The China Syndrome

June 15, 2007 — -- In the Wild West, rustlers and bank robbers met swift justice at the end of a rope. In the Wild East, namely China, the justice may not be quite as swift, but the punishment is just as brutal. China's press agency recently announced that its former top drug regulator, Zheng Xiaoyu, was sentenced to death for taking more than $832,000 in bribes to approve untested medicines. At the same time, the country's main quality control agency announced its first recall system, targeting unsafe food products.

Zheng Xiaoyu represents the tip of the proverbial iceberg. Because China is a country without the checks and balances found in the United States, it is inevitable that more tragedies like those resulting from tainted toothpaste and poisoned pet food will occur.

People in the United States may already have become sick -- or worse -- from bogus or bad products originating in China; our system just hasn't as yet detected these illnesses or deaths. The size of the drug industry and the margins on its most profitable products are too rich not to attract unscrupulous operators.

With government agencies, such as the Food and Drug Administration, accelerating the approval of low-cost generic drugs and several large retail businesses introducing low-cost co-pay plans, there is concern that low-cost generic imports will displace much of the low-margin U.S. pharmaceutical business.

What creates more immediate concern are bogus versions of higher-margin drugs and biologicals that may make it into our wholesale drug distribution system. With much higher price tags, these drugs become tempting targets for any unethical or sloppy Chinese manufacturers. Our faulty drug inventory systems, coupled with the proclivity of some Chinese manufacturers to bootleg and forge any product they can get hold of, can only be described as a systemic problem that must be confronted.

At the beginning of the 20th century, pure food and drug laws were created in the United States to deal with abuses in the evolving large-scale manufacturing system. The parallels with today's new Chinese enterprises are striking.

Steve Brozak is the president of WBB Securities LLC, an independent broker/dealer investment bank specializing in research in biotechnology, medical devices and health care.