2020-The Impact of China's Policies On Global

The Impact of China’s Policies on Global
Biopharmaceutical Industry Innovation

ROBERT D. ATKINSON | SEPTEMBER 2020
China is striving to become the global leader in biopharmaceuticals, but many of its policy steps
are “innovation mercantilist” in nature. This not only is expected to threaten U.S. leadership,
but also slow global life sciences innovation, with negative consequences for cures and
treatments.
KEY TAKEAWAYS
▪ America leads in drug discovery and production, ranking first in most innovation
measures, whereas China’s biopharma industry is still relatively small. But the
government’s “Made in China 2025” plan targets it as a key sector for global growth.
▪ Some Chinese policies help global innovation, such as (modest) funding of early
stage biomedical research. But many others are harmful—such as weak IP
protection, draconian price controls, pressured tech transfers, and discriminatory
procurement.
▪ When Chinese firms sell drugs with unfair support from the Chinese government, they
reduce the pace of global drug innovation by taking market share and revenue from
more innovative non-Chinese firms operating without such support.
▪ Congress and the administration need to be thinking now about actions to help ensure
U.S. biopharmaceutical leadership vis-à-vis China over the next two decades.
▪ In the trade arena, the administration should limit Chinese acquisitions and investments
in U.S. drug designers and producers; ensure trade negotiations include biopharma
issues; and fund the FDA to effectively inspect Chinese exports.
▪ Domestically, Congress should increase NIH funding, expand R&D tax subsidies,
support the Bayh-Dole Act, streamline drug approvals, enable data-driven life-science
innovation—and, perhaps most importantly, reject draconian drug price controls.
INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER

2020
INTRODUCTION
The production of biopharmaceuticals—large-molecule biotech drugs and small-molecule
chemical drugs—is one of the most innovation-intensive industries in the world. Worldwide, the
industry invests a greater share of sales into research and development (R&D) than any other
industry in order to continue to develop and bring to market new drugs and other treatments.
Unlike industries wherein China has already gained significant global market share,
including high-speed rail, solar panels, and telecom equipment, China’s global market
share and competitiveness in biopharmaceuticals is still quite low, with the global leaders
largely in the United States, with Japan and Europe following.
Competition can drive innovation, but it needs to be market-based competition.
It is for this reason that China has targeted the industry for global competitive advantage, as
detailed in a number of government plans, including “Made in China 2025.” China is taking a
range of steps to propel itself to become a major global biopharma competitor—starting with
developing a world-class generics industry. However, while some of these policy actions are
fair and legitimate, many are not, and are “innovation mercantilist” in nature, seeking to
unfairly benefit Chinse firms at the expense of more innovative foreign firms.
Competition can drive innovation, but it needs to be market-based competition. When Apple
came out with the iPhone and helped drive Blackberry from the market, this advanced
innovation, because it was based on consumer demand for a better product, drove the change.
In contrast, a Chinese biopharma firm selling a drug largely because it was supported unfairly
by the Chinese government likely reduces the pace of global drug innovation by taking market
share and revenue away from more innovative non-Chinese firms.
INNOVATION IN THE BIOPHARMA INDUSTRY

The biopharmaceutical sector includes research, discovery, testing, and manufacturing of
medicines and therapeutics that cure disease and improve patient health. The development of
new drugs requires years of painstaking, risky, and expensive research that for a new
pharmaceutical compound takes on average between 11.5 and 14 years of research,
development, and clinical trials at a cost of $1.5 billion to $2.6 billion.1
The industry is extremely innovative and far from mature: Maturity would mean either all
human diseases have effective treatments or further technological progress is not possible.
Neither is true. Many diseases, including cancer and Alzheimer’s to name just two, are
unfortunately still all-too prevalent. And new technologies and discoveries, including
personalized medicine, gene editing, organ printing, and immunotherapy, show enormous
promise. In other words, this is an innovative industry, not a mature one.
We see this in R&D investment. Large biopharma firms invest considerable resources in R&D,
with the top 30 companies globally (ranked by revenue) being responsible for 77 percent of
global pharmaceutical R&D funding. The U.S. life-sciences sector, for example, is extremely
research intensive, investing over 21 percent of its sales in R&D, while accounting for 23
percent of domestic R&D funded by U.S. businesses—more than any other sector.2 Measuring
INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 1
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R&D

2020
expenditures, the U.S. biopharmaceutical sector leads all other U.S. manufacturing sectors,
investing more than 10 times the amount of R&D per employee.3 And in the United States,
companies’ share of R&D classified as basic (14.3 percent) instead of later-stage applied and
development is higher than any other U.S. industry—and more than twice as high as the U.S.
industry average (6.4 percent).4
As companies earn more revenues, they invest more in R&D. As the Organization for
Economic Cooperation and Development (OECD) explained, “There is a high degree of
correlation between sales revenues and R&D expenditures.”5 (See figure 1.) This relationship
is tight because pharmaceutical sales are the main source of revenue pharmaceutical
companies use to generate the funding needed to finance research into, and development of,
future generations of innovative medicines.
Figure 1: R&D expenditures and sales in the pharmaceutical industry, 20066
Advanced Economies Lead

Most innovative biopharma companies are headquartered in advanced economies. The 2017
Biopharmaceutical Competitiveness and Investment Survey ranks 27 nations on a variety of
measures the biopharma innovation. Singapore led, with the United States second, followed
by Switzerland, Germany, the United Kingdom, and Israel.7 China ranked 20th. One study
ranking the 20 most innovative biopharma companies finds that the top 10 were outside of
China, with companies in Japan, Switzerland, the United Kingdom, and the United States;
and of the top 20, only 1, Jiangsu Hengrui Medicine, was headquartered in China.8
The United States remains the leader in discovery and production, ranking first in nearly all
measures of innovation.9 Of the top 25 pharmaceutical companies, 11 were headquartered in
the United States, accounting for 48 percent of total sales from this group. And in 2015, the
United
States attracted 74 percent of all worldwide venture-capital investments in the industry.10
Moreover, the United States increased its share of pharmaceutical R&D expenditures among
developed countries between 1995 and 2010 from 43 percent to 57 percent.11 In the 2000s,
more new chemical entities were developed and approved by regulatory authorities in the
United States than in the next five nations—Switzerland, Japan, the United Kingdom,
Germany, and France—combined.12 Broadening the lens to the years 1997 to 2016, U.S.-
headquartered enterprises accounted for 42 percent of new chemical and biological entities
introduced and approved around the world.13
China’s Competitive Position

Unlike some more-traditional manufacturing or electronics industries wherein China has
dominated global production, China’s biopharmaceutical industry is an emerging industry that is
still relatively small, but targeted by the Chinese government.
One reason the industry is relatively nascent is that as a still emerging economy, China’s health
care expenditures, including on drugs, are significantly lower than in higher-income nations.
Nonetheless, Chinese biopharma industry output has grown rapidly over the past decade as
Chinese incomes have grown and as China has dramatically expanded the share of its citizens
that are eligible for health insurance.14 Chinese sales increased from $26.2 billion in 2007 to
$122.6 billion in 2017 (U.S. sales were $466.6 billion).15 This is a key reason why China’s share
of global industry value added rose from 7.2 percent in 2001 to 22.1 percent in 2016, with over
two-thirds of that growth happening after 2010. (See figure 2.) Some of this is due to China being
the leading producer of active pharmaceutical ingredients (APIs) in drugs—accounting for
between 20 and 40 percent of global output—and is the world’s largest API exporter, as well as a
key generics producer.16 APIs and generics are less innovation based, with simpler production
processes and less need for original innovation. China more than doubled its biopharmaceutical
production capacity, including APIs, from 2010 to 2014.17 Per a KPMG report on China’s
biopharmaceutical industry, “Thanks to substantial state support, the biopharmaceutical industry
has enjoyed concentrated, high-speed growth over the past several years.”18
Figure 2: Global shares of value added of the pharmaceutical industry19
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001 2006 2011 2016
United States China Rest of World

However, China is moving toward becoming a developer and producer of innovative new drugs.
As the McKinsey Global Institute wrote, “[S]ome leading Chinese pharma companies that
historically focused on generics have started building capabilities and making investments in
innovative drugs.”20 It added, “[T]he number of applications of local innovative drugs entering
clinical trials in China has grown from 21 in 2011 to 88 in 2016.”21 In 2017, 800 innovative
molecules were under development in China, ranging from preclinical to phase III stages in the
pipeline, of which 10 percent were at clinical stage III (the stage at which medicines are
definitively tested for effectiveness or cure).22 A number of Chinese biopharma companies are
establishing multiregional clinical trials designed to serve global markets. For example, in 2018,
Chinese biologics and biosimilars maker Bio-Thera Solutions Ltd. started a phase III trial of its
HER2 antibody conjugate drug targeting HER2-positive metastatic cancer.23 As of mid-2018, 25
Chinese companies had applied for approvals for advanced anticancer drugs based on
biotechnology (PD-1/PD-L1 inhibitors).24 Moreover, in 2017, China had 139 clinical trials with
chimeric antigen receptor treatment (CAR-T) cell therapy, compared with around 118 in the
United States.25 Of just over 400 CAR-T clinical trials conducted in March of 2019, 166 were in
China, and 165 in the United States.26 Chinese biopharma start-ups are also broader in terms of
the number of drugs they make or license to make, with the average number of drugs when filing
for an initial public offering (IPO) in China being 10, versus 4 in the United States.27 And in
2016, China had filed 410 clustered regularly interspaced short palindromic repeats (CRISPR
gene-editing) patents, with the United States filing 447.28 In 2015, there were 173 publicly
traded pharmaceutical companies in China.29
China more than doubled its biopharmaceutical production capacity from 2010 to 2014.
Much of this has been based on the practice of simply copying from the leading Western
companies.30 In 2015, Chinese companies still produced less than 1 percent of new molecular
entities (e.g., drugs) globally.31
However, many global biopharmaceutical firms have expanded their investments in China. For
example, the Japanese biopharma firm Takeda relocated its Asia Development Center from
Singapore to Shanghai. Likewise, Sanofi is building an emerging market business unit in China.
In fact, virtually all of the world’s leading 20 pharmaceutical companies have manufacturing
facilities in China—and many have also established R&D centers there.32 China is an important
market for foreign life-sciences companies, with the top-10 mature drugs from foreign
companies adding $2.8 billion additional revenue to China from 2014 to 2018.33 From 2010
to 2014, annualized growth in Chinese sales revenue among biopharma manufacturers was 23
percent.34
Chinese firms are also expanding internationally, especially in world-class biopharma

innovation hubs. For example, numerous Chinese biotechnology companies have started new
R&D facilities in the United States, generally focused in such major biotech hubs as Boston,
San Francisco, and Research Triangle Park in North Carolina. Chinese companies use this
strategy to gain access to new technologies they can then bring back to the mainland—more
so than firms from most other nations that have shown considerable willingness to invest in
U.S. R&D and production facilities.35
Notwithstanding this progress, China still faces a number of challenges. Perhaps the core
challenge is, as a science-based industry, it is hard to close the gap with biopharma leaders
simply by copying them. In other industries, such as solar panels, high-speed rail, and robotics,
China caught up to leaders by copying their technology—often through theft and forced
technology transfer—and then using a variety of means, including predatory pricing supported
by government subsidies, to weaken foreign competitors. Copying can certainly work if China
wants to develop a globally competitive generics and biosimilar industry (biosimilars are follow-
on drugs to original biotech drugs), but it will not be enough to achieve significant market share
in innovative drugs. To do that, China needs to develop indigenous capabilities that allow it to
develop and bring to market first-to-the-world drugs. As a KPMG report notes, “The industry
also faces practical constraints, including a shortage of core technology, a subpar industrial
structure, weak R&D capacity, low resource efficiency, and disorderly markets.”36
Copying can certainly work if China wants to develop a globally competitive generics and biosimilar
industry, but it will not be enough to achieve significant market share in innovative drugs.
Moreover, many of China’s biopharmaceutical firms are quite small and do not have the scale
to become true innovators. More than 70 percent of China’s pharmaceutical manufacturers
have fewer than 300 employees and revenue of less than $3 million.37 And the vast majority
produce either APIs or generic drugs. For example, in 2012, there were 1,272 applications for
approval for generic drugs, with over 60 percent of them being submitted by different
companies more than 20 times each.38 This is why China lacks world-leading major
biopharmaceutical firms with the scale and technical sophistication of EU, Japanese, and U.S.
firms. In branded pharmaceuticals and biotechnology drugs, Chinese companies had less than
3 percent of global market sales in 2015.39
China’s relatively low per capita income is also a factor because it makes it harder for China to
pay for innovative new drugs, thus limiting the development of Chinese firms. This is why just 8
percent of new drugs approved globally between 2011 and 2017 are available in China.40
CHINESE BIOPHARMA INDUSTRY GOALS

For over a decade, the Chinese government has targeted biopharma as a key industry for
development. Its 2006 Report, “The Guidelines for the Implementation of the National Medium-
and Long-term Program for Science and Technology Development (2006–2020),” called on
China to master “core technologies” including “major new drugs.” China’s 11th Five-Year Plan
listed 16 “megaprojects,” including pharmaceutical innovation and development, and control
and treatment of AIDS, hepatitis, and other major diseases.41 As part of that plan, China’s State
Council directed provinces and municipalities to target the industry for development, which,
given the ability of local Chinese Communist Party officials to move up the ranks by following
the guidance of Beijing, was quite effective in driving local policy. The plan called on China to,
“Form an advanced industrial technology system supporting the development of biotechnology
drugs, establish a batch of multi-functional, bio-technical drug production bases in line with
international standards, and cultivate a group of enterprises with international
competitiveness.”42 The plan went on to call for:
Key technology development: build large-scale and high-throughput genome
sequencing technology and equipment, massive biological information processing and
analysis technology. Construction of public technology service platform: build a large-
scale biological resource pool and the core platform of the biological information
center, build a networked national biological resources and biological information
service facilities, strengthen the deep exploration of genetic information, and promote
the development of new sequencers. Provide bioinformatics services for individualized
diagnosis and treatment, biological resource discovery, animal and plant molecular
breeding, and industrial microbial strain modification.43
China’s 12th Five-Year Plan identified 7 priority strategic emerging industries, including
biotechnology, aimed at increasing their contribution to China’s gross domestic product (GDP)
from their then-current 2 percent level (2008) to 8 percent by 2015 (which it failed to meet),
and 15 percent by 2020.44 Despite its aspirations, the plan’s implementation was poor, with few
important reforms actually being implemented. For example, until 2017, the Chinese Food and
Drug Administration—now the National Medical Products Administration (NMPA)—had a
multiyear backlog of new drugs awaiting approval.
The State Council has called on all levels of government to target the industry for support.
However, China appears to have gotten more serious about implementation since then. Its
most recent 13th Five-Year Plan (2015–2020) maintained focus on the industry and called
for biotech industry output to exceed 4 percent of GDP by 2020, up from less than 2.5 percent
a few years prior.4546
Moreover, the State Council has called on all levels of government to target the industry for
support, writing, “The people’s governments of all provinces, autonomous regions, and
municipalities directly under the Central Government, ministries and commissions under the
State Council, and their respective agencies: The Bio-Industry Development Plan is hereby
printed and distributed to you, please implement it carefully.”47 The Bio-industry Development
Plan component set a target for biopharmaceutical sales to grow to $1.02 trillion by 2020 at an
annual growth rate of 20 percent.48 According to a set of guiding opinions from the State
Council, “Innovation will be strengthened through collaboration on key R&D projects, the
commercialization of pharmaceuticals, advances in medical devices, and the modernization of
TCM (traditional Chinese medicine). Industry and organizational structure will be optimized
through cross-sectoral mergers and restructuring, trans-regional shifts, and the development of
concentrated industry clusters.”49 The plan went on to note—in turgid bureaucratic language—
that the Chinese government would:
Establish a demand-side incentive mechanism for new biotechnology products. Break

regional monopoly and support bio-innovation enterprises to open up markets. We will
fully implement the price formation mechanism of biological products based on the
principle of high quality and good price, same quality and competitive price, and
promote the promotion and application of new products and new technologies to
support the development of high-tech service industry and related industries. Expand
medical insurance coverage, standardize drug procurement behavior, develop
commercial health
insurance, and support innovative drugs with clinical necessity, exact curative effect,
high safety and reasonable price to enter the medical insurance catalog. Improve the
biological breeding subsidy policy. We will steadily promote the pilot application of non-
grain fuel ethanol, carry out industrialized demonstration of biodiesel in an orderly
manner, and start the commercial application of aviation biofuels in a timely manner on
the basis of completing aviation biofuel verification flights. Intensify efforts to promote
resource tax and fee reform, speed up the elimination of outdated products,
technologies and processes, and promote the promotion and application of emerging
green technologies and products.50
Most recently, China’s Made in China 2025 identified ten key industries to target, including
biomedicine. It set out the following goals:
i) Goals for 2020: Promote a large number of enterprises to achieve drug quality
standards and systems that are in line with international standards, among which at
least 100 pharmaceutical enterprises obtain U.S., EU, Japanese, and World Health
Organization (WHO) authentication and achieve product export; according to
international drug standards, develop and promote 10–20 chemical and high-end drugs,
3–5 new traditional Chinese medicines, and 3–5 new biotech drugs; complete drug
registration in Europe, the United States, and other developed nations; speed up the
development of internationalization of domestically produced drugs; before 2020, when
international patents for blockbuster drugs expire, achieve over 90 percent generics
production; achieve breakthroughs for 10–15 important core and critical technologies;
and begin to establish national drug innovation system and innovation team.
ii)Goals for 2025: By 2025, basically achieve drug quality standards and systems that
are in line with international standards; develop chemical drugs, traditional Chinese
medicine, and biotech drugs focused on 10 major diseases; achieve industrialization of
20–30 innovative new drugs; 5-10 drugs with indigenous property rights receive U.S.
Food and Drug Administration (FDA) or EU authentication and enter the international
market; construct, improve, and support the national drug innovation system for
external services; form a high-level innovation team with an international perspective;
and promote China’s drug internationalization development strategy.51
In addition to the national Made in China 2025 plan, at least 19 of China’s 23 provinces have
their own plans.52 This should not be surprising because provincial communist-party leaders
are quick to support central government strategic priorities, aware that this is key to
professional advancement. Likewise, the 2016 State Council plan states:
All regions and relevant departments must fully understand the importance of
promoting the healthy development of the pharmaceutical industry, strengthen
organizational leadership, improve the working mechanism, and form a joint effort. All
regions should formulate specific implementation plans based on actual conditions,
carefully organize and implement them to ensure that all tasks are implemented. All
relevant departments should promptly formulate supporting policies in accordance with
the division of responsibilities and create a good environment.53
Finally, the update to China’s Strategic and Emerging Industries plan, the Strategic Emerging
Industry Development Key Product and Service Catalogue, first published in September
2018, also targets the life sciences.54
China also appears to be “skating where the puck will be” in the sense that the government is
focusing more on biotechnology and biology than on more traditional pharmaceuticals and
chemistry. Its 13th Five-Year Plan focuses on “genomics and other biotechnologies, networked
application demonstration, and the scaling up of a new generation of biotechnology products
and services, including personalized treatment and innovative pharmaceuticals.”55 It focuses
more on complex biotechnology drugs in part because that is where much of the industry is
going globally. In addition, some genomics-based drugs may need to be tailored by ethnicity,
which would give the Chinese an advantage in developing drugs for Chinese use. As one
article notes, “China’s leading biotech companies are already aware of the need to step up
their game. The novel chemical drug space may be close to saturation, but there’s still a lot to
explore in the biopharmaceutical field, and that is where China has the potential to catch up
with the world leaders.”56 Moreover, as one study shows, over the last two decades, nations
that had strengths in biology and life sciences have done better in pharmaceutical industry
competitiveness than did nations with traditional strengths in chemistry (the source of
competitive advantage in small- molecule, traditional pharmaceuticals).57
CHINESE BIOPHARMA POLICIES

It is important to distinguish between innovation policies that are fair and legitimate and those
that are unfair and illegitimate. At one level, making such distinctions implies a value
judgment, although there is considerable evidence and logic for making such distinctions. Fair
and legitimate policies are those that generally abide by the letter and the spirt of the World
Trade Organization (WTO), including nondiscrimination between domestic and foreign firms;
not tying domestic market access to certain behaviors (e.g., technology transfer, joint
ventures, etc.); generally limiting government intervention to addressing market and innovation
system failures (e.g., support for research, skill development, and related infrastructure, as
opposed to production or export subsidies); and ensuring a good regulatory and market
environment, including robust protections for intellectual property (IP). (While WTO has
allowed some compulsory licensing of certain drugs for specific low-income nations or in
exigent cases of national health emergency, overall, the WTO/TRIPS—Trade-Related Aspects
of Intellectual Property Rights—regime does respect IP.)
It is important to distinguish between innovation policies that are fair and legitimate and those that
are unfair and illegitimate.
Unfair and illegitimate policies include favoring domestic over foreign firms; employing a weak
IP regime, coupled with IP theft and forced technology transfer in order to obtain foreign
technology without paying market rates for it; subsidies for production and export; and foreign-
company acquisition not based on market prices and terms. (See table 1.)
For Chinese industrial policies, while some are legitimate and non-distorting innovation policies,
a much higher share are mercantilist and distorting policies.
Legitimate Chinese Biopharma Policies
China deploys an array of legitimate policies to spur biopharma growth and innovation.
Two key policy areas relate to talent and research funding. Chinese universities produce
around 150,000 life-sciences graduates annually, compared with America’s 137,000.58 This
supports global biopharma innovation as long as more-innovative foreign firms have equal
access to this talent in China, which they do not.
When it comes to biomedical research funding, the Chinese government invests much less than
the United States. In 2015, the Chinese government invested around $600 million to support
R&D in biotechnology, compared with over $40 billion in the United States.59 However, funding
levels are increasing, particularly in targeted emerging areas. For example, in 2016, China
launched its precision medicine initiative with the equivalent of $9.2 billion over 15 years,
compared with the U.S. National Institutes of Health (NIH) effort of $1.5 billion over 10 years.60
The Chinese government also provided $295 million for stem cell fundamental research under
its 12th Five-Year Plan. Between 2016 and 2020, it is expected to allocate around $400
million for stem cell research projects, 10 percent of which will be for gene editing. In 2018
and 2019, the Ministry of Science and Technology (MOST) issued its National Key R&D
Program for Stem Cell Transformational Research, funded at $60 million.61 China has also
established five new National Centers for Translational Medicine.62
The Chinese government also provides an array of incentives and supports, including research
grants, for biopharma firms. One study finds that one-third of Chinese firms engaged in
agricultural biotechnology research received government grants for R&D that play a key role in
increasing firms’ R&D spending.63 Local Chinese governments are also providing financial
incentives to help grow the industry. One key incentive is large-scale biomedicine science
parks. Zhaofeng Zhang, director of MOST’s Science and Technology for Social Development
program, reported that by 2020, China will spend around $1.45 billion to support 20
biomedicine science parks.64 This is in addition to the already over 100 national-level high-tech
and economic industrial parks involving biotechnology, and more than 400 provincial-level
parks.65 For example, Shanghai’s “Pharma Valley” is a 10-square-kilometer life-sciences park
that houses more than 500 biotech companies. Other local governments are also targeting the
industry, in part by building research parks and providing tax incentives and direct subsidies.66
Often, these provincial parks provide discounted or free office, laboratory, and small-scale
production space for up to six months, and after that, free manufacturing space—for as long as
five years. For example, the Shanghai government provides any company that obtains new
drug approvals in China and intends to manufacture and sell the medicines in Shanghai with
an annual subsidy equal to 10 percent of its initial research budget, up to a cap of 10 million
RMB
($1.4 million).67
In contrast to EU and U.S. rules that make the collection and use of patient data for research difficult,
there are no similar laws restricting the use of health data in China.
The central government is also investing in a nationwide network of manufacturing innovation

centers modeled on the Manufacturing USA Centers but funded at significantly higher levels,
plans to have almost 40 centers by 2025, and will presumably have some of them be focused
on
biopharmaceutical technology—given it is a priority sector. In addition, tax incentives the
Chinese government has developed for other high-tech sectors such as semiconductors benefit
biotechnology. These include up to a 15 percent reduction in corporate income taxes, and a 150
percent pretax “super-deduction” on specific types of R&D activity in China.68
Data will be increasingly important to biopharma innovation, especially in the next wave of
personalized medicine. In contrast to EU and U.S. rules that make the collection and use of
patient data for research difficult, there are no similar laws restricting the use of health data in
China.69 Moreover, the Chinese government has made the generation and sharing of medical
data a top priority. In 2016, the State Council issued a circular to promote the application and
development of big data in the health and medical sectors, including the construction of
national and provincial population health information platforms.70 This means Chinese
researchers are already using big data to train artificial intelligence (AI) health and biopharma
algorithms. For example, Chinese researchers were able to obtain 600,000 patient records
from a pediatric hospital to help train an AI algorithm to diagnose children’s diseases—
something that would have been extremely difficult to do in the United States.71 China’s DNA
repository of over 40 million individuals, which is targeted to reach 100 million residents by
2020, dwarfs that of any other country.72 The Chinese government uses access to this massive
database to attract foreign genetic research companies to China.73
China has improved its biopharma regulatory system. China joined the International Conference
on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human
Use (ICH). Both the U.S. Government and U.S. industry encouraged this move to international
standards. To join ICH, new members must implement a basic set of regulatory requirements
for the manufacture of pharmaceuticals, the conduct of clinical trials, and stability testing of
pharmaceutical products. In addition, the central government has either drafted or adopted
other proposals. As Beier and Baeder wrote,
Facilitate launching clinical trials after a 60-day review vs the current 12–18 month
approval process; allow use of non-Chinese data in the approval process for new
drugs; adopt the U.S. and Europe model to accelerated approval for breakthrough
therapies; improve intellectual property protection via data exclusivity; and facilitate
contract manufacturing and product licensing by severing the link between marketing
authorization and manufacturing licenses.74
China is improving its process of conducting clinical trials of new drugs, including establishing
more clinical trial centers.75 It has also announced it will put in place an expedited orphan drug
review process and create a new medical reimbursement agency. In addition, in 2017, China
added 340 drugs to its National Reimbursement Drug List (NRDL), including many novel and
expensive biologic drugs, replacing city- and province-level “experiments” developed by
Western drug companies over the prior four years.76 Also added to the NRDL through direct
listing were 128 Western drugs.77 Clearly, these regulatory changes have helped U.S. and
other foreign manufacturers access the growing pharmaceutical market in China.
China has also made considerable progress in its drug approval process, significantly adding
staff and reforming the approval process.78 China also recently cracked down on fraudulent
drug approval applications by holding them to fraud standards with severe penalties. This
change resulted in 86 percent of drug approval applications from Chinese companies being
withdrawn.

2020
Finally, one could argue that China’s large and growing market for drugs is likely to spur global
biopharma innovation. Drug consumption, particularly of non-generics (original innovative drugs)
in China is significantly lower than in richer nations. However, as per capita incomes continue to
grow, that gap will lessen. Moreover, China’s population of 1.4 billion is more than 4 times larger
than that of the United States. In part because of a growing economy and an aging pollution, the
Chinese drug market grew six times larger from 2005 to 2017.79 It is set to become the second
largest in the world, behind the United States, by 2020.80 Tragically, China now has a third of
the world’s cases of colorectal cancer, 40 percent of lung cancer, and half of gastric cancer
cases—all factors that will lead to the growth of drug sales in China.81 According to the
management consulting firm L.E.K. Consulting, China’s pharmaceutical market value is
expected to grow from $123 billion in 2017 to $160 billion by 2022.82 But this growing market
will only support global life-sciences innovation if foreign firms have a fair shot at selling into the
Chinese market, which is not the case.
Chinese Innovation Mercantilist Biopharma Policies

Notwithstanding the “good” non-mercantilist Chinese innovation policies for this industry,
China’s “bad” mercantilist policies significantly outweigh the former. There a number of
different types of mercantilist policies: some relate to discriminatory market access for foreign
firms, some relate to unfair subsidies, and others relate to IP theft. (See table 1.)
Table 1: Assessing China’s biopharma industry policies on global innovation
Type of Policy Impact on Global Innovation

Pressured joint ventures and technology transfer Harmful
Draconian drug price controls Harmful
Intellectual property theft Harmful
Undervalued currency Harmful
Protected domestic market Harmful
Limits of cross-border health data transfers Harmful
State-owned enterprises Harmful
Weak intellectual property protection Harmful
Discriminatory procurement Harmful
Government-backed venture capital investing Neutral
R&D subsidies favorable to Chinese firms Neutral
Supporting STEM education Helpful
Funding early stage biomedical research Helpful
Enabling use of personal health data for biomedical research Helpful
Pressured Joint Ventures

The Chinese three-stage playbook is quite similar for all advanced industries. Phase 1 starts
with allowing foreign imports. Phase 2 transitions to requiring and incenting foreign production
in China tied to forced technology transfer. And as a final stage, it switches to supporting
China’s

2020
domestic firms. China is actively in phases 2 and 3. Chinese government policies are
supportive of inbound foreign direct investment (FDI), and the biotech industry is on the
encouraged list of the Chinese government’s Catalog of Industries for Guiding Foreign
Investment. And while the sector is open to 100 percent ownership of foreign facilities, there
are still incentives and pressures to form joint ventures, thus helping domestic biopharma
firms.
As one article on the trend to invest in China notes, “From investing in China facilities to
acquisitions, licensing deals and joint ventures, the aim is to seek an edge in dealings with
domestic regulators and government.”83 In other words, in contrast to the developed, rule-of-
law nations wherein firms are largely treated the same regardless of whether they are a local
producer, in China, firms know they are at a disadvantage if they are not producing locally or
helping Chinese firms produce. As a WHO report notes, most foreign biopharma firms do not
enter into joint ventures in other nations, but do in China.84 In fact, virtually all major foreign
biopharma firms have manufacturing facilities in China—and some have R&D facilities.85
According to a comprehensive study of Chinse joint ventures, out of 29 industries, biopharma
had the 5th-highest rate of joint ventures.86 One reason for this, according to Asher Rubin, a
partner at the law firm Hogan Lovells, is firms “need a China partner, in general, to
commercialize [their] drugs in China.”87 Another reason for joint ventures is to receive better
treatment by the Chinese government, including faster drug approval, preferences in
purchasing drugs, and greater IP protection. As GlobalData Director of infectious diseases
Christopher J. Pace noted, “[B]eing ‘forced to compete against domestic firms that are given
an unfair advantage by the Chinese Government’ [is] one of the key concerns for foreign
companies.”88 In short, many international firms are pressured by national and local officials to
establish R&D centers in China for specific financial incentives, access to markets, and
approvals for related business expansions.
One key way to pressure firms into establishing joint ventures is through the drug approval
process. While drugs are on the approved list for FDI, Chinese governments encourage
foreign biopharmaceutical companies to form joint ventures if they want their drugs more
easily put on the government list of drugs to qualify for reimbursement or receive other
benefits.89 As the Shanghai American Chamber of Commerce wrote, “Adopting a minority
position as an MNC (multinational company) could create increased market competitiveness
and commercial opportunities and engender more favorable government treatment.”90
Similarly, in exchange for investing in China, provincial governments tout their willingness and
ability to help firms gain regulatory and market approval.91
Undervalued Currency
China’s biopharma industry has benefited from a deeply undervalued Chinese currency, which
at least for many years, provided it with a 25 to 35 percent price subsidy.92 One key benefit of
this was it made it easier to attract foreign biopharma companies to invest in China, as it
reduced their costs and lowered the costs of their exports. In 2007, it was estimated that
companies could achieve cost savings of up to 80 percent by conducting biomedical research
in China.93 A study in 2008 estimates that low costs in scientific talent, clinical trials, and raw
materials gave firms in China as much as a 90 percent cost advantage over firms in the United
States.94 A study from 2013 estimates that clinical trials, which can account for between 40
and 60 percent of the total costs of drug development, can be 67 to 80 percent cheaper than
those in Japan or the United States.95 One website estimated that by 2019, the median salary
for a research scientist
in China would have been $39,000, compared with $78,000 in the United States.96 This
artificial price reduction likely distorted the global patterns of research, thereby reducing
research in more innovative nations than would otherwise be the case.
Draconian Drug Price Controls

A key enabler of a robust domestic life-sciences innovation and production system is
reasonable drug-pricing reimbursement so companies can earn the revenues needed to invest
in the next generation of drug development. This is particularly true because so many drugs
never make it to market, and even of the ones that do, the marginal cost of production is much
lower than the average cost because of high levels of R&D needed.97
China is working aggressively to develop domestically produced generic alternatives to foreign

drugs, in part by dramatically cutting reimbursements for drugs, prior to which many were
foreign. China’s State Council has said it will adopt international cost-containment practices as
reference pricing for drugs, including new drugs. As the McKinsey Global Institute noted, “Most
imported drugs in the 2018 NRDL negotiation came out with a price significantly lower than
neighboring countries, 36 percent lower on average.”98 In 2019, the State Medical Insurance
Administration (SMIA) also launched its National Centralized Drug Purchase Trial with the goal
of substituting (mostly foreign) off-patent originator drugs with locally produced and steeply
discounted generics.99 Of the 31 drugs SMIA sought generic substitutes for, 25 were selected, of
which 23 went to Chinese suppliers—with price cuts as steep as 90 percent.100 This new model
is expected to spread nationally. In addition, at the end of 2018, the central government, led by
the National Health Commission, issued a plan for the development of generic drugs, which is to
include the issuance of a list of drugs encouraged for generic development, which will also be
used to inform industrial and technology policies designed to upgrade technical development
and manufacturing of these drugs (e.g., the Focused Research Program for the Development of
Generic Drugs).101 As a result, hospitals in the affected cities, where most prescribing takes
place, are under pressure from the central government to ensure a minimum share of
prescriptions are generics, even if patients request an original off-patent drug.
While foreign firms are largely being shut out of the Chinese market for generics and off-patent
original drugs through the new pricing policies, they still have some access to markets for on-patent
innovative drugs.
One goal of this is to centralize procurement of generics so as to generate a consolidation in the

industry in order to improve quality and competitiveness of the remaining firms. The price cuts
are so significant that few foreign drug companies can afford to make a winning bid. In short,
the goal is to put out of business small, often low-quality Chinese producers while at the same
time limiting market access to more innovative, foreign drug companies.102 This way, a modest
number of Chinese “champions” can be cultivated.
While foreign firms are largely being shut out of the Chinese market for generics and off-patent
original drugs through the new pricing policies, they still have some access to markets for on-
patent innovative drugs. In these cases, despite steep price cuts, overall revenues are up
because of significant increases in sales. This is due in large part to China having expanded its
health insurance program nationally in 2009 such that it covers its more than 1.3 billion
residents
today.103 Given new national efforts to shift to significantly discounted generics mostly
produced by Chinese firms, whether revenues will continue to grow remains an open
question.
Overall, Chinese drug price controls limit innovation for two reasons. First, they reduce
revenues going into the global drug discovery system. Overly restrictive price controls levied
against pharmaceuticals, by definition, mean less revenue for biopharma companies to invest
in R&D. For example, Golec and Vernon found that because of EU drug-price regulations,
“European Union pharmaceutical firms are less profitable, spend less on R&D, and earn
smaller stock returns than U.S. firms.”104 By using data from 1986 through 2004, they showed
that the economic trade-off for the EU, by maintaining real pharmaceutical prices constant over
19 years, was forgoing about 46 new medicine compounds. They took this one step further by
presenting a counterfactual scenario wherein, if the United States had adopted EU-type price
controls over the same time period, then the result would have been 117 fewer new medicine
compounds.105 Price controls also delay the launch of drugs in markets with controls.106 In other
words, the debate about price controls is not really one about whether society wants lower
prices in exchange for lower drug company profits; it is about whether society wants lower
drug prices in exchange for less and slower drug innovation—that is, cheaper prices today,
and less effective drugs when our children become adults.
Second, significantly limiting drug pricing harms foreign firms more than Chinese firms that have
a lower cost structure. This is made worse by the Chinese government’s recently mandated
significant price cuts on many drugs.107 By imposing very strict price controls and favoring
Chinese firms in national drug selection, China is seeking to build up its domestic industry
capabilities initially in generics and biosimilars, just as their industrial strategies for other
industries (e.g., aerospace, rail, electronics, etc.) were all about copying, rather than original
innovation.
Protected Domestic Market

China supports domestic biopharma firms by limiting foreign market access. The large and
growing Chinese market plays a key role in enabling these firms to gain scale and boost
innovation so they can then take on foreign firms in foreign markets. As noted, China limits the
market in part by favoring Chinese-company-produced drugs in competitions to be purchased
by hospital systems. China also protects the market by requiring drug import licenses, which
can be difficult to obtain, and issuing them for only for five years—and renewals are not
guaranteed.108
China also uses its regulatory system as a protectionist, industrial policy tool. For example, only
4 of the 42 cancer drugs approved globally in the past 5 years are available in China.109 In
addition, some of the proposed regulatory changes are designed to benefit domestic companies
over foreign ones. For example, NMPA has given priority review to innovative medicines
produced in China over those produced outside China.110 China has also localized testing
requirements for biologics testing and quality testing of imported ingredients, which adds to the
cost and delays the release of innovative drugs.111
The Chinese government also imposes import tariffs. Under the WTO Pharmaceutical
Agreement—to which China is not a party—the United States does not impose tariffs on
biopharmaceutical products. In 2018, China did eliminate tariffs on 28 categories of imported
cancer drugs, but remaining drug imports are still subject to a 5 to 6 percent import tariff.112 In
comparison, U.S. tariffs are zero.113
Protecting the Chinese market enables Chinese generics firms, which make up the lion’s share
of Chinese biopharmaceutical firms, to make above-average profits. As one article notes,
“Among the top 100 generic drug makers [globally], Chinese firms had an 18 per cent profit
margin in the third quarter, compared with a global average of 9.5 per cent.”114 One key reason
for these higher margins is foreign firms face a significant number of barriers to selling in
China, including waiting for import approval, while Chinese generics makers can more easily
copy foreign drugs and avoid many of the costs foreign generics makers face. These increased
profits allow these firms to reinvest more in R&D to become original drug innovators and
ultimately challenge foreign leaders.
Discriminatory Procurement
The Chinese government also uses discriminatory procurement practices to favor Chinese-
owned firms. The 2016 State Council document on the industry states, “In principle,
government procurement projects must purchase domestically produced products and
gradually improve the level of domestic equipment configuration of public medical
institutions.”115 Some argue that China uses the drug import license as an industrial policy
tool, limiting imports in order to give domestic firms a respite from foreign competition. For
example, the government did not approve the 2015 renewal of Pfizer’s license for the
importation of its Prevnar 7 drug, a pneumococcal vaccine. Many believe this was in order to
give a Chinese domestic pneumococcal vaccine more time to be developed free from
competition.116
Limits on Exports of Data

Chinese policy regarding genetic data is mercantilist in nature. In particular, Chinese law
makes it extremely difficult for genomics data or material to leave the nation, including by
being published in scientific journals, and has prosecuted a number of companies for doing
so.117 Moreover, foreign companies using genetic data from Chinese persons must enter into
cooperative agreements with Chinese organizations.118 At the same time, Chinese have
invested in U.S. operations so they can use and export genomic data of Americans.119 The
Chinese National Congress has proposed a Biosecurity Law, which would restrict all data
resulting from cross-border scientific collaborations from leaving China without government
approval and without the Chinese entity retaining some sort of rights over any technologies
eventually developed, even if normally they would not receive these rights.
Weak Intellectual Property Protection

Strong IP protection is key to innovation in the biopharmaceutical industry. Compared with the
United States and Europe, China’s IP environment for drug development has been decidedly
weaker. For example, both the United States and the European Union provide a period of
marketing exclusivity (aka “regulatory data protection”) for a drug independent of patent
protection, as well as patent-term extension to compensate for the loss of the patent term
during the approval process. China does not, effectively reducing the life of the patent by 40
percent, despite its TRIPS obligations under Art. 39.3, and despite the fact that their approval
process is usually longer than that of the United States.120 China also uses patent procedures to
invalidate patents based on heightened “enablement” and nonobviousness requirements. It
also makes it more difficult than the other IP5s (U.S., Europe, Japan, and Korea) for applicants
to file supplement data with the patent application (post-filing data supplementation), thus
invalidating more patents than would be the case if the patents were filed in the other IP5s.
China also provides only a 6-year data exclusivity period for drugs that contain new chemical
entities,
compared with 12 years (for biologic drugs) in the United States. However, China generally
does not live up to even this commitment, thereby allowing competitors to get access
sooner.121 This government strategy is key to enabling Chinese firms to “legally” copy the drug
discoveries of more innovative foreign companies.
Despite few other nations having such a discriminatory policy, China has also implemented its
“First to China” policy whereby when a drug is launched in China at the same time or before it is
launched in other nations, the foreign firm receives data protection. But as a report for the U.S.
China Economic and Security Review Commission notes:
The CFDA’s proposed rule would allow for the maximum protection period for biologics
only if they are submitted with Chinese clinical trial data and submitted for approval first
in China before other countries. For drugs first approved outside of China but using data
from Chinese trials, the market exclusivity is only one to five years, depending on the
time between foreign approval and filing in China (if the difference is more than six years,
China provides no exclusivity). Drugs first approved outside of China will receive only 25
percent of the maximum data exclusivity (i.e., three years for biologics) if they use no
data from Chinese trials and 50 percent (i.e., six years for biologics) if using outside data
supplemented with Chinese data.122
China also permits follow-on applicants to rely on the data submitted by the original drug
innovator to NMPA during the period of regulatory data protection, something the United States
and Europe do not allow.123 This is done in order to give a leg up to Chinese biopharma firms
while at the same time reducing their costs significantly. Likewise, when firms file for marketing
approval in China through NMPA, they must disclose a “new chemical entity” as part of the
application. However, as Ben Shobert testified before the U.S. China Economic and Security
Review Commission, “Upon approval, the submission is supposed to create six years of
proprietary coverage of the product in question. Industry has brought forward several examples
where domestic Chinese manufacturers have produced generic versions of the newly submitted
products within the six-year period of protection of data the CFDA’s filing stipulates a foreign
company should enjoy.”124 Moreover, while Europe and the United States provide a 10- and 12-
year exclusivity period, respectively, after the approval of a reference biologic drug before a
biosimilar drug can be approved, in China, the “new drug monitoring period” only applies to
Chinese-manufactured biologics.125
In 2017, NMPA proposed a patent linkage system that would have tied obtaining market
approval for a drug to a process for identifying and litigating patent disputes relating to the
product. But to date it has not acted on this. To gain regulatory approval, generics companies
would need to assert that their drug does not infringe on listed patents, and NMPA would need
to independently assess this.126 A linkage regime would be critical in addressing the problem of
infringing generic drugs being approved by China’s regulatory authorities. Without linkage,
NMPA has granted approval to Chinese generics makers to produce drugs for which foreign
firms hold valid and unexpired patents. Rather than limit this practice, NMPA asks firms to file
patent- infringement lawsuits, which typically start with the filing for a preliminary injunction—
but are very difficult to obtain in China. In addition, even if they are successful in their patent
litigation, plaintiffs usually see only minimal awards, often making it uneconomical to even file a
case.127
In addition, there is no consolidated patent registry in China equivalent to the “Orange Book” in
the United States, which lists all patented and approved drugs, so Chinese generics applicants
and NMPA may not be aware they are potentially infringing on patented products.128
In addition, over the last few years, the rate of patent invalidation from the Chinese Patent
Review Board has increased significantly, particularly for compound patents that cover all uses
of a molecule. For example, since 2015, nearly 75 percent of claims filed in China for violations
of pharmaceutical patents have resulted in at least 1 claim being invalidated. A study looking at
40 cases from 2018 finds that 44 percent of the challenged pharmaceutical patents had been
invalidated in whole, while 32 percent were declared partially invalid.129 Another study estimates
that foreign biopharmaceutical companies lost 59 percent of their patent cases brought by
Chinese generics companies, with 22 percent of the cases settled, and only 19 percent won.130
The speed by which patents are invalidated has purportedly increased, and is much higher than
invalidation rates in the United States and Europe.131 Invalidating foreign patents appears to be
a key way for China to enable its generics industry to gain market share.
Many of these patenting challenges come from domestic Chinese generics companies. For
example, in 2017, Shenzhen Salubris Pharmaceutical Co., Ltd challenged the issuance of a
Chinese patent to international drug company AstraZeneca for its drug ticagrelor. Four months
later, China’s Patent Reexamination Board declared the patent invalid because of a lack of
creativeness, even though the U.S. Patent and Trademark Office (USPTO) issued a patent for
the drug that will expire later this year.132 Moreover, unlike most developed nations, China
places limits on post-grant submission of data demonstrating a drug is innovative.
Moreover, this high rate of invalidation has generated the creation of a “reverse patent troll”
industry in China wherein individuals threaten to challenge a patent unless they are paid in cash
or given a free license (which they usually sell to a Chinese generics company). As one private-
practice lawyer in China stated, “It’s a protection racket.”133 In addition, Chinese law requires
products actually be sold in China before a patent holder can bring an infringement action.
Thus, even if a Chinese company produces an infringing product and gains regulatory
approval, a foreign drug company can be limited in bringing action if the company has not yet
sold the drug in China.
Some have argued that the Chinese patent office imposes overly strict requirements for
sufficiency of disclosure for enablement and inventive steps for biopharmaceutical patents that
result in foreign firms having to disclose too much data, which may include trade secrets. A
failure to provide this data may result in the Chinese government invalidating the patent and
then sharing the data with domestic firms.134 In countries with effective patents systems, patent
applicants are allowed to file additional data after the initial application is reviewed. But while
China has taken some steps in this direction, it does not appear to have gone far enough in
allowing additional data to be filed based on the examiner’s rejection of a patent on the
grounds of the application’s failure to meet inventive-step or disclosure requirements.135
The Chinese government also requires all drugs sold in China to go through Chinese clinical
trials, even if they have already been approved in the United States. This extends the time for
sales before a company can sell a drug by as much as 8 years, meaning the company has only
12 years of patent-protected sales left in China, absent patent-term restoration, before a
Chinese generics company can market a copy of the drug.
Also, in China, unlike in the United States and Europe, there is no extension of the patent term
to take into account long clinical-trial delays. Foreign firms also have difficulty prosecuting
cases of patent infringement in Chinese courts, including in gaining injunctive relief and, if
successful, receiving very small monetary damage awards.136 In addition, China’s Patent Law
is more restrictive when it comes to patenting related to the human genome, which limits
patent protections for biotech innovations.137
Some have argued that the Chinese patent office imposes overly strict requirements for sufficiency of
disclosure for enablement and inventive steps for biopharmaceutical patents that result in foreign
firms having to disclose too much data, which may include trade secrets.
Finally, NMPA announced in late 2018 its Rules for Overseas Inspection of Drugs and Medical
Devices, which require Chinese government inspections of R&D and manufacturing sites
outside of China.138 At one level, this is a perfectly legitimate step for the government to take;
after all, the U.S. FDA has the right to inspect plants in China when the output is to be
imported into the United States. However, given the long and systemic efforts by the Chinese
government at industrial espionage, including using supposed competition-agency inspections
for espionage purposes, this new development could in fact be used to illegally obtain
valuable IP for Chinese biopharma firms.
The new rules on data exclusivity favor companies that first launch in China, which are
typically not foreign companies. At the same time, it encourages foreign companies to seek
approval for their products in China first, ideally by developing drugs in China, or at least
doing clinical trials there.
IP Theft
Another important policy tool for China to advance its biopharmaceutical industry is IP theft.
There have been numerous reports of Chinese biomedical researchers working at American
universities, often on NIH grants, taking the IP their labs develop to China.139 NIH Director
Francis Collins, in a letter to grant institutions, wrote, “NIH is aware that some foreign entities
have mounted systematic programs to influence NIH researchers and peer reviewers and to
take advantage of the long tradition of trust, fairness, and excellence of NIH-supported
research activities.”
The Chinese 1000 Talents Program also supports this effort, as one key qualification for the
Chinese government offering incentives to scientists to come back to China is access to foreign
IP.140 For example, recently the U.S. Justice Department charged Harvard University’s Charles
Lieber with “one count of making a materially false, fictitious and fraudulent statement”
regarding his work with Chinese-based organizations, including the 1000 Talents Plan, while
he applied and received NIH funding.141 The U.S. Justice Department investigated an
individual who was “[k]nowingly and willfully working in the United States on behalf of
government- controlled and government-directed entities … for the purpose of recruiting high-
level molecular geneticists and stem cell researchers to work at state-controlled universities
and laboratories in [China], and for the purpose of acquiring and transferring to those state-
controlled universities and laboratories, cutting-edge molecular genetics and stem-cell
research and technology developed at leading academic and private sector research platforms
in the United States.”142
Moreover, given the longstanding and widespread Chinese hacking of valuable U.S. company
technology secrets, it is no surprise the Chinese have hacked into systems at U.S. biopharma
companies, including Abbott Laboratories and Wyeth (now part of Pfizer).143 And, as in most
technology fields, Chinese state-sponsored actors also target biopharma firms for theft of IP,
including through cybertheft and rogue employees.144 That theft is sometimes through direct
means whereby scientists working at biopharma companies in the United States engage in IP
theft and the transfer of that IP to China. In 2002, a Chinese national was charged with stealing
biological materials from Cornell University to bring to China.145 In 2013, two Chinese nationals
who had been employed as scientists at Eli Lilly were charged with stealing and providing trade
secrets to a Chinese pharmaceutical firm.146 In 2018, Yu Xue, a leading biochemist working at
a GlaxoSmithKline research facility in Philadelphia, admitted to stealing company secrets and
funneling them to a rival firm, Renopharma, a Chinese biotech firm funded in part by the
Chinese government.147 And last year a second scientist pled guilty as well.148 In 2019, MD
Anderson and Emory University both dismissed Chinese-born scientists for theft of IP.149 A
report to the U.S. China Economic and Security Review Commission notes, “Ventria
Bioscience, GlaxoSmithKline, Dow AgroSciences LLC, Cargill Inc, Roche Diagnostics, and
Amgen have all experienced theft of trade secrets or biological materials perpetrated by a
current or former employees with the intent to sell it to a Chinese competitor. In the academic
sector, researchers have stolen information or samples from their employers at Cornell
University, Harvard University, and UC Davis.”150 This information was then sold to Chinese
companies. In another case, a former Genentech employee was charged with trade-secret
theft and passing on critical information to a Chinese competitor.151 A former Chinese
employee of a leading medical device firm was convicted of stealing IP and then traveling to
China to obtain financing from the Chinese government to open a rival company using the
stolen IP—even though the government knew the technology was stolen.152
China is also a major source of fraudulent medicines imported to the United States, allowing its
producers to earn revenues for poor-quality or patent-infringed drug products.153 Eighty-eight
percent of products seized by the U.S. Customs and Border patrol for IP violations in 2016 were
from China or Hong Kong, and 8 percent involved pharmaceuticals and personal-care products.
Government-Backed Venture Capital Investing

