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Legal But Deadly

Thursday, June 30, 2011

Our new research shows that legal but poorly produced medicines may be as dangerous to consumers as counterfeits.

Patients in emerging markets want greater access to medicines, but supplying medicines cheaply is proving problematic. Part of the difficulty is the proliferation of illegal counterfeits in the poorest markets. Yet our new research shows that substandard medicines—those legally but poorly produced—pose an equally dangerous threat to patients1. Without a strong commitment from pharmaceutical companies and drug regulators around the globe, the problem will worsen.

The demand for medicines from the growing middle class in India, China, and, more recently, Africa is creating opportunities for pharmaceutical companies. McKinsey projects that by 2025 China and India will be respectively the third- and fifth-largest consumers in the world. African households with discretionary spending are also set to increase by 50 percent over the next ten years. These trends are significant for major Western companies like Bayer and Novartis, who already generate 25 percent of their revenue from emerging markets, up from single-digit percentages only a decade ago.

African manufacturers performed worst, yielding 8.3 percent failures overall, followed by Chinese, Vietnamese, and small Indian producers.

Internationally traded generic drugs, most commonly from India, have flooded emerging markets. A recent push to help low-income nations develop their own production capabilities has matured, and countries like Thailand, Ghana, Kenya, and Nigeria are now manufacturing their own medicines. Supported by many international donors, they argue that domestic production of pharmaceuticals will decrease transport costs, provide local jobs, increase expertise, and cut dependence on foreign suppliers.

In principle expanded drug production is good for consumers because increased competition causes prices to fall, thereby increasing drug access and, ultimately, improving patients’ welfare. Increased access to cheap products is only beneficial to the patient, however, if the products are “bioequivalent” (act in the same way in the body) to the approved products they are copying.

With the help of Africa Fighting Malaria and the Legatum Institute, we tested the quality of the medicines bought in emerging markets. We found that more than 4 percent of just under 2,000 legal samples failed basic quality tests.

These failures were not evenly dispersed. No innovator, brand-name drugs failed quality tests. The failure rates for drugs produced by large Indian manufacturers and all American and European companies were under 1 percent.

Meanwhile, African manufacturers performed worst, yielding 8.3 percent failures overall, followed by Chinese, Vietnamese, and small Indian producers. In emerging markets, domestically made products were far more likely to fail than imported products.

It’s too early to be sure whether tougher regulation propels improved performance or whether better companies demand stricter regulations as a barrier to entry.

Perhaps the most interesting dichotomy was between large and small Indian producers, with the smaller companies eight times more likely to produce a substandard product than the larger ones. The key difference may be due to location rather than company size. The best performing companies came from two states, Maharashtra and Andhra Pradesh, where experts agree that proper manufacturing practices are well enforced. Other Indian states are less diligent and may allow generics producers to drive costs down by simplifying the formulation process or using cheaper ingredients. This in turn may seriously affect the medicine’s safety and efficacy.

It is clear that the well-regulated states produce drugs of much higher quality than those with less stringent standards. We suspect this association explains much of the rest of the data in other poor locations, but we have not analyzed these locations in enough detail to be sure.

Production flaws in developing countries will only be exacerbated by lower quality chemicals inputs from China, the world’s largest chemical supplier. An FDA report from a decade ago demonstrates that 80 percent of the ingredients used in American pharmaceuticals were imported. This figure has undoubtedly increased as Chinese firms have captured a larger market share, and is likely higher in other countries. Chinese chemicals are always cheap and most are high-quality, but some are increasingly dubious. Several pharmaceutical industry experts in China privately indicate that perhaps as many as a quarter of ingredients purchased by Western companies come from unknown sources.

Poor oversight, weak regulation, and occasional grotesque negligence are likely to continue to compromise drug quality into the future. There are no simple solutions to this problem; with healthcare spending escalating, the idea that we should pay even more for drugs to ensure safety is a tough sell.

But Western buyers of Chinese medicines must pressure regulatory authorities in China to test comprehensively what is on the market and remove many of the substandard products they are certain to find. All aid agencies encouraging emerging nations to increase domestic production of medicines should insist on more careful oversight and closer adherence to standards by improving infrastructure and governance. If they do not, they will contribute to a public health crisis and exacerbate the problems they intend to address.

Roger Bate is the Legatum Fellow in Global Prosperity at the American Enterprise Institute, where Julissa Milligan is a research assistant.

FURTHER READING: Bate, Milligan, and Lorraine Mooney's AEI Health Policy Outlook examines the issue further. Bate has recently published “The Danger of Substandard Drugs in Emerging Markets: An Assessment of Basic Product Quality,” “Effective Intellectual Property Protections are Key to Future,” and “Diamonds' Fake Provenance—Another Disaster for Zimbabwe.” He has also written “‘Made in India,’ Faked in China” with co-author Tom Woods, and “How Safe Are Your Medicines?



1. See our AEI Health Policy Outlook examining wider causes of drug quality concerns, including in wealthier nations.

Image by Darren Wamboldt/Bergman Group.

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