coordination is difficult.”

Life Sentence

China’s clampdown follows a similar move by India. One in five strips of medicines sold there is a fake, a WHO taskforce reported in 2006, citing local pharmaceutical companies. The South Asian country tightened laws in 2009, raising the maximum penalty for producers to life imprisonment.

Tougher regulation and criminal penalties don’t address the root causes of counterfeiting, the International Policy Network said in its report. Counterfeiters exploit corrupt legal systems, so additional rules only increase corruption, the free-trade lobby group said.

China’s authorities are also fighting corruption, including handing a suspended death sentence to Wu Jianwen, a former president of Shanghai Pharmaceutical Group Ltd. Wu was convicted of accepting bribes and embezzling public funds, involving more than 50 million yuan.

China’s tougher regulations reflect the dangers of fake medicines compared with other counterfeit issues in the country, said David Twinberrow, Shanghai-based vice president of strategy and market development at Norwalk, Connecticut-based IMS.

“Copying software, T-shirts or DVDs is an intellectual property issue,” he said. “It is something else entirely when vulnerable people get sick or die because of fake medicines.”

--Natasha Khan, Daryl Loo. Editors: Adam Majendie, Jason Gale

To contact the reporter on this story: Natasha Khan in Hong Kong at nkhan51@bloomberg.net Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net


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