In part because biopharma is such a new industry for China, with few established firms, the
principal way the government is supporting it financially is through state-supported and guided
venture capital (VC) investment. Much of this money is provided by provincial governments.
At the end of 2017, there were a recorded 1,166 government-led venture funds, up from 214
funds in 2013, with 5.3 trillion yuan ($780 billion) in targeted capital.154 As the China Money
Network noted, this amount is equal to 32 percent of all assets managed by the global private
equity and VC industry.155 These government-backed VC funds are targeted to industries
deemed strategic by the Chinese government, including the biopharmaceutical industry. In
2012, China’s State Council Biological industry development plan targeted VC funding to:
Through the national venture capital investment funds, promote the establishment of a
number of professional bio-industry venture capital institutions engaged in different
stages of investment, encourage financial institutions to provide financing support for the
development of bio-industry, and guide the guarantee institutions to actively provide
financing and credit enhancement services.156
The 2016 State Council plan repeated this, calling to:
Innovate financial fund support methods, use incentive guidance, capital injection, and
application of demonstration subsidies to support projects with strong public service
nature such as application demonstration and public service platform construction; use
and guide industrial investment, venture capital and other funds to support Innovative
product research and development.157
As a result, biotech venture funding (both private and government) for firms in China increased
from $0.5 billion in 2015 to $2.5 billion in 2018.158 Of the 20 largest Chinese government
guidance VC funds today, most set up in Chinese provinces and cities, and 7 identify health
care (which includes biopharmaceuticals) as a key sector of focus.159 It is not clear how much
of this money comes from government rather than commercially guided investments. Over the
last five years or so, the Chinese government has funneled government funds to supposed
“private” entities in order to avoid charges of government subsidization—which is actionable
under the WTO Agreement. This is why the United States Trade Representative’s office sent
70 questions to WTO about Chinese subsidies, including in biotechnology.160 Nonetheless, it
appears at least some of these investments are much more generous in terms than they would
be if the venture firms were only trying to maximize returns.161
State-Owned and Backed Enterprises

Chinese governments also influence the industry structure through state ownership.
Approximately 36 percent of major biopharma firms were state owned in 2006, with 35 percent
privately owned and the remaining 29 percent foreign owned.162 There are several very-large-
scale state-owned pharmaceutical companies, including Sinopharm, China Resources
Pharmaceuticals, and Shanghai Pharmaceutical Group.163 State-owned enterprises benefit from
a number of advantages, including more-generous financing from Chinese state-owned banks,
and reduced profit pressures.
In addition, unlike most governments, Chinese governments provide subsidies beyond early-
stage investments in research. For example, the Beijing Genome Institute, the world’s largest
gene- sequencing organization, was funded in part by local government incentives and, in
2010, a
$1.5 billion line of credit from the China Development Bank.164
How to Think About China’s Biopharmaceutical Innovation

Views of Chinese innovation policy tend toward the Manichean: China is either helping global
innovation or hurting it. Add in the fact that the biopharma industry produces lifesaving
treatments and cures for people around the world, and the question becomes even more
nuanced and complicated. Resolving this issue is important because it can influence what the
U.S. and global response to China’s strategy and tactics should be.
First, it’s important to consider this in the context of the particular industry. If, for example,
China gains global and U.S. market share in the auto industry, the result might be a significant
loss to U.S. jobs, but with the benefit of slightly cheaper vehicles. But drugs are different. If
China gains global market share in drugs, it is possible it could significantly benefit the United

2020
States and the rest of the world through the production of better and perhaps cheaper drugs. In
this regard, the biopharmaceutical industry has much in common with the clean-energy industry
(e.g., solar panels, batteries, etc.). In both cases, the global need—better and cheaper
medicines in the former case, and better and cheaper clean technology in the latter—may
outweigh concerns about global competitiveness.
However, it is not that simple, because how China gains global market share has a major effect
on whether China’s biopharmaceutical innovation is also good for the rest of the world. If China
were to employ fair and legitimate policies to grow its domestic life-sciences industry, it would
create direct competition for non-Chinese workers, as Chinese employment in the industry
would grow while non-Chinese industry employment would shrink—at least its global share.
(See table 2.) The impact on foreign firms is indeterminate, as it is possible they would lose
market share from fair Chinese policies. But foreign firms could move R&D and production to
China and continue to thrive. In both cases, overall, foreign workers would be hurt, although
foreign firms would retain or even grow their global market share. Foreign consumers would
benefit, both from greater competition but also from “more shots on goal”—in other words,
from more researchers around the world working to develop cures and better treatments. If
China employs fair policies to grow its biopharma industry, it will contribute new or cheaper
drugs.
Table 2: Framework for understanding the impact of Chinese life-science policies
Fair Policies Unfair Policies

Foreign biopharma workers Harmful Harmful
Foreign biopharma firms Indeterminate Harmful
Foreign consumers Beneficial Indeterminate
Global drug innovation Beneficial Harmful
However, if China continues to employ unfair, mercantilist practices, the results are likely to be
harmful along all aspects. Because Chinese firms would gain global market share, foreign
biopharma firms and their workers would be hurt because they would lose market share to
Chinese firms through unfair competition.
If China is able to produce drugs more cheaply than other countries—for example, through
government subsidies to its producers—foreign consumers could be better off. However, foreign
consumers would be hurt because Chinese mercantilist policies would reduce the pace of
global drug innovation. This is akin to drug price controls in domestic markets: Consumers are
better off from lower drug prices but worse off from less biopharma innovation and fewer new
and more- effective drugs.165
Innovation mercantilist policies would likely be detrimental to global innovation in large part
because foreign firms are more innovative. For example, Chinese industrial espionage harms
global innovation because it reduces the rate of return from R&D to non-Chinese companies,
thus resulting in companies investing less in R&D. It also harms leading firms more than
laggards, as practitioners of industrial espionage such as China generally don’t spy on generics
companies, but rather on companies at the leading edge. Likewise, Chinese drug price
controls designed to
2020
favor Chinese generics firms reduce overall global industry sales and R&D, leading to a slower
rate of innovation. Chinese government-backed venture investments can harm global
innovation when their investments crowd out more innovative start-ups. For example, these
firms may invest in foreign biopharma companies with more-generous terms than foreign
venture firms would do (higher levels of investment, at an earlier stage and with less ownership
stake in the company). If the goal is to ensure technology and expertise are gained by China,
the result is a weakening of the superior foreign—especially U.S.—innovation ecosystems,
leading to less innovation. To be sure, these kinds of firm-specific government intervention are
very different from a broader form of support for the industry that does not distort individual
deals (or discriminate as to whether the beneficiary is a domestic or foreign enterprise), such
as an R&D tax credit start-ups and established firms can both use or support for early-stage
research through entities such as NIH.
COMPARATIVE INNOVATION PERFORMANCE

Overall, Chinese biopharma firms are significantly less innovative than the leading firms
around the world. One measure is scientific publications. From 2011 to 2015, China ranked
second in the world behind the United States in international biomedical publications.166 And
it quadrupled its global share of biomedical articles between 2006 (2.4 percent) and 2015
(10.8 percent).167 In 2016, it was responsible for almost as many biotechnology and applied
microbiology publications as the United States.168
However, it also has a population 4.4 times larger than the United States, so on a per capita
basis, China lags significantly behind the United States. In addition, its share of documents in
the top 1 percent of citations is lower than its overall share of articles.169 Moreover, while the
number of China’s biology and medical-sciences articles relative to U.S. articles grew 161
percent and 147 percent, respectively, China still lags relatively far behind, publishing only 19
percent as many biology-sciences articles as the United States, and only 11 percent as many
medical-sciences articles.170 On a per capita basis, this is just 4.3 percent and 2.2 percent of
U.S. levels, respectively. Moreover, there is evidence that at least some of the papers
published by Chinese scholars are fraudulent and produced by “paper mills.”171
Corporate R&D
Chinese pharmaceutical business R&D investment increased at a very rapid rate, by 254
percent, from 2008 to 2015, compared with 7.3-percent growth for the United States.172 In
2016, Chinese biopharma R&D stood at an estimated $7.2 billion, up from just $163 million in
2000.173 But China’s biopharma firms’ R&D-to-sales ratio was only around 2.7 percent, much
lower than the U.S. average of 15 to 20 percent.174 For example, figure 3 compares R&D to
sales ratios for 7 leading non-Chinese companies and 3 major Chinese companies.175 Only
Jiangsu Hungrui Medicine comes close to the leaders with an R&D-to-sales ratio of 16.7
percent. The other two companies, WuXi App Tec and Yunan Baiyo, invest significantly less.176
Figure 3: Biopharma firm R&D-to-sales ratio—Chinese (in red) and Non-Chinese (in blue) firms, 2019177
40%
35%
30%
25%
20%
15%
10%
5%
0%
Amgen Novo Celgene Roche Pfizer Merck Novartis Jiangsu WuXi Yunnan
Nordis Hengrui AppTec Baiyao
k Medicine
Patenting
Patenting is a measure of innovation. However, because so many patents issued by the
Chinese Patent Office are of relatively poor quality, patent counts from China cannot be
compared against patents issued by USPTO. As a result, this section includes USPTO patents
as well as patents filed internationally.
Only 688 life-sciences patents (in medical technology, biotechnology, and pharmaceuticals)
were granted by USPTO to Chinese inventors in 2018. Biotechnology and pharmaceuticals
patents issued to Chinese companies were only 5.2 and 6.3 percent respectively of the patents
granted to U.S. companies.178
Moreover, according to OECD, in 2016, China accounted for just 0.8 percent, 0.4 percent, and
1.5 percent, respectively, of triadic patents (patents filed in Europe, Japan, and the United
States) in biotechnology, medical technology, and pharmaceuticals, compared with the U.S.
share of more than approximately 40 percent in each.179 While triadic patents filed by inventors
in China grew between 1995 and 2015 (the latest year available), the number remains quite
small. (See figure 4.) And as share of GDP, China lags significantly behind the EU, Japan, and
the United States, with just 18 percent of the patent intensity of these three nations combined.
(See figure 5.)
Figure 4: Number of triadic biotechnology and pharmaceuticals patent applications by priority date180
6,000
5,000
4,000
3,000
2,000
1,000
United States European Union (28 countries) Japan China Rest of World
Data: OECD.Stat
Figure 5: Number of triadic biotechnology and pharmaceuticals patent applications by priority date per trillion
USD of GDP in 2015181
350
300
250
200
150
100
50
0
United States European Union Japan China
(28 countries)
RECOMMENDATIONS
For all the focus on the U.S.-Chinese trade relationship over the last year, issues relating to
the biopharma industry have received relatively little attention, especially compared with
industries such as semiconductors and telecom equipment. In part, this is because these
industries have important national security implications for America. But it is also because
China is seen as
much less of a threat to the U.S. biopharma industry than other industries. But this is a
mistake. China is a significant potential threat—it’s just that the actual threat, if it materializes,
is at least a decade away. Nonetheless, the United States cannot afford to wait until the
damage is clear (closed factories and laboratories, and unemployed U.S. workers), because by
then it will likely be too late, as has already proven to be the case for a number of U.S.
manufacturing companies. As such, Congress and the administration need to be thinking now
about actions to help ensure
U.S. biopharmaceutical leadership vis-à-vis China over the next two decades.
There are several steps the U.S. government should take internationally and domestically.
Regarding China, under the extended purview of the Committee on Foreign Investment in the
United States (CFIUS), the administration should consider blocking more Chinese acquisitions
of or investments in U.S. firms involved in the design or production of drugs. This would be
justified in part because the Chinese government provides large subsidies to some Chinese
VC funds investing in biopharma companies, while at the same time enabling rampant IP theft.
The United States cannot afford to wait until the damage is clear (closed factories and laboratories,
and unemployed U.S. workers), because by then it will likely be too late, as has already proven to be
the case for a number of U.S. manufacturing companies.
In addition, the Trump administration and subsequent administrations should ensure trade
negotiations with China include biopharma issues, such as forced technology transfer, IP theft,
data-transfer restrictions, cartel and monopoly issues, and discriminatory access to the Chinese
market. In addition, NIH should continue its work to better police abuse by Chinese nationals
who inappropriately transfer knowledge generated by NIH grants to China. NIH should also
more closely oversee any research funding or cooperation with China, particularly to limit
support for areas wherein the Chinese could develop a commercial advantage.182 This does not
mean limiting access to U.S. universities to Chinese students, but rather, increasing oversight
and limiting illegal and unethical behavior. Many in the science community argue this goes
against the global and open nature of science and scientific inquiry and exchange. But violating
rules, stealing IP, and other violations are not and should not be accepted in the science
community. Moreover, it’s time to recognize that China is engaged in a race for competitive
advantage in life sciences, and seeks that advantage through unfair—as well as fair—means.
Congress should also ensure the FDA has adequate funding to effectively inspect Chinese
facilities producing drugs and pharmaceutical ingredients (APIs) for U.S. consumption.
According to the
U.S. Government Accountability Office (GAO), of 535 of Chinese facilities subject to FDA
monitoring, as many as 243 were not inspected between 2010 and 2016.183 Moreover,
according to GAO, “FDA does not know whether or for how long these establishments have or
may have supplied drugs to the U.S. market, and has little other information about them.”184
Better inspection and enforcement has several benefits. Besides improving safety, it means
less production in China because many Chinese factories will likely fail inspections.
Domestically, there is also much to be done. Congress should continue its recent process of
steadily increasing NIH funding, as this is an important enabler of U.S. life-sciences
innovation.185 It should expand the R&D tax credit (the Alternative Simplified Credit) from 14
percent to at least 20 percent, and continue allowing first-year expensing of all capital
equipment, as enacted in the recent tax-reform legislation. Congress should continue to
support the Bayh-Dole Act of 1980, which created a uniform patent policy that enables small
businesses and nonprofit organizations, including universities, to retain title to inventions they
create with the aid of federal funding.186 Congress and the FDA should continue to improve
and streamline, wherever possible, the drug approval process, keeping in place existing safety
and efficacy standards. As Congress reauthorizes the Manufacturing USA program, it should
add funding for at least one center focused on biopharmaceutical manufacturing process
technology to complement the existing BioFabUSA center, which focuses on production
processes for large- molecule biotech drugs. This will be important if the federal government
wants to increase domestic drug production, especially of generics and APIs, and reduce
dependency on China.187
It’s time to recognize that China is engaged in a race for competitive advantage in life sciences, and
seeks that advantage through unfair—as well as fair—means.
Congress should do more to better enable data-driven biopharma innovation in the United
States. The ability of life-science innovators in China to access data is much greater than those
in the United States. The Information Technology and Information Foundation’s (ITIF) Center
for Data Innovation has called for the creation of a National Health Data Research Exchange to
prioritize the collection and sharing of patient medical data for research purposes.188 In
addition, the federal government should refrain from imposing arbitrary restrictions on certain
kinds of research, such as stem cell, as President Trump recently did.
China may have one advantage over the United States with its regulatory system, and that is its
regulations regarding biomedical innovation are less strict. This, however, can lead to problems,
such as when Chinese scientist He Jiankui modified the genes of newborn twins.189 However, it
does suggest there is more room for risk-taking in China, even if it comes at the expense of
human health. In contrast, the United States has imposed regulatory limits on innovation. For
example, President Trump recently ended federal funding for medical research using fetal
tissue, despite scientists insisting it is a key for innovation. As Doug Melton, a codirector of the
Harvard Stem Cell Institute and president of the International Society for Stem Cell Research
stated, “With these new arbitrary restrictions on research, the United States is ceding its role as
the global leader in the development of cellular therapies and regenerative medicine.”190
Perhaps most importantly, as it seeks to ensure more affordable health care, Congress should
safeguard that any efforts do not inappropriately limit drug prices. The scholarly evidence is
clear that limiting industry revenues through price controls results in less investment in R&D,
which limits badly needed drug discovery. A number of studies have found this causal
relationship. For instance, as OECD wrote, “There exists a high degree of correlation between
pharmaceutical sales revenues and R&D expenditures.”191 Imposing significant drug price
controls would starve biopharma companies in the United States from the innovation “fuel”
they need to stay at the global cutting edge, and in turn would enable China to catch up to the
United States.
Global Policy Coordination

For many areas of policy, a number of nations have an incentive to “free ride” on the rest of the
world, especially if the costs of doing so are global in nature, while the benefits are local. In spite
of this logic, on some issues, many nations act in a global interest. We see this when it comes to
climate change, with virtually all nations—the United States excepted—signing the Paris
Climate Accord to take steps to lower greenhouse gas emissions. (The United States also did
sign on to the Mission Innovation agreement.) Even though they would be better off
economically not paying the higher costs for clean energy, small and mid-sized nations are
participating in this accord because there is a global expectation that everyone needs to
cooperate in order to address a global challenge. Smog might be a local problem, but carbon
dioxide emissions are a global one. Being a free rider, in this case, comes with at least some
consequences, including global opprobrium; something the United States is now facing
(notwithstanding the fact that the United States is doing more to help address global warming
through its significant investments in clean energy research, development, and demonstration
than any other nation).192 It is time for a similar accord for global drug development. We need
the equivalent of a “Paris Drug Innovation Accord” in which nations make commitments to
adopt policies that spur global drug innovation, including policies related to drug pricing, IP,
and data sharing for research.
Acknowledgment
The author wishes to thank Stephen Ezell for providing valuable input on this report. Any errors
or omissions are the author’s alone.
About the Author

Robert D. Atkinson is the founder and president of ITIF. Atkinson’s books include: Big Is
Beautiful: Debunking the Myth of Small Business (MIT, 2018), Innovation Economics: The
Race for Global Advantage (Yale, 2012), and The Past and Future of America’s Economy:
Long Waves of Innovation That Power Cycles of Growth (Edward Elgar, 2005). Atkinson
holds a Ph.D. in city and regional planning from the University of North Carolina, Chapel Hill,
and a master’s degree in urban and regional planning from the University of Oregon.
About ITIF
The Information Technology and Innovation Foundation (ITIF) is a nonprofit, nonpartisan
research and educational institute focusing on the intersection of technological innovation and
public policy. Recognized as the world’s leading science and technology think tank, ITIF’s
mission is to formulate and promote policy solutions that accelerate innovation and boost
productivity to spur growth, opportunity, and progress.
For more information, visit us at www.itif.org.
ENDNOTES
1. The lower numbers are from Jorge Mestre-Ferrandiz, Jon Sussex, and Adrian Towse, “The R&D Cost
of a New Medicine,” UK Office of Health Economics, December 2012,
https://www.ohe.org/publications/rd-cost-new-medicine. The higher numbers are from the Tufts
Center for the Study of Drug Development, “Cost to Develop and Win Marketing Approval for a New
Drug is
$2.6 Billion,” news release, November 18, 2014,
http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study.
2. International Federation of Pharmaceutical Manufacturers & Associations (IFPMA), “The
Pharmaceutical Industry and Global Health: Facts and Figures 2014” (IFPMA, 2014), 13,
https://www.ifpma.org/resource-centre/facts-and-figures-2014-the-pharmaceutical-industry-and-global-
health/; TEConomy Partners, LLC, “Economic Impact of the U.S. Biopharmaceutical Industry: 2015
National and State Estimates” (PhRMA, October 2017), https://www.phrma.org/media/industry-
economic-impact.
3. PhRMA, “Chart Pack: Biopharmaceuticals in Perspective,” Version 2.0 (Washington, D.C.:
PhRMA, Spring 2012).
4. National Science Foundation, Business R&D and Innovation Survey, 2014 (Table 11; accessed July
2, 2018), https://www.nsf.gov/statistics/2018/nsf18302/pdf/tab11.pdf.
5. Organization for Economic Co-operation and Development (OECD), Pharmaceutical Pricing
Policies in a Global Market (OECD, September 2008), 189, http://www.oecd-ilibrary.org/social-
issues-migration- health/pharmaceutical-pricing-policies-in-a-global-market/key-characteristics-of-
the-pharmaceutical- sector-in-oecd-economies_9789264044159-2-en.
6. OECD, Pharmaceutical Pricing Policies.
7. Pugatch Consilium, Ascending to the Peak of Biopharmaceutical Innovation: Biopharmaceutical
Competitiveness and Investment (BCI) Survey, Fourth Edition, 2017 (PhRMA, 2017), 98,
http://www.pugatch-consilium.com/reports/BCI_2017_Report.pdf. The report surveys general
managers of multinational research-based biopharmaceutical companies in 31 countries.
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9. TEConomy Partners, LLC, “Closing the Gap: Increasing Global Competition to Attract and Grow
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gap- increasing-global-competition-to-attract-and-grow-the-biopharmaceutical-sector.
10. Ibid, 16.
11. Pankaj Ghemawat, with Stephen A. Altman, “DHL Global Connectedness Index: 2012” (DHL, 2012),
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12. Ross C. DeVol, Armen Bedroussian, and Benjamin Yeo, “The Global Biomedical Industry: Preserving
U.S. Leadership” (Milken Institute, September 2011), 5,
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17. Ibid, v.
18. KPMG, The 13th Five-Year Plan-China’s Transformation and Integration with the World Economy
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19. Ibid.
20. Fangning Zhang and Josie Zhou, “What’s next for pharma innovation in China,” McKinsey &
Company Pharmaceuticals & Medical Products, September 2017, 2,
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for-pharma-innovation-in-china.
21. Ibid, 3.
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management/chief-investment-office/our-research/discover-more/2018/china-biotech.html.
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25. With CAR-T treatment, cell-killing T-cells are removed from the body and engineered to recognize
the relevant cancer target. After the edited T-cells (CAR-Ts) are reintroduced to the patient, they
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27. McKinsey & Company, Building Bridges to Innovation, China Health Care Summit, 2018
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29. KPMG, The 13th Five-Year Plan, 15
30. Ibid.
31. Ibid.
32. European Commission, and World Health Organization, “China policies to promote local production
of pharmaceutical products and protect public health” (WHO, 2017), 25,
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33. McKinsey & Company, Building Bridges to Innovation, 67.
34. KPMG, The 13th Five-Year Plan-China’s Transformation and Integration with the World Economy
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and Other Foreign Engagement” (report prepared for the U.S.-China Economic and Security
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36. KPMG, The 13th Five-Year Plan, 20.
37. Jingyun Ni et al., “Obstacles and opportunities in Chinese pharmaceutical innovation,”
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39. McKinsey Global Institute, The China Effect on Global Innovation (October 2015),
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.
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43. Ibid.
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48. KPMG, The 13th Five-Year Plan, 16.
49. Ibid.
51. Translated by U.S. Chamber of Commerce, Made in China 2025: Global Ambitions Built on
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2020
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65. Gryphon Scientific and Rhodium Group, “China’s Biotechnology Development,” 39.
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2020
71. Cade Metz, “A.I. Shows Promise Assisting Physicians,” The New York Times, February 11,
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72. UBS, “China’s Biotech Revolution,” 24.
73. Trevor Hoey, “Genetic Technologies benefits from Healthy China Policy,” finfeed, March 28, 2019,
https://finfeed.com/small-caps/biotech/genetic-technologies-benefits-healthy-china-policy/.
74. David Beier and George Baeder, “China Set To Accelerate Life Science Innovation,” Forbes, July
6, 2017, https://www.forbes.com/sites/realspin/2017/07/06/china-set-to-accelerate-life-science-
innovation/#59322ee5e73b.
75. James Strachan, “Make China Great Again,” The M, July 18, 2019,
https://themedicinemaker.com/manufacture/make-china-great-again.
76. Beier and Baeder, “China Set To Accelerate Life Science Innovation.”
77. McKinsey & Company, Building Bridges to Innovation, China Health Care Summit, 2018
(Shanghai: November 13–14, 2018), https://www.biocentury.com/interactive/whitepaper/building-
bridges- innovation-2018.
78. Elise Amez-Droz, and Andrea O’Sullivan, “How Is China’s Drug Approval Agency
Outpacing International Counterparts? It’s Complicated,” The Bridge, March 4, 2019,
https://www.mercatus.org/bridge/commentary/how-chinas-drug-approval-agency-outpacing-
international-counterparts.
79. Torreya, “Creating Value Through China Partnering” (October 2018),
https://torreya.com/publications/torreya-creating-value-through-china-partnering-oct2018.pdf.
80. “Analysis of the development of China’s pharmaceuticals industry,” SOHU News, June 20,
2016, http://mt.sohu.com/20160620/n455320606.shtml.
81. Bloomberg, “Pharma Firms Face Shake-Up with China’s Plan to Bulk-Buy Drugs,” South China
Morning Post, January 2, 2019, https://www.scmp.com/news/china/society/article/2180378/chinas-
new-drug-procurement-plan-set-hit-its-pharma-firms-profit.
82. Elise Mak, “Still unsure how tap China market? Biopharma insiders offer tips for partnering,”
BioWorld, December 5, 2018, http://www.bioworld.com/content/still-unsure-how-tap-china-market-
biopharma-insiders-offer-tips-partnering-0.
83. “Pfizer to Invest $350 Million in China Biotech Hub, First in Asia,” Reuters, June 28, 2016,
https://www.reuters.com/article/us-pfizer-china-idUSKCN0ZE0A8.
84. European Commission and WHO, “China policies to promote local production of
pharmaceutical products and protect public health,” 32.
85. Ibid, 25.
86. Kun Jiang, Wolfgang Keller, and Larry Qiu, “International Joint Ventures and Internal vs
External Technology Transfer Evidence from China” (working paper, NBER, May 2018),
https://www.nber.org/papers/w24455.
87. “Asher Rubin,” Hogan Lovells, https://www.hoganlovells.com/en/asher-rubin.
88. Chris Lo, “Is China the Next Great Hope For the Pharma Industry?” Pharma Technology Focus,
89. Angus Liu, “Riding on Booming Drug Sales, Astra Zeneca Forms $133M China Joint Venture,”
FierceBiotech, November 27, 2017, https://www.fiercebiotech.com/biotech/riding-booming-drug-
sales- astrazeneca-forms-133m-china-joint-venture; Stephan Booshart, Thomas Luedi, and Emma
Wang, “Past lessons for China’s new joint ventures,” McKinsey & Company,
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/past-lessons-
for-chinas-new-joint-ventures.
90. Am Cham Shanghai and LEK Consulting, “Innovation in China, ‘Made in China 2025,’ and
Implications for Healthcare MNCs”, GPS Healthcare Quarterly, July 2018.
https://www.lek.com/sites/default/files/insights/pdf-attachments/Chinas-Healthcare-Innovation-by-
Made-in-China-2025-and-Implications-for-MNCs_JUL06.pdf.
91. Trevor Hoey, “Genetic Technologies benefits from Healthy China Policy,” finfeed, March 28, 2091,
https://finfeed.com/small-caps/biotech/genetic-technologies-benefits-healthy-china-policy/.
92. Phil Garton and Jennifer Chang, “The Chinese currency: how undervalued and how much does it
matter?” Australian Government Treasury, December 12, 2005,
https://treasury.gov.au/publication/economic-roundup-spring-2005/the-chinese-currency-how-
undervalued-and-how-much-does-it-matter; China Power Team, “Is the Renminbi undervalued or
overvalued?” China Power, February 11, 2016, https://chinapower.csis.org/renminbi-
undervalued/.
93. Ivy Tech, “China’s Biotech Long March,” Asia Biotech, vol. 11, no. 14, 2007, 3.
94. Frew SE et al., “Chinese health biotech and the billion-patient market,” Nat Biotech, 2008;
26:37– 53.
95. Seamus Grimes, and Marcela Miozzo “Big Pharma’s Internationalisation of R&D to China,” Routledge,
13 https://pdfs.semanticscholar.org/cccc/19564bbd82a55af96811cb01a37d1e37f20d.pdf.
96. “Average Research Scientist Salary in China,” PayScale,
https://www.payscale.com/research/CN/Job=Research_Scientist/Salary.
97. Stephen Ezell, “Yes, Drugs Like Remdesivir Should Be Priced Above Marginal Cost” (ITIF, May
27, 2020), https://itif.org/publications/2020/05/27/yes-drugs-remdesivir-should-be-priced-above-
marginal-cost.
99. Jianan Huang, “Use of External Innovation in China,” PharmExec.com, April 3, 2019, 4.
100. Ibid.
101. Ibid, 9.
102. Akash Saini et al., “In China 4+7 Equals Quality Generic Medicines at Affordable Costs” (Decision
Resources Group, May 2019), https://decisionresourcesgroup.com/blog/china-47-equals-quality-
generic-medicines-affordable-costs/.
103. Beier and Baeder, “China Set To Accelerate Life Science Innovation.”
104. Joseph H. Golec and John A. Vernon, “European Pharmaceutical Price Regulation, Firm
Profitability, and R&D Spending” (working paper, NBER, November 2006),
http://www.nber.org/papers/w12676.
105. Joseph H. Golec and John A. Vernon, “Financial Effects of Pharmaceutical Price Regulation on
R&D Spending by EU versus US Firms” Pharmacoeconomics, vol. 28, no. 8 (2010):615-628,
http://www.ncbi.nlm.nih.gov/pubmed/20617857.
106. Iain M. Cockburn, Jean O. Lanjouw, and Mark Schankerman, “Patents and the Global Diffusion of
New Drugs,” American Economic Review, Vol. 106, No. 1, January 2016, pp. 136–64.
107. Eric Ng, “China Pharma Must Swallow that Jagged Little Pill Called R&D as Government Slashes
Profit Margins of Generic Drugs,” South China Morning Post, January 19, 2019,
https://www.scmp.com/business/companies/article/2182740/china-pharma-must-swallow-jagged-little-
pill-called-rd-government.
108. Torreya, “Creating Value Through China Partnering” (October 2018).
109. Shannon Ellis, “Biotech Booms in China,” Nature International Journal of Science, January 17,
2018, https://www.nature.com/articles/d41586-018-00542-3.
110. International Trade Administration, “2016 Top Markets Report Pharmaceuticals Country Case Study,”
3, https://www.trade.gov/topmarkets/pdf/Pharmaceuticals_China.pdf.
111. Biotechnology Industry Association, USTR 301 Filing, 2019, 25.
112. Jin Zhang, “China’s Removal of Imported Drug Tariffs,” PharmExec.com, June 19, 2018,
http://www.pharmexec.com/chinas-removal-imported-drug-tariffs.
113. Matthias Bauer, “The Compounding Effect of Tariffs on Medicines: Estimating the Real Cost of
Emerging Markets’ Protectionism” (ECIPE, September 2017), https://ecipe.org/publications/the-
compounding-effect-of-tariffs-on-medicines-estimating-the-real-cost-of-emerging-markets-
protectionism/.
114. Bloomberg, “Pharma Firms Face Shake-Up with China’s Plan to Bulk-Buy Drugs,” South China
Morning Post, January 2, 2019, https://www.scmp.com/news/china/society/article/2180378/chinas-
new-drug-procurement-plan-set-hit-its-pharma-firms-profit.
115. Office of the State Council, National Policy on Health Industry.
116. Chris Lo, “Is China the Next Great Hope For the Pharma Industry?” Pharma Technology Focus,
117. David Cyranoski, “China’s crackdown on genetics breaches could deter data sharing,” Nature,
November 13, 2018, https://www.nature.com/articles/d41586-018-07222-2.
118. Emma Yasinski, “China Clamps Down on Foreign Use of Chinese Genetic Material and Data,” The
Scientist, June 17, 2019, https://www.the-scientist.com/news-opinion/china-clamps-down-on-
foreign- use-of-chinese-genetic-material-and-data-66016.
119. “China’s Biotechnology Development: The Role of US and Other Foreign Engagement”
(Rhodium Group, February 14, 2019), https://www.uscc.gov/sites/default/files/Research/US-
China%20Biotech%20Report.pdf.
120. Rise of the Red Dragon Will China’s ambitious plans to create a globally dominant pharma
industry succeed? Tmm_o718
121. Office of the U.S. Trade Representative, “Fact Sheet: 23rd U.S.-China Joint Commission on
Commerce and Trade,” Dec. 2012, last visited Feb. 7, 2019, https://ustr.gov/about-us/policy-
offices/press-office/fact-sheets/2012/december/23rd-JCCT .
122. Gryphon Scientific, and Rhodium Group, “China’s Biotechnology Development,” 17.
123. PhRMA, 301 Submission Filing to USTR, 81.
124. China’s Pursuit of Next Frontier Tech: Computing, Robotics, and Biotechnology, Hearing before the
U.S. China Economic and Security Review Commission, 115th Cong. (2017) (statement of Ben
Shobert, Founder and Managing Director, Rubicon Strategy),
https://www.uscc.gov/sites/default/files/transcripts/March%20Transcript.pdf.
125. Katherine Wan and Jialin Dai, “Biosimilars are Regulated Differently in China,” PharmaDJ, May 29,
2015.
126. Adam Houldsworth, “China’s Patent Linkage Plan in Serious Doubt,” iam, December 17, 2018,
https://www.iam-media.com/law-policy/china-seems-have-abandoned-patent-linkage-plans
127. Ibid.
128. FDA, “Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book),”
https://www.fda.gov/drugs/drug-approvals-and-databases/approved-drug-products-therapeutic-
equivalence-evaluations-orange-book
129. Jason Schindler, “‘Reverse Patent Trolls’ Plague Big Pharma in China,” iam, April 9, 2019,
https://www.iam-media.com/law-policy/reverse-patent-trolls-plague-big-pharma-in-china.
130. Unpublished paper, 2019.
131. “Patent Invalid Decision of Ticagrelor Tablets Revoked by Beijing Higher People’s Court,” China IP,
12/29/2018, http://www.chinaipmagazine.com/en/news-show.asp?id=10390.
132. Ibid.
133. Jason Schindler, “Reverse Patent Trolls.”
134. Dan Prud’homme and Zhang Taolue, “Evaluation of China’s intellectual property regime for
innovation” (Report for the World Bank, December 2017), 69–82,
https://www.researchgate.net/profile/Dan_Prudhomme/publication/322930089_Evaluation_of_China's_
intellectual_property_regime_for_innovation_Summary_Report/links/5a817dc3458515ce6140adc5/Ev
aluation-of-Chinas-intellectual-property-regime-for-innovation-Summary-Report.pdf.
135. Biotechnology Innovation Organization 2019 special 301 submission to the USTR (docket: USTR-
2018-0037), 24, https://www.bio.org/sites/default/files/BIO_2019%20Special
%20301_Review_Comment.pdf.
136. International Trade Administration, “2016 Top Markets Report Pharmaceuticals Country Case
Study,” 4, https://www.trade.gov/topmarkets/pdf/Pharmaceuticals_China.pdf.
137. BIO submission to the USTR 301, 25.
138. Huang, “Use of External Innovation in China,”4.
139. Lawrence Tabak and Roy Wilson, “Foreign Influences on Research Integrity” (presented at the 117th
meeting of the advisory committee to the director, NIH, December 13, 2005),
https://acd.od.nih.gov/documents/presentations/12132018ForeignInfluences.pdf.
140. Ibid.
141. Alex Keown, “Harvard Professor Arrested as Government Continues to Crack Down on
Researchers' Financial Ties to China,” BioSpace, January 29, 2020,
https://www.biospace.com/article/harvard- professor-two-chinese-national-charged-with-lying-
about-ties-to-government-of-china/.
142. Jerry Dunleavy, “Chinese ambassador secretly recruited scientists, FBI says,” The Washington
Examiner, June 25, 2020, https://www.washingtonexaminer.com/news/fbi-alleges-chinas-
ambassador- to-the-us-secretly-recruited-scientists.
143. Zack Whittaker, “Justice Department Accuses Chinese Spies of Hacking Into Dozens of US Tech and
Industry Giants,” TechCrunch, January 2019, https://techcrunch.com/2018/12/20/us-indictment-tech-
hacks-chinese/; Derek Lowe, “Chinese Pharma Espionage?” Science Translational Medicine,
December 15, 2011,
https://blogs.sciencemag.org/pipeline/archives/2011/12/15/chinese_pharma_espionage.
144. Office of the United States Trade Representative Executive Office of the President, Update
Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual
Property, and Innovation (Washington, D.C.: USTR, November 2018), 11,
https://ustr.gov/sites/default/files/enforcement/301Investigations/301%20Report%20Update.pdf.
145. William Kates, “Cornell researcher charged Researcher charged with stealing biological material
from Cornell University Words here,” OCALA.com, July 30, 2002,
https://www.ocala.com/article/LK/20020730/News/604244131/OS/.
146. Justin K. Beyer, “Two Former Eli Lilly Scientists Accused of Stealing $55 Million in Trade Secrets on
Behalf of Chinese Pharmaceutical Company In Southern District of Indiana Indictment,” Seyfarth
Shaw, October 28, 2013, https://www.tradesecretslaw.com/2013/10/articles/trade-secrets/two-former-
eli-lilly-scientists-accused-of-stealing-55-million-in-trade-secrets-on-behalf-of-chinese-pharmaceutical-
company-in-southern-district-of-indiana-indictment/.
147. Jeremy Roebuck, “Chinese American scientist admits plot to steal GlaxoSmithKline’s secrets for firm
in China,” The Philadelphia Inquirer, August 31, 2018,
http://www.philly.com/philly/news/pennsylvania/philadelphia/chinese-american-scientist-admits-plot-to-
steal-glaxosmithklines-trade-secrets-for-firm-in-china-20180831.html.
148. Alex Keown, “Second Scientist Pleads Guilty to Stealing GlaxoSmithKline Trade Secrets,”
BioSpace, September 18, 2018, https://www.biospace.com/article/-jc1n-second-scientist-pleads-
guilty-to- stealing-glaxosmithkline-trade-secrets/.
149. ASH Clinical News, “Scientists Depart MD Anderson and Emory Over Undisclosed Ties to China”
(May 2019), https://www.ashclinicalnews.org/news/citing-theft-research-china-md-anderson-dismisses-
three- scientists/.
150. Gryphon Scientific and Rhodium Group, “China’s Biotechnology Development,” 69.
151. Jason Green, “Former Genentech employees charged with trade-secret theft,” The Mercury News,
October 31, 2018, https://www.mercurynews.com/2018/10/30/former-genentech-employees-charged-
with-trade-secret-theft/.
152. United States Department of Justice, “Chinese National Who Stole Trade Secrets While Working for
Medical Device Companies Sentenced to Federal Prison,” news release, January 28, 2019,
https://www.justice.gov/usao-cdca/pr/chinese-national-who-stole-trade-secrets-while-working-medical-
device-companies.
153. Homeland Security, “Intellectual Property Rights Seizure Statistics: Fiscal Year 2017,” April 2018,
available at https://www.cbp.gov/sites/default/files/assets/documents/2018-Apr/ipr-seizure-
statsfy2017.pdf.
154. “China’s New $15bn Tech Fund Emulates SoftBank’s Vision Fund,” The Economist, July 5, 2018,
https://www.economist.com/business/2018/07/05/chinas-new-15bn-tech-fund-emulates-softbanks-
vision-fund.
155. Pan Yue, “China’s $798B Government Funds Redraw Investment Landscape, Here Are the Largest
Funds You Must Know,” China Money Network, October 31, 2017,
https://www.chinamoneynetwork.com/2017/10/31/chinas-798b-government-funds-redraw-investment-
landscape-largest-funds-must-know.
157. Office of the State Council, National Policy on Health Industry.
159. “China Government Fund Ranking,” China Money Network,
https://www.chinamoneynetwork.com/china-government-fund-ranking.
160. Tom Miles, “U.S. Sends 70 Questions to WTO About China’s Subsidies,” Reuters, January 30,
2019, https://www.reuters.com/article/us-usa-trade-china-subsidies/u-s-sends-70-questions-to-wto-
about- chinas-subsidies-idUSKCN1PO1HN.
161. “There are companies in China that haven’t even started clinical trials, and they have received term
sheets for $400 million,” said Nisa Leung, managing partner and leader of healthcare sector at
China- based Qiming Venture Partners.
162. European Commission and WHO, “China policies to promote local production of
pharmaceutical products and protect public health,” 20.
163. Ibid, 26.
164. “BGI Group,” Wikipedia, https://en.wikipedia.org/wiki/BGI_Group.
165. Joe Kennedy, “The Link Between Drug Prices and Research on the Next Generation of Cures”
(ITIF, September 2019), https://itif.org/publications/2019/09/09/link-between-drug-prices-and-
research- next-generation-cures.
166. Xiaoli Tang et al., Science China Life Sciences (October 2016) vol.59 no.10, 1075.
167. Ibid.
168. Task Force on American Innovation, “Second Place America: Increasing Challenges to U.S.
Scientific Leadership” (April 2019), 42, http://www.researchcaucus.org/wp-
content/uploads/2019/05/V3- Benchmarks-Highlights-Draft-Layout.pdf.
169. Ibid.
170. Robert D. Atkinson and Caleb Foote, “Is China Catching Up to the United States in Innovation?” (ITIF, April 2019),
http://www2.itif.org/2019-china-catching-up- innovation.pdf?_ga=2.47562407.1830997854.1559050972-
640630452.1503250664.
171. Eva Xiao, “Red Flags Raised Over Chinese Research Published in Global Journals,” Wall Street
Journal, July 5, 2020
172. OECD, stats.oecd.org (accessed February 12, 2015). Shows R&D by main activity. The industries are defned as
manufacture of basic pharmaceutical products and pharmaceutical preparations and manufacture of medical and dental
instruments and supplies. Data is for 2008 and 2015 or latest year available.
173. Liz Sablich, “Who’s Investing in Health Care R&D?” TECHTANK, April 23,2018,
https://www.brookings.edu/blog/techtank/2018/04/23/whos-investing-in-health-care-rd/.
174. Ibid.
175. “Top 10 Chinese Pharma Companies 2018,” Pharma Boardroom,
https://pharmaboardroom.com/facts/top-10-chinese-pharma-companies-2018/.
176. Used Google Translate to get data from two Chinese companies--Yunnan Baiyao and Jiangsu Hengrui Medicine.
177. Eric Sagonowsky, “The top 20 pharma companies by 2019 revenue,” Fierce Pharma, April 20, 2020,
https://www.fercepharma.com/special-report/top-20-pharma-companies-by-2019-revenue. Data from company annual
reports. Data for Celgene is from 2018.
178. Carol Robbins, Derek Hill, and Mark Boroush. January 15, 2020. "SCIENCE & ENGINEERING
INDICATORS: Invention, Knowledge Transfer, and Innovation." National Science Board. Table S8-4.
https://ncses.nsf.gov/pubs/nsb20204/data
179. Xiaoli Tang et al., Sci China Life Science, vol.59, no.10, October (2016):1078.
180. OECD, https://stats.oecd.org/viewhtml.aspx?datasetcode=PATS_IPC&lang=en.
181. Ibid.
182. “Global Research in China,” National Institute of Allergy and Infectious Diseases,
https://www.niaid.nih.gov/research/niaid-research-china.
183. Testimony before the U.S.-China Economic and Security Review Commission Hearing On:
“China’s Pursuit of Next Frontier Tech: Computing, Robotics, and Biotechnology,” 115th Cong.
(2017) (testimony of Benjamin A. Shobert, Founder and Managing Director, Rubicon Strategy Group Senior
Associate, National Bureau of Asian Research).
184. “Drug Safety: FDA Has Improved Its Foreign Drug Inspection Program, but Needs to Assess the Effectiveness
and Staffng of Its Foreign Offces,” United States Government Accountability Offce Report, December 2016,
https://www.gao.gov/assets/690/681689.pdf.
185. “The Critical Role of the NIH in Boosting Economic Competitiveness,” panel discussion hosted by ITIF, April
9, 2019, https://itif.org/events/2019/04/09/critical-role-nih-boosting-economic- competitiveness.
186. Stephen Ezell, “The Bayh-Dole Act’s Vital Importance to the U.S. Life-Sciences Innovation System” (ITIF, March
2019), https://itif.org/publications/2019/03/04/bayh-dole-acts-vital-importance-us-life- sciences-innovation-
system.
187. Testimony before the U.S.-China Economic and Security Review Commission Hearing On: the Military Health System by
Christopher Priest, Principal Deputy, Deputy Assistant Director, Healthcare Operations, Defense Health Agency, op. cit.
https://www.uscc.gov/sites/default/fles/Priest%20US-China%20Commission
%20Statement.pdf.
188. Joshua New, “The Promise of Data Driven Drug Development” (Center for Data Innovation, report forthcoming).
189. Henry T. Greely, “He Jiankui, embryo editing, CCR5, the London patient, and jumping to
conclusions,” STAT, April 15, 2019, https://www.statnews.com/2019/04/15/jiankui-embryo-editing-
ccr5/.
190. Amy Goldstein, “New restriction on fetal tissue research ‘was the president’s decision’,” The
Washington Post, June 5, 2019, https://www.washingtonpost.com/health/trump-administration-
imposes-new-restrictions-on-fetal-tissue-research/2019/06/05/b13433c0-8709-11e9-a491-
25df61c78dc4_story.html?utm_term=.9f86f13a60a8.
191. Organisation for Economic Co-operation and Development (OECD), Pharmaceutical Pricing Policies
in a Global Market (Paris: OECD, September 2008), 190, http://www.oecd.org/els/pharmaceutical-
pricingpolicies-in-a-global-market.htm.
192. Colin Cunliff and David Hart, “Contributors to the Global Energy Innovation System” (ITIF, report
forthcoming).
HEA RI NG E XPLO RING THE GRO W ING U. S. REL IAN CE ON CH INA' S
BIOTE CH AND PH ARMACE UT ICAL PRO D UCTS
HE A RI N G
B E FO R E THE
U. S.- C H IN A E C O N O M IC AND S E C U R IT Y R E V IE W C O M M IS S IO N
ONE HUNDRE D S IXTEE NTH CO NGRESS

FIRST S E S S IO N
W E D N E S D A Y , JULY 31 , 2019
P r i n t e d for use of the

U n i t e d S t a t e s - C h i n a E c o n o m i c and S ec u r i t y R e v i e w
Commission A v a i l ab l e via the World Wide Web:
w w w . u s c c . gov
U N IT E D S T A TE S - CHINA E C O N O M IC AND S E C U R IT Y R E V IE W
C O M M IS S IO N
W A S H IN G T O N : 2019
August 7, 2019
The Honorable Chuck Grassley

President Pro Tempore of the Senate, Washington, DC 20510
The Honorable Nancy Pelosi
Speaker of the House of Representatives, Washington, DC 20515
Dear Senator Grassley and Speaker Pelosi:
We are writing to notify you of the Commission’s July 31, 2019 public hearing on “Exploring the
Growing U.S. Reliance on China's Biotech and Pharmaceutical Products.” The Floyd D. Spence National
Defense Authorization Act for 2001 § 1238, Pub. L. No. 106-398 (as amended by the Carl Levin and
Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015 § 1259b, Pub. L.
No. 113-291) provides the basis for this hearing.
At the hearing, the Commissioners received testimony from the following witnesses: Christopher Priest,
Chief of Staff, Defense Health Agency Operations Directorate (J-3); Rosemary Gibson, Senior Advisor,
Hastings Center, Author, “China Rx”; Ben Westhoff, Author, “Fentanyl, Inc.”; Dr. Jennifer Bouey, Tang
Chair in China Policy Studies, RAND Corporation; Associate Professor, Georgetown University’s School
of Nursing and Health Studies; Dr. Mark Kazmierczak, Scientist and Associate, Gryphon Scientific LLC;
Benjamin Shobert, Director of Strategy for Health Business Strategy, Microsoft; Senior Associate,
National Bureau of Asian Research; Katherine Eban, Author, “Bottle of Lies”; Dr. Yanzhong Huang,
Senior Fellow for Global Health, Council on Foreign Relations; Professor, School of Diplomacy and
International Relations, Seton Hall University; and Craig Allen, President, US-China Business Council.
Mark Abdoo, Associate Commissioner for Global Policy and Strategy, Food and Drug Administration,
submitted testimony for the record. The hearing assessed China’s role in global health, pharmaceuticals,
and medical products. In addition, it examined the activities of Chinese health and biotech firms in the
United States, and U.S. access to China’s health market. Finally, the hearing considered the implications
for U.S. public health and national security of growing U.S. dependence on Chinese health products.
The full transcript of the hearing, prepared statements, and supporting documents are posted to the
Commission’s website, www.uscc.gov. Members and the staff of the Commission are available to
provide more detailed briefings. We hope these materials will be helpful to the Congress as it continues
its assessment of U.S.-China relations and their impact on U.S. security.
The Commission will examine in greater depth these issues and the others in our statutory mandate this
year. Our 2019 Annual Report will be submitted to Congress in November 2019. Should you have any
questions, please do not hesitate to have your staff contact one of us or our Congressional Liaison, Leslie
Tisdale Reagan, at 202-624-1496 or lreagan@uscc.gov.
Sincerely yours,
Carolyn Bartholomew Robin Cleveland

Chairman Vice Chairman
cc: Members of Congress and Congressional Staff

U. S.- C H IN A E C O N O M IC AND S E C U R IT Y R E V IE W C O M M IS S IO N
C AR O LY N BA R T H O LO M EW , C H AI R MAN
ROBIN C LE V E LA N D, VICE C HA I R M A N
C o m m i s s i o n er s :
A N D R EA S A. B O R G E A S K E N N E T H LEW IS
J E F FR E Y L. F IE D L E R M IC H A E L A. M C D E V IT T
HON. C A R T E P. G O O D W IN HON. JAMES M. T A LE N T
ROY D. K A M P H A U S E N M IC H A E L R. W E S S E L
THEA MEI LEE LARRY M. W O R T Z E L
The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense
Authorization Act for 2001 § 1238, Public Law No. 106-398, 114 STAT. 1654A-334 (2000)
(codified at 22 U.S.C. § 7002 (2001), as amended by the Treasury and General Government
Appropriations Act for 2002 § 645 (regarding employment status of staff) & § 648 (regarding
changing annual report due date from March to June), Public Law No. 107-67, 115 STAT. 514
(Nov. 12, 2001); as amended by Division P of the “Consolidated Appropriations Resolution,
2003,” Pub L. No. 108-7 (Feb. 20, 2003) (regarding Commission name change, terms of
Commissioners, and responsibilities of the Commission); as amended by Public Law No. 109-
108 (H.R. 2862) (Nov. 22, 2005) (regarding responsibilities of Commission and applicability of
FACA); as amended by Division J of the “Consolidated Appropriations Act, 2008,” Public Law
Nol. 110-161 (December 26, 2007) (regarding responsibilities of the Commission, and changing
the Annual Report due date from June to December); as amended by the Carl Levin and
Howard
P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015, P.L. 113-291
(December 19, 2014) (regarding responsibilities of the Commission).
The Commission’s full charter is available at www.uscc.gov.

