In my previous blog post, I described how artemisinin-based drugs were discovered in China in the 1970s and 1980s. Given their potency for the treatment of malaria, one would expect that Chinese made artemisinin-based drugs quickly became the first choice medicine in the global fight against malaria. Much to the chagrin of Chinese scientists and pharmaceutical companies, the World Health Organization (WHO) did not list a single one of China’s antimalarial drugs on its procurement list until 2007.
Why have Chinese companies been boxed out of a market for a drug that was invented by Chinese scientists and extracted from a plant native to China? The issue is not that China lacks interest in exploiting the drug’s commercial value overseas. As early as the 1980s, Chinese pharmaceutical firms were seeking to market their antimalarial products globally. The problem, as Dana Dalrymple noted in his book, was that as China had largely withdrawn from the rest of the world, Chinese research institutes and pharmaceutical companies lacked the necessary funding and expertise to independently break into markets traditionally dominated by multinational pharmaceutical companies.
Subsequently, Chinese officials and scientists asked for help from the China International Trust and Investment Corporation (CITIC), the only Chinese state enterprise that was authorized to deal with foreign investors. Through CITIC, Chinese drug developers and manufacturers partnered with Western counterparts to make artemisinin-based antimalarial products available to the rest of the world. In 1988, Guilin Pharmaceutical forged a partnership with Sanofi-Synthelabo that supplied the French pharmaceutical firm with artemisinin. This partnership facilitated the marketing of Artesunate monotherapy worldwide. In 1994, the Academy of Military Medical Sciences (AMMS)—the original patent holder in China—sold its international rights to market artemisinin-based combination therapy (ACT) to Ciba-Geigy, which was a Swiss company that later became Novartis. In return, Novartis agreed to source the Active Pharmaceutical Ingredients (APIs) of its antimalarial treatments from China and pay AMMS an annual royalty equivalent to 4 percent of its annual sales overseas. In 1999, Novartis became the first pharmaceutical company to launch a fixed-dose ACT called Coartem (artemether-lumefantrine). Kunming Pharmaceutical, AMMS’ partner in developing the first ACT, eventually became the supplier of APIs to Novartis.
By 2001, the WHO had ordered 150,000 treatment courses of monotherapies from Sanofi, of which Guilin Pharmaceutical was the supplier. However, at almost the same time, the WHO launched a series of policy initiatives that seemed to only reinforce Novartis’ first-mover advantage in the ACT market. In March, the WHO kicked off the Prequalification Medicines Programme, under which a new drug could be procured via the WHO only if the quality of the product conformed with WHO criteria for efficacy, safety and quality. In April of 2001, the WHO recommended the use of ACTs in countries where Plasmodium falciparum malaria was resistant to traditional anti-malarial drugs. The rigorous prequalification process raised the barriers for market entry for Chinese-made ACTs, as no Chinese pharmaceutical firms were good manufacturing practice (GMP)-approved by the WHO. It came as no surprise that Novartis’ Coartem became the first and only fixed dose ACT to meet the WHO prequalification requirements. In December, the company formed a ten-year formal alliance with the WHO to provide ACT for use by public health systems in developing countries without profit. In 2002, Coartem was added to the WHO’s Essential Medicines list for purchase by UN agencies that distribute medicine in the developing world. By 2011, when the alliance was formally brought to an end, Novartis had delivered more than 700 million treatments of ACT through the arrangement.
With support from the newly established Global Fund to Fight AIDS, Tuberculosis and Malaria (the Global Fund), the WHO was able to significantly expand its procurement of artemisinin-based therapies from two million in 2003 to thirty million in 2004. In light of growing concerns regarding artemisinin-resistant strains of malaria, the WHO began to seriously promote ACTs. In 2006, the UN stopped ordering monotherapies from Sanofi. At that time, Coartem accounted for nearly 80 percent of the ACT drugs purchased by the WHO. Some Chinese pharmaceutical companies complained that even though Coartem was purchased by UN agencies at cost price ($2.4/person), similar Chinese products could be marketed at much lower price ($1/person). If that was true, scale-up of ACT treatments in the developing world might have been constrained by Coartem’s relatively high price.
To be fair, partnership with multinational pharmaceuticals has involved technology transfer that has enabled Chinese companies to meet international quality, health, safety, and environment standards in the production of APIs, thereby enhancing the latter’s research and development capabilities. The ACTs later developed by Guilin Pharmaceuticals admittedly were more similar to generic versions of Sanofi’s products. Chinese pharmaceutical firms also benefited financially from being the major suppliers of artemisinin for multinational pharmaceutical firms. Being situated at the low end of the value chain, though, China was unable to reap the lion’s share of the benefits from the market: it was reported that the API to final formulation profit ratio is 1:20. Chinese API producers are also vulnerable to the fluctuations in the international market. In April 2004, when the Global Fund approved funding ($200 million) for the procurement of ACTs, the Artemisia annua (the source of artemisinin) planting season had already passed, which resulted in de facto shortage of the starting material and steep rise in API price. The shortage was widely reported, leading to unrealistically high forecasts on the potential of the market. Consumed by the zeal for artemisinin, the API producers in China increased from three in 2004 to more than one hundred in 2006, most of which were not even GMP certified. Meanwhile, the total acreage devoted to plantations of A. annua increased to 800,000 mu in 2006, four times the level needed to sufficiently meet market demand. The surplus of the starting material became clear when the WHO lowered its forecasts in 2005, prompting a free fall in the price for A. annua and APIs. In consequence, most of the new API producers went belly up.
The 2004-2006 artemisinin bubble nevertheless has not deterred Chinese pharmaceutical firms from pursuing its globalization strategy. Supported by the state, Chinese pharmaceutical firms since 2007 have become even more aggressive in promoting their anti-malarial products globally. But how successful are their efforts? This will be the subject of my next blog post.