Resident Fellow Roger Bate

Beijing is taking Draconian measures to clean up for the Olympic Games which start next month. In the past week, 300,000 high-emission or yellow-labeled vehicles, mainly freight trucks, have been banned from the city until Sept. 20 to ensure a "green" Olympics.

Du Shaozhong, deputy director of the Beijing municipal environmental protection bureau, announced the auto restrictions in an attempt to ensure acceptable air quality for the Olympic athletes. Beijing residents are familiar with such bans--during conferences and for periodic "blue sky" days--but how they will cope with such a long-term ban is difficult to imagine.

Another concern of the clean-up was revealed two weeks ago when the Chinese authorities revoked licenses for three pharmaceutical manufacturers, punishing 125 other companies (mainly retail pharmacies) for making, selling or distributing performance-enhancing drugs.

Over the past eight years, the Chinese government has been relocating polluting industry and power generation away from cities to cleaner plants in less populated areas. But the expedience of reducing particulate pollution, which even by official (overly optimistic) statistics is at twice the admissible level recommended by the World Health Organization, has prompted officials to temporarily shut down chemical production in and around Beijing prior to the Olympics. This crackdown is likely to include pharmaceutical production, so while the athletes can breathe a sigh of relief, the implication for drug availability around the world looks less healthy.

China is the largest producer of bulk pharmaceutical chemicals, also known as active pharmaceutical ingredients (APIs), which are made into drugs that supply the world. With India it supplies 40% of the API used in U.S. pharmaceutical production, an amount predicted to increase to 80% by 2020. China provides at least 20% of the APIs used in making Indian generic drugs, as well as about 75% of the intermediate products Indian firms require to synthesize the final products they sell.
 
So it is with alarm that the Indian trade press as well as several pharmaceutical sources in India, report that the Chinese government is likely to suspend the export of all the hazardous substances including pharmaceutical chemicals, starting the end of this week until 15 days after the Olympics in mid-September. For the next two months Western and Indian companies will find it difficult to import most chemical substances including bulk drugs and intermediates from China. This could prove costly to patients and especially costly for the Indian generics industry, because their companies are so reliant on Chinese inputs.
 
All drug companies are having profits compressed because the price of APIs has increased at least 50% over the past six months, partly due to high international demand and oil-price driven inflationary pressures felt by the rest of the economy, but also because of increased enforcement of existing environmental regulations in China, as well as new regulations recently enacted by Beijing.
 
Indian drug producers are raising prices in the wake of these rising input costs, and hint that perhaps 20% of normally available drugs will disappear from the pharmacies due to acute shortage and exponentially rising prices of drug intermediates imported from China. Krishna Reddy, chief executive officer of Shri Krishna Pharma (SKP), says the prices of some intermediates have doubled, even quadrupled in price over the past few months.
 
It is probable that the Chinese restrictions will be limited to Beijing and its surrounding areas, with supplies from other parts of China largely unaffected. But given that many of China's bulk API manufacturers operate around Beijing product prices will still increase drastically over the next few weeks as supply is constricted from Beijing alone.
 
It is impossible to calculate how many lives will be lost because drug prices are rising, but if products become unavailable or are priced out of reach of poor people in India and the developing world then it will be substantial.
 
It is worth considering that the U.S government still allows the importation of Chinese products in order to ensure supplies at low cost. Earlier this year, 81 Americans died from contaminated heparin sourced from China, yet the U.S. Food and Drug Administration (FDA) did not recommend restricting U.S. companies access to Chinese suppliers.
 
This demonstrates the importance of Chinese supplies to U.S. drug production; if the FDA, whose incentive is inherently conservative, did not prevent future supplies, the cost-benefit bias towards keeping the Chinese suppliers must be very strong indeed.
 
Chinese supplies being lost and the resultant rising prices will cost lives, as fewer patients access cheap medicines. It will be interesting to know what lives the Chinese authorities think will be saved from the environmental regulations being enforced.

Roger Bate is a resident fellow at AEI.