CONTENTS
WEDNESDAY, JULY 31, 2019
EXPLORING THE GROWING U.S. RELIANCE ON CHINA'S BIOTECH AND

PHARMACEUTICAL PRODUCTS
Opening Statement of Senator Talent

(Hearing Co-Chair)...........................................................................................................6
Prepared Statement...........................................................................................................8
Opening Statement of Commissioner Wessel
(Hearing Co-Chair)...........................................................................................................9
Prepared Statement.........................................................................................................11
Panel I: Administration Views on Chinese Pharmaceutical, Medical Product, and

Biotechnology Development and Sourcing
Panel I Introduction by Commissioner Wessel

(Hearing Co-Chair).........................................................................................................13
Statement of Christopher Priest
Chief of Staff, Defense Health Agency Operations Directorate (J-3)............................14
Panel I: Question and Answer............................................................................................27
Panel II: China’s Role in Global Health and Activities in the United States
Panel II Introduction by Senator Talent

(Hearing Co-Chair).........................................................................................................38
Statement of Rosemary Gibson
Senior Advisor, Hastings Center, Author, “China Rx”..................................................39
Statement of Ben Westhoff
Author, “Fentanyl, Inc.”.................................................................................................50
Statement of Dr. Jennifer Bouey
Tang Chair in China Policy Studies, RAND Corporation; Associate Professor,
Georgetown University’s School of Nursing and Health Studies..................................64
Statement of Dr. Mark Kazmierczak
Scientist and Associate, Gryphon Scientific LLC..........................................................86
Panel II: Question and Answer..........................................................................................98
Panel III: U.S.-China Links in Health and Medical Products: Risks and Opportunities
Panel III Introduction by Commissioner Wessel

(Hearing Co-Chair)....................................................................................................117
Statement of Benjamin Shobert
Director of Strategy for Health Business Strategy, Microsoft; Senior Associate,
National Bureau of Asian Research..........................................................................118
Prepared Statement..................................................................................................120
Statement of Katherine Eban
Author, “Bottle of Lies”..............................................................................................134
Statement of Dr. Yanzhong Huang
Senior Fellow for Global Health, Council on Foreign Relations; Professor, School of
Diplomacy and International Relations, Seton Hall University....................................147
Statement of Craig Allen
President, US-China Business Council.....................................................................160
Panel III: Question and Answer....................................................................................172
TESTIMONY SUBMITTED FOR THE RECORD
Statement of Mark Abdoo

Associate Commissioner for Global Policy and Strategy, Food and Drug
Administration...........................................................................................................193
EXPLORING THE GROWING U.S. RELIANCE ON CHINA'S BIOTECH AND
PHARMACEUTICAL PRODUCTS
WEDNESDAY, JULY 31, 2019
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Washington, DC
The Commission met in Room 428A of Russell Senate Office Building, Washington, DC at 9:30
a.m., Senator James M. Talent and Commissioner Michael Wessel (Hearing Co-Chairs)
presiding.
OPENING STATEMENT OF SENATOR TALENT

HEARING CO-CHAIR
COMMISSIONER TALENT: Okay, well, we'll get going a couple of minutes early
because we have only a short period of time for our first panel anyway, so we'll expand it a little
by starting a couple minutes early and several Commissioners are on their way, I know.
Good morning to everybody. Welcome to the seventh hearing of the U.S.-China
Commission's 2019 report cycle. Thanks to everyone for joining us today.
Today's hearing will examine China's role in global health in the national security,
economic, and public health concerns stemming from American dependence on Chinese health
products. Our witnesses will also discuss the activities of Chinese health and biotech firms in
the United States, as well as the opportunities and challenges U.S. health firms encounter
while operating in China or trying to sell into the China market.
China is the biggest global source of generic drugs, pharmaceutical ingredients, and
other health products including dietary supplements, biologics, and medical devices. There
are serious deficiencies in health and safety standards in China's pharmaceutical sector and
inconsistent and ineffective regulation by the Chinese Government. Yet, the U.S. imports of
these health products, either directly from China or indirectly through companies and third
countries continues to increase.
According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologic
imports are from China, as well as 39.3 percent of medical device imports, making China one of
America's top sources for medical products. These numbers understate significantly the true
sourcing of health products in China because China is also the primary supplier of precursors
for pharmaceutical companies in other countries such as India which, in turn, are major
suppliers of finished product to the United States.
China has emerged as the second largest pharmaceutical market in the world by
revenue only behind the United States. There are several factors contributing to China's
attractiveness as both a market and a production site including the low cost of production, a
large consumer base, and a deep talent pool. And as China's market power continues to
expand, U.S. consumers are becoming increasingly reliant on drugs sourced from the country
which presents economic and national security risks that we will explore today.
As the largest source of fentanyl, China also plays a key role in the on-going U.S. opioid
epidemic. Beijing's weak regulatory and enforcement regime allows chemical and
pharmaceutical manufacturers to export dangerous controlled and uncontrolled substances. We
will explore that as well.
Each of these topics warrants a thorough investigation. Taken together, they raise very
serious concern for American leaders.
I want to thank all of our witnesses, we have a number of great ones today, for sharing
their expertise with us. We're certainly looking forward to hearing from all of them.
Before we get started, I'd like to thank the Senate Committee on Small Business
and Entrepreneurship in which I was once honored to serve, for reserving this space for
our use today.
I now turn the floor over to my co-chair for this hearing, Commissioner Wessel.
PREPARED STATEMENT OF SENATOR TALENT HEARING CO-
CHAIR
Good morning and welcome to the seventh hearing of the U.S.-China Commission’s 2019
report cycle. Thank you all for joining us today.
Today’s hearing will examine China’s role in global health, and the national security, economic,
and public health concerns stemming from the American dependence on Chinese health
products. Our witnesses will also discuss the activities of Chinese health and biotech firms in
the United States, as well as the opportunities and challenges U.S. health firms encounter
while operating in China or trying to sell into the China market.
China is the biggest global source of generic drugs, pharmaceutical ingredients, and other
health products, including dietary supplements, biologics, and medical devices. There are
serious deficiencies in health and safety standards in China’s pharmaceutical sector, and
inconsistent and ineffective regulation by the government; yet U.S. imports of these health
products—either directly from China or indirectly through companies in third countries—
continue to increase.
According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologics
imports are from China, as well as 39.3 percent of its medical device imports—making China
one of the United States’ top sources for medical products. These numbers probably
understate significantly the true sourcing of health products from China, because China is also
the primary supplier of precursors for pharmaceutical companies in other countries, such as
India, which are major suppliers of finished product to the United States.
China has emerged as the second largest pharmaceutical market in the world by revenue—
only behind the United States. There are several factors contributing to China’s attractiveness
as both a market and a production site, including the low cost of production, a large consumer
base, and a deep talent pool. And as China’s market power continues to expand, U.S.
consumers are becoming increasingly reliant on drugs sourced from China, which presents
economic and national security risks.
As the largest source of fentanyl, China also plays a key role in the ongoing U.S. opioid
epidemic. Beijing’s weak regulatory and enforcement regime allows chemical and
pharmaceutical manufacturers to export dangerous controlled and uncontrolled substances.
Each of these topics warrants a thorough investigation—taken together they raise very
serious concerns for American leaders.
I want to thank our distinguish witnesses for sharing their expertise with us. We look forward to
hearing from each of you. Before we get started, I would like to thank the Senate Committee on
Small Business & Entrepreneurship for reserving this space for our use today. I now turn the
floor over to my co-chair for this hearing, Commissioner Wessel.
OPENING STATEMENT OF COMMISSIONER WESSEL HEARING
CO-CHAIR
COMMISSIONER WESSEL: Thank you, Senator Talent. Good morning. I'd like to
thank everyone for joining us and thank our witnesses for the time and effort they have put in to
their testimonies.
While this Commission deals with a variety of issues in the U.S.-China relationship
ranging from economics to military and security affairs to media freedom, the subject of today's
hearing touches upon the daily lives of our citizens.
Healthcare is an issue for every family. Millions take life-sustaining drugs on a daily
basis, including blood pressure medications, diabetes control pills, and a variety of other
medications. And based on the latest statistics, 68 percent take a dietary supplement on a
regular basis. Few know where the ingredients for those products come from. The packaging
rarely indicates. Increasingly, those products are coming from China.
What is the quality and safety of those products and what is our exposure? Should the
public be concerned? Should they have more information? Are the regulatory standards
sufficient to protect their interests, and how are the facilities being inspected?
These are important questions, but they just touch the surface of bilateral health sector
relationships between the U.S. and China. Today, we want to understand the current
landscape, as well as trace emerging trends and potentially risks. Consider the advances
taking place in the field of biotechnology and its potential for new therapies, medicines, and
other products. China has designated biotechnology as a strategic emerging industry and is
pouring billions into developing biotech and genomic products as a part of its industrial plans.
The Chinese Government encourages investments through venture capital investments in
U.S. biotech and health firms. Through a variety of programs, China is seeking to acquire the
knowledge of some of our key researchers and the intellectual property of leading
companies. Both legal and illegal means are being used.
China's activities in the U.S. biotech sector has fueled technology transfer enabling the
rapid development of China's domestic industry. To support its goals, Chinese companies have
accumulated private and medical data on millions of our people.
Earlier this year, federal prosecutors charged two Chinese nationals for the 2015 hack of
health insurance giant Anthem which resulted in the theft of nearly 80 million Americans’ health
data. But unlike other hacks that were targeted at personally-identifiable information, the hack
was targeted at obtaining longitudinal patient data to help support the development of their
healthcare sector including new drugs and treatments. These are the confidential health
records that our doctors and healthcare professionals keep.
While healthcare should be an area for cooperation in addressing many of the world's
most challenging problems, we have to ask whether we can protect U.S. intellectual property
and valuable health data while deepening collaboration. Scientific research should not be
subject to competitive games and strategies.
U.S. health and biotech firms meanwhile continue to face regulatory and other market
barriers that limit their ability to sell into the China market and compete with Chinese firms. In
recent years, China's government has improved regulatory procedures to allow foreign medical
products to enter the Chinese market more quickly. Concerns remain, however, over China's
weak commitment to protecting intellectual property rights and enduring willingness to favor
domestic providers of health services and products.
Our hearing will closely examine the question of market access, outlining the regulatory
challenges and market opportunities for U.S. firms accessing China's health market.
I'd like to remind our audience that witness testimonies and the hearing transcript is
available on our website, www.uscc.gov. Our next hearing, examining key trends in the U.S.-
China relationship in 2019 will take place on September 4th.
PREPARED STATEMENT OF COMMISSIONER WESSEL
HEARING CO-CHAIR
Thank you, Senator Talent. Good morning. I would like to thank everyone for joining us and
thank our witnesses for the time and effort they have put into their testimonies.
While this Commission deals with a variety of issues in the U.S.-China relationship ranging from
economics to military and security affairs to media freedom, the subject of today’s touches upon
the daily lives of our citizens. Health care is an issue for every family.
Millions take life-sustaining drugs on a daily basis, including blood pressure medications,
diabetes control pills and a variety of other medications. And, based on the latest statistics,
68 percent take a dietary supplement on a regular basis.
Few know where the ingredients for those products come from. The packaging rarely
indicates. Increasingly, those products are coming from China. What is the quality and
safety of those products and what is our exposure? Should the public be concerned?
Should they have more information? Are the regulatory standards sufficient to protect their
interests and how are the facilities being inspected?
These are important questions, but they just touch the surface of the bilateral health
sector relationship between the U.S. and China. Today we want to understand the current
landscape as well as trace emerging trends and, potentially, risks.
Consider the advances taking place in the field of biotechnology and its potential for new
therapies, medicines, and other products. China has designated biotechnology as a
Strategic Emerging Industry and is pouring billions into developing biotech and genomic
products as a part of its industrial plans. The Chinese government encourages investments—
including venture capital investments—in U.S. biotech and health firms. Through a variety of
programs, China is seeking to acquire the knowledge of some of our key researchers and the
intellectual property of leading companies. Both legal and illegal means are being used.
China’s activities in the U.S. biotechnology sector has fueled technology transfer enabling
the rapid development of China’s domestic industry. To support its goals, Chinese companies
have accumulated private and medical data on millions of our people.
Earlier this year, federal prosecutors charged two Chinese nationals for the 2015 hack of
health insurance giant Anthem, which resulted in the theft of nearly 80 million Americans’
health data. But, unlike other hacks that were targeted at personally identifiable information,
the hack was targeted at obtaining longitudinal patient data to help support the development
of their health care sector including new drugs and treatments. These are the confidential
health records that our doctors and health care professionals keep.
While health care should be an area for cooperation and addressing many of the world’s
most challenging problems, we have to ask whether we can protect U.S. intellectual
property and valuable health data while deepening collaboration? Scientific research should
not be subject to
competitive games and strategies.
U.S. health and biotech firms, meanwhile, continue to face regulatory and other market
barriers that limit their ability to sell into the China market and compete with Chinese firms.
In recent years, China’s government has improved regulatory procedures to allow foreign
medical products to enter the market more quickly. Concerns remain, however, over China’s
weak commitment to protecting intellectual property rights and enduring willingness to favor
domestic providers of health services and products. Our hearing will closely examine the
question of market access outlining the regulatory challenges and market opportunities for
U.S. firms accessing China’s health market.
Before we introduce our first panel, I would like to remind our audience that witness testimonies
and the hearing transcript is available on our website, www.uscc.gov. Our next hearing,
examining key trends in the U.S.-China relationship in 2019, will take place on September 4.
PANEL I INTRODUCTION BY COMMISSIONER WESSEL
It's now my honor to introduce our first panel which will provide the perspective of the
Defense Health Agency. I'd also like to note that the Food and Drug Administration had
submitted a statement for the record for this panel which is available on our website.
Today, we will hear from Christopher Priest who currently serves as the interim Deputy
Assistant Director for Healthcare Operations under the Defense Health Agency. He is
responsible for the policy, procedures, and direction of healthcare administration in military
medical treatment facilities. Earlier in his career, Mr. Priest served in the U.S. Army and retired
as a colonel after 30 years of service.
Mr. Priest, welcome. Please keep your remarks to seven minutes so that we can ask
questions. We appreciate your time and effort to be here and also thank you for your service to
this country. Please.
OPENING STATEMENT OF CHRISTOPHER PRIEST, CHIEF OF STAFF, DEFENSE HEALTH
AGENCY OPERATIONS DIRECTORATE (J-3)
MR. PRIEST: Senator Talent, Mr. Wessel, fellow commissioners, I am honored to

represent the military health system and the Defense Health Agency to discuss the safety and
sourcing of materials critical to medical support for our service members and all of the 9.5
million beneficiaries for whom we are responsible.
I have both a profound professional and personal interest in the subject of today's
hearing. As a retired Army officer, followed now by five years in civil service, both my family
and I have relied and continue to rely on military medicine for our care as I have done for most
of my adult life.
My colleagues still in uniform and those who have now retired and all of their families
have placed their trust and confidence in this system to protect and care for them, both on the
battlefield and here at home.
I share in the responsibility to sustain that trust and to ensure that they receive high
quality and safe care. The growing reliance of the U.S. on foreign sources for critical defense
related material is an issue that must be addressed at the national level. Relying on DoD or
other departments to address this issue piecemeal or in isolation will deliver sub-optimal
solutions that could result in the departments competing with each other for finite amounts of
production resources or product.
The most effective way to address this issue is to use the buying power of the federal
government in conjunction with effective laws and funding to partner with the nation's
pharmaceutical producers as one example; to maintain necessary infrastructure and
capabilities to independently meet the U.S. domestic and defense needs, and to compensate
the producers adequately for providing and maintaining those capabilities.
DoD is wholly dependent on the consumer market to produce and distribute
pharmaceutical products it requires, spending approximately $7.5 billion annually. DoD must
work with the constraints of the commercial sector and the market forces that drive and shape
it.
Depending on the commercial sector is a two-edge sword. It enables DoD to reap the
efficiencies of the competitive, commercial marketplace and it also makes DoD dependent on
the sources that competition produces.
DoD, through our colleagues at the Defense Logistics Agency and at the policy level,
monitors available stocks and production capabilities, plans and prioritizes them to meet
contingencies and work with the other departments responsible for U.S. pharmaceutical
production capabilities. Like other federal agencies, we rely on existing laws and those other
federal agencies including the Department of Health and Human Services, particularly the FDA,
and the Department of Commerce to monitor foreign investment in the commercial production
and distribution of medical supplies.
The Trade Agreements Act, or TAA, requires certain products sold to the United States
Government to be manufactured in the United States or in one of the designated countries with
which the U.S. has a free trade agreement or other special trade related arrangement. The
TAA applies to all federal supply schedule contracts, including drugs, medical supplies,
medical devices, as noted by the chairs. The DHA and DLA abide by the TAA and ensure
appropriate references are included in our procurement contracts.
There are processes in place to manage exceptions when products are not available
from TAA-compliant countries. And I've addressed that issue in some detail in the written
testimony,
but would be happy to address that further if you have questions.
Although DoD purchases a very small amount of finished pharmaceutical products from
Chinese sources, we are aware that 80 percent of the active pharmaceutical ingredients, the
API has noted, used by commercial sources to produce finished products come from China
and other non-TAA compliant countries such as India.
We are concerned about any situation where foreign actors, including China, control
substantial access to critical war-fighting material. We expect the trend towards Chinese
dominance of global APIs to continue following past trends.
The issues raised by the increased Chinese dominance in the global API market cannot
be overstated. There is risk that existing regulations, programs, and funding are insufficient to
guarantee U.S. independence from unreliable foreign suppliers. Our concern is the ability of the
domestic manufacturing capability to adjust to that risk, alternate sources, if any, and how long
the solutions would take to produce results.
The challenges being explored by this Commission have existed for some time and they
are growing as again the opening statements from the co-chairs. There is not a single solution
to these challenges. It requires a sophisticated approach that entails national security,
economic, health and diplomatic considerations. We are working closely with our colleagues
within DoD and across the federal government towards this end.
Thank you again for inviting me here to speak with you today and to demonstrate how
we currently integrate our efforts with DoD and other federal agencies to better support health
and readiness for those that we're proud to serve.
I look forward to answering your questions. Again, within the lens -- scope that the
Defense Health Agency, we provide and ensure healthcare delivery across a number of
venues through our Army, Navy, and Air Force partners who currently are responsible for
management administration of our military treatment facilities. And as you may know, we have
been transitioning that activity to the Defense Health Agency for management administration
under NDAA 2017 legislation. We also maintain the Tricare program which is one of the
divisions that falls under my purview. Therefore, if there are any questions that extend beyond
my area of responsibility, I will take those questions for the record and ensure you have a
timely response. Thank you.
PREPARED STATEMENT OF CHRISTOPHER PRIEST, CHIEF OF STAFF, DEFENSE HEALTH
AGENCY OPERATIONS DIRECTORATE
Prepared Statement
Of
Mr. Christopher Priest
Principal Deputy, Deputy Assistant Director, Healthcare Operations
Defense Health Agency
REGARDING
THE MILITARY HEALTH SYSTEM
BEFORE THE
U.S.-China Economic and Security Review Commission
July 31, 2019
Not for publication until released by the Commission

Senator Talent, Mr. Wessel, fellow Commissioners, I am honored to represent the
Defense Health Agency (DHA), to discuss this important subject. The safety and sourcing of
materials critical to medical support for our service members, and all of the 9.5 million
beneficiaries for whom we are are responsible, is a serious medical readiness matter.
The growing reliance of the U.S. on foreign sources for critical defense-related material is
an issue that must be addressed at the national level. Relying on DoD, or other departments,
to address this issue piecemeal or in isolation will deliver suboptimal solutions that could result
in the departments competing with each other for a finite amount of production resources or
products. The most effective way to address this issue is to use the entire buying power of the
federal government, in conjunction with effective laws and funding, to compel the nation’s
pharmaceutical producers, as one example, to maintain the necessary infrastructure and
capabilities to independently meet U.S. domestic defense needs, and to compensate the
producers adequately for providing and maintaining these capabilities.
DoD is neither authorized, by law, nor funded to produce commercial pharmaceuticals.
Therefore, DoD is wholly dependent upon the consumer market to produce and distribute the
pharmaceutical products it requires to ensure the health, safety and wellbeing of the DoD
personnel and beneficiaries who require them. DoD spends approximately $7 billion annually
on pharmaceuticals, which is less than 2 percent of the total US commercial market. Given its
relatively small footprint in the commercial marketplace, DoD must work within the constraints
of the commercial sector and the market forces that drive and shape it. Depending on the
commercial sector, it is a two-edge sword. While it enables DoD to reap the efficiencies of the
competitive commercial marketplace, it also makes DoD totally dependent on the sources that
competition produces. These sources are increasingly foreign and non-compliant with the Buy
American Act, as amended by the Trade Agreements Act of 1979. DoD’s compliance with
these acts drives up DoD pharmaceutical costs while having little or no effect on the primary
production arc of the commercial sector, which is bending toward foreign production sources.
DoD monitors available stocks and production capabilities, plans and prioritizes them to
meet contingencies and works with other departments responsible for US pharmaceutical
production capabilities. Like other federal agencies, it relies on the Department of Health and
Human Services (HHS), Food and Drug Administration and the Department of Commerce
(DoC) to monitor and react to foreign involvement in the commercial production and distribution
of medical supplies of the US.
HHS is the lead to develop national plans and programs to mobilize the health industry and
health resources for the provision of health, mental health, and medical services in national
security emergencies; develop national plans to set priorities and allocate health, mental
health, and medical services' resources among civilian and military claimants; and develop
guidelines that will assure reasonable and prudent standards of purity and/or safety in the
manufacture and distribution of food, drugs, biological products, medical devices, food
additives, and radiological products in national security emergencies.
DOC is the lead to develop control systems for priorities, allocation, production, and
distribution of materials and other resources that will be available to support both national
defense and essential civilian programs in a national security emergency; analyze potential
effects of national security emergencies on actual production capability, taking into account the
entire production complex, including shortages of resources, and develop preparedness
measures to strengthen capabilities for production increases in national security emergencies;
and perform industry analyses to assess capabilities of the commercial industrial base to
support the national

defense, and develop policy alternatives to improve the international competitiveness of specific
domestic industries and their abilities to meet defense program needs.
While DoD coordinates its needs, capabilities and requirements with HHS and DoC, these
other departments have the lead in promoting U.S. pharmaceutical production independence.
The Defense Logistics Agency (DLA)
DHA works closely with DLA to procure military medical supplies and equipment. DLA is
DoD’s medical material logistics enabler and its Executive Agent (EA) for Medical Materiel. As
the logistics enabler, DLA accepts material requirements, generated by medical clinical
decisions through DoD, and obtains the material to meet them at fair and reasonable prices
from the commercial sector.
As DoD’s EA for Medical Materiel, DLA develops, implements, and integrates end-to-end
supply chain processes and end-to-end supply chain and logistics support plans to support the
medical materiel requirements of the Combatant Commands (COCOMs) and the Military
Departments. DLA, in coordination with the COCOMs, the Chairman of the Joint Chiefs of
Staff, and the Secretaries of the Military Departments, programs and budgets to acquire,
maintain, and preposition medical materiel, or provides access to materiel, as necessary, to
meet global DoD contingency requirements for surge and sustainment.
In acquiring material, DLA is bound by the Federal Acquisition Regulation, the Defense
Federal Acquisition Regulation Supplement and the Buy American Act as amended by the
Trade Agreements Act (TAA), to use TAA-compliant sources if they are capable of meeting
DoD’s
needs. In fact, DLA is the “middleman” driven by DoD clinical and readiness requirements and
bound to acquire the material competitively from the commercial sector.
Authorities and Regulatory Framework
The Trade Agreements Act (TAA) requires certain products sold to the U.S. Government
to be manufactured in the U.S. or in one of the “designated countries” with which the U.S. has
a free trade agreement or other special trade-related arrangement. The TAA applies to all
Federal Supply Schedule contracts, including medical supplies and equipment. The DHA
abides by the TAA and ensures appropriate references are included in our procurement
contracts.
Contractors must certify, in their proposals to the Government, that the products listed for
sale on those contracts comply with the TAA. If such certifications turn out to be false, the
contractor may face unwelcome consequences, including monetary liability under the False
Claims Act, potential of criminal charges, and debarment from U.S. Government contracting.
The TAA requires end products delivered to Government customers to be “substantially
transformed” in either the U.S. or a “designated country” identified in the Federal Acquisition
Regulation (FAR). “Substantial transformation” occurs when a product is transformed from its
component parts into new and different articles. If substantial transformation happens outside
the U.S. or a designated country—for example, in China, India, or Malaysia—then the end
product is NOT TAA compliant and it typically cannot be sold to the U.S. Government.
There are processes in place to manage exceptions. If the Department cannot find TAA
compliant generic products in quantities sufficient to meet the DoD needs, we determine if a
TAA compliant brand name product is available in sufficient quantities. We must buy that before
a Non-Availability Determination (NAD) will be issued. Once DoD's demand exceeds a single
TAA compliant manufacturer's ability to meet that demand a NAD will be issued opening the
DoD market to all non-TAA compliant products.
Specific to medical and surgical products, there are 22 Non-Availability Determinations
(NADs, e.g., waivers) that allow use of non-TAA products. Unless the waiver specifically states
the country, it allows for product offerings from any TAA non-compliant country. It should be
noted that one NAD may encompass mulitiple products. Of the 22 NADs, only 4 waivers (e.g.,
exam gloves, surgical gloves/airways), named a specific country of origin (in this case Thailand
and Malysia). For drug products, there are currently 147 active NADs issued by the DLA, out of
the average 6,800 drug products that DLA purchases annually. For these NADs, the primary
country of origin is India. Consequently, we believe the total amount of spending on products
manufactured in China is low.
We have also reviewed prescripton drug purchases made under waivers by our mail order
and retail pharmacy network contract partners, ExpressScripts, Inc (ESI). They have confirmed
that none of the prescripton medications purchased in the past two years were manufactured in
China.
Purchases by Government Purchase Card (GPC) are also a concern as spending by GPC
are relieved of TAA compliance requirements. An example would be a repair part for a medical
device, where the device is TAA compliant, but the repair part could come from multiple
vendors. Repair parts might be purchased through a GPC and would therefore be exempt from
TAA compliance.
DHA Role in Overseeing Chinese Activities of Health-Related Product Manufacturing
The DHA has no legal authority in overseeing Chinese activities of health-related
product manufacturing in China. DHA’s role in overseeing the U.S. health, biotech and dietary
supplement industries is limited to making clinical decisions that promote the availability, safety
and quality of products we prescribe and use to ensure the health and wellbeing of the
Warfighters and beneficiaries we support. DHA partners with the Defense Logistics Agency and
the Food and Drug Administration to promote acquisition of these products from reliable, safe
and cost-effective sources.
Concerns regarding China’s activities in the U.S. biotechnology industry; sufficiency of
existing regulations
Although DoD purchases a very small quantity of finished pharmaceutical products from
Chinese sources, we are aware that approximately 80 percent of the active pharmaceutical
ingredients (APIs) used by commercial sources to produce finished products come from China
and other non-TAA compliant countries, such as India. DHA is concerned about any situation
where foreign actors, such as China, control substantial access to critical warfighting materiel
and potential serious risk of interruptions in the supply chain or posed by contaminated
APIs. This concern is compounded by the fact that there is no required registry for API sources
making it extremely difficult to gauge the extent of the risk. Based on reports of China’s
increasing control of APIs, there is risk that existing regulations, programs and funding are
insufficient to guarantee U.S. independence from unreliable foreign suppliers.

U.S. pharmaceuticals and dietary products industry reliance on supply chains involving
manufacturing plants based in and/or active ingredients sourced from China
As mentioned in the previous section, it is DoD’s understanding, based on business
intelligence from the FDA and the commercial sector that 80 percent of the APIs use by the
commercial production industry are sourced from China, India, and other non-TAA compliant
countries. We also understand that this dependence on Chinese sources is increasing. The
lack of a reliable API registry to accurately gauge the Chinese prowess in the global API
business makes it difficult to independently confirm these estimates and trends.
Expectations for change in domestic U.S. pharmaceutical and dietary supplement
industries to in the next five years with regard to where active ingredients, labor, or
other inputs are located and sourced from
The DHA relies on other agencies and organizations to monitor industry trends. The
narrative in this section reflects these insights rather than original analysis from DHA. Given the
commercial marketplace competitive forces at play, DHA expects the trend toward Chinese
dominance of global API to follow past trends and increase over the next five years.
National security risks—including the ability to protect and address the health needs of
our men and women in uniform, emergency responders, and the public—from current
and potentially increasing levels of dependence on Chinese health products

The national security risks of increased Chinese dominance of the global API market
cannot be overstated. Pharmaceuticals that are crucial to DoD’s ability to promote the health
of its Warfighters and protect them from nuclear, biological and chemical threats. Should
China decide to limit or restrict the delivery of APIs to the U.S. it would have a debilitating
effect on
U.S. domestic production and could result in severe shortages of pharmaceuticals for both
domestic and military uses. Our concern is the ability of the domestic manufacturing capability
to adjust to that risk, alternate sources, if any, and how long those solutions would take to
produce results.
Agreements (including formal agreements and any commitments made during JCCT,
S&ED or other fora) between the U.S. and China governing pharmaceuticals, medical
products, dietary supplements, and biotechnology; Compliance and impact of such
agreements
DHA is unaware on any formal agreements or commitments that exist between the U.S.
and China governing pharmaceuticals or other related medical products. Even if such
agreements exist, there would be concern that they present no guarantees in the event of
conflict or heightened tensions between the two countries.
Sufficiency of existing authorities and regulations to address the challenges presented
by China’s role in global medical and pharmaceutical supply chains
Existing authorities and regulations simply restrict the ability of DoD to purchase
pharmaceuticals and other medical products from China and other non-TAA compliant sources.
They do not restrict the U.S. commercial sector from using APIs from these sources to produce
domestic pharmaceuticals. In fact, DHA is unaware of any current laws and regulations that
address the challenge of Chinese dominance of the commercial API marketplace, on enables
the
U.S. to accurately gauge that dominance and intendent risk.
The challenges being explored by this commission have existed for some time and they are
growing. There is not a single solution to these challenges – it requires a sophisticated
approach that entails national security, economic, health, and diplomatic considerations. Thank
you for inviting us here today to speak with you about how we can integrate our approach with
other US Government agencies in support of better readiness and health.

PANEL I QUESTION AND ANSWER
COMMISSIONER WESSEL: Thank you for your testimony, again, your service, and
appreciate your being here.
Senator Talent for the first question.
COMMISSIONER TALENT: I want to join in thanking you and I know that the Defense
Health Agency has a wide range of responsibilities and many challenges you're confronting and
it's frustrating to have another one on your plate that as you point out in your statement is really
not because of anything that was within the responsibilities of the Department of Defense.
So you mentioned in your statement that there's like, I think 140 or 150, about 150 lines
of drugs or pharmaceuticals, out of over 6,000, that you are purchasing from countries outside
the Buy American Act, in other words, according to a special exception.
So can you tell us how much of the total, which drugs are the most sensitive? In other
words, if there were an issue, either national security or otherwise, and access to drugs or
precursors from China were substantially limited, do you all know the areas where you would
have immediate problems? Are you aware of that? Are you at the point where you know that?
MR. PRIEST: Sir, I think we're collecting that information as we speak. There's a
number of government activities and I think actually being driven from the White House through
the National Security Council, from the Office of Science and Technology Policy is looking at
this. We do have an inventory of those. I don't have that readily available. And I think as
stated in the written testimony, overall, the number that we've received directly from China is
not very large. However, that risk still continues, so I think as we can collect that information
and look at it.
We do know and I'll give one example, and I think actually Ms. Gibson is going to talk a
little bit about it later in her panel, but doxycycline and Cipro, which obviously we use
prophylactically and in response to anthrax are not produced domestically. In fact, a large
portion of that, I believe, is actually produced in China. But I think that's a leading indicator of
the seriousness of this conversation.
COMMISSIONER TALENT: Yes, because this is a -- I mean in certain aspects this is a
potential operational or battlefield issue. And so I would think that you all would be preparing at
least on that level and exploring possibilities like stockpiling and I don't know how feasible that
is with a lot of these medications.
All right, well, thank you. I might, if we have another round, I might have another one or
two.
COMMISSIONER WESSEL: Thank you. Let me ask a couple of questions, if I can,

and one of them you talked about the Trade Agreements Act and having spent some time with
the Buy American statute, et cetera, over the period. My understanding is that to qualify under
the act, and I understand you may not be a trade lawyer, is simply pressing a pill into its final
form will designate origination, so that when we say we're going to buy it from Japan or
wherever else, all of the APIs, you pointed out, I believe, 80 percent are coming from China.
Simply pressing the pill after they've bought all the supplies from China would designate it as
acceptable under the act. And that's a trade policy issue.
But what it says to me is we don't have really the ability to pierce through the supply
chains as well as we might like to protect those warfighters and their families, that as they are
out on the battlefield and subject to being in harm's way and subject potentially to injury, our
primary interest is in making sure that are able to come home to their families. And you do a
tremendous job, DoD, that the advances are startling in terms of survivability for what you, your
colleagues, and people on the battlefield are able do.
But it seems to me we don't even have all the information we need to assess the risks
and if we -- if conflict potential with China increases, our vulnerability will increase as well and
we need to have some way of assessing that.
Is that kind of assessment -- would that assessment be helpful to you and your
colleagues as you look at the treatment options for the people under your care?
MR. PRIEST: Sir, I think the answer is absolutely. I think the value of all of your panels
that you're doing, the work you're producing, along with the work also being conducted within
the administration, across all of the departments, absolutely gets to that point.
In representing the bottom of that supply chain and particularly that provider-patient
interaction and I'd like to give a shout out to my good friend, Captain Rick Freedman, who is
currently commanding the hospital in Bagram. He's a dental officer, but we don't hold that
against him. But I think he represents, he and his team that are actively taking care of patients
in an active theater, represent the risk that you talk about, the risk to that supply chain.
I do believe and I think the FDA comments in their written statement also points to the
murkiness of that data. That just adds to the risk.
And you're absolutely right, and again, not being a trade lawyer and a simple healthcare
administrator, I think simply having a TAA-compliant does not necessarily guarantee safety,
either from those sources coming in from China or frankly, any source of production. There's
always that risk that those drugs are not as effective as they should be, or there may be
manufacturing defects.
And again, a lot of this conservation we're talking about is on the pharmaceutical side
and I think there are other hosts of implications when you start looking at med devices,
laboratory services, genomics, again, the whole sphere of bioeconomics of which healthcare is
only one small piece.
But sir, I agree with you that that is our concern. Our obligation is to provide the best
services, using those materials. And again, what we have achieved over the last 20 years,
almost now 20 years of operation, 18 years anyway, across those theaters, the survivability
rate is highly dependent again on technology, research, and development, and having those
tools, including supplies and equipment, that we know are safe and effective.
COMMISSIONER WESSEL: Thank you. Commissioner Fiedler.
COMMISSIONER FIEDLER: Thank you. I have a couple of questions. You testified
that you spend $7.5 billion a year on pharmaceuticals. Obviously, U.S. pharmaceutical
companies are going to China in seeking low-cost production. So have you seen any
diminution in the costs of pharmaceuticals as a result of sourcing in China, costs of
pharmaceuticals being on everyone's minds in the United States?
MR. PRIEST: Trust me, Commissioner, it's actually on everybody's mind everywhere.
COMMISSIONER FIEDLER: Yes.
MR. PRIEST: Actually looking -- I think the military health system is not immune to the
pressures of cost. And obviously, we work hard and there are certain provisions in how we,
obviously, are able to deliver that service and we use it through three points of delivery and
there's different mechanisms and economic mechanisms to try and control those costs.
So it's a little hard to gauge the impact overall, but I'll give you a couple of examples of
how we actually execute the pharmacy benefit. We obviously have in-patient, out-patient
pharmaceuticals that we deliver to our patients through our military treatment facilities. Those
stocks are procured through DLA. And in conjunction with the VA and other federal partners in
the federal ceiling crisis, as part of the federal supply schedule, obviously, they negotiate up
front those rates -- for all that we’ll call the big four. So those are cost avoidance mechanisms
where are not part of that $6 billion spend. It actually would be higher without those particular
incentives. And we appreciate the fact that the buying power of the federal government across
those big four including HHS, VA and DoD obviously keep that cost lower.
We also deliver our benefit through the mail order program and through our commercial
partner, contract partner, ESI Incorporated, as our pharmacy benefit manager. We replenish
their particular stocks. Now, as I think I've noted in our testimony, we actually have talked to
the ESI CEO and they have indicated they procure none of their drugs through China. But all
of their sources obviously are TAA-compliant as well.
The third source is through the retail network that's obviously our third thing and there's
obviously, although there are FDA-compliant -- all three sources are FDA compliant, we don't
always necessarily know where the large companies, and again, we contract through ESI who
produce the claims, but out of the 6,500 I believe or so pharmacies in the United States, 5,500
are actually part of our program and deliver benefits to some of our patients.
COMMISSIONER FIEDLER: I have a quick two other questions. You're dependent on
the FDA inspection process. You don't have anything of your own, do you, on the -- you don't
test any pharmaceuticals?
MR. PRIEST: That's correct.
COMMISSIONER FIEDLER: What is the anecdotal evidence anyway, if you have it, of
any of the drugs that are administered to our warfighters being inadequate, counterfeit, or not
effective?
MR. PRIEST: I don't know that we have any specific data on that, but I do think that
there's been a recent experience with valsartan that think may illustrate the risk. Valsartan, as
you know, is a generic drug, but in that -- now there's a wide variety of companies that produce
it. What we have seen generally speaking with valsartan is a continuing trend where different
manufacturers and different lots and different mixtures are coming across with those
contaminated drugs that have carcinogens.
And I think Ms. Gibson probably can speak a little bit more and some of your other panel
members, much more eloquently than I can. But I think that's an illustration and a little bit of a
wake-up call although I think there are others historically, whether we go back to the heparin
issue ten years ago. But I think anecdotally, my concern from a healthcare delivery standpoint
is trying to communicate to beneficiaries. And I think it was a bit of an eye opener, certainly for
myself, that normally when we post or have the FDA post those notices, it's usually sort a one
and done.
But here we have the continual, on-going, at issues with valsartan particularly, not
limited to one source, but multiple sources, again in different mixtures. And is that indicative
potentially
--
COMMISSIONER FIEDLER: Is that both India and China given the fact that APIs are
going to India from China in the production of those drugs?
MR. PRIEST: What I think you’re pointing to is the second order risk, so yes. I think it
is, what's in India, but the fact that the APIs are coming from China to India just exacerbates
that risk. If anything, I think that's an interesting case study on the potential risk that we have
by relying on those foreign sources.
COMMISSIONER FIEDLER: Thank you very much.
COMMISSIONER WESSEL: Chairwoman Bartholomew.
CHAIRMAN BARTHOLOMEW: Thank you very much. Thank you, Mr. Priest, for
coming and testifying today and thanks to DoD for facilitating your participation.
Forgive my ignorance here. I'm trying to understand in terms of sort of the production
and the purchasing chain, is there any way that the seller or even the producer of the
components of either the drug or the device would know that it's the Department of Defense
system that these drugs or devices are going into?
MR. PRIEST: That's a great question. And I’d like to actually take it for the record
because I think that's a question our friends, our colleagues at the Defense Logistics Agency
may be able to better address.
I think that line of question alone is a question that increases risk. So I absolutely think
that that's something to explore. I personally don't know whether or not the supplier or by
default then those that are providing those active ingredients, potentially would know that it is
coming to a U.S. DoD facility or to a prepositioned stock, or into a Level 3, like my good friend,
Captain Freedman represents that hospital sitting in Bagram, or the man sitting on the front
line. I don't know whether or not it's trackable to that extent, but that, I think, is a question I
would like to
add --
CHAIRMAN BARTHOLOMEW: And if I can add into that, are there certain -- again,
forgive my ignorance, but are there certain drugs or material that are primarily used on the
battlefield so that even if somebody doesn't know specifically that the Department of Defense
would be purchasing it, it would be obvious that it would be for use in a Department of Defense
situation, a war-time situation?
MR. PRIEST: Well, I think based on some of the emerging technologies that we've
deployed in the battlefield, obviously, and I talked about the joint trauma system. And again,
marvelous work has been done, but those things, whether it's a HemCon Bandage, whether it's
obviously, different blood products in lieu of. And clearly, yes, I think those are somewhat
limited, although I think those are proliferating across the trauma systems in the United States.
And I think DoD is proud to have led the way in the trauma system evolution.
Again, I think as noted, our battlefield survival rates are unparalleled in history, but I
think it does certainly point to those specific items that would be military items that it could be
traceable from that perspective.
CHAIRMAN BARTHOLOMEW: Thanks. I look forward to the answer from the
record
.
MR. PRIEST: Thank you.
COMMISSIONER WESSEL: Senator Goodwin.
COMMISSIONER GOODWIN: Thank you, Mr. Chair. Thank you, sir, for your time
this morning.
As a follow-up to Commissioner Fiedler's question where you were discussing the
purchasing power of the federal government and bringing that to bear in your role as someone
who procures these pharmaceuticals, the focus, of course, is on keeping the price down. And
you alluded to Ms. Gibson, her testimony, which we'll hear later today suggests that this focus
on cost at least the focus on cost alone or exclusively is part of the problem to the extent that it
has resulted in a concentration of a single supply source, and the resulting shortages and
contamination issues that we've seen.
I want to get your sense of that assertion. And also she discusses in her testimony, not
to put you on the spot, some private initiatives that I believe, private hospitals have undertaken
to
broaden their perspective on negotiating for drug procurements, not focusing on cost alone, but
also quality.
MR. PRIEST: No, thank you, Senator. Again, as a healthcare administrator, we always
look through the paradigm of cost, quality, and access. That's sort of the trio of things that are
important to delivering healthcare.
For the Defense Health Agency and the military health system, operates under a
paradigm of what we call the quad aim, quadruple aim, readiness being at the focus, and the
main thing that we all focused on. But besides that, obviously, we're talking about better
health, better care, and lower cost.
Now as I sort of mentioned, I think I've alluded to and specified in the written statement,
the drive on cost is huge. Obviously, the budget for it is $7.6 billion. We have done well to
obviously maintain and sustain that at a reasonable rate, actually lower than the U.S. average.
But a lot that is because again of the assistance we get with federal ceiling price discounts and
obviously, the sharing with patients on co-pays when necessary.
But I do think that when we focus on the readiness, the buying power, we should not be
solely focused on the cost, but yet, obviously that is a major piece within, obviously, the
defense line and the overall defense health program that we're responsible for. So we try to
balance the fact that even though by law that we can't go outside of obviously how DLA does
that procurement and the stipulations we write into our actual contracts, whether they're DHA
contracts, DLA contracts or other department contracts to be TAA-compliant.
We note, like you stated, that there are other civilian commercial entities, hospital
systems, that have formed a conglomeration to look at different ways to do that to -- whether
as to leverage their own buying power or to leverage actual manufacturing capability. And I
think that as we look at strategic partnerships for the Defense Health Agency and the military
health systems are ones we'd like to explore further.
COMMISSIONER WESSEL: Senator Talent for a follow-up?
COMMISSIONER TALENT: Yes, was this subject included in the defense industrial
base study?
MR. PRIEST: Sir, I do not know.
COMMISSIONER TALENT: It might be a good to -- you might want to consider that as
a recommendation. Thank you.
MR. PRIEST: Thank you, sir.
COMMISSIONER WESSEL: Commissioner Lewis.
COMMISSIONER LEWIS: Thank you very much for appearing today. This is a subject
that really astounded me when I found out what the facts are in terms of our reliance on China
for so many of the drugs that are consumed in the United States.
It seemed to me the briefing paper that the staff gave us indicated that the FDA was
inspecting some of the pharmaceutical companies in China as they were producing things to
make sure that the ingredients were proper. And they found out with one particular drug that’s
used for high blood pressure that they were using degraded materials. And rather than
stopping the import of those items, the inspector was overruled by FDA because we needed
those drugs, even though they might be bad.
It seems to me that there are two reasons why we need to find alternative sources.
Number one, if the FDA cannot inspect the way that the Chinese companies are producing
these drugs, then we don't really know whether they're good or not, similar to the way that food
is inspected before it comes into this country. That also impacts the military.
The second reason is if China were to stop producing these goods or to restrict the
exports to the United States, we'd be really stuck for these drugs. It seems that we need to
arrange an alternative source from European drug manufacturers or other places in the world.
So what is the DoD doing to make sure that we're not totally dependent on Chinese
goods that aren't actually inspected?
MR. PRIEST: Well, sir, as you've sort of stated, the FDA has primary responsibility, the
Department of Commerce as well.
COMMISSIONER LEWIS: But we heard the budget restraints are stopping them from
doing things that need to be done.
MR. PRIEST: Yes, sir, but again, I think that responsibility within the administration
falls under those departments. Again, from DHA's perspective, since we neither procure nor
have the ability to test, and that's really outside of our purview. But I would certainly agree with
you that the risks that you stated are accurate.
COMMISSIONER LEWIS: Well, aren't there other alternative sources from Europe
even if the price is higher?
MR. PRIEST: Yes, sir. And actually, I think I commented on that in the statement. My
understanding, again, not being a procurement specialist either, but if I can paraphrase from the
statement, what we also know is the processes that we have to manage by exception, the
department cannot find TAA-compliant products in the quantity sufficient to meet our needs, we
determine if a TAA-compliant brand name, so this goes from generic to brand name, is available
in sufficient quantities. We must buy that before a non-availability determination is issued by
DLA.
Once DoD's demand exceeds a single TAA-compliant manufacturer's ability to meet that
demand, then a non-availability determination will be issued opening the DoD market to all non-
TAA compliant products.
So clearly, I think what that indicates from our DLA partners is they will exhaust
whatever other sources they can in order to meet our particular needs.
COMMISSIONER LEWIS: Well, if in fact, we can't find alternative sources to give us
the quantity we need, wouldn't it be worthwhile to make a large enough contract over several
years that it would encourage the alternative manufacturers to build facilities so that we would
have the quantities we need in the future?
MR. PRIEST: Well, sir, I think that's exactly what I was pointing to in the statement
about the recommendation about using the buying power of the federal government writ large
and looking at that domestic capability. Also, those are long-term solutions, those aren't easy,
quick fixes.
What you're kind of I think stressing is what we do in the current procurement cycles for
those where we have other sources and do we stockpile in sufficient quantities. Again, not
being a logistician or a contracting officer, I do surmise though because we do have
prepositioned stocks worldwide of equipment and material for the warfighters, that we do do
that.
Obviously the problem with that, our overall stockage then becomes -- those drugs in
particular, then obviously become outdated and out of compliance.
COMMISSIONER LEWIS: If the FDA cannot inspect the drugs that are being exported
to the United States, I don't understand why we would buy any goods from China that might not
meet the requirements that we need, rather than European drugs, even if they're at a higher
price. I don't understand that.
MR. PRIEST: Well, sir, and I think and I believe, and again, I will go back and ensure
with my DHA colleagues that I'm speaking correctly, but my understanding is we would. And I
think through another shortage recently, and that's exactly where we went and looked at buying
from Europe, from other markets, particularly western Europe.
COMMISSIONER LEWIS: Thank you very much. I don't understand why we're buying
any products from China when we can't inspect how they're being built. Thank you.
MR. PRIEST: Yes, sir.
COMMISSIONER WESSEL: Commissioner Bartholomew for a follow-up. CHAIRMAN
BARTHOLOMEW: Yes, thank you. And thank you again, Mr. Priest.
Are you a Californian? Did I see that you're --
MR. PRIEST: I did.
CHAIRMAN BARTHOLOMEW: Excellent. Always good to see Californians out here.
I want to make sure that I understand even when we are getting drugs from a TAA-compliant
country or company, right, the components of those drugs are still being produced in China or
India or somewhere else, right? So there's no guarantee of them -- of sort of the safety of the
component even though we're buying it through a system that is acceptable to us. Is that right?
MR. PRIEST: I think that's a fair assessment. At least I think we would agree based
on our understanding that that would be true, that the TAA compliance doesn't necessarily
guarantee safety. And obviously, that's why we believe and agree with the chair's opening
comments that that poses risk to our beneficiaries.
CHAIRMAN BARTHOLOMEW: Some of this, of course, is just a level of education
and understanding. Commissioner Wessel mentioned it in his opening statement, but people,
DoD related or not, get up in the morning, they take vitamins, they take their blood pressure
pills, they take whatever, anti-depressants, they take whatever. And don't think about or don't
have to think about what it is that has gone into it that they're taking. So it's an important issue.
I think in terms of public education, too, which Commissioner Lewis, I think that would be some
of the answer, if people knew sort of the potential daily risk of what they're doing, they might be
a little bit more concerned and raising concerns to people who could make decisions.
COMMISSIONER WESSEL: Thank you. And Mr. Priest, appreciating the context and
the rules within which you need to operate, the trade agreement authorities limit what you can
do and so, for example, Chinese products that are simply stamped into a pill form in another
country under the trade agreements confers transformation, and you don't have the ability to
look
through. You have to comply with existing law. That's where some of the risks are and
something we may want to look at.
Commissioner Fiedler.
COMMISSIONER FIEDLER: The Commission, a couple of years ago, staff did a good
very report on fentanyl importation. There's other testimony we're going to get about morphine
which I still imagine is served immediately to wounded warfighters.
What is the opioid problem that exists in society, how does it exist within the military?
MR. PRIEST: Actually, our overall incidents of opioid issues is actually lower than the
U.S. average as you would kind of imagine.
COMMISSIONER FIEDLER: You have greater control over prescription issuance than
they do in the civilian world.
MR. PRIEST: We do. Correct. Actually, I think that's something to be very proud of on
what we've been able to achieve.
COMMISSIONER FIEDLER: I think you should be.
MR. PRIEST: We also now track and have been looking at chronic opioid usage and
what's being prescribed. And obviously, in a lot of our military treatment facilities we have
dedicated pain clinics, but we do look at what they do versus the average provider and we're
able to drill down to the provider level to ensure that what we're giving is the accurate dosage
and is being done properly and in accordance with clinical practice guidelines. We take a very
hard look at that and want our provider force to be well aware of what they are actually
prescribing and our chief medical officer is leading that effort within the DHA. He and I actually
co-chair a group, the Medical Operations Group, now called the Enterprise Solutions Board,
and that's one of our key topics.
So we do want to make sure that therapeutically we're providing those particular
opioids when necessary, but we also want to ensure that it's done in a safe and effective
manner and we watching how those drugs are actually being prescribed. And I think again our
providers are to be commended for what we actually are able to achieve.
We're also trying to wean, obviously, looking at pain overall, to try and determine
alternative sources, so there's complementary medicine sources, acupuncture, all the rest, that
reduce our reliance on opioids is obviously a direction we're headed as far as the Defense
Health Agency's policies.
COMMISSIONER FIEDLER: Thank you very much.
COMMISSIONER WESSEL: Commissioner Wortzel.
MR. PRIEST: It’s good to see you, sir.
COMMISSIONER WORTZEL: Thank you for your willingness to be here. I'm sorry to
have shown up late and then don't ask a question, but this, the line of questions and responses
just struck me and I have to say I'm a military retiree. As a consequence, if I take regular
prescriptions, I'm required to use Express Scripts. They do a great job.
In the past three months, I have had four blood pressure medications recalled. When I
tracked down the sourcing, they all came out of India, but originally sourced in China, from four
different U.S. manufacturers, supposed manufacturers or at least provider companies.
In each case, that particular medication was contaminated with rocket fuel. If you did a
little work on the internet, you could figure that out.
So I know it's not your fault, but I think it's really important that something be done about
this by the Department of Defense and the U.S. Government in general.
The other medication wasn't contaminated with rocket fuel, but again, three recalls in a
three-month period. I imagine active duty people have the same problem. And that affects the
readiness of our force.
MR. PRIEST: Sir, I think that risk is well stated and I'm not sure if you were referring to
valsartan particularly.
COMMISSIONER WORTZEL: I am.
MR. PRIEST: We actually talked a little bit about valsartan in a previous question. That
actually from my perspective monitoring or having the pharmacy benefit under my purview was
disturbing for exactly the reasons you stated.
The fact that we couldn't and I think I'll just kind of restate briefly, the fact that as you
just indicated, multiple recalls over an extended period of time, different doses, different
packaging, not knowing what was sort of next, thinking as we normally see recalls, they're sort
of one and done. It's a single instance. It's a particular lot, self-disclosed from the
manufacturer. But it's just been a non-ending saga on valsartan and I think that that is a
disturbing trend.
And I do agree that that is something we need to pay close attention to and identify
because part of my obligation is to be able to inform patients like yourself, again, as a fellow
veteran, and for others that may be veterans as well, the obligation to do that so we can try and
provide those drugs that we know are safe and effective.
COMMISSIONER WORTZEL: Well, the interesting thing is, of course, probably six
times I had to get emergency refills at a local pharmacy and in each case they had tons of it
from a manufacturer that the Department of Defense did not use that were not contaminated.
They'd seen the problem earlier apparently. Again, it's a bureaucratic problem, but it's a big
one.
MR. PRIEST: I understand, but retail sources are not necessarily TAA-compliant. So it
goes both ways. What we want to make sure is, and I think Mr. Wessel said it, that's what we
are required to do and you go through that whole process of looking at the sources, are they
TAA- compliant. But it's well stated that there's active ingredients going into a pill form and that
data, the murkiness, I think the FDA commented on it in testimony, that's troubling for all of us.
That's not unique to the Department of Defense.
The fact that the retail sources can buy from other sources where we have to obviously
use TAA-compliant sources. In this particular case, that may have been very true, but think
about the implications on the other end of the spectrum, where retail sources, retail pharmacies
are buying their drugs that are not TAA-compliant. So I understand and I appreciate your
comment.
COMMISSIONER WESSEL: Mr. Priest, thank you for your testimony. Mr.
Lewis.
COMMISSIONER LEWIS: The more I think about this problem, the more I don't
understand why large contracts are not being given to either European or American
manufacturers which would encourage them to then create the components that Commissioner
Bartholomew talked about for two reasons. Number one, that would avoid the contaminations.
Number two, it would ensure the supply chain. I don't understand why large contracts are not
being considered by Department of Defense to encourage the construction of facilities to make
the components that go into the drugs.
MR. PRIEST: Sir, I appreciate the sentiment and the question and your comment. And
certainly, we'll carry that back to my colleagues in the Department. But part of the issue is
what's occurring today. And I think as the chairs have stated and others have stated, we are
reliant on where right those ingredients actually exist. We ask why sort of in my opening
statement I reference the fact that we think through the federal response and an integrated
interagency response, we should be looking at those alternative sources. But I would
imagine, again, I have no facts to back up my point, that we do do those contracts where we
can today.
Manufacturing capability either in Western countries or in the United States, those
alternative sources is exactly the point I was trying to make. I agree with your assessment.
COMMISSIONER LEWIS: Thank you.
CHAIRMAN BARTHOLOMEW: Can I get clarification, which is even the European
pharmaceutical companies are having to purchase the precursors and the components of the
drugs from China, correct? So it's not as -- I think it's a great idea, but simply shifting to a
different pharmaceutical company isn't necessarily going to solve the problem if everybody is
buying the pieces that go into that drug from someplace else.
COMMISSIONER LEWIS: China doesn't have a monopoly on the construction of these
components.
CHAIRMAN BARTHOLOMEW: Correct, that's different.
COMMISSIONER LEWIS: So why do we need to have even European companies
buying those? We could put in the contract they cannot use components made in China.
COMMISSIONER WESSEL: I think we will hear more today from some of our other
witnesses about the change in the supply chains over the past couple of years. There are
certain APIs that are only sourced from China.
COMMISSIONER LEWIS: They're only --
COMMISSIONER WESSEL: That are only sourced from China. And that's why we're
here today.
And Mr. Priest, we appreciate all that you're doing. We understand that the regulations
often prescribe certain activities. I think today's hearing and I assume follow-on work will help
us and Capitol Hill understand some of the challenges that exist in a changing sourcing
landscape.
We didn't talk about technologies, et cetera, as we talked about offline earlier today, you
know, remote technologies that are subject to hacking, and remote medicine for the battlefield,
et cetera, all of those are a different vector that poses new challenges as well.
And we are appreciative of your testimony. We know that your primary duty and what
you do so well is to protect our warfighters, their families, and the retirees, and that's what we're
hoping to do.
We're proud of the fact that over the last I think 11 years, 8 of our reports have been
bipartisan, have been unanimous. I think the issue we're here about today is not partisan, it's a
question of how do we serve our men and women in uniform and their families and thank you
for what you and your colleagues do.
MR. PRIEST: Thank you, Mr. Wessel. Absolutely sure, and I guess if I remark, we
spent most of our time talking about pharmaceuticals. If we had more time there is a plethora
of things we'd love to be able to discuss the Defense Health Agency and the military health
system are endeavoring on. As you know, there's a recent -- yesterday, the VA transitioned
their AHLTA records, medical records, over to the Millennium Center that we have that we now
co- share with them.
The joint information domain now of the medical records, the fact that we're
going to have a single instance of an electronic health record so that Mr. Wortzel and I, as
veterans, and others and maybe veterans don't have to carry paper records around or a
provider in one system can't show what's going on in the other system. The fact that we are
actually partnering much more closely with the VA and I think the electronic health record
allows us to
do that.
Medical devices, just one quick comment on medical devices. We know the risks that
that potentially has as well. And part of what we're doing with movement of that electronic
health record into a secure space is obviously then tying in those devices. And I think that
goes to our procurement activities. We are looking at -- because right now hospital
commanders, our military troop facility commanders can buy generally what they think they
need. We're saying no, that actually adds additional risk. We're going to centralize those
procurements a little to what Mr. Lewis I think was sort of talking about, but in a different
context because that way we can assure that we do look at the cyber implications of those
devices and certify them for a connection within our networks.
Lab services. That's another whole plethora of issues, looking at genomics and
sequencing and data sharing and where all of that information is going. What we're also
looking at as far as what we're doing inside of DoD with our genetic -- trying to not rely solely
on external sources for our own genetic testing where appropriate for therapeutic and clinical
value.
So those are some additional things I thought may be worthwhile to point out to the
Commission and obviously we've been very focused on pharmaceuticals.
COMMISSIONER WESSEL: Again, thank you. We look forward to continuing to
collaborate with you and your staff. We will take a 15-minute break. Thank you.
MR. PRIEST: Thank you, ladies and gentlemen.
(Whereupon, the above-entitled matter went off the record at 10:21 a.m. and resumed at
10:31 a.m.)
PANEL II INTRODUCTION BY SENATOR TALENT
COMMISSIONER TALENT: All right, if Commissioners could resume their seats, we

will begin the second panel. Our second panel will assess China's role in global health and
activities in the United States.
We'll start with Rosemary Gibson. I introduce everybody first and then we'll go to Ms.
Gibson. We'll start with Rosemary Gibson who is -- and whose name has been mentioned
already several times if you were here, who is Senior Advisor at the Hastings Center and
Perspectives Editor at the JAMA Internal Medicine. She's author of China Rx: Exposing the
Risk of America's Dependence on China for Medicine which documents the dramatic shift in
where medicines are made and the implications for American health security and national
security.
Next, we'll hear from Ben Westhoff, an award winning investigative journalist. Mr.
Westhoff's new book Fentanyl, Inc.: How Rogue Chemists Are Creating the Deadliest Wave of
the Opioid Epidemic, will be published in September. The book focuses on fentanyl which now
kills more Americans annually than any drug in history.
Our third panelist is Jennifer Bouey who is a Senior Policy Researcher and Tang Chair
in China Policy Studies at the RAND Corporation. As an epidemiologist with training in clinical
medicine and quantitative methods, Dr. Bouey's research centers on social determinants of
health among marginalized populations.
And finally, we'll hear from Mark Kazmierczak, who is a scientist with Gryphon
Scientific. He's a molecular biologist with expertise in performing risk assessments to support
government decision making on issues of biosecurity, public health, and biodefense. He's also
one of the authors of China's Biotechnology Development: The Role of U.S. and Other Foreign
Engagement, a report prepared for the Commission and published in February 2019.
We welcome all of you. We ask that you would keep your remarks to seven minutes
and Ms. Gibson, we'll start with you.
OPENING STATEMENT OF ROSEMARY GIBSON, SENIOR ADVISOR, HASTINGS CENTER,
AUTHOR, “CHINA RX”
MS. GIBSON: Good morning. Thank you, Senator Talent, Commissioner Wessel, and
all the Commissioners for the chance to be here today to talk about what has been a really
hidden and overlooked threat to our national health security, economic prosperity, and national
security, and that is our dependence on China for medicine.
As was discussed in the earlier panel, these are the medicines used by members
of Congress, presidents, members of the military, veterans, and all Americans. These
are the medicines bought in retail pharmacies, in pharmacies in supermarkets and big
box stores.
The focus of my testimony today will be on generic drugs because they are 90 percent
of the medicines that Americans take.
We can no longer make penicillin and that happened in 2004 when the last plant in the
United States closed and that happened and this is indicative of the predatory trade practices,
happened when a handful of Chinese companies dumped the chemical material to make
penicillin on the global market and it drove out all the U.S., European, and even Indian
producers. And then after it gained dominance, prices went back up.
That's the playbook that we see, the same practice with the Vitamin C cartel is emblematic of
how we have lost the capability to make so many of the core components in our medicines and
I think
this playbook will extend to finished generic drugs eventually.
In 2001, after the anthrax attacks when the U.S. Government needed to buy 20
million doses of doxycycline, we don't make it here, the United States turned to a European
company that, in turn, had to get the starting material from a plant in China.
I have four main points and then will highlight four recommendations. The first is our
industrial base to make our medicines is collapsing. We have virtually no manufacturing
capability left in the United States to make generic antibiotics. These are the medicines that you
give to your kids for ear infections, strep throat, and we're talking also about superbug treatment
and last resort antibiotics.
In five to ten years we'll have virtually no manufacturing capacity left for generic drugs.
And again, this is 90 percent of our medicines.
The second point is China's dominance is global. In February, Dutch Public Television
aired a documentary reporting the Netherlands' dependence on China for medicine. A former
industry official said on camera that they're concerned that China may not supply them with
medicine.
And as mentioned earlier, even India is dependent on China for 80 percent of the key
ingredients it needs for its generic industry. And when you control the supply of medicines, you
control the world. That's what we're looking at.
We are losing control over the supply of our medicines and when we lose control over
supply, we lose control over quality. That's why we have blood pressure medicines with
carcinogens in them and we can go into this more later in the Q and A, but the FDA cannot fix
this problem. It's already in the position of having to make tradeoffs between defective
medicines and shortages. And when we lose control over supply we also lose control over
price. China will be the price setter and we will be the price taker. And members of Congress
will not be able to bring in CEOs of Chinese companies and ask them not to raise prices.
The national security risks are pronounced. China could withhold supply. It could put
lethal contaminants in medicine or have no medicine at all, and I do believe it's in the realm of
possibility to target certain subjects having access to medical records and distribute products to
certain subjects.
The most surprising thing I learned from reading China Rx -- from working on China Rx
and reading it again, it took three years to do it, is that it's no one's job in the federal
government to know who controls the supply of our medicine. We wouldn't do that for oil. We
wouldn't do that for food. We consider our medicine as a cheap commodity to be purchased at
the cheapest possible price. That's the root cause. That's what needs to change.
I have four recommendations that I'll highlight here. First is we need a whole of
government review of our vulnerability, similar to the defense industrial base report, what was
done for the DoD. My understanding is I looked at that report, Senator, I didn't see any
mention of medicines. It's sort of outside of the DoD purview and understandable. I think we
need a whole of government review that's on-going and that identifies our vulnerabilities and
recommendations for how we can rebuild our industrial base.
Second, I believe the DoD and VA should have the flexibility to purchase medicines not
at the cheapest price, but based on value because right now American tax payers will be
shocked to learn that their hard-earned money is going to help build China's generic industry
as our domestic industry collapses.
Third, there's tremendous opportunity with advanced manufacturing technology to make
active ingredients here and finished generic drugs. It's been done on a pilot basis for generics.
We need to take that to commercial scale. It could revitalize communities' economies around
the country.
And finally, I'm sure you're aware, the Africa swine flu that is devastating the pig
population, worse than what it was 12 years ago when we had the heparin contamination that
killed hundreds of Americans, one of the recommendations I have in my testimony is that the
Committee on Foreign Investment in the United States, CFIUS, review the purchase of
Smithfield by a Chinese company, not so much for food security, but for our national health
security and that's because pig intestines are a rare earth of our healthcare delivery system.
So I have 28 seconds left and I'll leave that to all of you and I look forward to your
questions and comments.
PREPARED STATEMENT ROSEMARY GIBSON, SENIOR ADVISOR, HASTINGS CENTER,
AUTHOR, “CHINA RX”
Testimony of Rosemary Gibson, Senior Advisor, The Hastings Center and
Author, “China Rx: Exposing the Risks of America’s Dependence on China for
Medicine”
Before the U.S.-China Economic and Security Review Commission “Exploring
the Growing U.S. Reliance on China's Biotech and Pharmaceutical Products”
July 31, 2019
Thank you for the opportunity to testify at today’s hearing. I am Rosemary Gibson, Senior Advisor at the
Hastings Center and author of “China Rx: Exposing the Risks of America’s Dependence on China for
Medicine.”
I. Introduction
Millions of Americans are taking prescription drugs made in China and don’t know it and neither do their
doctors. These are prescription drugs in the legal supply chain that are distributed to U.S. hospitals, sold
in corner drug stores and grocery store pharmacies, and distributed to military hospitals and clinics
around the world. These are not the counterfeit drugs bought on the internet, or illicit drugs such as
illegal versions of fentanyl.
The public and many policymakers have been kept in the dark about U.S. dependence on China for
medicine and the health security and national security risks of this dependence. It’s time to turn on the
lights. The focus of this testimony is on generic drugs which are 90 percent of the medicines that
Americans take.
II. National Health Security at Risk
National health security and national security are threatened by U.S. dependence on China for thousands
of ingredients and raw materials to make our medicines. China’s aim is to become the pharmacy to the
world, and it is on track to achieve it.
China’s dominance is global. European countries depend on China for medicines. A Dutch Public
Television documentary in February 2019 reported the national security risks of the Netherlands’
dependence on China for medicine. A retired Dutch industry official said, “Now we’re afraid that China
will do things to deprive us of our medication.”
India’s large generic drug industry may be perceived as a viable alternative supplier. Its generic
manufacturers, however, depend on China for 80 percent of the active ingredients and chemical
intermediates essential for production. If past performance is indicative of the future, China will
eventually overtake India in generic drug production
The centralization of the global supply chain of medicines in a single country, whatever country it may
be, makes it vulnerable to interruption, whether by mistake or design.
Meanwhile, as U.S. factories have shut down, causing the loss of tens of thousands of manufacturing jobs
to China, the U.S. industrial base and our capacity to make most of our medicines is rapidly collapsing.
1. The U.S. Has Lost Virtually All of Its Industrial Base to Make Generic Antibiotics The nation’s
health security is in jeopardy. The U.S. can no longer make penicillin. The last U.S. penicillin
fermentation plant closed in 2004. Industry data reveal that Chinese companies formed a cartel, colluded
to sell product on the global market at below market price, and drove all U.S. European, and Indian
producers out of business. Once they gained dominant global market share, prices increased.
The U.S. can no longer make generic antibiotics. Because the U.S. has allowed the industrial base to
wither, the U.S. cannot produce generic antibiotics for children’s ear infections, strep throat, pneumonia,
urinary tract infections, sexually-transmitted diseases, Lyme disease, superbugs and other infections that
are threats to human life. We cannot make the generic antibiotics for anthrax exposure. After the anthrax
attacks on Capitol Hill and elsewhere in 2001, the U.S. government turned to a European company to buy
20 million doses of the recommended treatment for anthrax exposure, doxycycline. That company had to
buy the chemical starting material from China. What if China were the anthrax attacker?
2. Beyond Antibiotics, the U.S. Industrial Base for Generic Drug Manufacturing Is on the Brink of
Collapse. Generic Drugs are 90 Percent of the Medicines Americans Take Beginning in 2007, China
turned its attention to encourage its domestic companies to manufacture generic drugs for the U.S. The
first was an HIV/AIDS medicine. China’s generic industry is thriving as exports to the U.S. grow rapidly.
Examples of generic drugs made in China by domestic companies and sold in the United States include:
antibiotics, anti-depressants, birth control pills, chemotherapy for cancer treatment for children and adults,
medicine for Alzheimer’s, HIV/AIDS, diabetes, Parkinson’s, and epilepsy, to name a few. If past
performance is indicative of future performance, China’s generic drug companies will engage in cartel
formation and predatory pricing, and drive out U.S. and other western generic companies.
3. If China Shut the Door on Exports of Medicines and Their Key Ingredients and Raw Materials, U.S.
Hospitals and Military Hospitals and Clinics Would Cease to Function Within Months, if Not Days A
natural disaster, global public health crisis, or adverse foreign government action could disrupt the supply
of medicinal ingredients and finished drugs. Surgeries could not be performed at Walter Reed National
Military Medical Center (Bethesda Naval Hospital), Johns Hopkins Hospital, George Washington
University Hospital, INOVA/Fairfax, every other U.S. hospital, and military hospitals around the world.
Children and adults with cancer will suffer without vital medicines. For people on kidney dialysis,
treatment would cease, a veritable death sentence.
4. Presently, the pharmaceutical and chemical industry’s successful requests to the U.S. Trade
Representative not to impose tariffs on medicinal products made in China corroborate that much of
the US industrial base, and our self-sufficiency in manufacturing products essential for life, has
collapsed.
As documented in China Rx: Exposing the Risks of America’s Dependence on China for Medicine,
within four years of the U.S.-China Trade Relations Act of 2000, the last penicillin fermentation plant in
the U.S. closed; China’s vitamin C (ascorbic acid) cartel forced the closure of the last U.S. production
facility, and the last aspirin (acetylsalicylic acid) manufacturing facility ceased business because of
predatory pricing by Chinese firms. Baxter Healthcare switched heparin suppliers from Wisconsin to
China, and a lethal contaminant in heparin was later found that killed hundreds of Americans.
Nearly twenty years later in 2018 and 2019, U.S. industry has advocated successfully to keep medicinal
products—prescription drugs and their core components—off U.S. tariff lists. The rationale for this
position is tariffs would increase drug prices and health spending.
It is unclear whether, or how much, costs will rise absent transparency on the price paid to
manufacturers by a handful of companies that buy generic drugs from manufacturers in China in large
quantities, and absent the ability to compare this price with the amount consumers, hospitals, the
military and the VA pay.
Second, emphasis on monetary price ignores a very high price the U.S. is paying: the loss of trust in
medicines by doctors and the public because of substandard, defective, and lethal drugs sold to U.S.
hospitals and consumers. Ninety-five percent of Americans don’t trust medicines made in China. A
prominent physician said to me, “We are becoming like a developing country with our medicines.”
Third, the absence of protection for U.S. generic and pharmaceutical chemical manufacturers from
China’s medicine cartels and predatory pricing has caused the near collapse of U.S. manufacturing, and
remaining capacity faces an imminent existential threat.
Fourth, once China gains even more domination in production of generics, consumers, hospitals, and the
government will lose control over the price they pay for medicines. China will be the price setter, and the
U.S. will be the price taker.
Fifth, at that point, the FDA will have an even more difficult time than it does now to inspect and regulate
the quality of medicines.
These points are discussed in greater detail below and illustrate that protecting China’s industry and
helping it grow, while causing the collapse of U.S. generic manufacturing, is a mistake of epic
proportions to the country’s health security and national security that will have serious adverse effects
for generations to come.
5. As the U.S. Rapidly Loses Control Over the Production and Supply of Vital Medicines, It Loses
Control Over the Price of Medicines Consumers and Hospitals Pay As China gains more control over
America’s supply of medicines, it could charge American consumers and patients higher prices, or
extort concessions from the federal government to keep prices affordable. This is not mere speculation.
China’s domestic companies formed a vitamin C cartel in the early 2000s and increased prices up to
600 percent, which increased the cost to American consumers and businesses. When U.S. businesses
sued the Chinese companies for antitrust violations, the Chinese government asserted in federal court
that Chinese law required its domestic companies to fix prices and control exports of vitamin C to the
United States. This assertion reveals China’s clear strategy to control the supply and price of health-
related commodities in the United States.
6. Risks of Contaminated and Potentially Lethal Medicines Are Increasing The deaths of 246
Americans who were administered the blood thinner heparin in 2007 and 2008 were reported to be
associated with a lethal contaminant that was deliberately placed during the manufacturing process in
China for economically motivated reasons. More recently, millions of Americans were sold blood
pressure medicines that contained a cancer-causing genotoxic impurity. While many manufacturers have
been forced to recall their products, the most troubling was a manufacturer in China whose blood
pressure medicine, valsartan, contained per pill more than 200 times the acceptable interim limit for the
carcinogen. Even more concerning is the manufacturer knew its product did not meet U.S. standards but
sold it anyway to unsuspecting U.S. hospitals and patients. In the case of this company, the FDA banned
all products from its facility from entry into the United States.
7. The FDA Cannot Fix the Underlying Cause of These Threats to National Health Security The
FDA cannot fix the underlying cause of the proliferation of contaminated and potentially lethal
medicines in
the legal supply of America’s medicines. It cannot fix the penchant of large purchasers of generic drugs to
pay manufacturers the cheapest price rather than a price based on value, which includes quality, an
uninterrupted supply, and health security.
The current approach of hammering down on manufacturers on price is the root cause of contaminated
and lethal drugs in the legitimate supply chain and shortages and unavailability of life-saving medicines.
Since the early 2000s, hundreds of medicines at any point in time are in short supply or unavailable
altogether in the United States. In 2015, the FDA banned twenty-nine products from a manufacturing
plant in China. But because of concerns about shortages of vital medicines, the FDA exempted fifteen
from its ban including products to make chemotherapy for children and adults with cancer, and to treat an
AIDS-related cancer.
The FDA can regulate only the medicines that large buyers of generic drugs purchase. It cannot dictate
what they buy. The FDA is caught in the “regulator’s dilemma” whereby it is in the unenviable position
of weighing the relative risks of allowing vital but defective medicines to remain on the market or
exacerbating shortages.
8. More than 10 Percent of Generic Drugs Tested Do Not Meet Quality Standards A growing number
of Americans and their doctors are concerned about the quality and safety of their medicines and rightly
so. An online pharmacy Valisure is reportedly the first pharmacy that chemically tests every batch of
every medication it sells. At its laboratory located at the Yale Science Park in New Haven, Connecticut,
more than 10 percent of the batches of medicines it has tested are rejected for not meeting quality
metrics. Reasons for rejection include issues with dosage, dissolution, marketing claims related to
dissolution or levels of probable human carcinogens.
9. Procurement of Medicines from Trustworthy Manufacturers Based on Value, Not Cheap, is the
Antidote to Threats to National Health Security The threats to national health security are driven by the
race-to-the-bottom on price paid to generic manufacturers. This price is different from the higher price
that consumers pay. This practice is driving production to China, the only country whose government
subsidizes its domestic manufacturers. It is building China’s industry while rapidly dismantling U.S.
manufacturing.
C. National Security Risks
1. Medicines Can Be Used as a Strategic and Tactical Weapon Against the United States Medicines in
the hands of an adversary can be weaponized. Supplies can be withheld. Medicines can be made with
lethal contaminants or sold without any real medicine in them, rendering them ineffective. These products
can be distributed to specific targets. Detection is time-consuming at best, and virtually impossible at
worst.
2. Dependence on China is a Risk to the U.S. Military, Combat Readiness, and Force Protection
The thousands of men and women on U.S. aircraft carriers in the South China Sea are dependent on
the adversary for many of their essential medicines. Combat readiness and force protection are at risk
with
the military vulnerable to disruptions in supply and contaminated and toxic medicines. In 2018, more than
31,000 active duty military personnel, veterans, and their family members were notified they may have
been given blood pressure medicines containing a cancer-causing ingredient.
3. No one in the federal government is responsible for knowing who controls the U.S. supply of
medicines. The federal government lacks a locus of responsibility for conducting ongoing risk
assessments to the U.S. supply of medicines. There is no point of accountability to take all means
necessary to assure an uninterrupted supply of quality medicines produced by trustworthy
manufacturers.
4. Medicines should be treated as a strategic asset similar to oil and other energy supplies and
agricultural commodities such as wheat and corn. The United States would cease to function
within days if supplies of energy and food commodities were disrupted. The same is true of
medicines.
Recommendations
Recommendation #1: Require a whole of government review and assessment of the nation’s
vulnerabilities in the medicine supply chain and recommendations to strengthen the U.S. industrial
base to be able to meet the nation's critical generic drug needs.
A whole of government review and assessment of vulnerabilities in the medicine supply chain and
industrial base to manufacture generic medicines and their ingredients is essential and should include the
Department of Health and Human Services, Department of Homeland Security, Department of Defense,
Department of Veterans Affairs, the National Security Council, and other relevant departments, agencies
and other entities.
A framework for consideration that can be drawn upon is the 2018 Department of Defense report,
Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain
Resiliency of the United States. The effort assessed the status of U.S. manufacturing and the defense
industrial base, identified current risks, and identified action steps for risk mitigation.
Similarly, a whole of government review and assessment of the nation’s vulnerabilities in U.S.
manufacturing of generic medicines and their ingredients should, inter alia:
(i) identify finished drugs and essential components necessary for the manufacture of medicines vital for
civilian and military use whose supply chains are at risk of safety and quality concerns and disruption;
(ii) identify the defense, homeland, economic, geopolitical and other contingencies that may disrupt,
strain, compromise, or eliminate supply chains of medicines and their essential components that are
sufficiently likely to arise and require preparation for their occurrence;
(iii) assess the resilience and capacity of the manufacturing base and supply chains to support health
security and national security needs in the event of the contingencies including an assessment of: the
manufacturing capacity of the United States; gaps in domestic manufacturing capabilities including non-
existent, extinct, threatened, and single-point-of-failure capabilities; and supply chains with single
points of failure and limited resiliency;
(iv) recommend legislative, regulatory, and policy changes and other actions to avoid, and prepare for,
contingencies identified; and
(v) recommend federal investments to strengthen the U.S. manufacturing base and increase self-
sufficiency in the manufacture of priority generic medicines and their ingredients in the interest of the
country’s health security and national security.
Recommendation #2: The National Health Security Strategy, the National Security Strategy, and
the Public Health Emergency Medical Countermeasures Enterprise (PHEMCE) strategy should
include actions to strengthen the U.S. industrial base to assure an uninterrupted supply of generic
medicines and the ingredients to make them. This is vital for the continuity of day-to-day
operations of the nation’s hospitals, health care systems, and military hospitals and clinics around
the world.
A robust and resilient industrial base capable of manufacturing generic medicines and their essential
ingredients should be a national health security and national security priority. Further, it should be the
policy of the federal government to reduce the nation’s vulnerability to disruptions in the supply of
medicines and their essential ingredients.
Identification of actions in the above strategic plans to strengthen the U.S. industrial base will elevate the
importance of domestic capacity to manufacture generic medicines most vital for continuity of operations
in the civilian and military health care systems.
Recommendation #3: Manufacturers of generic medicines who sell medicines to the Department
of Defense and VA should be required as a condition of receipt of taxpayer dollars to disclose to
the Department of Defense and VA whether their products and the active ingredients, chemical
intermediates, and raw materials contained in them are sourced from countries that are
adversaries or strategic competitors to the United States. This information is vital for the
Department of Defense to conduct its mission on behalf of the nation.
Some generic drug manufacturers will not disclose the country-of-origin of medicines to the Department
of Defense. Lack of transparency in country-of-origin poses a risk to combat readiness and force
protection.
Recommendation #4: The Department of Defense and the VA should have the flexibility to procure
medicines based on value and not the cheapest price. Currently, the DoD and VA buy medicines
based on price alone. This practice undermines force protection and combat readiness. It also
increases the military’s dependence on China. Further, American taxpayers will be dismayed to
learn that their money is helping China grow its domestic generic industry while enabling the
imminent collapse of U.S. generic manufacturing.
The Department of Defense and the VA buy the cheapest medicines to assure prudent use of taxpayer
money. This practice exposes the U.S. military to dependence on China and helps build China’s industry
as U.S. manufacturers face an imminent existential threat. This practice stands in contrast to military
procurement of nuclear submarines and aircraft carriers for which outsourcing of manufacturing to China
is not an option on grounds of national security. The same rationale should apply to vital medicines such
as generic antibiotics.
Combat readiness and force protection will be strengthened by providing the Department of Defense the
flexibility to procure medicines based on value (price, quality, reliable supply, and security).
U.S. hospitals are using their procurement dollars to launch the purchase of prescription drugs based on
value not just price. Civica Rx is a non-profit formed by the Mayo Clinic and 900 hospitals representing
one-third of licensed hospital beds in the U.S. It pays manufacturers a fair, sustainable, and transparent
price, not a race-to-the-bottom price. The country-of-origin and manufacturer are transparent to the
purchasers. Long-term contracts with manufacturers enable them to invest in their facilities and assure an
uninterrupted supply of quality medicines. Civica Rx is procuring life-saving generic antibiotics that will
be manufactured in Ohio.
The combined purchasing power of the Department of Defense and the VA, coupled with long-term
contracts with manufacturers, could spur production in the United States and deliver quality medicines for
the men and women in uniform, their families, and America’s veterans.
Recommendation #5: Congress should provide funding for pilot projects to demonstrate the
feasibility of commercial-scale advanced manufacturing technology to produce generic drugs and
their essential ingredients to meet national health security needs. This funding will enable
medicines to be produced much faster, at lower cost, more reliably with real time quality control,
and a smaller environmental footprint.
The Defense Advanced Research Projects Agency (DARPA) has supported the development of
advanced manufacturing technology to strengthen battlefield medicine in field hospitals and remote
areas with disease outbreaks among other applications.
Currently, applications of this technology have successfully demonstrated small-scale production of the
active ingredients in a number of essential medicines.
While pharmaceutical companies with new drugs under patent are beginning to adopt advanced
manufacturing technology, U.S.-based generic companies are unlikely to invest in innovative
manufacturing because it is financially infeasible due to severe price competition from Chinese
domestic firms.
Federal investment is needed to show proof-of-concept of commercial-scale domestic production for
generic drugs, their active ingredients, and chemical starting materials. This action will create a robust
and resilient manufacturing base and secure the nation’s health security and national security.
Recommendation #6 The Committee on Foreign Investment in the United States (CFIUS) should
review the health security and national security implications of Chinese company ownership of
Smithfield Foods, the world’s largest pork processor and hog producer. Pig intestines are the “rare
earths” of medical care and vital for the day-to-day functioning of U.S. civilian and military
hospitals.
The U.S. and the world depend on China for an estimated 80 percent of the pig intestines to make
heparin, a blood thinner which is ubiquitous in hospitals. It can be said that pig intestines are the “rare
earths” of medical care. Rare earths are essential components for electric vehicles, consumer electronics,
other high- tech devices, and the defense industry. In the health care sector, pig intestines are essential
components
for the functioning of the U.S. medical care system. It takes one pig to make a vial of heparin.
In 2018, African swine flu virus erupted in China and the US Department of Agriculture estimates a
nearly 20 percent decline in China’s pig population in 2019 from 428 million to 350 million. Twelve
years ago, blue ear disease in China decimated its pig population, not as severely as the present
situation. Facing a shortage of the authentic ingredient at that time, economically motivated criminals
in China’s heparin manufacturing industry developed a lethal substitute that mimicked the real one.
Product was shipped to the United States and other countries, and the estimate of 246 deaths is a likely
underestimate because of the insidiousness of lethal ingredients in medicine and the challenge of
linking cause and effect.
In the short term, severe heparin shortages are predicted for the U.S. and other countries. In the medium-
term, global demand for heparin will increase because of U.S. and global population growth coupled with
the expansion of China’s hospital and health care sector. Meanwhile, the land carrying capacity for an
increase in the pig population, and the threat of more disease outbreaks, suggest supply will not keep pace
with demand.
In 2014, the FDA Science Board, which advises the FDA Commissioner on matters of scientific affairs,
discussed heparin supplies and shortages. It was noted that if the U.S. has virtually all the heparin
coming from a single country, no government agency can order U.S. pig producers “to put all of their
pig guts after slaughter into heparin production” to assure continuity of health care provision in the
United States. It was suggested that this concern be elevated to the highest levels of national security.
The Committee on Foreign Investment in the United States (CFIUS) should review the national security
implications of Chinese ownership of Smithfield. According to the CFIUS website, its members do not
include the Secretary of the Department of Health and Human Services, who oversees national health
security and public health emergencies. This needs to change. Components of medicinal products are
essential to the business continuity of the U.S. medical care system.
Conclusion
I want to thank the Commission for holding today’s hearing and drawing attention to U.S. dependence
on China for medicines and the impact on the nation’s health security and national security. Thank you
for the opportunity to testify and I look forward to your questions and helping the Commission in any
way going forward.
OPENING STATEMENT OF BEN WESTHOFF, AUTHOR, “FENTANYL, INC.”
COMMISSIONER TALENT: You're yielding back the 28 seconds. Thank you for that
and for your testimony.
Mr. Westhoff.
MR. WESTHOFF: Thank you, Senator Talent, Commissioner Wessel, and the
distinguished members of the Commission for allowing me to testify today.
The U.S. opioid crisis began with the over prescription of pharmaceutical opioids like
OxyContin. When users' prescriptions ran out, many turned to street heroin. Now the crisis
has entered its third wave led by fentanyl. Fentanyl was already a widely used medical drug,
but illicitly-produced fentanyl is mainly abused today. This fentanyl is mostly made in China
and then sent directly to U.S. consumers through the mail or funneled into the country by
Mexican cartels.
U.S. political leaders have harshly criticized China for allowing large quantities of
fentanyl, fentanyl analog, fentanyl precursors, and other new drugs called novel psychoactive
substances, or NPS, to be smuggled into America. In response, China has pledged strong
action to stem the tide.
However, my deep reporting and research for my new book, Fentanyl, Inc.: How Rogue
Chemists Are Creating the Deadliest Wave of the Opioid Epidemic, shows that China has not
been acting in good faith. I will explain.
A critical part of China's rapidly-growing economy is its sprawling chemical and
pharmaceutical industries. Most companies produce legitimate chemicals, some make illicit
ones, and others are in between. Reforms have been promised, but inspections remain
sporadic. China's clumsy, understaffed bureaucracy involving at least eight different agencies
has a difficult time controlling these industries. Thus, dodgy companies that keep their heads
down can operate without problems.
Many Chinese officials don't seem to fully understand the laws governing the
manufacture and sale of these chemicals and companies manipulate the legal gray areas to
their advantage. At the same time, China encourages these industries through lucrative tax
incentives and subsidies. These incentives have undoubtedly driven legitimate innovation in
exports, but the rise of fentanyl and NPS has been a terrible side effect.
Quietly, money has gone to Chinese companies exporting deadly drugs that are killing
tens of thousands of Americans annually. For example, China designates certain companies
as new and high technology enterprises which helps these companies, including those
exporting dangerous drugs to the U.S., receive lucrative incentives.
Also exploited are various programs administered by China's Ministry of Science and
Technology. Chinese companies showered with these types of government benefits include
one called Yuancheng, based out of the city of Wuhan. It receives them even while by its own
admission it sells ingredients to make fentanyl called precursors all over the globe including to
the U.S.
It is possible that Chinese Communist Party officials don't realize this is happening.
Then again, it's possible they do considering the Chinese tax code directly encourages the
export of these drugs through reimbursements called the value-added tax rebate or VAT
rebate. Not every exported chemical gets a VAT rebate, but thousands do including fentanyl,
other fentanyl analogs not used for medical purposes anywhere, synthetic cannabinoids, and
anabolic steroids.
The U.S. says stemming the flow of illicit synthetic opioids and other NPS from China is
a top priority. And China says it shares this commitment. Indeed, on May 1, 2019, China
scheduled all fentanyl analogs including those not yet created.
China has difficulty enforcing its drug laws, but this was the most far reaching and
potentially significant type of action China has taken in this realm, yet there's much more the
U.S. can do to stem the flow of these drugs from China.
My first suggestion is pressuring China to eliminate tax rebates, grants, and subsidies to
companies making and exporting these dangerous chemicals. It makes sense for legitimate
Chinese pharmaceutical companies to receive VAT rebates for exporting fentanyl for medical
use. But it is outrageous that China offers these tax rebates for many other fentanyl analogs
that are illegal for Chinese manufacture and export.
China also needs to eliminate incentives given to these companies by the Ministry of
Science and Technology.
My next suggestion is that the U.S. schedule more fentanyl precursors and pressure
China to do the same. Making fentanyl from scratch is a complicated process, but making it
from precursors is a fairly simple one. This is the process favored by Mexican cartels who
usually import the precursors from China. Yet, currently, all but two of the known fentanyl
precursors are unscheduled, not just in China, but in the U.S. and worldwide.
The U.S. should also pressure China to allow the DEA and the FDA to do their work.
China's pledge to control fentanyl analogs are meaningless without enforcement. It's not just
the American agencies, however. China's own drugs and medicine regulating agencies need
to be properly staffed and funded.
My final suggestion is that the U.S. should do more at home. China believes U.S.
demand is driving the opioid crisis and indeed predatory tactics by U.S. pharmaceutical
companies and sales policies here have helped create the world's largest market for opioids.
Therefore, even if China reigns in its rogue industries, if American demand for these drugs
does not subside, production will simply shift to other countries. Promoting harm-reduction
measures is critical. Advocates of harm reduction believe drug use is inevitable and that we
must work to make it as safe as possible.
I suggest much increased funding for medication-assisted treatment for addicted users.
In addition, first responders and others who encounter overdose victims should be better
supplied with naloxone which should be available and affordable to everyone.
Users need better access to drug-checking kits. These are inexpensive tests that
inform users what's actually in their drug and can detect fentanyl. Studies have shown these
tests save lives.
Also critical is overturning the Illicit Drug Anti-Proliferation Act of 2003, known as the
RAVE Act which effectively inhibits concert organizers from allowing drug checking at their
events and festivals.
Information campaigns about NPS are also critical, especially when it comes to
children. Parents, in particular, need to be properly educated. They need to believe that an
overdose can happen to their kid because it can happen to any kid. Thank you.
PREPARED STATEMENT OF BEN WESTHOFF, AUTHOR, “FENTANYL, INC.”
Panelist Name: Ben Westhoff
Author of Fentanyl, Inc.: How Rogue Chemists Are Creating the Deadliest Wave of the Opioid
Epidemic
Testimony before the U.S.-China Economic and Security Review Commission
“Exploring the Growing U.S. Reliance on China's Biotech and Pharmaceutical Products.”
July 31, 2019
Introduction
The U.S. opioid crisis began with the overprescription of pharmaceutical opioids like
OxyContin; when users’ prescriptions ran out, many turned to street heroin. Now, the crisis has
entered its third wave, spurred by fentanyl. Though fentanyl was already a widely-used medical
drug produced by legitimate pharmaceutical companies, illicitly-produced fentanyl is mainly
abused today. This fentanyl is mostly made in China, and then sent directly to U.S. consumers
through the mail, or funneled into the country by Mexican cartels.
China has been harshly criticized by U.S. political leaders for allowing large quantities of
fentanyl, fentanyl analogues, fentanyl precursors and other new drugs known as Novel
Psychoactive Substances (NPS) to be smuggled into America. Yet most of China’s critics
recognize the difficulty of controlling the country’s vast chemical and pharmaceutical industries,
where legal and illegal production can take place in the same facilities. Further, China has
pledged strong action to stem the tide of these drugs. Earlier this year the country scheduled all
fentanyl analogues, a move that was applauded by President Trump and others.
My deep reporting and research for my new book Fentanyl, Inc.: How Rogue Chemists Are
Creating the Deadliest Wave of the Opioid Epidemic, however, shows that China has not been
acting in good faith. The country’s stated goal to crack down on these drugs has been undercut
by its monetary policies, which directly support rogue Chinese chemical companies, the very
same ones that are fueling America’s opioid crisis.
Factors contributing to China’s emergence as a global hub of illicit and counterfeit

medicines and pharmaceuticals
A critical part of China’s rapidly growing economy is its sprawling chemical industry. Its
400,000 chemical manufacturers and distributors (by U.S. Department of State estimates) span
the country, making and selling everything from fertilizers to industrial solvents to antibiotics to
psychoactive drugs. Most operate legally, some operate illegally, and others are in between.
Driven in part by government subsidies and incentive programs, as well as a large population
of skilled chemists, China’s pharmaceutical industry has also been growing at a breakneck
pace for decades, especially since the normalization of U.S.–China trade relations in 2000.
This chemical and pharmaceutical industry expansion has been driven in large part by exports,
which are seen as critical to the country’s continued growth. At the same time, China has been
under fire for years for its record on food and medicine safety. Its medicines and supplements
have been responsible for hundreds of deaths and thousands of hospitalizations around the
world (exact numbers are unknown).
Reforms have been promised, but inspections remain sporadic and American officials have not
been satisfied. For a variety of reasons, Chinese companies making medicines tend not to be
inspected as thoroughly as those in Western countries. Though the U.S. FDA has a presence
in China and is permitted to do some (though not all) of its desired inspections, it is, by all
accounts, understaffed and underfunded.
Meanwhile, China’s clumsy, understaffed bureaucracy has a difficult time controlling the
country’s chemical industry. Different layers of government are sometimes at odds with one
another, local officials are corruptible, and industry regulations are confusing and poorly
enforced. Thus, dodgy companies that keep their heads down can often operate without
problems. Many have websites advertising legitimate products, while also making chemicals
intended for illicit use.
“Lack of coordination and competing regulatory oversight...creates opportunities for some firms
to hide unregulated activities in plain sight,” testified the RAND Corporation’s Bryce Pardo, an
expert on drugs in China, to Congress in 2018.
While American chemical and pharmaceutical companies tend to portray themselves as

focused and streamlined, many of their Chinese counterparts offer an extraordinary range of
products.
Regulating this industry—where chemicals that speed up rubber manufacturing and those
combating erectile dysfunction are peddled by the same people—is complicated by the fact that
China’s chemical bureaucracy involves at least eight different agencies, including its Food and
Drug Administration, Ministry of Chemical Industry, and General Administration of Quality
Supervision, Inspection, and Quarantine.
Because there are so many regulatory agencies, and because so many chemical companies
make both legitimate and illicit products, the Chinese government has a difficult time finding
and penalizing those who break the law. “Many of China’s chemical production facilities are
described as ‘semi-legitimate’ producers, which are allowed to make chemicals but unlicensed
to sell them to pharmaceutical companies,” reads a 2016 report by Sean O’Connor of the
U.S.– China Economic and Security Review Commission.
Being unlicensed doesn’t necessarily stop these producers from selling to pharmaceutical
companies, however. To further deceive the government, some companies set up “shadow
factories,” facilities shown to inspectors that are not actually where their drugs are made.
Fentanyl-precursor manufacturers, for example, can evade scrutiny by labeling their products
as industrial chemicals instead of pharmaceutical ones.
Few people seem to understand the laws governing the manufacture and sale of Chinese
chemicals. Long and complicated ordinances are enacted at the whim of the central
government, and then enforcement often falls to regional agencies, who may not fully
understand what Beijing has commanded or may have their own, competing interests.
Chemical companies manipulate the large amount of gray area to their own advantage to
reap profits.
How the Chinese government supports its rogue chemical industry
For more than a decade, China has been encouraging its chemical and pharmaceutical
industries by offering companies lucrative tax incentives, subsidies, and other direct financial
support. The government has devoted enormous resources to the task, and these incentives
have undoubtedly driven innovation and helped expand these industries and their exports. But
the rise of fentanyls and NPS has been a terrible side effect. Quietly, money intended to spur
legitimate innovation has gone to companies exporting deadly drugs that are killing tens of
thousands of Americans annually. It’s unclear how aware the Chinese central government is of
this. Neither China’s National Narcotics Control Commission, nor the Chinese embassy in
Washington D.C., responded to my requests for comment.
One method the government uses to promote its chemical and pharmaceutical industries is by
designating companies as New and High Technology Enterprises [NHTEs]. This is a critical
designation toward receiving financial incentives. “Since China’s new Enterprise Income Tax
Law took effect in January 2008, the country’s national and provincial governments have
implemented a series of tax incentives for [NHTEs],” reads a briefing by the Asian business
advisory firm Dezan Shira & Associates. “A hugely profitable industry in China, proactively
applying for the different subsidies, tax exemptions and government funding schemes can
significantly reduce a high tech company’s tax burden and improve its market position.”
It might seem strange to call these chemical and pharmaceutical companies “tech” companies,
but the term tech is used differently in China. “It’s not just those that make computers or chips
or semiconductors,” said Lucy Lu, research analyst for the Washington, DC–based Peterson
Institute for International Economics. “If you’re a chemical company and, say, invent some new
chemicals or new drugs, you will be considered a tech company in China.”
Other programs benefiting Chinese companies exporting illicit drugs include the Spark
Program, which according to a Chinese government website is “aimed at popularizing modern
technology in rural areas,” as well as something called the Innovation Fund, both of which are
administered by the Ministry of Science and Technology. This organization also administers
the Torch Program, which helps these companies by assisting with marketing and personnel
training, and in other areas. “In size, scale and commercial results China’s Torch Program,”
wrote the
Huffington Post, “is the most successful entrepreneurial program in the world. Of all the Chinese
government programs, the Torch Program is the one program that kick-started Chinese high-
tech innovation and start-ups.”
The Torch Program also helps establish special industrial zones, which seek to promote
Chinese businesses through subsidized land, subsidized rent, shared manufacturing
infrastructure, and other resources. “China has been very generous in building these industrial
parks as attractions for companies,” said Gary Hufbauer, a trade expert at the Peterson
Institute for International Economics. “It’s a nice break, certainly on the land, and maybe even
the building.” The benefits of operating in these zones can significantly impact a company’s
bottom line. “The high-tech zones have become a major engine to China’s economic growth,”
Zhang Zhihong, director of the Torch High Technology Industry Development Center, told
China’s state-run news agency Xinhua.
Many Chinese companies exporting dangerous drugs for illicit use are showered with
government benefits. One particularly egregious example is Yuancheng Group, which is located
in the city of Wuhan and sells huge quantities of fentanyl precursors. As shown in Fentanyl,
Inc., the government designated Yuancheng an NHTE in 2011, entitling it to preferential tax
policies and also making it eligible for various rebates and reimbursements related to research-
and- development efforts and staff training. Beginning in 2012 Yuancheng was sponsored for
three years by the Torch Program, and has also been a beneficiary of the Spark Program and
the Innovation Fund. It has also won government grants, and some of its sub-companies list an
address in a special industrial zone. All of this has taken place while Yuancheng has been, by
its own admission, selling fentanyl precursors all over the globe. Its clients include Mexican
cartels, American drug dealers, and many others. This is perfectly legal under Chinese law;
when one fentanyl precursor is banned in China, Yuancheng simply halts its sale and focuses
on others that remain unscheduled.
Another company selling fentanyls and NPS that was incentivized by the Chinese government
is 5A Pharmatech Co., led by Yan Xiaobing, a Chinese national who has been placed on the
U.S. Justice Department’s list of most prolific international drug traffickers. Indicted in
September, 2017, Yan, who is also based in Wuhan, stands accused of conspiring to
manufacture a host of NPS, including Flakka, N-bombs, synthetic cannabinoids, methylone,
fentanyl ,and fentanyl analogues, and then distributing them in the United States and twenty
other countries. China has
refused to extradite him to the U.S. 5A claimed to make legitimate chemicals for export, and to
work with large firms including Johnson & Johnson and Pfizer, but representatives from both
companies denied this. Nonetheless, 5A -- which is a subsidiary of Wuhan Livika Technology
Co., and until early 2016 was known as 9W Pharmaceutical Technology Co. – had the support
of the Chinese government. According to a company profile on Hubei Province’s official
website, the company was located in an economic development zone. (The company also
claimed to have received certification as an NHTE, but this could not be confirmed.)
It is possible that Communist Party officials don’t realize companies they support are exporting
illicit fentanyl products and other NPS. Then again, it’s possible that they do, considering that
the Chinese tax code directly encourages these exports.
This practice apparently stems from China’s desire to upgrade its pharmaceutical industry.
While the US pharmaceutical industry makes expensive, patent-protected, brand-name drugs,
China specializes in cheap generic drugs, which is why its legal, aboveboard chemical
revenue is smaller than America’s, despite greater output.
China is trying to change this, however. A countrywide initiative called “Made in China 2025”
seeks to upgrade the country’s manufacturing status, to move it up the “value chain,” using
policy changes and government investment. The Chinese pharmaceutical industry is a major
part of this initiative, and the government has moved to incentivize increased spending on
research and development, and to promote industry consolidation. The goal is to produce
higher-quality, more expensive medical drugs, for use at home and abroad.
One way China works to expand these exports is by offering tax reimbursements via the value-
added tax rebate, or VAT rebate. Companies are reimbursed for tax money they have already
paid in the process of making their products—for example, taxes they paid when they bought
the ingredients needed to make a certain chemical compound.
The VAT rebates go as high as 16 percent; a 16 percent rebate means the exporters receive a
full tax reimbursement. Not every exported chemical gets one, but thousands do, and the
rebates vary wildly. According to China’s State Administration of Taxation website, aspirin and
sildenafil
(the drug in Viagra) get no VAT rebates. Melamine, the industrial chemical used to adulterate
milk powder products that was linked to infant deaths in 2008—but which also has safe uses—
gets a 10 percent rebate. So does fentanyl. And beyond that at least ten fentanyl analogues—
including 3-methylfentanyl, which is not used for legitimate medical reasons, anywhere—get a
13 percent rebate. In September 2018, China announced it would raise VAT rebates on about
four hundred different products for export, from chemicals to semiconductors, in what Reuters
described as “a bid to boost prospects for shipments amid its trade war with the United States.”
Also in 2018, the VAT rebate for fentanyl was increased, from 9 percent to 10 percent. It was not
one of the four hundred products from the September announcement, and it is unclear when
exactly in 2018 this occurred, or whether it was also in response to the trade war.
China began issuing VAT rebates in 1985. It doesn’t explain why particular chemicals get the
rebates they do; one possibility is that products with a “value add” get higher rebates, while
generics get lower rebates or nothing. There is no doubt that if a particular chemical’s VAT
rebate rate is higher, companies are more likely to export it.
Among the beneficiaries of these rebates are legitimate Chinese companies legally
manufacturing fentanyl for medical use. Only three types of fentanyls are legally permitted to be
made in China for domestic medical use or export: fentanyl, sufentanil, and remifentanil. It’s
unclear why at least eight other fentanyl analogues get VAT rebates. And while it’s also unclear
how many Chinese companies exporting fentanyls or fentanyl precursors for illicit use are
receiving these tax rebates, the CEO of Yuancheng Group, which exports fentanyl precursors
that are used illicitly, says his company is included among them.
There is little doubt that China is undercutting its publicly stated goal of stopping the export of
dangerous drugs for illicit use. Besides encouraging their export through its tax code and high-
tech subsidies, it has been ineffective at ensuring such exports don’t end up in the wrong
hands.
“If China had a subsidy on lead, you’d probably see a lot more bullets coming out of China, and
that’s what’s happening here with the precursors. They’re just subsidizing whatever is a high-
value commodity, and in this case it just happens to be really potent synthetic opioids or opioid
precursors,” said RAND’s Bryce Pardo. “The Chinese government doesn’t have a good
capacity for regulating its own industry. At the same time, it wants to export and make as much
money as possible. They’re getting ahead of themselves and causing a lot of harm in the
process.”
Dr. Katherin Tobin, former Commissioner for U.S.–China Economic and Security Review
Commission, said my findings fit with a pattern of Chinese government activities that the
Commission has long been tracking.
“The primary incentive, particularly for local-level Chinese government officials, is to support
economic growth,” said Tobin. “Therefore, it is likely Chinese regulators and policymakers have
chosen to look the other way regarding the production and export of fentanyl products. This
incentive structure persists despite the Chinese government’s repeated promises to crack down
on narcotic flows, a sign that Beijing is guilty of gross negligence in enforcing its chemical
regulations, bad faith in its negotiations with the United States, or both.”
How to stem the flow of illicit synthetic opioids from China

The U.S. says stemming the flow of illicit synthetic opioids and other NPS from China is a top
priority. U.S. Senators Chuck Schumer and Tom Cotton, who are targeting fentanyl produced in
China, wrote recently in USA Today that legislation they proposed would “require the imposition
of sanctions on criminal organizations that traffic these drugs into the United States, the
financial institutions that assist them and the drug manufacturers that supply them. The
legislation would also urge diplomatic efforts with U.S. partners to establish multilateral
sanctions against foreign traffickers, and authorize new streams of funding across the U.S.
government to combat opioid trafficking.” It would also “allow the U.S. to apply pressure to the
Chinese government to boost regulatory enforcement on pharmaceutical companies that
create and distribute the drug.”
Such actions could be beneficial in numerous ways, including potentially cutting into illicit drug
manufacturers profits; I’ve found that these organizations sometimes stash money in American-
owned banks or banks owned by countries with U.S. partnerships, for example.
Greater regulatory enforcement by China is also critical. President Xi Jinping has sought tighter
regulations in drug production and increased penalties for rogue actors, and in March 2018 it
was announced that the Chinese FDA was being reorganized to strengthen its oversight
capabilities. But more action is needed.
A sticking point has been China’s lag behind the U.S. in scheduling dangerous fentanyls and
NPS, often for years. For this reason the U.S. lobbied China to “blanket ban” fentanyls, similar
to America’s Federal Analogue Act. Signed by President Reagan in 1986, this law specifically
targeted fentanyls and NPS (then known as designer drugs) by making anything deemed
“substantially similar” to schedule I or II psychoactive drugs—in either effect or structure—
automatically illegal from the moment of creation. The effectiveness of this law has been
debated; it is difficult to enforce, and some scientists say it inhibits their ability to do scientific
research and develop effective new medicines.
But President Trump got his wish when, on May 1, 2019 China scheduled all fentanyl
analogues, including those not yet created. This is the most far-reaching, and potentially
significant, type of action China has taken in this realm. It is far from a panacea -- China has
difficulty enforcing its drug laws -- and yet it may be effective, considering that, in the past,
shortly after China schedules a specific chemical, U.S. seizures of that chemical drops,
something that is not true when a chemical is scheduled in the U.S. or internationally. Further,
a large percentage of the dangerous recreational chemicals made in China are synthesized
not by cartels or criminal organizations, but by companies operating legally. The leaders of
these organizations often follow the letter of the law.
The effectiveness of China’s “blanket ban” of fentanyl analogues should be judged by the
amount of seizures of novel fentanyls in the U.S. in the coming years. If the numbers drop
significantly, the blanket ban should be considered a success. However, even if China
succeeds in substantially lowering its illicit NPS output, the industry may simply migrate to
other countries, like India.
There is much more the U.S. can do to effectively stem the flow of illicit synthetic opioids and
other NPS from China. My suggestions:
1) Pressure China to eliminate tax rebates, grants, and subsidies to companies exporting illicit
fentanyls, fentanyl precursors, and NPS.
Beyond its illicit uses, fentanyl is an important medical drug. For this reason it is fine for
legitimate Chinese companies to receive VAT rebates for exporting it and other chemicals used
in medical settings. But it is outrageous that China offers these tax rebates for at least eight
other fentanyls that are illegal for Chinese export, including chemicals that have never been
used for legitimate medical reasons, anywhere.
And it’s not just VAT rebates. As detailed above, Yuancheng and other companies selling
fentanyls, fentanyl precursors, and NPS receive other subsidies and grants from the Chinese
government, including from programs run by China’s Ministry of Science and Technology.
These are clear and obvious examples of China encouraging the production of dangerous
drugs that are killing Americans, and the U.S. should pressure them to cease doing so.
2) Schedule more fentanyl precursors and pressure China to do the same.
Making fentanyl from scratch is a complicated process, but making it from precursors is a fairly
simple one. Mexican cartels, for example, tend not to have access to trained chemists capable
of making it from scratch, and thus tend to import the precursors from China.
Controlling the flow of fentanyl precursors, then, is of critical importance, and yet currently
Chinese companies are able to export them to anyone for illicit use, with no controls
whatsoever.
According to the DEA, there are sixteen different known precursor chemicals that can be used to
make fentanyl. Only two are scheduled, NPP and 4-ANPP. The U.S. scheduled NPP in 2007,
and 4-ANPP not long after, but they weren’t scheduled in China until November, 2017, ten
years later. As a result, when the current fentanyl crisis began to gain speed in the 2010s,
Chinese companies were well-positioned for legal NPP and 4-ANPP sales, with virtually no
oversight from the Chinese government.
To this day, the rest of the known fentanyl precursors remain unscheduled, not just in China but
in the U.S. and worldwide. And so Chinese companies are able to sell them, for illicit use, with
no consequence. Since 2017, for example, Yuancheng Group has been pushing fentanyl
precursors known as N-phenylpiperidine-4-amine and 4-anilino-1-benzylpiperidine.The
company’s salespeople offer to send these precursors in phony packaging to fool U.S.
customs. -
- purporting to contain, say, banana snacks or dog food.
Much has been made over China’s scheduling of fentanyl analogues, but their scheduling
of fentanyl precursors could potentially have an even larger impact. They are unlikely to do
so, however, unless the precursors are first scheduled in the U.S. and internationally.
3) Pressure China to allow the DEA and the FDA to do their work.
Sean O’Connor’s 2017 U.S.–China Economic and Security Review Commission report noted
“several recorded instances of Chinese law enforcement and drug regulators delaying visa
approvals for FDA officials and deleting laboratory test records.” The DEA is also sometimes
not allowed to do its work in China. According to Katherine Tobin, former member of the U.S.–
China Economic and Security Review Commission, China’s pledge to control fentanyls are
meaningless without enforcement. “The Chinese government’s promises have not been fulfilled
until U.S. officials and law enforcement on the ground in China—such as the DEA and FDA—
observe these controls being implemented in a manner consistent with Beijing’s pledge to
crack down on flows of fentanyl, as well as fentanyl analogues and precursors.”
It’s not just the American agencies, however. China’s own drugs- and medicine-regulating
agencies need to be properly staffed and funded, before there can be any hope of
consistent enforcement of China’s drug laws.
4) Promote harm reduction at home
China believes the U.S. bears a great deal of responsibility for the opioid crisis, considering the
overwhelming demand for opioids here. Indeed, predatory tactics by U.S. pharmaceutical
companies and failed U.S. policies have helped create the world’s largest market for opioids.
Therefore, even if the above tactics are effective in diminishing China’s export of illicit fentanyls
and NPS, if American demand for these drugs does not subside, the production will simply shift
to other countries.
According to nearly every drug and addiction expert I spoke with for Fentanyl, Inc., decades of
War on Drugs policies have failed to protect American users from overdose and death.
Fortunately, America’s political leaders are beginning to believe that care and treatment are
more effective than incarceration, as shown by President Trump’s signing of a pair of 2018
bills: one providing for better opioid treatment options, and another focused on criminal justice
reform, which reduces some drug sentences. However, the criminal justice reform law
specifically
excluded fentanyl offenders -- which was a mistake -- and many politicians continue to make the
dubious distinction between users and dealers, considering that many addicted users become
dealers simply to support their habits. “These aren’t two distinct sets of people,” Maryland public
defender Kelly Casper told Mother Jones. “They want to charge all of these people with drug
dealing, when in fact the core of the problem is that they’re users.
Advocates of harm reduction believe that drug use is inevitable, and that we must work to
make it as safe as possible. Curbing the tide of U.S. opioid deaths will require sweeping new
harm reduction-focused public-health initiatives, including much-increased levels of funding for
treatment programs like medication-assisted treatment. First responders, police, firefighters,
and others who encounter overdose victims need to be better supplied with naloxone, which
should be available and affordable to everyone.
Also critical is increasing users’ access to drug-checking kits. These are inexpensive tests that
inform users what’s in their drugs, and can immediately detect the presence of drugs like
fentanyl. These tests, made by companies like Bunk Police, serve as a form of prevention and
save lives. A 2017 study carried out in Vancouver, British Columbia found that those who
discover fentanyl in their drugs are ten times likelier to lower their dose, which makes them 25
percent less likely to overdose. “Drug users are far more rational than we make them out to be,”
said Dan Ciccarone, a University of California, San Francisco doctor who is an expert in this
field, told The Cut. Also critical is overturning the Illicit Drug Anti-Proliferation Act of 2003,
known informally as the RAVE Act, which effectively inhibits concert organizers from allowing
drug-checking at their events and festivals. Many young people die of drug overdoses at these
events every year, lives that could be saved if this legislation were overturned.
Information campaigns about fentanyl and NPS are also critical. Rather than simply preaching
“Just Say No,” users must have reliable, accurate information, to know the dangers of hyper-
potent new synthetic drugs like fentanyl and K2/Spice (also known as synthetic cannabinoids),
compared to traditional, plant-based drugs like heroin and marijuana. It’s one thing to
experiment, but when people know that the drugs in their hands could kill them instantly, they’re
more likely to use caution.
Information campaigns are vital at schools, hospitals, youth centers, treatment centers, and
elsewhere. During my reporting I visited the suburbs of Dallas, Texas, which has been hit
especially hard by these new drugs. A substance abuse counselor there named Grace
Raulston told me that the K2 menace in the area was significantly reduced after an information
campaign was disseminated. “The biggest thing we’re fighting now is education. The majority
of people out there—parents especially—do not have any idea the scope of the problem we’re
dealing with today,” said Courtney Pero, a narcotics sergeant from Plano, Texas.
Parents need to believe that an overdose could happen to their kid, because it can happen to
any kid.
OPENING STATEMENT OF DR. JENNIFER BOUEY, TANG CHAIR IN CHINA POLICY
STUDIES, RAND CORPORATION; ASSOCIATE PROFESSOR, GEORGETOWN
UNIVERSITY’S SCHOOL OF NURSING AND HEALTH STUDIES
COMMISSIONER TALENT: Thank you. Dr. Bouey. Am I pronouncing your name

correctly?
DR. BOUEY: Bouey, yes.
COMMISSIONER TALENT: Bouey, okay. Go ahead. Thank you.
DR. BOUEY: Senator Talent, Commissioner Wessel, and distinguished members of
the U.S.-China Economic and Security Review Commission, thank you for inviting me to
testify before you on China's activities on global health.
My testimony will have three sections. First, I will give a brief overview of China's
global health assistance activities and their motivations. Secondly, I will summarize U.S.-
China's collaborations of health and their differences in their approach. And lastly, I will give
some recommendations.
China's current global health assistance can be grouped into five categories: Chinese
medical team; the hospital, clinic construction; medicine and medical equipment donation;
health related humanitarian aid and disaster relief programs; and health professional training
programs.
The Chinese medical team and hospital construction have the longest history. Dating
back to 1959, China built a TB hospital for Mongolia. And back in 1963, they dispatched their
first medical team to Algeria during the war.
Over the past years, China has built more than 150 hospitals, dispatched more than
25,000 medical professionals to 69 countries. These activities help to fill in some of the gaps
when there is a severe lack of health professionals and basic health infrastructures in resource
poor areas.
And more recently, China has impressed the global health community with its timely and
unprecedented response to the 2014 and '16 Ebola pandemic in West Africa. China's donation
of the anti-malaria medicine and vaccines has also peaked during 2010 and '12.
Even though China's global health assistance activities are often overshadowed by the
Western developed countries' activities, no one can deny the significance of China's fast
transformation from a major recipient of foreign aid to a critical provider of resources.
One may ask why China is scaling up its global health activities. In my opinion, I put
into three reasons. First, China felt that it had something unique to offer. A developing country
not long ago, they were in the same position as the recipient countries now. So they believe
that China's success in domestic public health can be easier translated into other developing
countries.
Secondly, like many other countries in this era of globalization, China realized the impact
of pandemic on their national economy. In 2003, SARS cost China 25 billion USD in
interrupted international trade and productivity. In 2016, the first case of yellow fever was
diagnosed -- this is the first case in Asia, was diagnosed in Beijing. The patient was a Chinese
migrant in Africa.
So at the time when there are over a million Chinese migrants in Africa and over
100,000 Africans in China, China wants to strengthen its pandemic preparedness capacity and
protect its own economic activities and investment.
And lastly, China has always considered global health assistance as a soft power and
wants to be part of the global governing.
So what are the U.S.-China's collaboration on global health? Well, the majority of the
collaboration so far has been focused on the infectious diseases and within China. GAP, the
Global AIDS Program, helped set up the first U.S. CDC office in Beijing. And in 2004, the
Chinese National Influenza Center and the U.S. CDC initiated the collaborative agreement to
build capacity in influenza surveillance in China. In my view, this is a long-term collaboration
that provided sustainable data sharing and research exchange and benefits both countries as
well as WHO and should be considered as a model for the future collaborations.
In terms of collaborations in developing countries, so far there are not so many.
Under the previous administration, U.S. CDC has reached out to China's Chinese CDC and
to jointly sponsor five CDC centers in Africa. This is, as I see, the start of this type of
collaboration.
Otherwise, U.S. and China's programs mostly parallel in these countries and they're quite
different in terms of philosophy and approach. On paper, for example, China's aid to Africa is
pitched as on a peer-level assistance. China does not impose any political or economic
conditions for the recipient countries.
On a technical level, the U.S. global health activity favors a vertical approach that
focuses on a few infectious diseases. China's global health aid tends to be more like a
horizontal approach and building infrastructures to create a system-wide expansion of access
to medicine. So these activities and their good coordination can be complementary to each
other.
So my recommendations for the U.S. policymakers, well, in general, the global health
community considers China's contributions so far as positive. Most of the criticism on China's
activities are the lacking of transparency and the coordination. I suspect these problems were
caused partly by the severe under staff and the lack of capacity at a central government level in
China. I hope U.S. can collaborate with Chinese Government on global health capacity
building, especially on personnel and project management, cultural and language integration,
and program impact evaluation.
It will be also helpful to encourage Beijing's continued collaboration with
multi-lateral organizations and help integrate their global health activities with other global
initiatives.
In terms of other risks, as my fellow panelists have highlighted, China has become the
largest manufacturer of health products, providers of pharmaceutical ingredients, and the
producer of vaccines in the world. It is critical that Chinese Government strengthen the
regulatory structure to ensure the quality control of these products.
I would encourage continued collaboration between the U.S. FDA and China FDA and
hope to help accelerate the process of adopting the consistent best practice. Capacity building
in biomedical regulatory science, similar to that for the global health professionals, is an urgent
need in China.
And finally, since we talked about fentanyl and China's drug policy, I would like to point
out two successful cases in the past and see what we can learn from them. One is China's
tobacco control. For many years, Chinese Government were reluctant to work to act on the
tobacco control because of the worry of the lost revenues from the tobacco industry and
WHO's Framework Convention on Tobacco Control eventually changed the government's
attitude.
So what I think we can learn here is if we can frame fentanyl crisis not just as a U.S.
problem or U.S.-China problem, but as a global issue on synthetic drugs, similar to the
methamphetamine and ketamine epidemic in Asia and codeine and tramadol in Africa, it will be
easier to engage Chinese Government if we invite them to be part of alliance to have -- to fight
against the synthetic drug crisis.
And finally on building a surveillance system and data-sharing system, I'll go back to the
successful case of the influenza collaborations between U.S. and China. And given the time, I'll
stop here.
PREPARED STATEMENT OF DR. JENNIFER BOUEY, TANG CHAIR IN CHINA POLICY
STUDIES, RAND CORPORATION; ASSOCIATE PROFESSOR, GEORGETOWN
UNIVERSITY’S SCHOOL OF NURSING AND HEALTH STUDIES
Testimony
Implications of U.S.-China Collaborations

on Global Health Issues
Jennifer Bouey
CT-516
Testimony presented before the U.S.-China Economic and Security Review Commission on July 31, 2019.
For more information on this publication, visit www.rand.org/pubs/testimonies/CT516.html
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Implications of U.S.-China Collaborations on Global Health Issues
1
Testimony of Jennifer Bouey
2
The RAND Corporation
Before the U.S.-China Economic and Security Review Commission
July 31, 2019
T
hank you, Senator Talent and Commissioner Wessel and distinguished members of
the U.S.-China Economic and Security Review Commission, for inviting me to testify
today. My testimony on China and global health will have five sections: The first
provides a brief history of China’s engagement with global health assistance in the pre–
market reforms era (1950s to 1980s). The second summarizes China’s current global health
activities and their impact (1980s to the present). The third describes the Chinese
government’s motivations and future plans for global health. The fourth focuses on past U.S.-
China collaborations in global health and their different strategies. The fifth and the final
section contains suggestions for actions U.S. policymakers could take to address the
challenges associated with China’s global health activities.
China and Global Health in the Pre–Market Reform Decades (1950s- 1980s)
If we accept the goals for global health that Robert Beaglehole and Ruth Bonita suggested
3
in 2010 as “actions for promoting health for all,” then China’s most significant contribution to
global health indexes is arguably its own success in the domestic public health program that
reduced mortality, increased life expectancy, and built a comprehensive health system for 1.3
billion Chinese. China’s growth in life expectancy at birth from 35 years in 1949 to 65.5 years in
1
The opinions and conclusions expressed in this testimony are the author’s alone and should not be interpreted as
representing those of the RAND Corporation or any of the sponsors of its research.
2
The RAND Corporation is a research organization that develops solutions to public policy challenges to help make
communities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit,
nonpartisan, and committed to the public interest.
3
Robert Beaglehole and Ruth Bonita, “What Is Global Health?” Global Health Action, April 6, 2010.
4
1980 ranks as among the most rapid sustained increase in documented global history. During
this time, China embedded its public health improvement goals in political campaigns and
achieved its goals in the expansion of maternal and child health services, immunization,
5
infectious disease reduction, primary health care services (e.g., Barefoot Doctor Program ), and
general improvements in water, sanitation, and hygiene. Many believed that the significant
improvement in health, in partnership with a strong primary education, prepared the workforce
for the massive transformation of economy and society in 1978 and laid the foundation for
6
China’s economic miracle in the past three decades. China’s experience during these years
also helps to inform its strategies for foreign aid programs.
In the early 1950s, as a new and politically isolated country, China had limited activities on
foreign aid. Egypt was the first African country to establish the ambassadorial diplomatic
7
relationship with China in 1956. China’s premier, Zhou Enlai, then visited Africa three times
between 1963 to 1965 and announced China’s “Five Principles in Foreign Relationship” and
8
“Eight Principles in Foreign Aid.” China’s global health assistance programs started in this
context as it deployed its first medical team to Algeria following the Algerian War and the flight
9
of the country’s trained health professionals in 1963. In the following years, China sent medical
teams to Zanzibar (1964), Laos (1964), Somalia (1965), Yemen (1966), Congo (Brazzaville,
10
1967), Mali (1968), Mauritania (1968), Vietnam (1968), and Guinea (1968). Many attributed
the success of China gaining a seat at the United Nations (UN) in 1971 to the support from the
delegates of African countries. In 1972, China joined the World Health Organization (WHO) and
11
continued to expand its Chinese Medical Teams (CMTs) to 28 countries. In 1978, as WHO
announced the Declaration of Alma-Ata to highlight the importance of primary care in the new
global paradigm for health care, the Chinese health care system’s rural Barefoot Doctor
12
Program was featured.
4
Kimberly Singer Babiarz, Karen Eggleston, Grant Miller, and Qiong Zhang, “An Exploration of China’s Mortality
Decline Under Mao: A Provincial Analysis, 1950–80,” Population Studies: A Journal of Demography, Vol. 69, No.
1, 2015.
5
Officially instituted in 1968, the program sought to shift domestic health policy away from urban centers to
severely understaffed rural areas by educating and empowering locals with sufficient medical education to act as
basic primary care practitioners. At the program’s height, it had created roughly 1 million new paramedical workers,
dramatically increasing access to health care across the country.
6
Judith Banister and Xiaobo Zhang, “China, Economic Development and Mortality Decline,” World Development,
Vol. 33, No. 1, 2005, pp. 21–41.
7
Chu Shulong and Jin Wei, “时事出版社 [China’s Foreign Strategy and Policy],” in China’s African Policy [中国
对非洲政策], Shishi Publisher, 2008, p. 268.
8
W. A. C. Adie, “Chou En-lai on Safari,” The China Quarterly, No. 18, 1964, pp. 174–194.
9
Huang Yangzhong, “Pursuing Health as Foreign Policy: The Case of China,” Indianan Journal of Global Legal
Studies, Vol. 17, No. 1, 2010.
10
Li Anshan, “李安山：中国援外医疗队的历史、规模及其影响 [History and Impact of the Chinese Foreign Aid
Programs],” Jingluecn, January 1, 2013 (http://www.jingluecn.com/zt/zhongguozaifeizhou/2013-01-07/324.html).
11
Georgetown University Initiative for U.S.-China Dialogue on Global Issues, U.S.-China Dialogue on Global
Health Background Report, Washington, D.C., 2017.
12
T. Hesketh and W. X. Zhu, “Health in China: From Mao to Market Reform,” BMJ, May 24, 1997.
Less visible but no less significant in China’s early global health aid was the role of hospital
construction. China’s first hospital construction project was building a 100-bed tuberculosis
13
sanatorium in Mongolia in 1959. This less-known assistance program signaled the start of
infrastructure building as a critical part of China’s global health aid. In 1969, China built a
hospital in Tanzania as part of its growing involvement in the region. In much of Africa and
other parts of the world, however, these efforts were overshadowed by the greater health
assistance provided by the United States, the Soviet Union, and their allies.
Another Chinese contribution to global health during this period was the discovery of the
antimalarial drug artemisinin through a military research program. This top-secret effort was
initiated to help North Vietnamese troops suffering from malaria in their jungle warfare during
14
the Vietnam War. Artemisinin later gained WHO’s recognition as an antimalarial in 1993 and
eventually earned a Nobel Prize for Medicine in 2015 for the Chinese scientist, Dr. Tu Youyou,
who discovered the medicine. Nowadays, artemisinin is one of the few medical innovations from
China that has been approved by WHO. In East Africa, artemisinin combination therapy (ACT),
15
became the preferred treatment for malaria ten years ago.
China’s Current Global Health Activities (1980s to Present)

Two government white papers on China’s overseas development aid, published in 2011 and
2014, did not contain detailed data on development health aid (DHA). A few research papers on
China’s DHA made inconsistent estimates using data mostly from online or unpublished
records. Perhaps the understanding of the scale and scope for each DHA activity is more
meaningful.
Currently, China’s DHA activities can be grouped into the following categories: CMTs, hospital
construction, pharmaceutical and equipment donations, public health and health security
16
programs, and health professional training programs. According to a forthcoming book, since
1963, China has sponsored and built more than 150 hospitals in foreign countries, its CMT
program cumulatively dispatched more than 25,000 medical professionals to 51 African
counties
and provided health care for more than 280 million patients, its artemisinin donations reached
40 million people outside China, the international emergency humanitarian response teams
reached out more than 60 times, and more than 20,000 foreign health professionals were
17
trained.
Chinese Medical Team Program

The primary goals of the CMT program are to provide expert medical services to the host
9
population and to train local health care professionals on-site. A bilateral agreement between
13
Wang Chen, Chinese Strategy in Health Aid, Beijing: International Economic and Trade Collaborative Research
Center, Chinese Ministry of Health, in press.
14
Li Anshan, Chinese Medical Cooperation in Africa: With Special Emphasis on the Medical Teams and Anti-
Malaria Campaign, Uppsala, Sweden: Nordic Africa Institute, 2011.
15
Chen, in press.
16
S. Chen, M. Pender, N. Jin, M. Merson, S. Tang, and S. Gloyd, “Chinese Medical Teams in Africa: A Flagship
Program Facing Formidable Challenges,” Journal of Global Health, Vol. 9, No. 1, 2019.
17
Chen, in press.
China and an aid recipient country on sending a CMT is usually first processed by China’s
National Health Commission. The agency will then ask a designated provincial government to
make decisions on the number of health professionals and their different disciplines for the
mission. Once in the host country, the teams are overseen by the Chinese embassy’s Economic
and Commercial Counselor’s office. Most teams consist of the health professionals with
necessary medical specialties, a team leader, a translator, and a chef. The size of the teams
ranges between a half dozen to more than 100 people, with an average of 20–30 members per
team. In 2017 alone, 1,059 Chinese health care workers served in long-term CMTs (rotations of
six months to two years) in 51 countries, helping address the gap in the global health
10
workforce. Although most of the CMTs were dispatched for routine clinical operations, China
also sent teams to perform specific advanced procedures, such as cataract surgeries, cleft lip
18
repair, and congenital heart disease surgeries.
The criticisms of the CMT program pointed out that the program has remained mostly
unchanged in terms of its organization and management for 60 years, with little internal or
19
external evaluation since its inception. CMTs also focus exclusively on clinical treatment
instead of combining clinical work with public health prevention programs or health care system
building. Suggestions have been made to centralize the demand and providers for CMTs
instead of letting individual provinces be the primary respondents, diversify and open the
selection of health professional at the national level, and align CMT program activities with the
local public health system, China’s other health aid programs, and the other international donor
20
programs.
Hospital Construction
China has carried out more than 150 foreign aid projects by building or upgrading clinics,
hospitals, antimalaria centers, medicine storage, medical centers and labs, and centers for
disease control. Between 2013 and 2017, China completed the initial planning of 50 heath care
facility infrastructure implementation projects, 70 percent of which were in Africa. In recent
years, hospital construction was often accompanied by local infrastructure development (roads
and
21
power generators) and donations of Chinese medical equipment and medicines.
One example is the 100-bed Sino-Congo Friendship Hospital completed in 2013 in
Brazzaville that provides general clinical services. The hospital, with over 300 staff and a 23-
member CMT, provides health care for a population of more than 200,000 people, half of whom
are farmers. The Chinese government contributed more than USD 6 million for the
construction. The hospital currently ranks among the top three public hospital in the capital
22
area. Similar Chinese government donation projects also included the Levy Teaching
Hospital in Lusaka,
18
“Chinese Doctors Perform Surgery upon Cleft Lip, Palate Patients,” The News, July 14, 2019
(https://www.thenews.com.pk/print/486214-chinese-doctors-perform-surgery-upon-cleft-lip-palate-patients).
19
S. Chen, M. Pender, N. Jin, M. Merson, S. Tang, and S. Gloyd, “Chinese Medical Teams in Africa: A Flagship
Program Facing Formidable Challenges,” Journal of Global Health, Vol. 9, No. 1, 2019.
20
Chen et al., 2019.
21
Chen, in press.
22
AIDATA, “China Contributes $6 Million for Construction of China-Congo Friendship Hospital,” undated
(https://china.aiddata.org/projects/30201).
Zambia and the Mazka Hospital near Kigali in Rwanda. Last year, construction of the first
private-funded Chinese hospital was launched as a part of the Belt and Road Initiative (BRI):
23
the Seychelles Afei Holding is backing a $30 million, 600-bed hospital contract in Ethiopia.
Critics have noted that, although this facility construction often filled gaps in critical
infrastructure, it is not always well integrated into the local health system. Whereas in China the
state might be able to use its authority to integrate the new infrastructure, more-decentralized
African health systems cannot typically do so. There were also concerns that China’s piecemeal
approach to supplying personnel and infrastructure cannot substantially contribute to the health
improvement of Africans. Ray Yip, the former director of the China Program at the Bill and
Melinda Gates Foundation, stated, “Those all represent a substitution approach. [The Chinese]
go to a hospital, they run the service for a year, and during that time people in the catchment
area benefit. But when they leave, there is not much left behind. So, it’s not a bad thing but in
terms
24
of impact, it’s relatively small.”
Health Professional Training Programs

In addition to infrastructure and CMT support, China also provides professional training,
especially in such medical specialties as obstetrics and gynecology (ob-gyn), surgery,
pathology, cancer treatment, neurology, Chinese medicine, trauma, and cardiac surgery. One
example is the China-Canada West Africa Cardiology Collaboration Program implemented in
Ghana in 2014. The program has trained dozens of cardiology doctors and nurses and raised
clinical capacity for countries in West Africa. One graduate conducted the first cardiac surgery
in Ghana. In addition to the clinical training, the program also helped organize the first
epidemiologic survey on cardiovascular disease risks in the region, which provided critical
evidence used by the health policymakers at Ghana’s Ministry of Health.
Public Health and Health Security Program Support

Eager to change the country’s damaged public health image associated with the initial
mishandling of the 2002–2003 severe acute respiratory syndrome (SARS) outbreak, the
Chinese government launched an unprecedented response to the Ebola epidemic in West
Africa in 2014–
On March 24, 2014, right after Guinea health authorities confirmed the presence of an
Ebola outbreak, the Chinese embassy sent warnings to Chinese nationals there. In early April,
the Chinese government provided Guinea emergency humanitarian aid and followed with
emergency assistance to Liberia and Sierra Leone. In August, China’s State Council mobilized
action across 23 ministries and departments, dispatching a CMT to West Africa days after
WHO declared Ebola a Public Health Emergency of International Concern. The Ebola team
deployed to West Africa was one of the largest CMTs, with about 1,200 clinicians, public health
experts,
23
“‘Silk Road’ Hospital Breaks Ground in Ethiopian Capital,” Xinhua, September 14, 2017
(http://www.xinhuanet.com//english/2017-09/14/c_136609571.htm).
24
Quoted in Ted Alcorn, “New Orientation for China’s Health Assistance to Africa,” Lancet, December 15, 2015.
25
Huang Yanzhong, “China’s Response to the 2014 Ebola Outbreak in West Africa,” Global Challenge, Vol. 1,
2017, e1600001.
and military medical officers. They opened a 100-bed treatment unit in Liberia and established
26
three field demonstration sites while providing free treatment. Within six months, China also
built a biosafety level-3 laboratory in Sierra Leone, transporting all construction materials in 87
27
days.
Domestically, China accelerated the development of Ebola diagnostic kits and medical
countermeasures. In November 2014, the Chinese Food and Drug Administration (FDA)
approved the test reagent developed by three Chinese firms, making China one of the few
countries that could produce diagnostic kits. One diagnostic test was approved by WHO in May
28
2015.
Although China’s overall humanitarian contributions to the 2014–2016 Ebola pandemic was
29
dwarfed by those from the United States and the United Kingdom, the Chinese government’s
efforts impressed the international community and may set precedent for China’s future
engagement in public health emergencies.
Another global health aid milestone is China’s contribution to the establishment of the
African Center for Disease Control (ACDC). ACDC was proposed by the African Union to help
Africa build capacity in pandemic surveillance and responses, including disease surveillance,
rapid responses, laboratory systems, information systems, and public health research. The
headquarters is in Addis Ababa, the capital of Ethiopia and the headquarters for the African
Union. The Chinese government signed the agreement to construct the ACDC headquarters
30
building on June 24, 2019. The new office of Global Health under the Chinese Center for
Disease Control and Prevention also sent public health experts to serve as technical advisors
and provide training at the ACDC headquarters.
Pharmaceutical Donations, Production, and Investment

According to the Chinese Ministry of Commerce, China has donated 38 million doses of
antimalarial medicine and USD 10 million worth of equipment to antimalaria centers in more
31
than 40 countries since 2006. From 2010 to 2012, China donated 60 batches of antimalarial
medicine, hepatitis A vaccine, and cholera vaccine. China’s donations peaked in 2012 and were
halted because of the concerns of the quality of the medicine, tied to a lack of brand recognition
and clinical trial evidence.
26
Christina Larson, “China Ramps Up Efforts to Combat Ebola,” Science, November 3, 2014.
27
Kun Tang, Zhihui Li, Wenkai Li, and Lincoln Chen, “China’s Silk Road and Global Health,” Lancet, Vol. 390,
No. 10112, 2017, pp. 2595–2601.
28
Tang et al., 2017.
29
Yanzhong, 2017.
30
Africa Centres for Disease Control and Prevention, “AUC and Government of China Sign Exchange of Letters of
Agreement for the Construction of Africa CDC Headquarters Building,” June 27, 2019
(http://www.africacdc.org/press-centre/news/93-auc-and-government-of-china-sign-exchange-of-letters-of-
agreement-for-the-construction-of-africa-cdc-headquarters-building-2).
31
Wang Chen et al., “中非卫生合作-国际发展援助理论的探索与创新 [Relationship Between Aid and
Development of African Healthcare and Public Health System],” in 中非卫生合作-国际发展援助理论的探索与创
新 [Sino-Africa Health Collaborations: Innovations in Global Development Assistant Theory], Beijing: Ren Min
Wei Sheng Publisher, 2015.
Even though artemisinin has been approved by WHO and ACT became the preferred
treatment for malaria in East Africa ten years ago, the appreciation of China’s donation of
antimalarial medicine was hampered by counterfeit medicines resulting from regulatory failure
in East African countries and unscrupulous business practices that flooded the markets with
fake drugs. As the journalist Kathleen McLaughlin reported in 2013, “The deadliest problem
remains counterfeiting and fakes, risking lives and threatening to kill China’s potential for real
32
medical aid in Africa.”
China is also the world’s largest provider of active pharmaceutical ingredients (APIs) for the
production of antiretroviral treatment (ART) HIV medicine. In 2010, 873 tons of APIs were
produced in China, but only 1.9 percent were used in China for ART medicine production. The
33
majority of the APIs were exported to pharmaceutical manufacturers outside China. Currently,
only a few medicines and testing kids from China for HIV and malaria were approved by the U.S.
FDA or WHO. Even though China produces a sufficient supply of 48 vaccines for 28 diseases
for its 1.3 billion population, only one vaccine (Japanese encephalitis) has been prequalified by
WHO.
The lack of international qualification for Chinese medical products is partly attributable to
the fragmented Chinese pharmaceutical sector. Researchers estimate there are 5,300 to 7,000
34
local manufacturers, each with a small share of the Chinese domestic market. The market,
however, is the second largest in the world, grew at a compound annual rate of 16 percent
35
between 2010 and 2014, and is forecasted to grow 9.1 percent between 2015 and 2019. The
market is currently dominated by generic medicines without patent protection, and many
companies have a varying degree of API business mixed in with formulation business, conduct
both a distribution and a manufacturing business, and sell both traditional Chinese medicines
and Western medicines. The reliable data are often associated with supply chains for hospital
sales of prescription drugs in the top-tier cities and large hospitals. Those that provide supply
36
only for smaller cities tend to have little or unreliable data. The government has been seeking
to consolidate the pharmaceutical sector and increase the average size of firms to support
quality inspection and improvement. The latest national recommendation for the 13th Five-Year
Plan specifically aimed to have all medicine on the National Essential Drug List go through
37
bioequivalence testing by 2020.
China is the largest manufacturer of vaccines in the world, producing 1 billion doses each
year—about 20 percent of the global supply. Currently, the majority of the vaccines produced in
32
Kathleen McLaughlin, “Fake Fake Drugs from China: What’s Stopping a Cure for Malaria in Africa?” Atlantic,
June 11, 2013 (https://www.theatlantic.com/china/archive/2013/06/fake-fake-drugs-from-china-whats-stopping-a-
cure-for-malaria-in-africa/276750/).
33
McLaughlin, 2013.
34
Rachel Lee and Lawton Robert Burns, “China’s pharmaceutical sector,” in Lawton Robert Burns and Gordon G.
Liu, eds., China’s Healthcare System and Reform, New York: Cambridge University Press, 2017.
35
International Trade Administration, “2016 Top Markets Report Pharmaceuticals: Country Case Study,” 2016
(https://www.trade.gov/topmarkets/pdf/Pharmaceuticals_China.pdf).
36
Lee and Burns, 2017.
37
“重榜：医药工业十三五规划完整版 [Chinese National Recommendation for the 13th Five-Year Plan (2015–
2020)],” Sina, November 8, 2016 (https://med.sina.com/article_detail_103_1_14074.html).
China supply the domestic market, contributing to China’s record-low immunization expenditure
per capita ($20 per person in 2009). In 2011, China passed the WHO vaccine regulatory
assessment, which allowed Chinese suppliers to qualify for UN procurement. In 2013, the WHO
prequalification of the Japanese encephalitis vaccine licensed by China’s FDA was another big
step forward for China being competitive in the global supplier market. Dr. Lance Rodewald, the
head of WHO’s Expanded Programme on Immunization (EPI) in China, commented that the
news was “really terrific, as they have made it possible for the United Nations and other
agencies to procure life-saving vaccines for countries without the capacity to make high quality
38
vaccines or the resources to purchase them.”
However, the hope for a fast and widespread vaccine prequalification may prove to be
unrealistic because of the lack of incentives for Chinese manufacturers. Many would rather
focus on the domestic market than invest in a lengthy and expensive prequalification process.
The Japanese encephalitis vaccine prequalified by WHO succeeded only after years of wide-
39
ranging technical support from PATH, with funding from the Bill and Melinda Gates
Foundation.
In recent years, the Chinese government has encouraged Chinese pharmaceutical
enterprises to invest in Africa. In 2017, Liaoning-based Neusoft Medical Systems signed a deal
with the Tanzanian government to build a medical equipment manufacturing facility, the largest
40
in Africa. In doing so, China is hoping to invest in the long-term market in Africa and
capitalize on vertical integration with the Chinese suppliers of APIs—that is, the factories will
obtain
Chinese APIs without additional payment before the production. The commitment of Chinese
API supply will help small African manufacturers reduce preproduction cost and become more
competitive.
Motivations and Vision

Even though China’s global development assistance was historically overshadowed by the
United States, United Kingdom, Japan, and other Organisation for Economic Co-operation and
Development (OECD) countries, no one can deny the significance of China’s transformation
from a recipient of foreign aid to a critical provider of development resources in the Global
South. A 2017 analysis showed that China had emerged as an important participant in global
health, serving as a source of overseas development assistance and DHA, sharing concerns
about cross-border infectious disease threats, joining in global health governance, and
41
participating in global sharing of knowledge and technology. To understand China’s plan for
global health, we
can first review China’s motivations in the historical context.
China’s early external assistance programs in the 1950s to 1980s were clearly motivated by
finding global political partners when facing the pressure of perceived U.S. containment and
38
Quoted in World Health Organization, “China Enters the Global Vaccine Market,” Bulletin of the World Health
Organization, Vol. 91, 2014, pp. 626–627.
39
PATH is a global nonprofit health organization aims to provide health equity.
40
“Tanzania: Govt Enter Pact With Chinese Firm to Build Hospital Equipment Factory,” September 18, 2017
(https://allafrica.com/stories/201709190237.html).
41
Tang et al., 2017.
competing with Taiwan for diplomatic recognition. China’s total foreign aid amounted to 6.9
42
percent of its GDP in the last years of Mao’s era. After a relatively quiet period during the
1980s and 1990s, when China received global donors’ assistance in its own economic reform
and development, China reinitiated its foreign aid program in the mid-1990s. China’s foreign aid
in this later era was designed to pursue common economic development and was overseen by
the Ministry of Commerce. In 2000, China hosted the first Forum on China-Africa Cooperation,
a new multilateral venue that became the main platform for cooperation between Beijing and
African partners. In recent years, China has been aware of the skeptics and criticisms from
international societies on the lack of transparency and coordination among its foreign aid
projects.
In this context, several specific reasons for China’s current increasing contributions to global
health emerge.
Pandemic and National Security

Like other countries in the era of globalization, China realized the outbreaks of infectious
disease and increased global mobility have posed increasing challenges to global health
security. The 2002–2003 SARS pandemic and the provincial governments’ mishandling of the
early cases is still a fresh memory of many Chinese officials and public health workers. SARS
—a deadly and highly contagious virus-borne disease—originated in southern China. For three
months, the local government denied the epidemic, causing the deadly virus eventually to
spread to 37 countries. This resulted in more than 8,000 infections and 775 deaths, cost China
$25.3 billion from the interrupted international trade and productivity, and slowed its GDP
43
growth by 1–2 percent in 2003. In 2016, China announced its first imported yellow fever case
associated with a 32-year-old Chinese citizen who had worked in the Luanda Province, Angola,
since 2009. The
patient developed a fever and chills on March 8, 2016 (day 1), Beijing time and returned to
Beijing on March 10, 2016 (day 3), after 22 hours of traveling. He was admitted to the intensive
care unit at an infectious disease hospital in Beijing and died on day 9, despite an aggressive
44
treatment. This first yellow fever case in Asia, which originated from an outbreak of yellow
fever in Angola, confirmed China’s pandemic concerns, particularly at a time when the scale of
China-Africa trade and travel volume had been rapidly increasing. With 1.1 million members of
Chinese diasporas in Africa and 100,000 African migrants among many other immigrants in
45
China, China has legitimate concerns about pandemics’ impacts on its own national security.
42
Tang et al., 2017; Lin Shi, 当代中国的对外经济合作 [Contemporary China’s External Economic Cooperation],
Beijing: Chinese Social Science Press, 1989, p. 68.
43
Wen Hai, Zhong Zhao, Jian Wang, and Zhen-Gang Hou, “The Short-Term Impact of SARS on the Chinese
Economy,” Asian Economic Papers, Vol. 3, No. 1, 2004, pp. 57–61.
44
Zhihai Chen, Lin Liu, Yanning Lv, et al., “A Fatal Yellow Fever Virus Infection in China: Description and
Lessons,” Emerging Microbes & Infections, Vol. 5, No. 1, 2016.
45
United Nations, International Migrant Report 2017: Highlights, New York, 2017.
Protecting China’s Economic Activities and Investments
Another global health concern is pandemics’ impact on China’s economy, given its
increasing dependence on active global trade and developments. BRI is committed to the
financing and implementation of large infrastructure projects in many countries in Africa, Latin
America, and Asia. Many BRI projects attract international and domestic migrants and
concentrate a large quantity of labor and capital in small areas that traditionally have high
disease burdens and an underdeveloped health care system. Protection against disease risks
46
and pandemics will be essential to achieve BRI’s economic goals. Therefore, although BRI
is primarily economic, there are important health dimensions. In a 2017 BRI meeting to
promote health cooperation, a Beijing communiqué was adopted by more than 30 health
ministers.
Seventeen bilateral memoranda of understanding were signed between China and BRI
countries and agencies, such as UNAIDS (Joint United Nations Programme on HIV/AIDS),
Global Fund, and Gavi, the Vaccine Alliance. The agreement covered health security, maternal
and child health, health policy, health systems, hospital management, human resources,
medical research, and traditional medicine. The Chinese government plans to launch four
networks—public health, policy research, hospital alliance, and health industry—to promote
47
global health collaborations along its BRI projects.
Improving China’s Global Image

As the antiglobalization sentiment rose in many Western countries and the traditional global
DHA funding from the United States and its allies plateaued, China’s overseas aid budget grew
48
between 2013 and 2015, and China is poised to become a vital global donor. In a way, the
recent establishment of a department of global health at China CDC and China International
Development Cooperation Agency (CIDCA) was China’s response to some of the international
49
criticism of its global development programs. The agencies were tasked to lead reforms to
improve the efficiency and effectiveness of China’s foreign aid by reinforcing central
government control and providing coordination of its historically decentralized foreign aid
activities (such as province-based CMT and friendship programs). This transition will also
include the growing differentiation of foreign aid programs (coordinated by CIDCA) from the
commercial financing packages (under Ministry of Commerce). China also seems to want to
counter some of the foreign concerns about the financial and environmental risks of BRI
infrastructure programs (rogue donor and debt trap diplomacy) by starting to carefully integrate a
greater range of socially conscious projects in environmental protection, public health, and
50
education.
46
R. Horton, China’s Rejuvenation in Health, Lancet, Vol. 389, 2017.
47
Tang et al., 2017.
48
Elanah Uretsky, Jennifer Bouey, and Rebecca Katz, “China’s Emerging Role in Global Health,” Health Affair,
January 17, 2018.
49
Cheng Cheng, “The Logic Behind China’s Foreign Aid Agency,” Carnegie Endowment for International Peace,
May 21, 2019.
50
Matthew P. Goodman and Jonathan E. Hillman, “China’s Second Belt and Road Forum,” Center for Strategic and
International Studies, April 24, 2019 (https://www.csis.org/analysis/chinas-second-belt-and-road-forum).
In addition, CIDCA hopes to promote and facilitate policy research and recommendations
pertaining to Chinese foreign aid. Compared with many Western countries, China is still new to
building its professional and organizational capacity for global governing (e.g., global linguistic,
51
cultural, and political research). Global health is a brand-new academic field in China. There is
also a gap in the scholarly work and research on international development and an urgent need
to provide adequate training to global health professionals. The agencies working on aid can
barely keep pace in recruitment and training with the growth of China’s aid-related ambition and
its ever-expanding on-the-ground operations and expenditures. Both the department of global
health at China CDC and CIDCA are currently encountering difficulties with recruiting sufficient
52
numbers of suitable staff. Many criticisms regarding the transparency of China’s aid programs
are often due to the decentralization of the aid programs and the fact that China’s current
system fails to coordinate data collection and evaluations. As a consequence, China has a
difficult time showcasing its global health contributions and impact, compared with the leading
countries in
the field. The new agencies are expected to change that.
Vision—Future Plan
53
In the next decades, China will focus on a number of global health areas. First, the
Chinese government hopes to consolidate and centralize the governing body on global
development aid projects and conduct comprehensive evaluations of the projects, especially
on sustainability measures and clarifications on the long-term (aid-recipient) country
responsibilities to ensure the sustainability of the aid impact. Second, the government hopes to
design and implement
capacity-building programs in global health, focusing on training in policy, technology, and
management. Focus areas include health finance, public health policy design, pandemic
preparedness and response, quality control on health products, and traditional Chinese
medicine development. The capacity building will rely on on-the-job training, new academic
department and management degrees in medical and public health programs, and academic
exchange programs. Third, China hopes to emphasize more public health intervention and
health system building rather than clinical aids in its DHA programs. Examples including
antimalaria surveillance and intervention in the Mekong basin, schistosomiasis control in Africa,
and implementing 100 maternal and child health promotion projects in developing countries.
Fourth, the government hopes to strengthen collaborations between its DHA programs with
multilateral organizations, such as WHO, UNICEF, Global Fund, and Gavi, the Vaccine
Alliance. Lastly, the government proposes to combine China’s DHA and financial investment
with infrastructure- building programs to facilitate biomedical industry development in Africa.
51
Tang et al., 2017.
52
Deborah Brautigam, “U.S. and Chinese efforts in Africa in Global Health and Foreign Aid,” in Xiaoqing Lu
Boynton, ed., China’s Emerging Global Health and Foreign Aid Engagement in Africa, Center for Strategic and
International Studies, 2011.
53
Chen, in press.
U.S.-China Collaborations in Health
The United States and China have collaborated for more than two decades on infectious
disease control (HIV/AIDS, influenza, and emerging infections), cancer, and other
54
noncommunicable diseases.
 As HIV emerged as a crisis in China and the United States, both countries increased
their bilateral cooperation to combat the pandemic. The Chinese government partnered
with the U.S. CDC to establish China CDC’s Global AIDS Program (GAP) in China in
early 2003. GAP quickly developed and implemented a comprehensive HIV prevention
and mitigation plan across 15 Chinese provinces to promote increased surveillance of
high- risk populations. The U.S. CDC, in partnership with China’s National Center for
AIDS/STD Control and Prevention, has assisted with capacity building, including
improving the quality and geographical reach of laboratory testing capabilities,
developing an epidemiological surveillance system, and expanding treatment options.
 U.S.-China collaboration was an important part of the anti-SARS campaign in 2003. In
October 2003, U.S. Secretary of Health and Human Services Tommy Thompson visited
China and forged a multiyear partnership with the Chinese Ministry of Health to develop
a more robust public health infrastructure. Thompson also established a U.S.
Department of Health and Human Services health attaché at the U.S. embassy in
Beijing.
 In 2004, the Chinese National Influenza Center (CNIC) and the U.S. CDC initiated
cooperative agreements to build capacity in influenza surveillance in China. The two
agencies collaborated on (1) developing human technical expertise in virology and
epidemiology in China; (2) developing a comprehensive influenza surveillance system by
enhancing influenza-like illness reporting; (3) strengthening analysis, utilization, and
dissemination of surveillance data; and (4) improving early response to influenza viruses
with pandemic potential. In 2014, China expanded its surveillance and response system
to include 408 laboratories and 554 sentinel hospitals and trained 2,500 public health
staff. CNIC established viral drug resistance surveillance and platforms for gene
sequencing, reverse genetics, serological detection, and vaccine-strain development.
CNIC also built a bioinformatic platform to strengthen data analysis, publishing weekly
online influenza surveillance reports in English and Chinese. The surveillance system
collects 200,000– 400,000 specimens and tests more than 20,000 influenza viruses
annually, which
provides valuable information for WHO influenza vaccine strain recommendations.
CNIC now provides training for other countries to improve global capacity for influenza
control.
 Beyond infectious diseases, the National Institutes of Health and the Natural Science
Foundation of China also signed an implementing arrangement in 2010 to develop the
U.S.-China Program for Biomedical Research Cooperation “to stimulate collaborative
basic, translational, and clinical research between United States (U.S.)-based
researchers and Chinese researchers in the areas of cancer, environmental health,
heart disease, blood
54
Georgetown University Initiative for U.S.-China Dialogue on Global Issues, 2017.
disorders, diseases of the eye and visual system, mental health, and neurological
disorders. Partnering U.S. and Chinese investigators must work jointly to submit identical
applications to NIH and National Natural Science Foundation of China (NSFC),
55
respectively.”
These collaborations share common goals for improving the practice of public health and
strengthening public health institutions in detecting and responding to public health problems in
the United States and China.
Despite common goals and challenges faced by both countries, there are ideological and
strategic differences in the United States’ and China’s approaches to foreign assistance.
Whereas most U.S. foreign aid is provided by grants, China’s programs are financed by
56
loans. The West’s approach to aid includes conditionality and selectiveness, which assumes
that aid works best in well-governed countries where corruption is not a significant problem;
57
therefore, poorly governed countries are often denied aid. One could argue that a problem
with such an approach is that the countries that fail to fulfill these conditions are the ones most
in need of assistance. In contrast, China’s aid to Africa is claimed to be unconditional with “no
ties,” which means that China does not impose any political or economic conditions for the
recipient countries.
On a tactical level, China and the United States take different approaches to global health
crisis situations. The United States and other Western nations tend to favor a “vertical” approach
that focuses on capacity building to eradicate a disease’s burden through boosted personnel,
medical resources, and research. For example, the United States’ largest global health program
— the President’s Emergency Plan for AIDS Relief (PEPFAR)—accounted for 61 percent of
U.S. global health funding in FY 2018, or USD 6.6 billion. The funding targets the prevention
and the
58
treatment and care of HIV/AIDS. In FY 2019, three-quarters of the USD 11 billion in U.S.
global health assistance funding focused on three diseases: HIV, tuberculosis, and malaria.
After adding 5 percent for health security, 80 percent of the U.S. DHA focuses on infectious
59
diseases.
China’s global health aid tends to take a “horizontal” approach centered on building
infrastructure to create a system-wide expansion of access to medicine and health care. As
mentioned, the 2017 Beijing BRI health forum featured collaborative agreements with 30
55
U.S. Department of Health and Human Services, U.S.-China Program for Biomedical Collaborative Research
(R01 Clinical Trial Optional), RFA-CA-19-009, January 2019 (https://grants.nih.gov/grants/guide/rfa-files/rfa-ca-
19-009.html).
56
Charles Wolf Jr., Xiao Wang, and Eric Warner, China’s Foreign Aid and Government-Sponsored Investment
Activities: Scale, Content, Destinations, and Implications, Santa Monica, Calif.: RAND Corporation, RR-118, 2013
(https://www.rand.org/pubs/research_reports/RR118.html).
57
Junyi Zhang, “How Does Chinese Foreign Assistance Compare to That of Developed Countries?” Brookings,
August 25, 2016 (https://www.brookings.edu/opinions/how-does-chinese-foreign-assistance-compare-to-that-of-
developed-countries/).
58
Henry K. Kaiser Family Foundation, “The U.S. President’s Emergency Plan for AIDS Relief (PEPFAR),” January
31, 2019 (https://www.kff.org/global-health-policy/fact-sheet/the-u-s-presidents-emergency-plan-for/).
59
Henry K. Kaiser Family Foundation, “Breaking Down the U.S. Global Health Budget by Program Area,” May 31,
2019 (https://www.kff.org/global-health-policy/fact-sheet/breaking-down-the-u-s-global-health-budget-by-program-
area/).
ministries of health and multilateral organizations in such areas as health security, maternal
and child health, health policy, health systems, hospital management, human resources,
medical research, and traditional medicine, without naming any specific disease. Instead, the
Chinese government highlighted the goals to build four networks—public health, policy
60
research, hospital alliance, and health industry—to promote global health.
It is not a conclusion that disease-specific approaches will neglect system building, nor that
infrastructure- and network-building approaches would ignore the local epidemics. This type of
labeling of the programs and funding reflects the different measures for outcomes. It raises
concerns because many developing countries are experiencing epidemiologic transition—where
61
chronic diseases cause the majority of deaths and limit economic productivities. The
infectious-
disease-driven global health approach may miss the target.
Nevertheless, these different approaches, while making collaboration difficult, can also be
complementary in nature to benefit the recipient countries. African nations have also benefited
from the competition introduced into the field of international assistance by China’s more-robust
foreign aid activities since 2006. This competition has given African governments (including the
less stable countries) options and leverage with respect to foreign donors.
Recommendations for Future U.S.-China Collaborations in Global Health

As the world’s two largest economies, the United States and China face increasingly similar
challenges in health: Domestically, both face a rapid increase in health expenditures because of
aging societies, an increase in chronic medical conditions, and an increase in substance use
disorders. Globally, both face pandemics, climate-change-induced health problems, mass
migration, and bioterrorism. Past U.S.-China collaboration in data and technology sharing on
pandemic surveillance, public health system building, and biomedical research have benefited
both countries and the world. Unfortunately, given the increased tension between the two
countries on trade, technology sharing, and security concerns, bilateral collaborations on health
—such as data sharing on surveillance and innovative biomedical research—may suffer. In this
context, I would recommend for your consideration the following initiatives.
Collaboration on Global Health Capacity Building

How much China can contribute to global health depends on its personnel and management
capability. Until the Chinese government builds a professional workforce to configure its long-
term national global health strategy, collect reliable programmatic data, conduct timely
evaluations on program effectiveness, and build confidence to embrace the recipient country’s
culture and language, we will continue to see China’s global health aid programs fragmented
and in a “hit-or-miss” style without much transparency (e.g., lack of systematic data records),
60
Tang et al., 2017.
61
Thomas Bollyky, “Health Without Wealth: The Worrying Paradox of Modern Medical Miracles,” Foreign Affairs,
November/December 2018 (https://www.foreignaffairs.com/articles/2018-09-26/health-without-wealth).
compared with those from more established countries. It may take China five to fifteen years to
train its public health professional cohort to work abroad with a more comprehensive vision.
Meanwhile, the U.S.-China collaborations should continue on global health training, including
scholar and student exchange programs, short-term training on program management, and
global health research conferences to help China accelerate its progress toward building an
efficient global health workforce. Unfortunately, the concern surrounding the security,
technology, and political calculations from both countries will inevitably hurt the established
networks on pandemic preparedness and hinder further integration of a global health alliance. I
hope the U.S.- China Strategic Economic Dialogue can reopen and be used to incorporate
global health collaborations.
Encourage Beijing’s Greater Collaborations with Multilateral Organizations

In the past 60 years, China has responded positively to and made progress as a participant
in global governance. China’s recent prominence in global health has contributed to the UN
agencies’ missions and opened China to being more receptive to feedback and guidance from
WHO, the World Bank, and the International Monetary Fund. The Chinese government holds its
reputation working with international institutions in high regard. In a way, one might say that the
United States has been quite successful in its Cold War–era goal of reaching out to then-
isolated China and including it in the global order. It seems to be counterintuitive to discredit
China’s contributions when it is starting to take more responsibilities and contributing more as
an active member of the global governing system.
Work Toward Regulatory Harmonization

Because China became the largest manufacturer of health products, provider of
pharmaceutical ingredients, and producer of vaccines in the world, it is critical that the Chinese
government strengthen regulatory structures to ensure the quality control of these products.
The government is consolidating the fragmented pharmaceutical sector and fostering larger
and stronger companies in its recent five-year national plan. Such action will pave the way for
the rigorous regulation implementation. Continuing collaborations between the U.S. FDA and
Chinese FDA can help strengthen the process of adopting consistent best practice to regulate
medical product manufacturing and development. Capacity building in biomedical regulatory
science, similar to that for the global health professionals, is an urgent need in China.
Collaboration on China’s Drug Policy

Recent RAND research has brought up concerns about China as an exporter of the vast
majority of illicitly sourced synthetic opioids. Lack of regulatory oversight, local corruption, and
an abundance of chemical manufacturers in China contribute to this potential global health risk.
The Chinese government has taken some steps to stop the trend, but producers are quick to
62
adapt. Since most of these synthetic drugs are exported to other countries, China itself has not
yet faced the prospect of user-associated morbidity and mortality consequences experienced in
other countries. The current concern is whether the Chinese government has the political will
and capability to control the situation. I recommend that the United States consider employing
lessons from the two recent successful public health programs in China—tobacco control and
influenza surveillance—and apply these models to the synthetic drug epidemic.
 Leverage multilateral organizations’ action on synthetic drugs and provide a cost
model—the tobacco control case study: China is the world’s largest producer and
consumer of tobacco. The Chinese government has resisted the WHO Framework
Convention on Tobacco Control (FCTC) for years out of fear of losing large government
revenue from the tobacco industry. Eventually, however, the government’s pursuit of
international recognition in public health and the demonstration that the cost on health
care for tobacco users exceeded the profit gained led to the government’s decision to
63
implement the WHO FCTC. As we learned from the tobacco control process, working
with the multilateral international organizations, such as WHO, may be the best channel
to obtain the Chinese government’s collaboration on this action, since the government
values its reputation at the UN. In addition, cost-effectiveness analysis, particularly
when projecting the increased use of synthetic drugs in China, can provide strong
evidence for the public health agencies to convince the government to take action on
the illegal practice.
 Build a surveillance and response system on synthetic drug use—the influenza
surveillance system case study: CNIC and U.S. CDC collaborated on capacity building
in seasonal and novel influenza prevention and control strategies in China and beyond.
The collaboration also strengthened real-time data analysis and dissemination and
provided critical technical support when the Chinese government committed USD 46
million to expand the pandemic response system to influenza and other emerging
64
diseases. CNIC, in return, provided valuable clinical, lab, and epidemiological research
and data to WHO and the U.S. CDC. CNIC became the sixth WHO Collaborating Centre
for Influenza in 2010 and now provides training for countries to improve global capacity
for influenza control. Expecting a growing epidemic of synthetic drug use in China and
other countries, I recommend applying a similar surveillance model to that of influenza to
document synthetic drug use and inform the coordinated response.
62
Bryce Pardo, Beau Kilmer, and Wenjing Huang, Contemporary Asian Drug Policy: Insights and Opportunities
for Change, Santa Monica, Calif.: RAND Corporation, RR-2733-RC, 2019
(https://www.rand.org/pubs/research_reports/RR2733.html).
63
Yang Gonghuan, Tobacco Control in China, Singapore: Springer, 2018.
64
Michael A Stoto1, Min Kang, Tie Song, Jennifer Bouey, Matthew R. Boyce, and Rebecca Katz, “At the Frontier
of the Global Battle Against Emerging Infections: Surveillance and Management of Avian Influenza A(H7N9) in
Guangdong Province, China,” Journal of Global Health Reports, Vol. 3, 2019, e2019017.
OPENING STATEMENT OF DR. MARK KAZMIERCZAK, SCIENTIST AND ASSOCIATE,
GRYPHON SCIENTIFIC LLC
COMMISSIONER TALENT: Thank you. Dr. Kazmierczak.

DR. KAZMIERCZAK: Thank you, Senator Talent, Commissioner Wessel, and the rest
of the Commission for inviting me to provide this testimony today.
Over the past five years, China has advanced its biotech capabilities and offerings
primarily through three industries: therapeutics, contract research and manufacturing,
and DNA sequencing, and related technologies. Although in many cases China is still catching
up to the major players in the global biotech market, they are beginning to make inroads and
in some cases notably genomics, are along the leading edge of technology.
Many of the biologic drugs being developed in China are biosimilars, meaning a highly-
similar molecule to an existing approved biologic drug, similar to producing generic drugs.
Common biosimilar targets include popular drugs like Humira, Avastin, and Herceptin used for
treating chronic conditions such as arthritis, psoriasis, and cancer. Few of these drugs have
made it to market, however, and China has yet to become a significant source of biologics in
the U.S.
Supporting pharmaceutical and biologics R&D are contract research organizations,
CROs, companies that provide outsourced services for pre-clinical and clinical development.
In 2017, there were more than 1100 CROs worldwide, with around 400 of them in China.
China's WuXi AppTec is a leading global CRO, managing over 200 projects in pre-clinical and
clinical development through its biologic-focused component WuXi Biologics. Unfortunately,
data are not available on how many U.S. companies or what portion of the U.S. market are
using CROs in China.
China also hosts several companies providing DNA sequencing services including
some of the world's largest. BGI is the third largest sequencing company behind U.S.-based
Illumina and Thermo Fisher, and offers DNA sequencing machines and services for basic
research and pharmaceutical R&D. BGI has formed numerous clinical research partnerships
with U.S. institutions providing DNA sequencing and analysis services.
The growth of China's biotech industry has come in large part through investments in
U.S. biotech. Chinese firms spent $3.5 billion in direct investment and venture capital from
2013 to 2017 with very little investment activity before then. In 2018, the health and biotech
sector became the top recipient of Chinese foreign direct investments, due both to sustained
investment in the sector and a significant decline in the Chinese investment in the U.S. overall.
Similarly, Chinese venture capital in U.S. biotech which increased overall since 2014
and became the top industry for Chinese-led VC in 2018 has also dropped significantly.
Chinese investors provided 40 percent of the venture funding in U.S. biotech in the first three
quarters of 2018, but in the first half of 2019, Chinese-led rounds dropped 83 percent. The
drop in Chinese investment in U.S. biotech has largely been credited to the reforms passed
last year for the CFIUS review process as firms are limiting or restructuring investments to
avoid scrutiny.
Whether or not this effect was intended, the changes to review of foreign transactions are
causing a major shift in the investment landscape, resulting in uncertainty in the near term.
The effects
of these changes will need to be monitored closely to ensure U.S. biotech companies don't
suffer due to lack of capital.
Others testifying before you today will describe the large extent to which China supplies
generic drugs and active pharmaceutical ingredients for the U.S. In the traditional
pharmaceutical market, the chemical entities that are the active ingredients in drugs can be
synthesized through relatively simple processes and generic versions of drugs can be
inexpensively produced and quickly marketed.
Biopharmaceuticals, however, are highly complex large molecules produced by
engineered cells or organisms and do not have generic versions. Instead, companies wishing
to duplicate successful biopharmaceutical products must reengineer cell systems to produce a
biosimilar drug, an endeavor that requires more advanced technology, is more expensive to
produce, and has greater regulatory hurdles. These difficulties provide a significant barrier that
limit China's ability to produce low cost drug alternatives as they have done for traditional
pharmaceuticals.
Although China's biologic industry focuses heavily on biosimilars, it is too nascent to yet
have produced significant results. Currently, no biosimilars from China are approved in the
U.S., and only a handful are marketed in China.
China's rise in biotech may potentially present economic risks from increased
competition in the marketplace, such as potential loss of market share and transfer of wealth
overseas. Chinese companies are not yet challenging the U.S. as a major producer of
biopharmaceutical products, however. Sustained and increased investment by the U.S.
Government in biotech R&D will help to ensure they do not catch up in the near future.
Where China is becoming a global leader is in DNA sequencing, genomics, and related
fields. Their advances in this arena are already providing competition to U.S. companies, as
well as raising concerns over privacy and human rights. The investments China is making into
genomics and artificial intelligence, including a $9 billion precision medicine initiative, and
cross-sector coalitions like the Digital Life Alliance, provide opportunities for Chinese
companies to make significant advances in biologics, diagnostics, and other medical
biotechnologies.
We are still at the dawn of the machine learning and artificial intelligence age with the
most transformative discoveries likely yet to come. Today, however, the U.S. appears to under
value healthcare-related data at least when compared to the major efforts underway in China
and by Chinese firms.
Going forward, the U.S. can take several steps to maintain its position as a global
biotech leader and safeguard against increased competition from China and other countries.
By increasing and sustaining federal funding for basic and applied research across the
sciences, the
U.S. can help drive innovation and economic prosperity and reduce the likelihood that U.S.
researchers turn to China and other countries for support.
The U.S. also must prepare to take advantage of advances in genomics and big data in
healthcare. Given the growing importance of personal data in biotech and other industries, the
U.S. must rebuild its data protection laws to delineate acceptable use of, and access to
personal data while protecting individuals' rights and privacy.
Finally, to guide these and other efforts, the U.S. needs to take a close look at the
economic opportunities afforded by its biotech industry, as well as the sector's needs. This
includes identifying dependence on foreign industries, recognition of rising players on the world
stage such as China, and analysis of the industry's health, stability, and vulnerability to foreign
competition.
Thank you again for this opportunity to speak today. I look forward to answering your
questions.
PREPARED STATEMENT OF PANELIST DR. MARK KAZMIERCZAK, SCIENTIST AND
ASSOCIATE, GRYPHON SCIENTIFIC LLC
Exploring the Growing U.S. Reliance on China's Biotech and
Pharmaceutical Products
A hearing before the
U.S.-China Economic and Security Review

Commission
July 31, 2019
Testimony of
Mark Kazmierczak, Ph.D.

Gryphon Scientific, LLC
Thank you, Senator Talent, Commissioner Wessel, and the Commission for inviting me to provide this
testimony on China’s biotechnology industry. Most of the information presented in this testimony I
collected while researching the report “China’s Biotechnology Development: The Role of U.S. and Other
Foreign Engagement,” submitted to the Commission in February of this year, and in following the trends
and developments in this arena since. The scope of that report encompassed biotechnology applications
in healthcare and other industries, including biopharmaceuticals (i.e., biotech drugs), but did not include
the traditional pharmaceutical industry (i.e., “small molecule” drugs). As such, I will describe how
advances in China in the biopharmaceutical industry, as well as related biotechnology fields such as
genomics, are impacting the U.S. with respect to its own biotechnology industry as well as its economic
and national security.
Biotech products and services provided to the U.S. by Chinese firms
Over the past five years, China has advanced is biotechnology capabilities and offerings primarily through
three industries: therapeutics (i.e., biopharmaceuticals), contract research and manufacturing, and DNA
sequencing and related technologies. Although in many cases China is still catching up to the major
players in the global biotechnology market, they are beginning to make inroads and, in some cases
(notably genomics), are along the leading edge of technology.
Development of therapeutic biologics has contributed a large part of China’s biotechnology growth in the
past five years. According to a 2017 analysis of China’s biologics market by Goldman Sachs,
investigational new drug (IND) filings (i.e., applications for drug candidates to be used in clinical trials) for
biologics in China have increased from fewer than ten per year before 2013 to 30-40 annually during
2014-2017.1 The types of biologics being developed are primarily protein-based therapeutics targeting
chronic diseases such as cancer, diabetes, and autoimmune diseases, especially antibodies and
antibody-based drugs. Many of the biologic drugs being developed in China are biosimilars, meaning a
highly similar—although not identical—molecule to an existing approved biologic drug. Such products
have a lower risk associated with development because the compound has already been shown to be
effective, although the economic return is diminished as a result (similar to producing generic drugs).
Existing biologic therapies drawing a lot of attention from Chinese biosimilar developers include Humira
(adalimumab—an immunosuppressive drug for treating conditions such as arthritis, psoriasis, and
ulcerative colitis), Avastin (bevacizumab—an immunotherapy for several types of cancer), Rituxan
(rituximab—for treating non-Hodgkin's lymphoma and chronic lymphocytic leukemia), and Herceptin
(trastuzumab—an immunotherapy for breast, stomach, and esophageal cancer).
The biologic R&D activity of Chinese biotech companies, however, is largely focused on developing
products for the Chinese domestic market. Many of the biologic drugs sold in China are imported, and
1
Yeh et al. (2018) China: Healthcare: Biotechnology: Biologics: Balancing quality and affordability; Fosun Pharma up to Buy.
Chinese companies are looking to take a larger share of that market. Biologics developed in China are
also not yet making it into the U.S. market. Few, if any, biologic drugs currently approved by the Food and
Drug Administration (FDA) were developed by Chinese companies (although I have not performed a
thorough assessment of FDA approvals, I am not aware of any such products). In at least one case, a
Chinese company has acquired an FDA-approved biologic through direct investment: in 2017, Sanpower
Group, a private Chinese technology conglomerate, bought Dendreon, producer of the prostate cancer
immunotherapy Provenge. Provenge is not a blockbuster drug, however, and Dendreon was struggling to
find a successful market at the time of the sale.
Supporting the boom in biologics R&D in China and globally is a large contract research and
manufacturing industry. Contract research organizations (CROs) support pharmaceutical, biologics, and
medical device companies by providing outsourced services for preclinical or clinical development. CROs
can perform preclinical studies for a drug candidate, such as safety and efficacy trials and
pharmacodynamics studies, as well as conduct Phase I-IV clinical trials. CROs play a prominent role in
drug development worldwide, with more than half of all pharmaceutical companies employing them. In
2017, there were more than 1,100 CROs worldwide, with around 400 of them in China.2 China’s WuXi
AppTec is a leading global CRO—according to the company, its biologics-focused component WuXi
Biologics managed 205 projects at the end of 2018, including 97 in the pre-clinical development stage, 94
in phase I and II clinical development, 13 in phase III development, and one in commercial manufacturing.
Unfortunately, determining the customer base of WuXi Biologics or any other CRO is a difficult endeavor,
and data are not available on how many U.S. companies, or what portion of the U.S. market, are using
CROs in China. Because a large part of CRO services is navigating regulatory requirements, use of
foreign CROs for advanced-stage clinical development would likely be for products intended to be
marketed in that country, although services such as pre-clinical development and manufacturing will still
be valuable regardless of the location of the company.
China also hosts several companies providing DNA sequencing services, including some of the world’s
largest sequencing companies. BGI is the third largest company behind U.S.-based companies Illumina
and Thermo Fisher and offers sequencing for basic research and pharmaceutical purposes as well as
reproductive-health services. As part of its business strategy, BGI has formed numerous clinical research
partnerships with U.S. institutions, including leading U.S. academic research centers, providing DNA
sequencing and analysis services. (BGI also sells DNA sequencing machines, which are competitors to
those sold by Illumina and Thermo Fisher.) Other top genomics companies in China include WuXi
NextCODE, Novogene, and CloudHealth Genomics, which provide services such as DNA sequencing
and bioinformatics (i.e., computational analysis of genetic data). WuXi NextCODE was formed in 2015
when WuXi PharmaTech acquired U.S.-based NextCODE Health. In addition to sequencing and
genomics, Chinese companies can provide molecular diagnostics services (i.e., detection of specific
proteins or genetic sequences to indicate disease), such as “liquid biopsy” for cancer diagnostics and
noninvasive prenatal testing—including HaploX Biotechnology, Singlera Genomics, Berry Genomics, and
Annoroad Genomics.3
In the U.S., clinical testing providers need certification to show that they comply with the requirements set
in the Clinical Laboratory Improvement Amendments (CLIA) program, which assures appropriate
standards are in place to ensure the validity of test results. Certification can occur through third-party
accreditation, the most prominent being the College of American Pathologists (CAP). In our research for
our report to this commission, my colleagues and I identified 23 companies with a Chinese nexus that
have CLIA/CAP accreditation and perform genome sequencing, molecular diagnostics, or other genetic
2
Chiu N. (2017) Contract Research Organization Market. GF Securities (Hong Kong) Brokerage LTD.; PR Newswire. (2018)
Contract Research Organizations Global Market Opportunities and Strategies To 2021.
3
GenomeWeb. (2018) Chinese Firm HaploX Biotechnology Raises $32M in Financing. GenomeWeb.; Singlera Genomics. (2018)
Singlera Genomics Raises $60 Million in Series A+ Financing. https://www.prnewswire.com/news-releases/singlera-genomics-
raises-60-million-in-series-a-financing-300619990.html.; Sun Y. (2017) China Doubles Down on the Double Helix. Neo.life.
https://medium.com/neodotlife/cloudhealth-the-booming-genomics-industry-in-china-2e5476f469b0.; Illumina. (2015) Berry
Genomics NextSeq CN500 Instrument and Non-Invasive Prenatal Testing Reagent Kit Receives Chinese FDA Premarket
Clearance. https://www.illumina.com/company/news-center/press-releases/press-release-details.html?newsid=2030982.;
GenomeWeb. (2017) Chinese Genomics Firm Annoroad Raises $105M. https://www.genomeweb.com/business-policy-
funding/chinese-genomics-firm-annoroad-raises-105m#.XSuTbOhKiUk
testing, including WuXi NextCODE and Novogene. Unfortunately, we don’t know how many U.S.
customers or what share of the U.S. market they have.
In January 2017, Chinese artificial intelligence company iCarbonX announced the Digital Life Alliance, a
new collaborative effort designed to give people a deeper understanding of the medical, behavioral, and
environmental factors that contribute to proper health. iCarbonX was founded in China in 2015 by the
former CEO of BGI and aims to build an internet-based ecosystem of digital life based on artificial
intelligence and an individual’s biological, behavioral, and psychological data.4 The consortium ultimately
aims to merge comprehensive biological and patient-generated data with artificial intelligence (AI)
technology and predictive algorithms to provide data-based insights into an individual’s health, disease
progression, and aging and deliver a personalized guide for living well. The system could also be
leveraged by the healthcare industry to improve precision medicine. Companies within the Digital Life
Alliance bring expertise in fields such as protein measurement, microbial detection and isolation, human
health modeling, enzymatics, the study of immune system regulation, data analysis, and artificial
intelligence, and include the U.S.-based companies SomaLogic, HealthTell, AOBiome, and GALT.
PatientsLikeMe, a U.S.-based company that collects health records and other data from U.S. patients
(through self-submission) was also part of the consortium until they were made to divest from the alliance
earlier this year following review by the Committee on Foreign Investment in the United States (CFIUS).
Activities of Chinese biotechnology firms in the United States
Several Chinese biotechnology companies have started new R&D facilities in the U.S., generally focused
in major biotech hubs such as Boston, San Francisco, and the Research Triangle area in North Carolina.
By locating in major U.S. biotech regions, Chinese companies are seeking access to advanced
technologies and expertise, a well-educated workforce, and top-tier research universities and biotech
companies to foster collaboration. Two high-profile examples are QLB Biotherapeutics, a branch of Qilu
Pharmaceutical, and VcanBio USA, started by VcanBio Cell & Engineering Corporation, one of the largest
biotech companies in China. Both startups are located in the Boston area and develop cancer
immunotherapy products and related technologies. Companies operating in genomics and molecular
diagnostics are also opening research centers in the U.S. Novogene established a genome sequencing
center on the campus of the University of California, Davis, and Genetron Health opened their molecular
diagnostics and precision medicine center, Genetron Health Technologies, in Research Triangle Park,
NC.
In addition to R&D startups, and sometimes in combination with them, some Chinese biotech companies
have opened biotech incubators in the U.S. Startup incubators refer to a range of commercial facilities and
organizations that provide infrastructure and support to help new companies grow and develop. The
simplest biotechnology incubators provide laboratory space and equipment, allowing fledgling companies
to share and distribute those startup costs, which in biotechnology are high. Incubators also frequently
provide business support, including leveraging their expertise and networks to facilitate expansion and
marketing, as well as providing basic legal and accounting support. Incubators are often linked to or
sponsored by investors in the companies within the incubator, thereby increasing the probability that
those investments result in a successful company and a positive return to those investors. In the case of
Chinese biotechnology incubators in the U.S., parent companies are often looking to help companies
develop products for the Chinese market while benefiting from access to U.S. expertise and technologies.
Some of the large companies have opened incubators that are collocated with their U.S. R&D facilities,
including Qilu Pharmaceutical’s Qilu Boston Innovation Center. Although most endeavors are from private
companies, the China-U.S. Biotechnology Innovation Center currently being built in Houston, which
specializes in IT, biomedicine, and nanotechnology, is a product of the Jiangsu Industrial Technology
Research Institute, a major nonprofit research institute founded and supported by the Jiangsu provincial
government.
4
iCarbonX. (2017) iCarbonX Expands Digital Life Alliance to Accelerate Development of Global Health Ecosystem.
https://www.businesswire.com/news/home/20170105005285/en/iCarbonX-Expands-Digital-Life-Alliance-Accelerate-
Development.
Chinese biopharmaceutical companies looking to develop drugs for the global market also conduct
clinical trials in the U.S. For example, Chinese biopharmaceutical leader Innovent has three drug
candidates for which they have received IND approval from the FDA (the initial step in starting clinical
trials for a drug), all for monoclonal antibody therapeutics. As of yet, though, no such products have
successfully advanced to commercialization.
These activities of Chinese biotechnology companies in the U.S. are for the most part spearheaded by
private industry (only three percent of investment involved state-owned enterprises) and are seemingly
driven by market forces. The Chinese government, whether at the national or provincial level, does not
appear to be providing significant incentives specifically for biotech companies to be doing business
internationally. Of course, several prominent national plans and industrial policies promote the
development of biotechnology as a key industry to the country’s growth and economic advancement,
including the 13th Five-Year Plan, Made in China 2025, and numerous industry development plans and
roadmaps. These policies direct development of China’s biotechnology industry—one of nine strategic
emerging industries, along with others like clean energy, next generation IT, and high-end equipment
manufacturing—to create a strong domestic market but also to be competitive globally. Some of the major
national policies identify utilization of foreign capital and markets as a means for doing so but do not
provide specific pathways or mechanisms for doing so.
Trends and implications of Chinese investment in the U.S. health, biotech, and
pharmaceutical industries
In our report to the Commission, my colleagues and I described a rapidly growing landscape of Chinese
investments in the U.S. biotechnology industry. $3.57 billion was spent by Chinese firms (in 144
transactions) on direct investments and venture capital from 2013-2017, with very little investment activity
in the 13 years prior ($256 million in 49 transactions). Over this period of rapid growth, the number of
transactions increased year over year, as did total investment value for all years but one. In 2018, the
health and biotechnology sector (encompassing all of the healthcare sector, including traditional
pharmaceuticals) became the top recipient of Chinese capital (foreign direct investment) in the U.S.,
surpassing more traditional sectors such as real estate and transportation. While overall Chinese
investment in the U.S. has faced a tremendous decline recently—from $46 billion across all industries in
2016 to $5 billion in 2018—health and biotechnology has shown to be more resilient than other industries.
The detailed data on Chinese investments in U.S. biotech through 2017 showed a few key points:
1) Almost all Chinese investment in U.S. biotechnology occurred in medically related segments.
Seventy percent of total Chinese investment has been in biologics and contract research and
manufacturing, reflecting China’s stated policy interest in biopharmaceuticals and demand on the
healthcare market and mirroring the high level of biologics development activity occurring
domestically in China. Another 22 percent was in genomics, molecular diagnostics, and precision
medicine.
2) Chinese investment in the U.S. biotech sector is overwhelmingly private—only three percent of
the total Chinese investment in biotech since 2000 came from formally state-owned actors. The
role of state-owned investors is much smaller in biotech than in overall Chinese investment in the
U.S., where an average of 24 percent of investment dollars come from state-owned enterprises.
3) Both acquisitions and venture capital (VC) financing have contributed significantly to the rise in
Chinese investment in U.S. biotech, comprising 96 percent of all investment value (67 percent in
acquisitions of U.S. companies and 29 percent in VC and other portfolio investment).
Experts in the U.S. biotechnology industry paint a similar picture of recent abundance of Chinese
financing, especially VC. Biotech-specific funds were created starting in early 2017 to get in on the
biotech investment boom. This is not unique to China, as biotech investments are a new trend globally.
Chinese biotech investors have many of the same qualities as U.S.-based venture capitalists. They are
interested in the same companies and the same technologies as they follow trends looking for value and
high returns. Like investment firms globally, Chinese biotech investors span a range of sophistication from
highly professional to questionable, but there is nothing to indicate that they are on average more or less
legitimate than investors in other countries. U.S. investment firms may tend to provide greater
biotechnology or drug development expertise than Chinese firms, though; as a result, Chinese investors
may provide higher valuations for startups or otherwise offer better deals in an attempt to close the gap.
Chinese venture capital in U.S. biotech has increased overall since 2014, and in the second half of 2018
surpassed the other major industry for Chinese VC, information and communications technology. In the
past year, however, Chinese investment in the U.S. has dropped significantly, and biotech has not been
spared. According to a report by Bay Bridge Bio, the number of venture rounds led by Chinese investors
in the first half of 2019 dropped 83 percent compared to the same period in 2018.5 These investors
provided 40 percent of the venture funding in in the first three quarters of 2018, but that has virtually
disappeared in 2019. Fortunately, U.S. investors seem to be picking up the slack in biotech; Series B
investment, where the biggest shift has occurred, has been stronger in the first two quarters of 2019 than
in any quarter of 2018.
The drop in Chinese investment in the U.S., and in biotech specifically, has largely been credited to the
reforms passed last year to the CFIUS review process. Because of CFIUS’s expanded review authority
for transactions involving critical technologies, many Chinese biotech investors are restructuring their
deals or pulling out completely. The president of Fosun Healthcare Holdings, a major Chinese
biopharmaceutical investor, said the firm would be limiting its investments in U.S. biotech to avoid such
scrutiny. Caution is being exercised on both sides, as U.S. startups are also turning down Chinese money
to avoid attracting attention from regulators. Whether or not this was the intended effect, the changes to
regulatory review of foreign transactions are causing a major shift in the investment landscape, resulting
in uncertainty in the near term. The effects of these changes will need to be monitored closely so that
adjustments can be made, if necessary, to ensure U.S. biotech companies don’t suffer due to lack of
capital.
Risks of Chinese biotechnology activities to U.S. economic and national security
Chinese biotechnology investments and research ventures help to bring technologies and products into
the Chinese market, advancing China’s stated goals of becoming a global leader in biotechnology. A
large focus of Chinese investments is geared toward advancing their capabilities in developing biologics
for healthcare. It is still too early to determine how effective these investments have been, as drug
development can take a decade or more, but so far, the number of innovative biopharmaceuticals coming
from China remains low.
The risks presented by China’s increased activities in U.S. biotechnology are largely economic and are
associated with increased competition in the marketplace, such as potential loss of market share and
transfer of wealth overseas. (Because the R&D in China is largely in therapeutics, and the products being
developed are very specific to their purpose, there is little opportunity to subvert these technologies for
offensive uses.) Chinese startups in the U.S. take advantage of the research knowledge and innovation
pipeline here to try to produce drugs for both the Chinese and U.S. markets. Utilizing U.S. research
infrastructure and personnel to develop products that will be marketed and sold abroad or domestically by
a foreign company does represent a drain on U.S. R&D capital and a loss of potential return on
investment. However, we have no indication that China is doing this more so than other countries, or that
they are particularly successful yet. More importantly, the sizeable lead we have—China’s biotech market
is less than a tenth the size of the U.S.’s—and the superior innovation infrastructure and technological
expertise suggest that China will not threaten the U.S. global standing in the near future. In the long-term,
a sustained increase in technology investment by the federal government will help to ensure our
continued dominance in this field.
5
Bay Bridge Bio. (2019) Chinese investment in US biopharma startups down over 80% in 2019.
https://www.baybridgebio.com/blog/chinese_investment_down_1h2019.html.
Theft of intellectual property by foreign nationals has been a concern in technology fields for many years
and will continue to be. Several instances of theft of trade secrets by Chinese researchers and technology
employees in the U.S. have been documented, going back decades, although the rate of known such
occurrences is very small compared to the number of opportunities. Recently, the National Institutes of
Health (NIH) has addressed this issue and has taken steps to ensure disclosure of foreign sources of
funding by its researchers. Last year, it began an investigation and has since sent letters to over 60
institutions regarding 180 individuals suspected of violating disclosure rules; 18 of these have been
escalated to the Department of Health and Human Services for further investigation. The course of action
taken by the NIH is necessary, but also a measured one—no new restrictions have been enacted, the
agency is simply improving enforcement of existing rules. Additionally, NIH has increased outreach to its
funding recipients to increase their awareness of potential security risks and how to properly mitigate
them. This approach serves as a good model for how to monitor and mitigate potential risks from China
and other countries without imposing restrictions that may hinder research.
Perhaps the most significant potential risk stemming from China’s biotechnology development is their
advancement in medical and genetic sequence data collection and analysis. China is prioritizing genetic
and healthcare data as a valuable resource, perhaps to a much greater extent than is the U.S.—as
evidenced by their $9 billion precision medicine initiative (compared to the $215 million dedicated to the
U.S. initiative). China has established national and regional centers focused on big data in health and
medicine, including a goal to build a genetic database containing the genomes of one million ethnic
Chinese, and use that information to study the relationship between genetics, disease, and the
environment. As companies like BGI and others continue to form research partnerships in the U.S., the
size and diversity of available data grows. Such data, when combined with advanced analytical
technologies including AI, can be used to identify new determinants of disease to be targeted for
development of drugs or molecular diagnostics or to guide or precision medicine.
China’s activity in genomics has raised some serious human rights issues with regard to surveillance of
people, especially ethnically driven surveillance. Last February, it was reported that the Chinese region of
Xinjiang, with a large population of the Uighur ethnic group, collected DNA samples and biometric data
from 36 million people through a program billed as providing physicals to residents. The Chinese police
used DNA sequencing machines purchased from U.S.-based Thermo Fisher Scientific for this program
(the company has since said they will no longer sell sequencers in Xinjiang). Additionally, studies
investigating genetic markers for ethnic populations and genetic determinants of ethnicity-specific facial
features (to aid in AI-based facial recognition) have been published by Chinese research groups. Given
the history of surveillance and mistreatment of the Uighur population by the Chinese government, these
uses of genetic data cause grave concern, not necessarily specific to the U.S., but certainly for human
rights around the world.
U.S. competition from China is also a major risk in the field of genomics. The investments China is
pouring into genomics and AI could provide opportunities for Chinese companies to make significant
advances in medical biotechnology including biologics and diagnostics. We are still at the dawn of the
machine learning and artificial intelligence age, with the most transformative discoveries likely yet to
come. Large healthcare data sets are likely to drive new discoveries and cures. Today, the U.S. appears
to undervalue healthcare data when compared to the major efforts underway in China and by Chinese
firms—not only in analyzing these data sets but also building and gathering them. Still, the U.S. maintains
a lead in science and technology activity and holds a strong, if not leading position in machine learning
and AI. Given these advantages, the U.S. appears well-positioned to compete for the lead in future
innovation in healthcare data analytics should it choose to prioritize it.
Sourcing vulnerabilities for the U.S. vis-à-vis Chinese medical and biotech companies
Many reports have documented the large extent to which China supplies generic drugs and active
pharmaceutical ingredients for the U.S. I will not speak to this issue here, as the research my colleagues
and I have performed did not cover traditional (small molecule) pharmaceuticals, and others testifying
before you will have more insight into the topic. I would, however, like to draw a contrast to the issue of
supply chain vulnerabilities as it relates to biopharmaceuticals. In the traditional pharmaceutical market,
the chemical entities that are the active ingredients in drugs can be synthesized through relatively simple
processes, and generic versions of drugs can be inexpensively produced and quickly marketed.
Biopharmaceuticals, on the other hand, are highly complex large molecules produced by engineered cells
or organisms. Because of this, generic versions of biologics do not exist—companies wishing to duplicate
successful biopharmaceutical products will need to re-engineer cell systems to produce a highly similar,
though not identical, biosimilar drug. Such an endeavor requires more advanced technology and comes at
a higher cost than production of generic drugs. Furthermore, although biosimilars do enjoy an abbreviated
regulatory approval pathway in the U.S., it is more extensive than the approval of generics, as
companies need to demonstrate that their imitator molecule is biologically equivalent to the existing drug.
The difficulties in developing biosimilars provide a significant barrier that limit China’s ability to produce
low-cost drug alternatives as they have done for traditional pharmaceuticals. Although China’s biologics
industry focuses heavily on biosimilars, it is too nascent to yet have produced significant results.
Currently, no biosimilars from China are approved in the U.S., and only a handful are marketed in China.
As I mentioned earlier in my testimony, China also has yet to become a significant source of novel
biologics in the U.S. It is possible that China is (or could become) a significant source of critical
biotechnology ingredients (e.g., media, nucleotides, enzymes, etc.), but I have not examined this aspect
of the biotechnology market.
Another major segment of China’s biotech sector is its large CRO industry. CROs are an integral part of
the global biopharmaceutical industry, but it is unclear how much of the U.S. biotech industry is
dependent on Chinese CROs. Regardless, the U.S. CRO industry is still the world’s largest, and U.S.
firms would likely be able to fill the gap if the Chinese market were to decline or otherwise be obstructed.
U.S. ability to address risks posed by China’s biotech development
The reforms to CFIUS review authority brought about by the passage of the Foreign Investment Risk
Review Modernization Act last year are a significant step in broadening the U.S.’s power to monitor and
regulate biotechnology investments from China and other foreign countries. By expanding the types of
covered transactions involving critical technologies (as yet to be defined but potentially including
biotechnology) and personal information, The U.S. has a greater ability to address potential threats from
China through such investments. The expanded authority still does not allow scrutiny of venture financing
with foreign limited partners, however, so these types of investments can still go unmonitored. The risk
from such investors is low, though, given the low level of control they typically have.
Protection of dual-use biotechnology in the U.S. through export control has been traditionally focused on
materials such as equipment (e.g., fermenters) and specific biological agents, and is ill-equipped to deal
with the changing nature of biotechnology threats. Acquisition of intellectual property, not physical
property, has become the greater threat when it comes to dual-use biotechnology, and the export control
laws of the U.S. are only now beginning to catch up. The Export Control Reform Act, passed as part of
the National Defense Authorization Act for fiscal year 2019, adds foundational and emerging technologies
to the commerce control list, which may include biotechnology, including synthetic biology, genomics, and
genetic engineering. Although this change potentially allows the U.S. to control a much broader set of
technologies, the broad and undefined nature of foundational and emerging technologies opens a risk of
casting too broad of a net and overburdening and hindering legitimate research with limited utility in
deliberately harming U.S. national security (e.g., genome editing, which was listed as a weapon of mass
destruction in 2016 by the Director of National Intelligence). The Department of Commerce’s Bureau of
Industrial Security is undergoing a process to define the terms, and the outcomes of this effort could have
a significant effect on biotechnology research in the U.S. As this process unfolds, any technology of
concern should undergo a detailed risk assessment to understand current and near future capabilities,
comparative advantages to existing technologies, indications of convergence with other fields, and level of
maturity. Furthermore, technologies with little or no credible risk to national security or which embargoed
countries could easily acquire or develop through other means should not be subject to export
control.
One industry segment in which the U.S. is seeing strong competition from China is genomics and related
fields (including molecular diagnostics and precision medicine). The large data sets of medical and
genomic information that Chinese companies are developing, in part through investments and research
collaborations in the U.S., are fueling advances in this area. Currently, protections the U.S. places on such
data are minimal, and an imbalance in data sharing between the U.S. and China exists. Chinese law
prohibits any personal information generated within its borders from being transmitted or stored overseas,
and specifically includes genetic and population health data in this restriction. The U.S. has no similar
regulations controlling foreign access to personal data—the primary law protecting health data in the U.S.,
the Health Insurance Portability and Accountability Act, is designed to ensure patient privacy but not
protect the data itself. Given the growing importance and value of personal data in not only biotechnology
but many other industries, careful control of who has access to data generated in the U.S. is crucial to
ensure the economic and societal benefits stemming from the use of such data are secured. Therefore,
Congress needs to enact comprehensive data protection laws that delineate acceptable use of and
access to personal data while protecting individuals’ rights and privacy. A strict prohibition on data
export may not be necessary; the General Data Protection Regulation, which went into effect last
year in the European Union, strikes an appropriate balance and could serve as a model framework for
such a law.
Additional recommendations for Congress
As China’s biotechnology industry grows, so does its standing as a competitor to the U.S. Currently,
Chinese biopharmaceuticals lag behind the U.S. significantly, although their genetic technology
companies are becoming world leaders. In addition to their market lead, the U.S. has a superior
innovation infrastructure through its top research universities and institutes and federal support for
technology transfer. However, to ensure the U.S. maintains its standing and does not forfeit economic
opportunities to China, Congress must increase and sustain federal funding for basic and applied
research across the sciences. In constant-dollar terms, total life science R&D obligations peaked in
2010 and declined 18 percent by 2015.6 The trend in all life science subcategories, as well as across all
science and engineering fields (e.g., physical sciences, engineering, social sciences, life sciences, etc.),
is similar. Fortunately, R&D spending is trending upward again, and the budget for the NIH has increased
by approximately $2 billion in each of the last four years. Still, given the continuing expansion of the U.S.
biotech industry, U.S. researchers may turn to China to fund their work if domestic funding is in short
supply. In addition, a shortage of federal R&D funding could open a window for other nations, including
China, to compete with the U.S. Given China’s continued trend in increased R&D spending and the
growth of their biotech industry, China appears to be attempting to capitalize.
At a speech before the American Association for the Advancement of Science in February, White House
Office of Science and Technology Policy director Kelvin Droegemeier made an argument for greater
private funding of science and technology research. Although private investment is welcome and indeed
necessary, the federal government plays a critical role in supporting such endeavors, especially in basic
research where a return on investment is too far removed and too uncertain for industry to gamble on. In
biotechnology and medicine, some of the most groundbreaking discoveries have come from such studies;
the rapid gene-editing technology known as CRISPR came from a basic study of bacterial defense
mechanisms. Ensuring sustained federal funding for science and technology research will help drive the
U.S. innovation engine and lead to continued economic prosperity.
To support federal investment in science and technology, and specifically biotechnology, a clear
understanding of the contributions of the industry to the greater economy is needed. The U.S. developed
a National Bioeconomy Blueprint in 2012 which outlined strategic goals for growing the U.S.
biotechnology industry, but it is far out of date compared to current technology trends and failed to
foresee risks to U.S. competitiveness that are now arising. Congress should call for an update to the
National Bioeconomy Blueprint to provide a strategic framework by which the U.S. could ensure
6
National Science Board. (2018) Science and Engineering Indicators. https://www.nsf.gov/statistics/2018/nsb20181/. [Figure 4-9;
Appendix Table 4-24].
the vitality and competitiveness of its biotechnology industry in the face of a dramatically
changing global industry landscape.
The National Academies of Sciences, Engineering, and Medicine, through the ongoing Safeguarding the
Bioeconomy project, is laying much of the groundwork that could be utilized in an effort to revive this
strategy. Building off of this effort (which will be completed later this year), a refresh of the Blueprint would
underscore the importance of the biotechnology industry to the greater U.S. economy and illustrate how
the federal government can support its future growth. In order to provide clear guidance, the Blueprint
should include an assessment of U.S. dependence on foreign industries, including recognition of rising
players on the world stage, such as China, and an analysis of the health and stability of the U.S.
biotechnology sector, including identifying which segments are strong, which are vulnerable to foreign
competition, and which may be key to future growth of the sector. A National Bioeconomy Blueprint
containing these pieces can serve as a guiding document to support implementation of specific
mitigations against foreign interference in the biotechnology industry. Given the effects on Chinese
investment already seen as a result of new review authorities through CFIUS, a carefully measured
approach guided by rigorous assessments such as these is needed as the U.S. moves toward greater
oversight of foreign interactions.
PANEL II QUESTION AND ANSWER
COMMISSIONER TALENT: All right, you all did a good job of staying on time. The first
questioner will be Commissioner Kamphausen.
COMMISSIONER KAMPHAUSEN: Thank you to our panelists for your powerful
testimony.
Ms. Gibson, I have several questions for you with regard to pharmaceuticals and thank
you again for your written statement.
As I understand the nature of the problem and I'm a non-specialist, there are at least two
central elements to the issue. One is that however it got there and you document quite well how
China did get there, greater than 80 percent of APIs are Chinese in origin. And secondarily, we
have inadequate mechanisms for testing, leading to high failure rates or pollutants or
carcinogens or whatever. Would you agree with that kind of framing of the issues in that way?
And then I have a couple follow-up questions.
MS. GIBSON: I think those two points address major factors that characterize the
industry and where we are now, yes.
COMMISSIONER KAMPHAUSEN: You focused on generics because you said that's
90 percent of what we take.
MS. GIBSON: Yes.
COMMISSIONER KAMPHAUSEN: Aren't those problems similar with brand name
medicines as well, the two initial problems that I talked about?
MS. GIBSON: My understanding is that there are some brand name drugs that do use
active ingredients made in China, say certain chemotherapy products. When it comes to
quality and testing, it's also my understanding at least from what people in the industry say
that the brand name companies have a little more incentive to assure quality because their
name is on the box and they're the only supplier.
COMMISSIONER KAMPHAUSEN: Good. Well, then two very specific questions. On
page four of your testimony, I think it's outline point B8, you talk about an on-line pharmacy that
says it tests every batch of every medication it sells. Are we at the front edge of this? Will that
be a more common practice and what are the cost implications?
MS. GIBSON: Yes, what you're referring to is a new start-up company on the Yale
Science campus called Valisure and they said their motto is that we test everything before they
sell it. They test three batches of every product. And they have found that more than ten
percent of what they test and they test for active ingredients. They test for dissolution. If you
take a medicine does it stay in the body for the right period of time, are they actually medicine
for that duration. And they test for inactive ingredients. And they did test for the solvents in the
contaminated blood pressure medicine.
I think it's a game changer, but what would help even more is if we had a
Consumer Reports type reporting, having that testing done and make it public. This is way
beyond the FDA's capability. I think we need a market-based approach and I think that
could help turn around the market and ensure we have quality drugs.
The challenge is that sometimes if there's contaminants in them, you may not know
what to test for. That's what happened with the contaminated heparin. That lethal
contaminant fell under the radar using existing testing methods at the time. So if you're not
testing for it, then you're not going to look for it, so it could still be in there. But I think it would
be a big step forward if the public and institutional purchasers, the DoD, VA, initially to get the
market going
and demand higher quality medicine that we have some testing. But that however still doesn't
address the issue of our industrial base and the collapsing of our industrial base to
manufacture 90 percent of our medicines.
COMMISSIONER KAMPHAUSEN: That then leads to my last question. In your oral
testimony, I think you alluded to some possibilities for reversing China's dominant position on
producing APIs. Could you elaborate that a little in the minute we have left?
MS. GIBSON: I think it's fascinating to watch what the private sector hospitals in the
United States are doing, led by the Mayo Clinic and 900 other facilities. They formed a
nonprofit called Civica Rx in response to persistent shortages of vital life-saving medicines.
We're talking about last resort antibiotics here.
And hospitals have put up capital in this nonprofit and they are doing direct contracting
with trustworthy manufacturers. And so far, the first two products that they have purchased or
contracted to purchase are -- one is vancomycin which is an absolutely critical antibiotic and
that will be made in Bedford, Ohio. It will be a Danish company that will be opening up
production here. And then there's a second antibiotic.
Recently, they have contracted to produce 14 or 15 other critical medicines that are in
persistent shortage and I just read before coming up here just to confirm that, they expect that
their member hospitals will save between 35 to 50 percent on the cost and that's because
these are medicines, when they're in shortage, they cost more. So this is a way to get around
that and also to stimulate more producers for essential drugs that are trustworthy.
And the other secret is they have long-term contracts. So we're going to put out a
contract, not every year, and change it. Do it for five, ten years and that manufacturer knows
that it will have the capital and the resources to invest not only in back-up facilities to
manufacture, but also to invest in quality manufacturing.
Transparency on price, transparency on who's making it, I think that's a game changer
and I think we should be doing that for our public procurement for the DoD and VA and to really
cause some needed disruption in the current system.
COMMISSIONER KAMPHAUSEN: Thank you.
COMMISSIONER TALENT: Next will be Commissioner Wessel, and then after that, I
have Commissioners Cleveland, Fiedler, and Bartholomew lined up.
COMMISSIONER WESSEL: Thank you all for being here and I'm going to have, if
there's time, another round of questioning because there's a diverse set of issues here.
I was very troubled by our last panel, our DoD witness, not by his integrity, but by the
questions about whether we know and have the ability to ascertain where the products are
coming from that our troops and our families and people are ingesting on a daily basis, many of
them for life-saving purposes.
Ms. Gibson, if you could help me on the question of supply-chain integrity for a moment
and anyone else who has information. My understanding is we've had difficulty getting FDA
personnel into China, having difficulty getting them the visas they need to operate, and then the
ability to travel within country, so that I was told in one instance they were concerned about a
facility and it took six weeks for them to get the travel permit to be able to visit and, of course,
by that time you can clean up virtually anything.
I believe your book also referred to some investigator looking through the window seeing
all these vats and by the time they were able to get into the facility, all the vats were gone. So
it's a little difficult to ascertain quality.
Can you talk to me a bit about the difficulty our investigators, our own government has in
ensuring quality and what steps we should be taking? I thought we had an MOU at one point
with China. It appears that, as you were saying, Mr. Westhoff, that as it relates to fentanyl that
maybe the stated comments are not followed through as it relates to policies that are being
articulated.
MS. GIBSON: Sure. Well, the FDA to inspect a plant here in the U.S., they can walk in
tomorrow unannounced and say we're here. Whereas, when the FDA conducts inspections in
other countries because it is a foreign country, they tell the government six to eight weeks in
advance that we will be there. That's not always the case according to the FDA, but that is the
general rule.
The other point that you mentioned, Commissioner Wessel, about China withholding
visas for FDA employees to work in China, that has been a prolonged issue and when myself
as a writer of China Rx tried to inquire well, what's the status? The lack of transparency is
really
quite pronounced. I do think we have to question whether inspections in China will ever be up
to our desire to have the kinds of inspections we have here for the simple reason if China has
increasing control over the supply of our medicines, I think we lose leverage. We lose leverage
from a regulatory point of view. It's just sort of a take it or leave it.
And one thing about the FDA I think is very important to understand is -- and this was
uncovered when I came across a document from the FDA counterpart in Europe, the European
Medicines Agency. And in 2012, they actually came out and said in writing what they call the
regulators dilemma. They're having to make tradeoffs between allowing defective medicines,
not supplements, this is our legal supply of medicines. They're making tradeoffs between
allowing substandard defective medicines into their countries versus shortages. This was
unthinkable years ago and that's because we have a really narrow supply chain. And this is
also true, I believe, for the FDA which I haven't seen them put that in writing.
Let's take the case with the recent blood pressure medicines that were contaminated
with carcinogens. The FDA had to make the terrible choice between do we allow a medicine
with lower levels of contaminant to be taken by American consumers and patients, or do we
have shortages? If they took it all off the market, there would be virtually nothing left and you'd
compare that to the risk of people having high blood pressure and strokes and heart attacks.
This is the situation in we're in now, and it's not going to get any better. So that’s why I say we
can't inspect our way to solve this problem.
We need a solution that again rebuilds our industrial base, diversifies our manufacturers
that are out there that supply us with medicine. And frankly, let's be clear. The price paid to
manufacturers has been cheap, cheap, cheap. We've been hammering the big companies that
buy generics drugs, they hammer down on price. If you hammer down on anything too much,
it's going to break. And the quality is broken and the supply chain is broken. That's why we
have shortages.
So I think we have to get to the root cause of the problem and that will certainly help the
FDA do the job that I think many of the good professionals there do want to do.
COMMISSIONER WESSEL: Thank you. If there's another round.
COMMISSIONER TALENT: Our Vice Chair, Commissioner Cleveland.
VICE CHAIRMAN CLEVELAND: Thank you, all, for your well prepared and thoughtful
testimony.
Mr. Westhoff, when we published our paper last fall on fentanyl, we made the case that
the evidence of improvement after Chairman Xi agreed to schedule fentanyl, the evidence of
improvement in the problem would be an increase in raids, arrests, and prosecution, and
access,
visa access for the DEA to schedule unannounced visits. Have we seen any improvement in
those four areas?
MR. WESTHOFF: Well, the law just took effect May 1st of this year, so I think it's too
soon to tell.
VICE CHAIRMAN CLEVELAND: How did the law affect what -- the possibility of raids
or arrests or prosecutions?
MR. WESTHOFF: Well, on May 1st, all fentanyl analogs were blanket banned, as it
will. So previously, these chemical companies when one fentanyl analog was banned, they
would simply tweak the molecular structure and make a new one. This new law outlaws that,
so even fentanyl analogs that have never been created, will be automatically banned,
scheduled.
And so I haven't seen any results of what might have changed since May 1st.
VICE CHAIRMAN CLEVELAND: Thank you. Ms. Gibson, I want to draw attention to
your work on palliative care because it is hard work and incredibly valuable. So thank you for
that service.
Are shortages driven by epidemics or problems or are there already
shortages in terms of medicines available?
MS. GIBSON: It's my view that shortages of essential medicines are caused by the
narrowing of the supply chain to a few suppliers. And that happens because of how we
purchase medicines. If we hammer down too much on price the good businesses go out of
business. They can't make it for that price, so we're left with a handful.
And also, I think it's really clear from the Vitamin C cartel case which I didn't mention in
the testimony, but which I think many of the Commissioners are familiar with. It was a case
very clear cut of a handful of Chinese companies forming what's called a Vitamin C cartel and
driving out all the U.S. and European producers of ascorbic acid, so we can't make Vitamin C
any more. And the Chinese Government came to bat on behalf of its domestic firms and said
that it's a matter of Chinese law we required our companies to fix prices and to control exports
to
the United States. So that is indicative of perhaps underlying intention about manipulation in
the market for these essential commodities for our health.
VICE CHAIRMAN CLEVELAND: Do you think that it would be possible to develop a
top ten list of critical drugs that we should be monitoring to ensure a safe and sufficient supply?
You mentioned vancomycin, but I was wondering if there were others.
MS. GIBSON: I think the list would be pretty long. If you ask any hospital what they
need to survive on a daily basis, I think generic antibiotics I would put on that list and I would
put heparin on that list. And bear in mind people in the industry say that if China shut the door
on exports, within just a couple of months our hospitals would cease to function, so this has
tremendous urgency.
VICE CHAIRMAN CLEVELAND: And finally, Dr. Bouey, we published a paper some
months ago, talking about the role of China in international humanitarian assistance operations.
And in your testimony you mentioned their involvement in the Ebola outbreak.
Can you describe how they coordinated with the international community as the
international community went in? Because what we tend to see is China gets involved, but on
their own terms and their own way somewhat detached from whatever the international
community requirement or norms are. So if you could describe specifically the Ebola
engagement, that would be helpful.
DR. BOUEY: Yes. Thank you. So I think that's not surprising for me to hear what your
comments. China's global health assistance programs are traditionally pretty much based on
their own government and sometimes even delegated to the provinces.
For the 2014-2016 Ebola humanitarian aid, China has coordinated within their own
government 23 ministries, so they actually responded quite timely. They first asked their
embassy to warn their citizens in the affected areas and then they set up -- as soon as WHO
sent out -- announced this is a pandemic, they built a medical team of 1200, more than 1200
personnel which is the largest of the Chinese medical team and they have clinicians, public
health experts, and military medics. And they built a hospital in Liberia of over 100 beds and
also a level 3 biological lab in Sierra Leone. They also provide quite a lot amount of funding for
these countries, not only on the medical care, but also on other social and food and other
related care.
China, at the same time, they build their own vaccine development, so they had one of
the vaccines approved by WHO on Ebola, one of the first that year.
So I think in terms of scale, this is one of the largest humanitarian aid that China has
been able to put together.
In terms of whether they coordinate with other countries, I don't think, I haven't heard a
lot about their working. But I know they contribute to the WHO to the humanitarian fund, but
most of the action are on their own.
COMMISSIONER TALENT: Commissioner Fiedler.
COMMISSIONER FIEDLER: A couple of comments, but I would also like to establish
some information for ourselves and others. The pharmaceutical production process is heavily
automated. It is capital intensive and not labor intensive. Is that not correct?
MS. GIBSON: From my understanding about the manufacturing of pharmaceuticals, the
technology to make our medicines has not changed in a very long time. We've had more
innovation in the making of potato chips than we have in our medicines. That's why one of the
recommendations I have is about deploying really terrific technology, advanced manufacturing
technology that would do that to make it much less labor intensive, much more secure, and real
time checking of quality.
COMMISSIONER FIEDLER: So you're saying it's labor intensive now?
MS. GIBSON: I think there are others who could answer that question, but I can say
that if deploying new available technology on a commercial scale for our generics, it could be
less labor intensive, smaller footprint and more efficient, and higher quality.
COMMISSIONER FIEDLER: Okay, does anyone know if anyone has tracked the
increase in China's control of the market, let's say in generics, and the profits of U.S.
pharmaceutical companies who use them?
MS. GIBSON: Well, if we're talking about generics, what I have heard from the industry
is earlier this year and I heard this second hand and that's why we need this whole of
government review of our industrial base is that several of the largest western generic drug
makers
announced that they were dropping substantial numbers of products from their manufacturing
portfolio and that suggests that they just simply can't compete.
COMMISSIONER FIEDLER: It also suggests that they're not happy with the margin.
So it's not necessarily that they can compete, it's that they want to make more money than --
MS. GIBSON: That could be the case. I think there's the price paid to manufacturers,
and then there's the price that consumers pay. I think if you look at India, India has a tough
time competing with China on active pharmaceutical ingredients. China undercuts India.
India can buy active ingredients cheaper from China than it would cost them to make it. So I
think there's a persistent problem there and that's again we've heard that China subsidizes its
domestic
industries quite significantly.
COMMISSIONER FIEDLER: Does anyone actually think that we will ever be able to
inspect anything in China? We have no history when it comes to many other subjects, whether
it would be forced labor, MOUs that we have signed. I'm not cynical about it. I'm just realistic
about it.
MS. GIBSON: I'll add. There's a chapter in China Rx about chicken, importing chicken
from China and I put that in there because I understand we haven't really imported a whole lot
of processed chicken from China and we haven't imported chicken raised in China here yet.
But what's interesting from a regulatory point of view is that USDA inspectors will not be in
those China plants.
COMMISSIONER FIEDLER: We had a hearing years ago on fish in China and the
testing of tilapia and whatever shrimp, farm-raised catfish, and we weren't testing those fish, but
the pollutants that are produced upriver from the farm. So we had a standard of -- inspection is
not a solution to me, number one.
MR. WESTHOFF: If I may, I concur with your cynicism, Commissioner, and when it
comes to recreational drugs, I think that we have to work on the demand side, even if we are
able to get these inspections in China, the production will likely shift to countries like India.
COMMISSIONER FIEDLER: I agree with you. We have our own problems. I'm not
blaming everything on China, okay?
But I will get even more cynical now. That rebate on fentanyl is a policy decision. A
policy decision made the knowledge that the drug is damaging America. Forget the demand.
I can only read that as a conscious decision to damage us. Sorry, tell me I'm not right.
I mean fentanyl is a world-wide problem. It is the most damaging drug out there. It kills
you really quickly if you take a minor overdose of it and they got a VAT tax rebate policy for its
production?
And I'm supposed to believe that the May 1st law is going to be enforced any more than
the Chinese have enforced any other agreement they've ever reached with us?
MR. WESTHOFF: Yes, again, I share your cynicism. The only thing I would add is that
fentanyl is a legitimate medical drug as we all know. And Chinese companies are able to export
it legally for legitimate reasons.
What's more troubling to me is that China also offers these VAT rebates for a wide array
of fentanyl analogs and other NPS, novel psychoactive substances, that have never been used
for a medical purpose any time in history anywhere in the world. And so to me, I just can't
understand why that is.
COMMISSIONER FIEDLER: That's a policy decision. I think Dr. Bouey wanted to
address those inspection questions.
COMMISSIONER TALENT: I think we're over time.
DR. BOUEY: I would just quickly respond. I am not an expert on fentanyl, but I've seen
similar problems.
I mean in China, the drug medicine quality is a huge problem. It's a huge crisis within
China. You've talked about several vaccine crises in China. I think the government and the
people should be very worried about their own production and inspection.
So I think it’s probably better to engage the Chinese Government on these inspections.
Because they internally need to boost up their capacity, but that will take time.
I think even for global health expertise it will take five to ten years to train the expert
professionals in global health and the regulatory fines may take even longer.
But I think in order to engage China, the Chinese Government to put it on the priority,
that's why I bring up the tobacco control is that if they see this is an international problem and
also engage with their interest in controlling the methamphetamine and ketamine, create an
alliance on combating the synthetic drugs. It might be easier to bring them to at least focus,
bring this to the priority list in addition to strengthen the regulatory system.
And if I can say one word about the influenza collaboration, I think that's a good model
because that collaboration shows that the Chinese are sharing data on influenza surveillance
to WHO and with the U.S. CDC. I hope that can be a model.
COMMISSIONER TALENT: Okay, we will move on. We're staying pretty much on
time. I hope to have time for a second round.
Commissioner Bartholomew.
CHAIRMAN BARTHOLOMEW: Thank you very much and thank you to our
witnesses. It's a very interesting -- and I'm learning a lot.
First a statement and then a couple of questions and some of my questions actually will
also go to our final panel because they cover some of these topics. But I just want to say that
one way that China can also demonstrate its commitment to addressing global health crises is
by allowing Taiwan to participate in organizations that address global health crises like the
World Trade Organization and participate also more actively in addressing bilateral health
issues when they arise. Just a comment.
Dr. Kazmierczak, am I pronouncing it correctly?
DR. KAZMIERCZAK: Kazmierczak.
CHAIRMAN BARTHOLOMEW: Kazmierczak. Thank you for noting particularly the
nefarious use of DNA against the Uighurs and the ethnic profiling that goes along with it.
I'm interested in what kind of informed consent takes place. There is so much data that
is being gathered. There's so much American data that's ending up in China, but with Chinese
citizens whose data is being gathered, is there any sort of informed consent that's going on,
anything like an IRB?
DR. KAZMIERCZAK: Well, I think that's a good question. It's unclear exactly how
much. I know there are definitely instances where there was absolutely no informed consent,
so the incident I talked about in my written testimony of collecting DNA samples on the Uighur
population in one province, that was explicitly stated to be a health physical under a program
Health Physicals for All and people were allegedly told that this is for your health physical, but
when they asked to see the results, were told you don't need to see the results. So there's
definitely cases where there's absolutely no informed consent.
I think on a broader scale, I've mentioned in my written testimony and in my report the
number of healthcare data centers that China has developed that is collecting not only
genomic data, but also all sorts of healthcare data.
I believe, I would imagine that a lot of that is to support legitimate medical needs and
legitimate healthcare research and so there is an aspect of informed consent there, but laws
differ in the U.S. and in China as to whether informed consent is required to share data for an
additional research purpose. So usually when you enter into a research trial, there is informed
consent for that specific study. And the laws, and I hesitate to say definitively because the laws
differ a lot, but there may or may not be a requirement for informed consent to then use that
data for other research purposes.
CHAIRMAN BARTHOLOMEW: Dr. Bouey, anything to add?
DR. BOUEY: I have done some of the NIH-sponsored studies in China. That's been
my
only experience working with academia in China. I think if we work in China with universities,
we always request, we have to conform to the NIH requirements on informed consent as well as
human subjects or trainings and all of that. But if it's initiated not by a collaboration with U.S.
Government, then you know, those will be the gray areas. I have no idea.
CHAIRMAN BARTHOLOMEW: Just a final question to any and all of you, we talk a lot
about production which is obviously a production of pharmaceuticals and we haven't talked
about devices, but devices also which is critically important, but also R&D is really important for
the next generation of drugs. I'm thinking particularly chemotherapy. You know, a lot of times
it's to keep yourself alive until the next drug comes on line and is usable.
Is the U.S. losing our leading research scientists to Chinese companies either operating
here or Chinese companies that are in China? Does anybody know about that?
DR. KAZMIERCZAK: I can address that somewhat. I don't think I would go so far as
to say we are losing our leading scientists. Research in the United States is heavily dependent
on an international researcher community and China certainly does have programs to entice
top research personnel to move to -B to relocate to China, giving them large startup packages
and what not. And this targets both native -- both U.S.-born and Chinese-born scientists.
However, using data from NSF, if you look at the rate at which PhDs in science and
engineering in the U.S., foreign PhDs getting their degrees in the U.S., the rate at which they
return -- they return to their home country in five or ten years, China has the lowest return rate
out of all countries. And so that is to say that despite their efforts of trying to entice and
definitely -- certainly bringing some top talent to China, they are really trying to catch up to other
countries and they have much higher stay rates than say scientists in Europe do.
CHAIRMAN BARTHOLOMEW: Anybody else? All right. Thank you. COMMISSIONER
TALENT: Commissioner Lewis is next.
COMMISSIONER LEWIS: Thank you very much for your information today. You have
vast knowledge of something that most people are totally unaware of. Ms. Gibson, you
mentioned today this is the situation we are in with our collapsing industrial base for drugs. It's a
very sobering situation. I'd like to ask each of you if you'd please tell us the recommendations
that you're making, how long would it take to affect those recommendations, how much would it
cost, and who opposes them.
MS. GIBSON: Well I'll start. I think to begin sooner rather than later in the short term.
The DoD and VA, if they could purchase based on value and not just price -- cheapest price.
That includes quality, security, uninterrupted supply. That would be a very important
consideration for force protection and combat readiness. And it would also direct our tax
payer money not over to China to build its industry, but to build it here.
My understanding is there's no law that requires the DoD and VA to purchase the
cheapest drug. It's, I think, a well-intended effort to save tax payer money, but we wouldn't
have our, you know, aircraft carriers and nuclear submarines built in China.
And for very important medicines, we should really take a close look at what it will take
to purchase based on value and not just on price. I think there's opportunity also for the DoD
and VA to look at what the private sector market is doing in hospitals to purchase those drugs
that are in perpetual shortage that are expensive. So there it's possible, depending on how
much they pay now, the DoD and VA might be able to pay less. That would be a first step.
Insofar
as wellness costs more money, what we know is that the large purchasers of generic drugs --
big ones -- they purchase the vast majority of all of them. They buy very cheap. But that's not
the price you and I pay when we go to the drugstore. So without knowing how much a markup
there
is among these groups in-between, it's hard to say whether in fact if the DoD and VA went
directly to the manufacturers whether in fact that could save tax payers money and save federal
agencies money.
In the medium term, the DoD through DARPA has invested in what's called pharmacy on
demand. This is the use of that remarkable manufacturing technology where chemists can
produce -- forgive my lay language in a box in a lab, the API for essential antibiotics and make
small dose volumes within 24 hours. How can we get some public investment to support
demonstrating that small volume production to commercial scale production? It hasn't been
done before, certainly on the API level, and have a stock pile of API. Once you have the active
pharmaceutical ingredients, it's much easier then to make the finished drugs.
So I'm not a fan of stock piles because that's not going to get us out of the mess we're
in now. But stockpiles of API using this advanced manufacturing technology could go a long
way. I would put that in the medium term. And there are good people out there that are
chomping at the bit to want to do that. So that's a short-term endeavor. And then something
for the medium term.
MR. WESTHOFF: My first suggestion was to pressure China to eliminate these VAT
rebates, grants, and other subsidies to companies that are exporting illicit fentanyls, precursors,
and NPS. This information that China offers these types of subsidies is being revealed for the
first time right now. These are revelations from my book which comes out in September.
So the first step, I think is simply making this information known. I think that this
wouldn't cost anything to the U.S. It would obviously cost China a lot in terms of its industry.
And China would likely oppose it on that grounds -- on those grounds. But at the same time, it's
so outrageous to be fueling a drug crisis in this way. China also doesn't want to be known as
the world's drug pusher. And so I think this could be effective if the U.S. put this type of
pressure on China.
I also recommend scheduling more fentanyl precursors and pressuring China to do the
same. Traditionally how this works is that the U.S. will schedule one of these types of drugs
and then it will be scheduled internationally, which forces China to do it within a certain amount
of time -- say a year. Right now there's not any pressure on China to do this because the U.S.
hasn't even scheduled these precursors. And that's Step 1. And I think that the case would be
easy to make.
Senator John Kerry led the effort to schedule the first two fentanyl precursors in 2016, I
believe. And he was successful after the U.S. did it to getting it done internationally. And China
followed not that long afterward.
DR. BOUEY: So my answer -- short answer to your question, I think, is we have to think
about globalization and the market mechanism. In terms of China being the supply chain for
most of the API, I think that's a fact. I think it's upon the market's regulations for any companies
that are buying China's products to raise the quality control and raise these issues.
I think China itself in terms of government, it seems that they're trying very hard to
regulate their own pharmaceutical sectors. It's very fragmented. And right now, there are
5,000 to 7,000 companies registered in China. Many others are not even registered. So in
their last two National Five Year Plan, they tried to consolidate -- they encouraged
consolidation of some of these companies to create a bigger and more solid companies. That
would pave the way for the regulations to go in and help. Right now there's just been too
many, too small, and too hard to regulate. So that would be my -- my answer would be just
continue to help Chinese government on this effort.
DR. KAZMIERCZAK: I'm looking at this from the perspective of biotechnology,
biopharmaceuticals, and DNA sequencing as opposed -- which as I mentioned earlier is a very
different situation from the traditional pharmaceutical market. But there are still issues there.
I think with respect to biologics from China, our major concern right now is economic
competition as they become more advanced in developing biosimilars or other products. And
my top recommendation is to increase U.S. funding support for basic and applied research.
I think the U.S. has a far superior ability to innovate, but just needs to make the proper
investments in it. So obviously that would cost money, but it's an investment that could bring
about a lot of new advances, both basic research which has led to countless discoveries from
the gene editing technology CRISPR. And everybody's aware that the internet was obviously
not
bio-related, but government-funded research. So you never know what basic research is going
to produce major breakthrough technologies. So I think supporting that is very important.
On top of that, helping companies through programs like SBIR, Small Business
Innovation Research programs to help those products come out of basic research and into
products is also very important. The other main challenge that we've talked about is with
healthcare data and genomic sequencing and the privacy and security issues around that.
The U.S. has some of the weakest laws as far as protecting personal data. China is
very strict and does not allow personal data on its citizens to be shared or stored outside of
the country. I don't think we need to go that far. But I think with the GPDR that was passed
recently -- or a couple years ago, I think it's obviously a global concern. And I think that is an
appropriate sort of model to use.
And I think if we were to -- if we were to advance our laws to allow sharing of data to
advance biomedical research with trusted partners while simultaneously preventing access
from those that are not deemed to be able to handle it securely or maintain patient privacy is
very important. I think that's a leading step that we need to do soon.
COMMISSIONER LEWIS: Thank you all very much. It's very sobering to know that
we don't make penicillin. And that we're having to collapse the major industry in the United
States. I want to ask each of you if you could please send us on one or two pages, how long it
would take to affect your recommendations, how much it would cost, and how long it would
take. Thank you very much.
COMMISSIONER TALENT: Thank you for that. I'm going to go now. And then I have
Commission Goodwin and Wortzel in the first round. And then we'll go to a second round. I
think we'll have time with Commissioners Wessel, Kamphausen, and Cleveland.
Dr. Bouey, I thought your history of China's global healthcare activities was very helpful
for us. And I imagine a lot of what you said is going to end up in like the background of our
report.
A couple of quick questions for you really for clarity. So when I was reading on Page 3,
I think you said that the Chinese have built 150 hospitals and 25,000 healthcare professionals
in their CMTs. And that they've treated 280 million patients. And that last number kind of
jumped
out at me. That's 5.5 million a year since 1963. And many of those years, I don't think they
were that active globally. Like in the 70s and 80s, I don't think they were. So where does that
information come from?
DR. BOUEY: That is coming from a report from the Chinese Ministry of Commerce.
COMMISSIONER TALENT: Okay.
DR. BOUEY: So that ministry until last year was in charge of coordinating the medical
teams in China. So what happened in China is that once they get a request from a country,
they
will send that to the province. They will have designated province to partner with that country.
And then the province will send out a team and organize that. So that's a report from the AA
book publishing. I think they are still in the final stage of --
COMMISSIONER TALENT: Is there any other independent documentation? That
comes from the Chinese government. Right?
DR. BOUEY: It does come from the Chinese government.
COMMISSIONER TALENT: And it's not like they have a history of transparency
regarding their global health activity. So that figure at least isn't documented any place else?
DR. BOUEY: Not in others. So that's from that chapter, yes.
COMMISSIONER TALENT: You also mentioned that they do a lot of -- you were
contrasting their activities globally with U.S. and other countries. And you mentioned they do a
lot of infrastructure. So that's hospitals, healthcare infrastructure. Right? Hospitals healthcare
--
DR. BOUEY: Right, health-related. So again, this is talking about transparency and
coordination. That's a problem area as always. The Commerce Department in the past, they
usually report how many, you know, buildings they do infrastructure buildings. They don't
specifically bring out, you know, this is a hospital. This is a clinic.
COMMISSIONER TALENT: Right, I see.
DR. BOUEY: And they don't report that way. So there are research teams and I
personally work with Tsinghua University looking at some of these infrastructure buildings and
medical support. And we're trying to bring out, you know, okay this is a hospital. This is a
malaria clinic. So we considered them as a health assistance.
COMMISSIONER TALENT: When they build infrastructure, whose firms -- whose
companies do they use? Do they use the local companies or do they bring in Chinese?
DR. BOUEY: That's a good question. I think there's a changing trend in that. In the
past, it's mostly -- Like any other infrastructure building in Africa and Asia, they bring in their
own workers. But I think the Chinese government are very sensitive to the criticism
international society that they're not relying on -- they're not helping the local industry. I think in
the recent infrastructure buildings, they are trying to build -- at least the report from what I've
seen in Africa, some of the infrastructure construction sites, they have 80 percent of the locals.
And still have you know, 10 to 15 percent of their own workers.
COMMISSIONER TALENT: And they finance most of those through loans. Right? I
mean they loan money to the local government. So we see another reason why they've been
doing this. I mean they're loaning money to the local governments -- going into debt to hire
their firms to build infrastructure.
DR. BOUEY: Right. You're correct. And I think the new agency -- this is called the
CIDIGA (phonetic), they're trying to change -- to separate the global aids -- the humanitarian
aids from the commercial interest. So that's one step they're trying to do. I think over -- It was
just started last April. And I think over this year, they're trying to figure out -- was in their own
government to figure out -- to separate the two.
COMMISSIONER TALENT: Yes.
DR. BOUEY: But so far it's difficult because they have loans -- concessional loans aid --
concessional loans and grants. They're all lumped together.
COMMISSIONER TALENT: Okay. Since I'm the chairman, I'm going to be disciplined
and hope I have a second round. Because Dr. Kazmierczak, you can be thinking about this. I
want to ask why the Chinese have developed CRO industry, which you mentioned. Robin's
going to ask it. Good. So we'll get a chance to do that. All right. Commissioner Goodwin?
COMMISSIONER GOODWIN: Thank you, Senator. Mr. Westhoff, point of
clarification. In your written testimony in discussing these VAT rebates, you mentioned that
they are offered for at least eight other fentanyls that are illegal for Chinese export. Are they
legal for Chinese manufacturing and distribution, I'm assuming?
MR. WESTHOFF: No, they are not.
COMMISSIONER GOODWIN: What are they legal for? MR.
WESTHOFF: Nothing.
COMMISSIONER GOODWIN: So they're providing a tax rebate for the production of
an illegal product -- illegal narcotic?
MR. WESTHOFF: That's correct.
COMMISSIONER GOODWIN: That's appalling. I think Mr. Fiedler's cynicism is
justified.
Ms. Gibson, returning to this discussion of cost and the pressure on agencies, Tricare,
HHS, state governments and the like to negotiate based on cost and the benefits that are there.
But it obviously dominates the negotiations with drug companies. And the discussions on who is
included or excluded from negotiated drug schedules and the like presumably with the benefits
to those agencies, to those state governments, to tax payers, and ultimately to the beneficiaries.
And we can measure it. It's quantifiable. It's tangible.
We can determine whether there were savings that were occasioned by a
particular drug being used as opposed to another. How do we measure value? How do we
measure quality? It can be done in the example that you gave about a war ship. There are
benefits to doing that. There are reasons why we source certain products or goods or services
from certain places.
And even beyond national security if you're building a dam or a bridge, vendors would
have to -- potential vendors would have to meet certain minimum eligibility requirements. A
threshold of expertise, in addition to competing on cost. So how do we do it in this context as
you described it? And how is that consortium of hospitals doing it?
MS. GIBSON: Thank you for the question. The consortium of hospitals, they're buying
directly from manufacturers. So they're bypassing all the folks in-between that, you know, add
to margin. So that's certainly one way to approach it.
As for cost, I think we have to look at the medium term and long term. As mentioned
earlier, when we lose control over the supply, we lose control over price. China will be the price
setter and we will be the price taker. And we saw that with Vitamin C when the Chinese cartel
was formed and prices went up when all the other producers went out. So these are hidden
costs and they've not been calculated.
There was an estimate of the cost of drug shortages in this country because of the
narrowing supply chain. And they only measure the time that pharmacists spend, which is
enormous. It's about $400 million that hospitals spend just to manage drug shortages and
recalls. That doesn't include so many other costs. And frankly the cost of human life.
Remember we had hundreds of people die in this country 12 years ago from a
contaminated blood thinner purchased from China. And if you look at the email exchanges of
companies that purchased it, it was the cheap stuff. Some things you just don't want cheap.
There's a very high price to cheap. And one of the interesting things I wrote about in China Rx
is how is it that the products are so cheap? One, it's not just subsidies from the government.
It's also companies will say well we assume no liability for our products. So we're buying
medicines that are a matter of life and death and we assume no liability. And what recourse do
we have
when there is a bad product?
Back to an earlier question. If you look at what happened with the vaccines
that were bad in China, you know, many, many people were arrested. That affected the people
in China. But when the heparin that we got from China killed hundreds of Americans, there
was nobody arrested.
The blood pressure medicine contaminants with carcinogens, it was knowingly they
were shipping product to the United States -- the worst offender was a Chinese company
where the amount of carcinogen was 200 times the acceptable limit per pill. And what
prompted them to do that? Because Valsartan was going generic. And there were companies
competing vigorously for global market share. And so they wanted to come up with a more
efficient means of making that blood pressure medicine. And they did.
The problem was they came up with this new chemical process -- and this hasn't been
reported in the media -- but no one -- it was great chemistry -- and solved the problem to make
it more efficient. But no one considered that this is a product that would be consumed by
humans. And it was dangerous. It was lethal. And when the FDA went in to inspect this plant,
they saw that the company knowingly sent substandard defective medicines with genotoxic
impurities to the United States.
So if we want cheap, we can buy cheap. But what's missing from the whole equation
on generic competition on price -- Let's have lower prices -- is quality. And if we have 10
percent of our generic drugs that don't meet standards and if the public knew about that --
There's a very high hidden price that we're paying for cheap.
COMMISSIONER GOODWIN: But from my perspective, I think the challenges -- the
choice isn't that stark. As you say, I think we have to take a broader, more longer term view
because --
MS. GIBSON: Absolutely.
COMMISSIONER GOODWIN: -- the downward -- you know, the pressure to keep
costs low -- The choice is not let's pay a little bit more versus sourcing it from China with all the
dangers that may with that.
MS. GIBSON: Right.
COMMISSIONER GOODWIN: It's let's keep costs low. And then what's that due to our
manufacturing base over the course of ten, 15, 20 years? And we've seen what it's done -- the
concentration --
MS. GIBSON: Right.
COMMISSIONER GOODWIN: -- of supply chains in China. MS.
GIBSON: Right.
COMMISSIONER GOODWIN: Thank you.
MS. GIBSON: Yes, we can revigorate our communities and our local economies by
bringing this manufacturing back home at the same time that we can have higher quality tested
drugs that the FDA can actually go in and inspect. I think it's a win-win on all counts. It doesn't
all have to be in the U.S., but at least we're diversifying our manufacturing base to trustworthy
countries.
COMMISSIONER GOODWIN: Thank you.
COMMISSIONER TALENT: Commissioner Wortzel is next.
COMMISSIONER WORTZEL: Thank you all for being here and your willingness to
take part in this. I have what I think are a set of linked questions that I'm going to attempt to
address. And ask Ms. Gibson and Dr. Kazmierczak to try and respond with ways that we can
shift the production to the U.S. and strengthen the industrial base. And you each have very --
Well you haven't really told us how, Ms. Gibson, but you have. And what bothers me, Dr.
Kazmierczak is yours all requires government-funded solutions. I mean that's your big deal,
funding. And I don't think that's going to happen.
So I guess I'd ask both of you if there are other ways to help develop this U.S. industrial
base and strengthen it. Punish the countries that are providing these bad things and providing
subsidies. I'm not a lawyer. Can you take them into some world court and sue them? Create a
reasonable fair market place through legislation? What would you recommend there? How
would we incentivize private research by U.S. companies by lowering taxes for a period of time
while they put new drugs on the market. So I'll throw those things out there. I'm searching for
ways that don't have the federal government funding.
DR. KAZMIERCZAK: I'll start that. Thank you for the question. I guess I have a
couple responses to that. I think incentives could very much be part of the solution as well. By
saying increase government funding, I guess I'm saying increase government support. So
whether that's through tax incentives, I think the bottom line is that we have the capability to
produce -- at least in the case of biopharmaceuticals, we have the capability to continue to be
the leader for a long time. And so it's just encouraging those activities.
As far as -- I will say there's another aspect to this. And that goes into access to other
markets. Access to the Chinese market in particular. China has been reforming its laws -- its
regulations on biologics and biosimilars to become more in line with global standards. And
actually provides the greatest amount of post-market data protection, data exclusivity than any
other country.
However, that is dependent on the drugs having been developed in China using clinical
trials that were conducted in China and have Chinese partners. So if you're using data from
outside China, you get less exclusivity, which makes that market less attractive. So there are
diplomatic avenues to try to bring China into a more friendly market so that our companies can
compete there, as well as being able to compete domestically.
MS. GIBSON: The figure I've seen about how much we spend on generic drugs in the
United States is $70 billion a year. So how can use that money we currently spend and buy
smarter and buy wiser and buy high quality? How we do take the procurement dollars in the
private sector, which is why I'm so intrigued by the consortium of private hospitals. And frankly
as shortages continue and become -- which I believe that they will in our healthcare system and
as quality problems persist, one would hope that, that model would expand to other healthcare
facilities in the private sector to spur a diversified manufacturing base with trustworthy suppliers.
I think when it comes to national security say for the DoD, do we really want to tell the
men and women in uniform that we're going to buy cheap because it's going to save tax
payers money? I think in that case, I think we want to buy based on value. And look closely
at what manufacturers will charge versus what adding everything else in-between the middle
men -- if we took that out of the system, could that be more economical and more prudent for
the use of tax payer money? And I think the same is true for veterans.
So I think we have opportunity to use our procurement dollars differently to move the
market. When it comes to advance manufacturing technology, I think just demonstrating the
proof of concept that we can do this on commercial scale, which hasn't been done before. And
the FDA is supportive of this technology. But actually doing it and saying here's how it can be
done. And yes, your facility can be FDA approved. Show that. And have buyers -- maybe it's
this consortium of hospitals that we will buy product that we can make here in real time quality
control. That could take some modest amount, I believe, of incentive to stimulate that private
market and that development of that technology at a higher scale.
COMMISSIONER TALENT: Commissioner Bartholomew has a quick clarifying
question.
CHAIRMAN BARTHOLOMEW: Yes. Ms. Gibson, you're talking about additive
manufacturing. You're talking about 3D printing, aren't you, essentially? That there would be
machines that could print up -- I'm using that word -- manufacture on demand drugs. Is the
technology already there or not yet?
MS. GIBSON: I'm thinking of the advanced manufacturing technology, which is called
pharmacy on demand, making the API, which is the most costly part of a generic drug. And
that's why generic companies don't have the incentive to invest in this because their margins
are so small. That's the technology I'm thinking of.
CHAIRMAN BARTHOLOMEW: Okay, thank you.
MS. GIBSON: I'd be happy to provide the Commission with more information on that.
It's fascinating. And I think it's the future should we choose to support it.
COMMISSIONER TALENT: All right, we have finished Round 1. And because of
Commissioner Wessel's and my tremendous foresight, we have time for Round 2. We
scheduled enough time for this panel. I think we should be very proud of that. And we will go
to Commissioner Wessel for first questions in Round 2. And then I have Commissioner
Kamphausen and Cleveland so far lined up.
COMMISSIONER WESSEL: Thank you, all. This has been very helpful. You know,
I've been sitting here getting angrier and angrier because my -- I love my dog. My wife, after
the melamine scare, you known refuses to buy dog food made in China. And I realize there's
more disclosure on our dog food than there is on the drugs that we use every day for our
families. And to me, that is -- that's a crime.
Going to Dr. Wortzel's question, a couple of things. One, my understanding is several
years ago, there was legislation that would require on the labels, the source of the active
ingredients. And that is not part of present law. Is that right, Ms. Gibson?
MS. GIBSON: That's my understanding. These was country of origin legislation
proposed around 2007 and 2008. I think it was by Sherrod Brown. And that was killed on the
first pass.
COMMISSIONER WESSEL: Right. So I'm of the view that, you know, if it's on the dog
food bags, maybe it should be on what we're -- you know, whatever products, whether they're
dietary supplements or pharmaceuticals. So I think we need to look at the question of what
the impediments are to country of origin labeling for active and maybe inactive ingredients so
that we can address that.
But as a market based solution, I would welcome anyone's comments. I think someone
made the statement that there's limited liability. Without having to have massive government
expenditures or no government expenditures, if we were to create an insurance risk based
system where importers of the APIs, importers of the finished products, TSHEA (phonetic)
products, or pharmaceuticals had to bond or insure against risk, it seems to me that would
have a pretty significant impact on the sourcing patterns. An insurance company doesn't want
to be left holding the bag for liability. And therefore presumably is going to demand that an
importer go upstream to its suppliers and have some kind of confidence in the supply chain.
For anyone, Ms. Gibson or anyone else who may want to respond, can you just give me
your opinions on whether that kind of system may actually help us in this dilemma?
MS. GIBSON: I'll start. I think it's a really interesting idea. It would certainly raise the
cost of exporters from China and other countries. But that would also perhaps improve the level
-- create a more level playing field for manufacturers here and in other countries where the
standards may be better.
COMMISSIONER WESSEL: Any other thoughts? Okay. Dr. Bouey, a separate
question for you. And an issue we have to deal with constantly because on the one hand, we've
talked about all of the threats that exist here today -- our earlier panel on this one in terms of
sourcing. Healthcare is one of those fields where there really is a global commons or should be.
You talked about pandemic threats et cetera. You know, without denigrating all that is Chinese,
which tends to be at times, the political mode of the day, how do you think we are able to
address that challenge so that we can talk about U.S. interests. The health and safety of our
population, while also addressing, again as Mr. Westhoff, you know, pointed out, fentanyl is not
legal in China, but they're giving export taxes to it. How do we deal with, you know, that
dilemma in the U.S./China debate right now?
DR. BOUEY: My opinion -- personal opinion, there can be three level actions. So we
have the short-term, medium-term, and long-term. So the long-term certainly would be more
collaborations. Helping China to build capacities for regulation was in China on both medicine,
medical products, and vaccine. I think China has been trying -- actually what I heard in China is
that they are only producing the API, which is actually low margin -- profit margin. The
government hoped that their pharmaceuticals can build more formulas or you know, drugs that
can be on the international market. But right now only a handful of drugs and only one vaccine
is procured by WHO. So China's far away from providing for medicine on the international drug
market. So they're focusing on API now.
So to help China to harmonize some of the regulations will be the long-term solution.
Medium-term solution, I think will be more collaborations similar to the influenza surveillance.
So if U.S. CDC, China CDC, U.S. FDA, China FDA can have real collaborations. That they can
-- you know, there was the influenza surveillance. U.S. CDC, they signed agreement for
capacity building.
And then Chinese government put in more than $400 million into building these labs all
over the country. They built more than 500 labs that raised to capacity. And they're providing
data to -- sharing the data to both countries, as well as to WHO. So every year when we see --
we know what is the target influenza, you know, for vaccine, that's some of the data that's used
for international organizations.
In the short-term, I think if we want to address the fentanyl issues, that's short-term.
Again, I think would be engage China. Since the government -- their leaders are very sensitive
to international opinions. And they want to be part of the global governance. I think something
that's framed again as synthetic drug problems all over the world. You know, yesterday I saw
a report saying that 80 percent of the opiate seizure -- the illegal opiate productions is actually
in Africa is the tramadol issues. So here certainly, you know, we're all focusing on fentanyl.
But there are larger epidemics out there.
So bringing China in as an active player in that coalition, I think will be the fastest way to
get their attention. And bring their priority so that it can change their policies.
COMMISSIONER WESSEL: And I appreciate all of that. MS.
GIBSON: Thank you.
COMMISSIONER WESSEL: And I don't -- you know, collaboration is great. I think
China is putting that collaboration in real jeopardy as a result of many of its policies. You know,
you talked about world opinion. I think world opinion demanding that China change certain
practices is as high as it's ever been. I don't see a lot of change. So I think it's -- at this point,
the next step as China's leaders beginning to take certain steps that will re-engage
collaboration and give greater confidence. Thank you.
COMMISSIONER TALENT: Commissioner Kamphausen?
COMMISSIONER KAMPHAUSEN: Two quick questions for Ms. Gibson. Just a point of
fact. We talked about the coalition of hospitals. Do you have any idea where they're sourcing
their APIs?
MS. GIBSON: I don't.
COMMISSIONER KAMPHAUSEN: Okay. Dr. Bouey, on Page 15 of your testimony,
you talk about the importance of encouraging Beijing's greater collaborations with multilateral
organizations. And you talk about progress that China has made as a participant in global
governance. Following up on Chair Bartholomew's statement earlier. What insights or
perspective's do you have on Beijing's declining to allow Taiwan to participate in the World
Health Assembly every year since 2017 on a political basis based on their opposition to the Tsai
Administration in Taiwan? I mean Bloomberg has rated Taiwan's healthcare system as ninth
most efficient, effective in the world. What sense can we make of this? And how does it
contribute to this assertion that you've made that China wants to be more of a stronger
participant in global governance and healthcare issues? Thank you.
DR. BOUEY: Well, I think that's a difficult question for me because I'm not a
China/Taiwan expert. I think China's government mainland government has the political will to
participate in global governing, especially from my knowledge on global health assistance. I
think, you know, my limited knowledge about Taiwan's health system as a model. I think even
now China itself has lots of problems. One of them is their health system. They have a single
payer social insurance program that they cannot keep up with the cost of healthcare. And they
have very limited ability to work with the long-term care and disability care for now. So they're
actually looking into Taiwan as a model to what are -- you know, you said they also look at the
U.S. But they think Taiwan has a better model in terms of healthcare provider. Personally I
hope as a researcher, as a public health professional, there will be -- I hope there will be more
collaborations.
COMMISSIONER TALENT: Okay, Commissioner Cleveland has been very patient.
Okay, we had the same question, didn't we? So I had previewed it. Dr. Kazmierczak, if you
could explain why -- both Commissioner Cleveland and I were interested because your written
testimony was really good and you make the point that in this area, biotech, biologics, the
Chinese have not yet advanced very far, although they are certainly investing and certainly
ambitious. But there are a couple of areas where they really are competitive and have a
significant amount of market sharing. One of them is these contract research organizations.
Right? So why? I mean why are they doing so well there? What's your analysis of that? What
needs are they meeting in that area and why have they been effective?
DR. KAZMIERCZAK: Thank you for the question. Industry uses contract research
organizations for the same reasons that anybody outsources any services. It's because of
costs. It's cost and expertise. And this is true for large pharmaceuticals where it may be more
of a cost issue, but especially important for start-ups where that expertise is a lot easier to go
outside than to build within.
And so China has been developing these -- essentially been taking advantage of that.
So they are able to provide these services. And they do have a large technically advanced
workforce that can do this work. And they can do it at a lower cost. And so this is why they've
been able to build up that industry.
It can also be used as sort of stepping stone to more advanced development. So you
may be -- It may be a way of training the workforce to then move on from the contract research
activities into other companies or arms of the same company that are actually developing new
biologics or biosimilars.
COMMISSIONER TALENT: Are these CROs subsidized? Are they given any help by
the government to compete or do you know?
DR. KAZMIERCZAK: I have not seen any specific instances of CROs being funded by
the Chinese government, although I did not look explicitly for that. But given the amount of
support that they've given for Biotech in general, it would not surprise me if some of them are.
COMMISSIONER TALENT: Do they work mostly, if you know, mostly for firms that
are trying to get business or approval in China? Because it sounds like they help navigate a
lot of the regulatory terrain. Right? So do the Chinese firms deal mostly with -- work mostly
for
firms wanting to work in China or are they working -- For example, companies trying to navigate
here in the United States, do they go and hire Chinese CROs?
DR. KAZMIERCZAK: I think that's a very large portion of their clientele, although I
haven't done a systematical analysis of it. One of the major activities for CROs is to help
navigate the approval process for a drug. And so you will see -- it will be more likely that a
company would want to use a Chinese CRO if they're trying to access the Chinese market, so
yes.
COMMISSIONER TALENT: Did you have any followup, Commissioner?
VICE CHAIRMAN CLEVELAND: One, you note that data are not available on how
many U.S. companies or what portion of the U.S. market are using CROs in China. And yet
they're involved in critical pre-clinical trials. Would there be any way of collecting that data?
It's just something that there hasn't been interest in? Or what would the impediments or
barriers be to understanding which U.S. companies are relying on CROs in China?
DR. KAZMIERCZAK: Well, it's definitely difficult to get specific quantitative data.
Because unlike investment data, these are private -- these are customer/client transactions
that are not reported. So there's no database for that kind of information. I have not had the
opportunity, but am extremely interested in looking at exactly that issue. And so there are
ways around it. Largely, it would just be through talking to the U.S. -- the major players and
the smaller players actually in the U.S. biotech industry to get a sense of this.
I will say that the U.S. CRO industry is still the largest in the world. Both American and
foreign companies are using American CROs to a great extent.
COMMISSIONER TALENT: Hey, we have one commissioner remaining,
Commissioner Lewis. And I think we should just about have time for his questions. And then
we'll be done. Commissioner?
COMMISSIONER LEWIS: The information that you've given to us today is obviously a
matter of national security. And earlier this year, we had another hearing with an aerospace
manufacturer was doing things that was not in the national interest. And there was a story
about it in the Wall Street Journal. After the report appeared in the Wall Street Journal, that
aerospace company stopped doing what they were doing. Well it seems to me that if the
report that you give us on my earlier question, how long it will take to affect your
recommendations? How much it would cost? And who opposes it? If we include in our report
or if the press finds out who opposes your recommendations, it might cause them to change
their conduct. So I really
would appreciate any information you can give us on those subjects. Thank you very much.
COMMISSIONER TALENT: Okay, all right. Well -- Yes, Commissioner Cleveland?
VICE CHAIRMAN CLEVELAND: Are any of you aware of how the Chinese are using
BRI to promote their medical industry?
DR. BOUEY: So at RAND, we are hoping to start some of the research projects looking
into BRI. It's environmental and a social impact of BRI. I only know from the same report I
read from Chinese government, one of their goals in the -- while they had a BRI health summit,
a couple of years ago. So they're aware that in order -- along with BRI, they want to develop
health assistance programs. And it's partly to protect their investments. I think that's pretty
natural. But also use it -- to coordinate with infrastructure building and to enhance the
investment in healthcare.
I know that the Chinese government is hoping that their companies will be more
interested to investment in Africa to build the factories because they already have the API. So
they can use that as an incentive. So if they have a local production, then they don't have to
put in funding for API to make the -- So that's an incentive. So I think that's -- They definitely
have in mind to coordinate health assistance with the BRI project.
COMMISSIONER TALENT: All right. We want to thank the witnesses again for your
outstanding testimony. For your answers to our questions. And sometimes we have a follow-up
or two that we solicit for answers in writing. And if we do, we'll let you know. And if you can
help us some more, that would be great. So thank you. And we will now break for lunch until --
what is it, 1:35, I think? 1:30.
(Whereupon, the above-entitled matter went off the record at 12:28 p.m. and resumed at
1:29 p.m.)
PANEL III INTRODUCTION BY COMMISSIONER WESSEL
COMMISSIONER TALENT: Good afternoon. We'll get started. Our third panel will
examine U.S.- China links in health and medical products assessing market opportunities and
economic health and national security risks of these relationships.
We'll start with Benjamin Shobert who is a Senior Associate for International Health, the
National Bureau of Asian Research. Mr. Shobert is also the Director of Strategy for Health
Business Strategy at Microsoft where he leads engagements with national governance
providers in the Biotech Community.
Next, we'll hear from Katherine Eban, an investigative journalist, a Fortune Magazine
contributor, and an Andrew Carnegie Fellow. Ms. Eban's book, Bottle of Lies: The Inside Story
of the Generic Drug Boom reveals fraud and dire conditions in the overseas manufacturing
plants where the majority of our low cost generic medicine is made.
Our third panelist is Yanzhong Huang who is Professor and Director of Global Health
Studies at Seton Hall University. Dr. Huang is also a Senior Fellow for Global Health of the
Council on Foreign Relations where he directs the global health governance round table series
and co-directs the China and Global Governance project.
Finally, we will hear from Craig Allen who is President of the United States China
Business Council. Prior to joining USCBC, Mr. Allen had a long career in public service, which
included multiple tours in China and broader Asia and culminated with his appointment as the
U.S. Ambassador of Brunei from 2014 to July 2018, TPP, an interesting time.
I ask all our witnesses to keep your remarks to seven minutes. And Mr. Shobert, we'll
start with you. Thank you.
OPENING STATEMENT OF BENJAMIN SHOBERT, DIRECTOR OF STRATEGY FOR
HEALTH BUSINESS STRATEGY, MICROSOFT; SENIOR ASSOCIATE, NATIONAL
BUREAU OF ASIAN RESEARCH
MR. SHOBERT: Well good afternoon. And thank you for the opportunity to come back.
It's always a pleasure to be here and to testify. Across Washington D.C., the last three years
have been marked by a recognition that much of what has been taken for granted in the U.S.-
China relationship specifically and globalization more generally needs to be reassessed given
the extent to which a normalized relationship between the United States and China had been
assumed.
And taken into account during the construction of critical supply chains such as those in
the pharmaceuticals and medical device sectors, much of this re-thinking has been jarring.
And it has provoked policy makers and politicians to re-think assumptions that have undergird
the global economy for nearly three decades.
Whether we should assume that healthcare will remain a durably unique high-
technology sector, not subject to the strains and fissures that mark other high technology
industries. Or whether healthcare is simply earlier in China's foreign direct investment cycle
and as such, has not yet felt these pressures, but soon will, requires a dispassionate
assessment.
In assessing risks, we must first weigh whether China's historical success in other high
technology sectors are applicable to healthcare. Healthcare incubation ecosystems, in
particular life sciences and biotech are fragile. And have proven very difficult to recreate.
Where they have been developed, it has taken decades of intentional investment and
cultivation of ties between academia, venture capital, medical centers, and industry.
While no one should doubt China's appetite for making these investments, a degree of
caution is worth striking as to whether the country will be as successful as quickly as it has
been in other high technology sectors. Should China's ambitions prove to be unfulfilled, it is
possible that foreign healthcare companies may begin to experience increasing difficulties over
market access or technology transfer issues. And if so, healthcare may find that today's more
open and positive relationship with the Chinese market, including with key Chinese regulators,
could change.
Four risks will need additional attention from American policy makers. In particular, as
they relate to lessons we should learn from the experiences of other high technology industries
in China. First, the impact of ongoing trade tensions on bilateral investments and on supply
chain uncertainties. Each of which has unique characteristics within the healthcare sector.
Anxieties over where you get your new iPhone is one thing. Uncertainties over where you get
your antibiotics or anti-hypertensives is quite another.
The world, not just America, has become increasingly dependent on China as its
source for manufacturing pharmaceuticals. Whether America should have taken this
dependency on foreign manufactured pharmaceuticals is not a question best directed to the
U.S.-China relationship. Rather if American policy makers want to ensure that a certain
national formulary is widely available to the public in times of crisis, policies around domestic
production, and a national formulary would be appropriate.
It is worth calling our collective attention to this concern. Taking a dependency on China
for pharmaceutical products in particular has historically been understood as one of the reasons
the U.S.-China relationship can and should be thought of as safe and stable. It is now
interpreted through a lens of mistrust. If we indeed believe America can take calculated
dependencies on
China for critical components to modern life; healthcare and medicine being just two of those,
then we are still working in good faith. However, if we no longer believe that America can do
so, much of what has supported the modern era of globalization is no longer valid.
The second risk is CFIUS' role in evaluating Chinese FDA into the American healthcare
sector. The April 2019 determination by CFIUS that the Chinese digital healthcare company,
iCarbonX would have to divest its $100 million investment in the American patient healthcare
platform, PatientsLikeMe, has drawn significant attention by both American and Chinese
investors. And has already had a negative effect on bilateral investments.
Third, differences in appetites for investment and for risk in relationship to large national
biobanks funded by the American and Chinese respective political systems. The curated data
sets that result from these investments serve as the foundation for the 21st Century economy.
The greater diversity, quality, and quantity of data available to researchers should in turn result
in an accelerated development of precision medicines. Which should result in companies
being able to spin out new therapeutics and diagnostics predicated on access to those
privileged data sets. Justifying government led investments in these data sets has become
increasingly difficult in the United States in particular.
Fourth, asymmetric data access policies and standards between the United States and
China and their impacts on economic competitiveness needs to be more fully understood. As
currently embodied in both law and practice, American researchers do not have symmetrical
ability to work with Chinese data assets as do Chinese researchers to work with American.
Artificial intelligence ability to develop new use cases hinges on access to large
quantities of training data. And no country in the world is as serious about funding the
aggregation of data across a number of disparate verticals of which healthcare is just one, than
is China. As American policy makers wrestle with questions around asymmetric data access
policies between the United States and China, it would be wise to keep in mind that American
healthcare and technology companies stand to benefit if promulgated policies in both countries
were to exist that allowed training on both countries data sets. At current investment levels,
China will amass a much larger and more diverse healthcare specific set of data upon to which
train AI, than with China.
With that, let me end on five recommendations to Congress. First, deliberately gate
Chinese FDI into American healthcare verticals based on our companies' ability to do the same
in China. Second, review Americas national formulary and determine how best to construct
the
supply chain to anticipate times of crisis. Third, pursue harmonized standards around the
sharing across borders of personal health information.
Fourth, update our trade policies to reflect the era of big data artificial intelligence. And
fifth, make sure that our government has an appetite to match China relative to its ambitions in
new sectors such as biotechnology and artificial intelligence. Sectors that certainly have a
national security implication to them, but perhaps most critically are directionally important as to
where our economy goes over the next 100 years. Thank you.
PREPARED STATEMENT OF BENJAMIN SHOBERT, DIRECTOR OF STRATEGY FOR
HEALTH BUSINESS STRATEGY, MICROSOFT; SENIOR ASSOCIATE, NATIONAL
BUREAU OF ASIAN RESEARCH
Hearing On: “A Healthy Relationship? Assessing the Risks and Opportunities of China’s
Medicine and Health Development”
July 31, 2019
Benjamin A. Shobert
Author, Blaming China: It Might Feel Good but It Won’t Fix America’s Economy; Senior
Associate, National Bureau of Asian Research; Director, Healthcare Strategy, Microsoft
Across Washington DC, the last three years have been marked by a recognition that much of
what has been taken for granted in the US-China relationship specifically, and globalization
more generally, needs to be re-assessed. Given the extent to which an increasingly
normalized relationship between the US and China had been assumed, and taken into
account during the construction of critical supply chains such as those in pharmaceuticals and
medical devices,
much of this re-thinking process has been jarring, and has provoked policymakers and
politicians to re-think assumptions that have undergird the global economy for nearly three
decades.
For industry, long standing concerns over issues such as market access and intellectual
property (IP) theft in China appear to have reached a breaking point over the last two years, in
particular across a variety of high technology industries, with at least one notable exception
relevant to this hearing: healthcare1. Whether the U.S-China Economic and Security Review
Commission (USCC) should assume in its recommendations to Congress that healthcare will
remain a durably unique high technology sector, not subject to the strains and fissures that
mark other high technology industries such as telecommunications, clean-technology and
semiconductors, requires a dispassionate assessment of the risks and opportunities posed
both to American businesses and consumers by China’s current role in the global healthcare
economy.
Healthcare has been commonly thought of as being different than other high technology
industries due to several factors. First, and perhaps most critically, because healthcare remains
an industry where nearly all those who contribute to its advancements believe deeply in their
responsibility to better their fellow man, whether through development of new products, or in-
person administration of care to the sick. Second, because healthcare is inexorably linked to
those public health concerns that most governments hold front and center to their legitimacy,
they make a concerted effort to balance between the needs of the public and industry in ways
other sectors cannot (admittedly, not always in ways that either finds satisfying). Third, that few
technological improvements cascade across the globe more quickly than those in healthcare,
perhaps as best demonstrated by the increase in human longevity over the last century.
Fourth,
that certain research and development (R&D) heavy healthcare sectors, such as those in
precision medicine, require a very special ecosystem that is not easily replicated by the brute
force of industrial planning.2
1
Note: For the purposes of this written testimony, unless otherwise explicitly stated, “healthcare” will represent
healthcare services (hospitals, senior care, home healthcare, skilled nursing, etc.), as well as life science,
pharmaceuticals, and medtech (durable medical equipment, disposables, surgical devices, etc.).
2
Joseph Wong, Betting on Biotech: Innovation and the Limits of Asia’s Development State (Ithaca: Cornell
University Press, 2011), 165.
For the last thirty years, these four factors have also benefited from a set of shared beliefs that,
until recently, supported the narrative for why high technology companies in other sectors also
wanted to be in China: the size of the Chinese market, its relative immaturity relative to the
products and services available in western markets, and the Chinese government’s appetite for
foreign direct investment (FDI) in these sectors.3 And yet, for all of the reasons why the
healthcare market in China should be seen as continuing to be full of opportunity, the last
several years have begun to demonstrate that while healthcare may be unique in certain ways,
it is not so different as to entirely escape the pressures that other high technology sectors have
found to be problematic in China. Understanding how the risks and opportunities for the
medicine and
health sectors in China are changing, and their potential impact on American industry and
patients, requires being grounded in several critical aspects of the Chinese healthcare sector.
China-Specific Healthcare Context

Chinese policymakers approach the healthcare sector with five concerns, only three of which
should be thought of as unique to healthcare. American policymakers would do well to
understand the ways in which healthcare can, and cannot, be thought of as unique from other
high technology sectors from the vantage point of their Chinese counterparts.
First, that access and affordability of healthcare services across China continue to be problems
of such import as to represent potential sources of instability for the government. While today
China’s government can accurately say that greater than 95% of the country’s rural population
have government provided healthcare insurance, out of pocket spending (OOP) by the average
Chinese family (rural or urban) is still well above that of its industrialized neighbors.4 A World
Health Organization (WHO) study asserted that “China ranked 188th among 191 member states
in fairness of financial contribution.”5 For all the efforts of the Chinese government to reform its
domestic healthcare system, in 2015, approximately 44% of poor families in China found
themselves “impoverished because of illness.”6 Pervasive inequalities between the quality,
affordability and access to healthcare via public hospitals continue to exist between urban and
rural settings in China.7
Second, ubiquitous hongbao or “red envelope” practices reflect a broken funding mechanism
that places additional financial strain on Chinese families and in so doing, has come to
represent
the Chinese government’s inability to properly fund the public healthcare system. Red
envelopes have long been the way in which private citizens pay to get to the front of the line at
a public hospital, or pay the physician under the table in addition to any service charges they
may incur,
as well as the way in which companies pay physicians to prescribe certain pharmaceuticals or
3
“What Can We Expect in China in 2019?”, McKinsey, https://www.mckinsey.com/featured-insights/china/what-
can-we-expect-in-china-in-2019.
4
China Power Team. "Is China’s health care meeting the needs of its people?" China Power. August 29, 2018.
Updated May 9, 2019. https://chinapower.csis.org/china-health-care-quality/.
5
World Health Organization. “The world health report 2000 — health systems: improving performance”, WHO,
2000.
6
Wei Fu, “Research in health policy making in China: out-of-pocket payments in Healthy China 2030”, BMJ.
February 5, 2018. https://doi.org/10.1136/bmj.k234.
7
Li Zhong and Li Jun, “Lessons and prospects of Universal Health Coverage in China: the importance of equity,
quality and affordability,” Asian Bioethics Review, March 12, 2019.
diagnostic services.8 As is often the case in China, these perverse incentives have led to
innovations of a sort, with huángniú or “scalpers”, developing a business of selling their place in
line at a hospital for a fee.9 So to, as other high technology sectors have found in China, errors
of the Chinese government’s making (in this case chronically under-funded public hospitals
marked by a lack of proper oversight) can result in liabilities the private sector is held
accountable for. The 2013 GSK scandal, where the company was found to be widely
participating in hongbao payments towards doctors and government officials, has been subject
to a number of interpretations, one of which is that whatever legitimate Foreign Corrupt
Practices Act (FCPA) violations GSK was guilty of, their actions (and those of their competitors
– both foreign and domestic) had come to be accepted as part of the cost of doing business in
China.10 In this way, the inconsistent application of laws in China’s healthcare economy remain
an omnipresent concern as multinational corporations (MNCs) develop sales, marketing and
distribution strategies for the local market.
Third, that healthcare remains one of the few parts of the Chinese political economy where
Chinese families believe the government has a very specific responsibility to perform. In
healthcare we see concerns over national security (does China have adequate production
capacity, and/or supply of, the relevant formulary to protect itself from public health
emergencies), environmental pollution (the tainted air, water and food supply representing the
reason why many families must seek out care in the first place), and corruption (the previously
mentioned hongbao practices) intersect, and much of the time all within the four walls of a
government run hospital. The 2012 Pew Research Center’s analysis of China found that
during the survey period, anxieties over China’s healthcare system had more than doubled, a
reflection of these concerns.11 The Chinese government is widely understood by the public as
being accountable for the problems in the national healthcare system, and because of this,
recognizes that foreign expertise and in limited capacities, foreign investment, is useful.
While the previous three factors are unique to healthcare, the next two are not. In fact, the next
two share similarities with other high technology sectors that have come under pressure in
China.
Because of this, these next two considerations bear a deeper analysis as to how lessons from
other industries may prove relevant to healthcare.
Fourth, that healthcare – in particular the development of IP in life sciences and biotech – is
somehow uniquely challenging, and that China’s historical success in other high technology
sectors will not apply to healthcare. As I shared in my 2017 testimony to the USCC, “China’s
pursuit of a domestic biotechnology sector may well indicate the limits of its particular
centralized economic planning capability. Biotechnology does not easily line up with those other
high technology sectors such as clean-technology and semiconductors where China has been
able
8
Joseph D. Tucker, Bonnie Wong, Jing-Bao Nie, Arthur Kleinman, “Rebuilding patient-physician trust in China,”
The Lancet. Volume 388, Issue 10047, P755, August 20, 2016.
https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(16)31362-9/fulltext.
9
Jia Guo, “How Does Healthcare in the U.S. Compare With China’s?” SupChina. March 28, 2017.
https://supchina.com/2017/03/28/healthcare-us-compare-china/.
10
Zhiwu Chen, “Foreign companies are easy targets in China,” Financial Times. July 17, 2014.
https://www.ft.com/content/2ee46a08-0cfb-11e4-bcb2-00144feabdc0.
11
“Growing Concerns in China about Inequality, Corruption”, Pew Research Center: Global Attitudes and Trends.
October 16, 2012. https://www.pewresearch.org/global/2012/10/16/growing-concerns-in-china-about-inequality-
to become a globally disruptive force. A helpful way to think of high technology areas where
China has been most successful is in those areas that had been already transitioned from bench
science to application engineering, and in areas where process innovation (doing more
manufacturing faster and at greater scale than in developed markets), has been most
impactful.”12 Healthcare incubation ecosystems – in particular life sciences and biotech – are
precious and
have proven difficult to re-create. Where they have developed, it has taken decades of
intentional investment and cultivation of ties between academia, venture capital, research
hospitals and industry to identify ways of developing, scaling and monetizing healthcare IP.13
While no one should doubt China’s appetite for making these investments, a degree of caution
is worth striking as to whether the country will be as successful, as quickly, as it has been in
other high technology sectors.
Fifth, that China’s ability to develop a domestic healthcare sector is an essential part of its
economic development strategy. As I wrote in a 2016 special report for the National Bureau of
Asian Research (NBR): “Economies that have a vibrant life science community feature high-
paying jobs, systems that deliberately foster innovation within academic institutions, robust
protections for intellectual property (IP), and a sophisticated manufacturing infrastructure. In
addition, economies that feature global champions in these high-technology fields create
benefits for other industries domiciled within the same geography. The characteristics of
economies that have successful life science sectors easily complement the policy agenda of
the Chinese government to reframe what ‘made in China’ represents to its own people and the
world.”14 While China’s ambitions in healthcare may have unique motivations versus other high
technology sectors, they also share and idea and motivation; namely, that for China to continue
to economically develop it will need to become a global powerhouse in higher technology
industrial sectors, of which healthcare is one.
As evidenced by the growing number of domestically originated new drug submissions to
China’s National Medical Products Administration (NMPA, and formerly known as the China
Food and Drug Administration, or CFDA), no one should doubt China’s aspirations to
successfully develop novel molecules or precision medicine capabilities, in particular with
respect to efforts focused on chimeric T cell receptors (CAR-T) and Clustered Regularly
Interspaced Short Palindromic Repeats (CRISPR). In both cases, objective analysis suggests
that China’s ability to make progress with respect to western R&D efforts may owe less to
concerted industrial policy, and more to the lax regulatory environments within which Chinese
companies operate in these two research areas in particular.15 Said differently, the lack of
certain ethical oversight for CRISPR, and the regulatory approval channel CAR-T has been
able to take
12
Benjamin Shobert, Hearing On: “China’s Pursuit of Next Frontier Tech: Computing, Robotics, and
Biotechnology,” March 16, 2017, U.S.-China Economic and Security Review Commission, 3.
13
Note: Additional context on the peculiar nature of the biotech incubation ecosystem can be found in Ajay
Gautam’s book Drugs, Politics & Innovation: An Emerging Markets Cocktail, Partridge Singapore, March 4, 2016.
14
Benjamin Shobert, “Priming the Pump: Applying Lessons Learned from High-Tech Innovation to the Life
Sciences in China”, National Bureau of Asian Research. April 2016, 27.
15
Mark Kazmierczak, Ryan Ritterson, Danielle Gardner, Rocco Casagrande, Thilo Hanemann, Daniel Rosen,
“China’s Biotechnology Development: The Role of US and Other Foreign Engagement: A report prepared for the
U.S. China Economic and Security Review Commission”, Gryphon Scientific and Rhodium Group, February 14,
2019, 24-25.
advantage of (a medical technology versus drug clinical trial), account for some of the velocity
of Chinese efforts in these two areas, as opposed to intentional policy making.16
Yet, while we can observe an increase in the amount of domestic investment in the broader
healthcare industry (in particular life science and biotech sectors), and a correlated increase in
the number of domestic clinical trials, we cannot yet say that Chinese industrial policy has
resulted in a thriving sector characterized by the development of new therapeutics that hold the
potential to accelerate China’s domestic economy by manufacturing, distributing and selling
these products to the world. What we still have is a sector marked by enormous ambition and
investment from both public and private sector actors in China. But, as policymakers and
investors in more developed markets can attest, significant downside risks reside at the
intersection of human biology, science and commercialization; China’s success in this sector
should not be assumed, both because past efforts to leverage industrial policy by other
economies have proven unsuccessful, and because unlocking the next era of precision
medicine led innovations are not scientifically nor economically assured.
These last two contextual factors both revolve around the idea of healthcare as just another
high technology sector that China will be targeting. This requires special attention with respect
to what the USCC has asked around risks. It is this consideration, healthcare as just another
high technology vertical within which China’s domestic industrial policy will be applied, that
suggests caution in how risks are thought of, and designed around. Perhaps most critically,
thinking of healthcare in this way allows American industry and policymakers to now reflect on
and apply hard lessons learned from other, non-healthcare, high technology sectors in China.
To the extent industry and policymakers outside of China now wish a more deliberate
approach had been taken to how non-healthcare related high technology sectors were brought
to China, we now have an opportunity to reflect on these lessons learned, and where
appropriate, apply them to healthcare, to ensure the interests of both the US and China are
taken into account.
Opportunities
Three opportunities continue to characterize the Chinese healthcare economy, all of which are
positive for both American industry and patients.
First, the market potential. China’s pharmaceutical sector is already the world’s second largest,
and is poised to increase in size to ~$145 billion by 2022.17 McKinsey estimates that the
Chinese healthcare economy should reach $1 trillion by 2020.18 While the size of China’s
potential market is alluring regardless of industry, in healthcare China’s potential plays a
somewhat different role. Austerity measures driven by aging populations across western
markets, alongside the transition away from fee for service to value-based care in the United
States in particular, have resulted in many multinational healthcare companies aggressively
seeking out new growth opportunities. The allure of the Chinese market’s ability to mitigate the
revenue and margin pressures faced in western markets has, in part, explained why so many
16
Ibid., 24.
17
Alex Keown, “Exponential Pharma Growth Expected in China by 2022”, BioSpace, April 20, 2018.
https://www.biospace.com/article/exponential-pharma-growth-expected-in-china-by-2022/.
18
Franck Le Deu, Rajesh Parekh, Fangning Zhang, and Gaobo Zhou, “Health care in China: Entering ‘uncharted
waters’”, McKinsey & Company, November 2012. https://www.mckinsey.com/industries/healthcare-systems-and-
services/our-insights/health-care-in-china-entering-uncharted-waters.
multinationals (pharma and medtech in particular) have made China such a central part to their
growth story.19
Second, investment. Up until the October 2018 US Department of Treasury pilot program that
announced additional scrutiny would be applied to FDI (including biotech) Chinese appetite for
investments in American healthcare was growing.20 The Gryphon Scientific and Rhodium
Group analysis of this topic from earlier this year found that “despite the recent rapid increase,
the total value of outbound M&A in the pharmaceutical and biotech sectors remains relatively
small at just $7 billion in 2000-2017, which is a small fraction (two percent) of total Chinese
outbound M&A in that period.”21 Given the American biotech venture capital sector is not
currently short capital, investment monies from China are not critical.22 However, for those who
have sought out Chinese capital, savvy Chinese investors have increasingly tied their
willingness to deploy funds into a western biotech firm to in-licensing terms that ensure the IP
in question has a route to market in China.23 If outbound Chinese investment into American
biotech companies continues to slow, so too may the market access opportunities for
American biotech startups in China slow down. It is worth noting that this opportunity is quickly
diminishing given the Committee on Foreign Investment in the United States (CFIUS) ruling on
iCarbonX’s investment in PatientsLikeMe, a point which will be addressed later in more
detail.24
Third, harmonization of healthcare standards to global norms. For years, China’s
pharmaceutical regulatory processes were badly out of sync with those of its developed
neighbors. This resulted in treatments that could not be made available to the Chinese public.
But over the last five years, Chinese regulators have turned their attention towards reforming
the former CFDA (now NMPA), with striking results as measured by the velocity and number of
new domestic and foreign drugs approved for use in China.25 The result of these efforts to
bring China’s regulatory environment up to western standards has meant that multinationals
can sell their products into
the Chinese market within a larger window of patent protection than had been previously
afforded them. This is not only a material new source of revenue, by growing the potential total
addressable market for new healthcare innovations, it is possible to spread R&D cost over more
covered lives, hopefully leading to lower costs. In addition, harmonization of regulatory
19
Angus Liu, “China’s driving sales growth ahead of the U.S. for Big Pharma. But can it last?”, FiercePharma, May
28, 2019. https://www.fiercepharma.com/pharma-asia/china-drives-growth-ahead-u-s-for-big-pharma-will-it-last.
20
Ned Pagliarulo, “US tightens scrutiny of foreign investment into biotech sector,” BioPharma Dive, October 11,
2018. https://www.biopharmadive.com/news/us-tightens-scrutiny-of-foreign-investment-into-biotech-
sector/539437/.
21
Kazmierczak, et. al., 56.
22
“Another Trophy Quarter for VC-Backed Biotech Funding,” LifeSci VC, April 30, 2018.
https://lifescivc.com/2018/04/another-trophy-quarter-for-vc-backed-biotech-funding/.
23
“China drug in-licensing opportunities expected to swell as local pharma focus on R&D,” Pharmaceutical
Technology, May 23, 2019. https://www.pharmaceutical-technology.com/comment/china-in-licensing-deals/.
24
Christina Farr, Ari Levy, “UnitedHealth buys PatientsLikeMe, which faced Trump administration scrutiny over
Chinese investor,” CNBC, June 24, 2019. https://www.cnbc.com/2019/06/24/unitedhealth-buys-patientslikeme-
after-cfius-forced-sale.html.
25
Mark Terry, “30 New Drugs from Foreign Countries Approved in China in Last 21 Months”, BioSpace, November
27, 2018. https://www.biospace.com/article/30-new-drugs-from-foreign-countries-approved-in-china-in-last-21-
months/.
standards also ensures that innovations developed in China can be exported to markets in need
more quickly than they otherwise would be.26
Finally, the harmonization of China’s pharmaceutical sector to global standards has important
quality and safety implications to American consumers. As China continues to legitimize the
enforcement capability of the NMPA, and to force consolidation of its highly fragmented
pharmaceutical manufacturing sector, the ability to ensure the Chinese supply chain is up to
western standards increases. The USCC has expressed specific interest on this point, and it is
worth reinforcing that while the NMPA’s enforcement regime is relatively new, the Chinese
government is very invested in ensuring they comport to global standards, both to ensure the
quality, safety and efficacy for domestic consumption, as well as to ensure that Chinese novel
molecules can be exported and adopted by the global market.27
Risks
Five risks will need additional attention from American policymakers, in particular as they relate
to lessons we should learn from the experiences of other high technology sectors in China, and
those questions posed by the USCC commissioners.
First, the impact of ongoing trade tensions on bilateral investments and on supply chain
uncertainties, each of which has unique characteristics within the healthcare sector: anxieties
over where your new iPhone will be made is one thing. Concern over where your antibiotics or
hypertensives come from is quite another. The world, not just America, has become
increasingly dependent on China as its source for manufacturing pharmaceuticals. Even India,
known for its unique policy and industrial environment with respect to pharmaceuticals, now has
taken a dependency on Chinese manufacturing to such an extent that it is estimated 80% of
India’s active pharmaceutical ingredients (APIs) originate from China.28
A global trade war on the basis of telecommunication equipment carries with it the risk of
destabilizing the economy. A global trade war which has repercussions to medicines that are
currently widely available, and at reasonable costs, would have much more deleterious effect.
Whether America should have taken this dependency on foreign manufactured
pharmaceuticals is not a question best directed at the US-China relationship. Rather, if
American policymakers want to ensure that a certain national formulary is widely available to
the public in case of crisis, policies around domestic production and inventory would be
appropriate. It is worth calling attention to the point that this concern – taking a dependency
on China for pharmaceutical products in particular – has historically been understood as one
of the reasons the US-China relationship can and should be thought of as safe and stable. It
is now interpreted through the
26
Note: The export of the Ebola vaccine Ad5-EBOV, by CanSino Biologics Inc. is one early example of this. See
Angus Liu, “China approves domestic Ebola vaccine developed from recent outbreak,” FiercePharma, October 24,
2017. https://www.fiercepharma.com/vaccines/china-approves-self-developed-ebola-vaccine-from-2014-outbreak-
virus-type.
27
Eric Ng, “Why most small players may not survive China’s pharmaceutical industry consolidation: Strategy aims
to turn China’s predominantly off-patent drug copying pharmaceutical industry into one that’s capable of coming up
with innovative patentable products,” South China Morning Post, January 31, 2018.
https://www.scmp.com/business/companies/article/2131230/why-most-small-players-may-not-survive-chinas-
pharmaceutical.
28
Arun Sreenivasan, “China crackdown on polluting firms leaves Indian pharma industry in quandary as API prices
rise 40% in four months,” PharmaBiz, July 13, 2018. http://www.pharmabiz.com/NewsDetails.aspx?
aid=109959&sid=1.
lens of fear, and the deeper anxieties about the troubled state of relations between the two
countires should not be missed by anyone. If we indeed believe America can take calculated
dependencies on China for critical components to modern life – medicine being chief among
these – then we are still working in good faith. However, if we no longer believe that America
can do so, much of what has supported the modern era of globalization is no longer valid.
Second, CFIUS’ role in evaluating Chinese FDI into the American healthcare sector. The April
2019 determination by CFIUS that the Chinese digital healthcare company iCarbonX would have
to divest its $100 million investment in the American patient healthcare platform PatientsLikeMe
has drawn significant attention by both American and Chinese investors.29 There are several
important risks this has surfaced. CFIUS’ ruling is understood to be largely a function of
concerns within the American government of allowing a Chinese company to have access to a
large set of American personally identifiable information (PII), including personal health
information (PHI).30
Trade lawyers familiar with the CFIUS process have been quick to point out that it does not
appear iCarbonX pursued the appropriate CFIUS pre-approvals to ensure the deal would meet
their standards.31 Consequently, the October 2018 interim regulation that implemented
updates to the Investment Risk Review Modernization Act (FIRRMA) and which pays
particular attention to “target industries” with “critical technologies” and “sensitive personal data
of United States Citizens” set CFIUS and iCarbonX on a collision path.32 The specific risk
CFIUS was
worried about had to do with how American PHI would be exposed to a Chinese company
whose business model required exposure of said PHI to artificial intelligence systems. The
resulting machine learned (ML) models would have been trained on American PHI collected as
part of the PatientsLikeMe platform, among other data sources (including Chinese PHI). It was
unclear to American regulators whether this training activity would have taken place in
computer system domiciled within the United States or China, and attempts by iCarbonX to
dissuade CFIUS that the training in question could be limited to American computers was
deemed inadequate.
CFIUS undoubtedly has an important job to do with respect to guarding America’s national
security, including the privacy of American citizens. The unique “claw-back” or “disturbance”
rights CFIUS possesses means that any foreign investment deemed to cross a national security
or privacy line can be deemed illegitimate and mitigation by the foreign company required.
This, coupled to the current US-China trade war, has resulted in a dramatic decrease of
Chinese
29
Christine Farr, Ari Levy, “The Trump administration is forcing this health start-up that took Chinese money into a
fire sale,” CNBC, April 4, 2019, https://www.cnbc.com/2019/04/04/cfius-forces-patientslikeme-into-fire-sale-
booting-chinese-investor.html.
30
Harry Clar, Betty L. Louie, Jeff Zhang, and Xiang Wang, “Grind and PatientsLikeMe Outcomes Show Non-
Cleared Transactions’ Exposure to CFIUS Scrutiny, Especially When PII Is Involved,” Orrick, April 23, 2019.
https://www.orrick.com/Insights/2019/04/Grindr-and-PatientsLikeMe-Outcomes-Show-Non-Cleared-Transactions-
Exposure-to-CFIUS-Scrutiny#.
31
“CFIUS Developments: Notable Cases and Key Trends,” Gibson Dunn, April 24, 2019.
https://www.gibsondunn.com/cfius-developments-notable-cases-and-key-trends/.
32
Michael E. Leiter, Ivan A. Schlager, Donald L. Vieira, Daniel J. Gerkin, Michelle A. Weinbaum, “CFIUS Pilot
Program Expands Jurisdiction to Certain Noncontrolling Investments, Requires Mandatory Declarations for Some
Critical Technology Investments,” Skadden, Arps, Slate, Meagher & Flom LLP, October 11, 2018.
https://www.skadden.com/insights/publications/2018/10/cfius-pilot-program-expands-jurisdiction.
investment in American biotech: the first half of 2019 has seen a 60% reduction in American
biotech firms by Chinese venture capital.33
Third, differences in the appetites for investment and risk by the American and Chinese political
systems. Across the globe, national governments are standing up large biobank initiatives. In
2016, the United States launched the 21st Century Care Act, with $6.3 billion in funding, to
include a variety of population health data.34 In 2013, the United Kingdom established
Genomics England, a program designed to sequence 100,000 genomes.35 Similar efforts are
in motion in Canada, Japan, Thailand, Qatar and Latvia. China meanwhile has been even
more ambitious, with a variety of national and provincial efforts ranging in scope and budget,
but all designed to create datasets that include genetic information. One of the more widely
referenced
examples in China is the China National GeneBank, which aims to have genetic material from
10 million different bio-samples.36 The range of activities vary across each of these efforts, but
they typically include a fully sequenced human genome, tied to a longitudinal health record (the
electronic capture of an individual’s healthcare, including lab data).
What these initiatives share in common is not just the advancement of human knowledge:
these curated data sets serve as the foundation to the 21st century’s biotech industry. The
greater diversity, quality and quantity of data available to researchers should in turn result in
accelerated precision medicine development, which should result in companies being able to
spin out new therapeutics and diagnostics predicated on access to these privileged data sets.
Justifying government led investments in these data sets has become increasingly difficult, in
the US in particular.
If American policymakers do not incentivize the development of equally large and technically
rich data sets in the United States as are available in China, we are foregoing a significant
opportunity both economically, and from a public health point of view. To the extent the USCC
is particular invested in preventing the United States from falling behind China, or to taking an
even greater dependency on Chinese healthcare products, strategies to deepen American
investment in the development of these curated data assets will be required.
Fourth, asymmetric data access standards and policies between the US and China, and their
impact on economic competitiveness and consumer privacy. The previously mentioned data
assets are the result not only of a citizen’s PHI, they also exist as a result of public sector
financing of these biobank initiatives. The public anticipates a return on its investment in the
form of advanced therapeutics, as well as the development of new companies who successfully
commercialize their offerings, enriching the economy as a result. However, as currently
33
Tom Hancock and Hannah Kuchler, “Chinese VC spending on US biotech hit by security reviews,” Financial
Times, July 8, 2019. https://www.ft.com/content/6d647f7e-a13a-11e9-974c-ad1c6ab5efd1.
34
Trudy Lieberman, “With media watchdogs on the sidelines, pharm-funded advocacy groups pushed Cures Act to
the finish line,” HealthNewsReview.org, December 6, 2016. http://www.healthnewsreview.org/2016/12/with-
media-watchdogs-sidelined-pharma-funded-advocacy-groups-pushed-cures-act-to-the-finish-line/.
35
James Gallagher, “DNA project ‘to make UK world genetic research leader,” BBC, August 1, 2014.
https://www.bbc.com/news/health-28488313.
36
Zhuang Pinghui, “China opens first national gene bank, aiming to house hundreds of millions of samples,” South
China Morning Post, September 22, 2016. https://www.scmp.com/news/china/article/2021623/chinas-noahs-ark-
first-national-gene-bank-opens-shenzhen.
embodied in both law and practice, American researchers do not have equal ability to work with
Chinese PHI, as do Chinese researchers with American PHI.
De-identified PHI from Americans may be shared across borders, provided the de-identification
process meets the Health Insurance Portability and Accountability Act (HIPAA).37 However, as
the Gryphon-Rhodium report from February 2019 makes clear: “Only a Chinese entity may
apply for such a permit; therefore, the only lawful way for international entities to access
Chinese genetic data is through collaboration with a Chinese institution. All collaborations
involving genetic data must be approved by the participating institutions and by the China
Administration of Human Genetic Resources. Chinese entities partner with a foreign institution
must state the purpose of the collaboration, the duration of the collaboration, and any plans for
sharing and ownership of IP.”38 Such a regulatory approach by the Chinese government may
in fact be perfectly reasonable, but it must symmetric with the same approach to how PHI is
shared across borders by the US government. A more elastic posture on the part of the
American government, who is now revisiting the consequences of taking more liberal
approaches to asymmetric policies between the US and China in other non-healthcare arenas,
may not be appropriate, in particular with respect to something as sensitive as PHI.
On this point, it is important to not get ahead of the facts. It has been suggested that Chinese
access to American PHI could result in their ability to design the perfect bioweapon, targeted
only at Americans.39 This makes for good science fiction, but thus far quite bad science; and,
in being bad science, it runs the risk of being both inflammatory and counter-productive. What
American policymakers should care about is not disincentivizing the development of large
Chinese biobanks with vast quantities of PHI. What American policymakers should care about
is that we are making similar investments, and that America and China have agreed upon
protocols specific to de-identification and bilateral cross-border data sharing, so as to ensure
the pace of progress in healthcare continues to accelerate.
Fifth, the trade-off between high volume and low profit, as embodied by the Chinese
government’s tendering process. This concern is nothing new, but continues to be a risk that
will require attention, and possibly discussion as part of the U.S.-China Comprehensive
Economic Dialogue (CED), as it has been in prior administrations. Specifically, the ongoing
pricing pressure that American multinationals are under in the pharma sector in particular, as it
relates to their ability to access broader portions of the Chinese healthcare system (the public
hospital formulary, and its reimbursement system in particular) will need ongoing attention.40
The Intersection Between Artificial Intelligence and Healthcare

In many important ways, the USCC’s questions lay the groundwork for one of the more critical
matters that needs Congress’ attention: the intersection between artificial intelligence (AI) and
37
“Guidance Regarding Methods for De-identification of Protected Health Information in Accordance with the
Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule”, Health and Human Services,
https://www.hhs.gov/hipaa/for-professionals/privacy/special-topics/de-identification/index.html.
38
Kazmierczak, et. al., 129.
39
Davd J. Lynch, “Biotechnology: the US-China dispute over genetic data,” Financial Times, July 31, 2017.
https://www.ft.com/content/245a7c60-6880-11e7-9a66-93fb352ba1fe.
40
David Shen, “China announces pilot scheme for pharmaceutical tendering with minimum procurement
quantities,” Allen & Overy LLP, December 5, 2018. https://www.lexology.com/library/detail.aspx?g=8cdd2be6-
8e6f-4b81-8582-e3ea87cbca43.
healthcare in China. Currently, several city-specific AI initiatives in China represent
significantly larger investments in AI that the US government is planning to make in total.41
This represents a very real challenge to the ability of AI dependent healthcare companies in
the US building out their technology stacks, identifying use cases, and ensuring insights can
be derived and applied to the benefit of American patients.
Large biobanks are not the only healthcare data asset national governments care about, and
are investing in. China’s Ministry of Science and Technology has established a number of
programs designed to collect and centralize other types of data, including not only the
previously mentioned genomic and longitudinal health record data, but also imaging records
such as those from magnetic resonance imaging (MRI) and computed tomography (CT)
scans.42
AI’s ability to develop new use cases hinges on access to large quantities of training data, and
no country in the world is as serious about funding this aggregation of data across a number of
disparate verticals, than is China. As American policymakers wrestle with questions around
asymmetric data access policies between the US and China, it would be wise to keep in mind
that American healthcare and technology companies stand to benefit if promulgated policies in
both countries were to exist that allowed training on both countries’ data sets. At current
investment levels, China will amass a much larger and more diverse healthcare specific set of
data upon which to train AI than will the United States. This point must be reinforced: it is in
the interests of American industry and patient care to ensure that our companies and research
institutions can train on these data sets, and if they cannot, to diligently work to build up
equivalent resources upon which American AI companies can train.43
As with the analysis of China’s progress in CAR-T and CRISPR, some of these advancements
are the result of differences in regulatory standards between the two countries. In the case of
how Chinese researchers train on large healthcare data sets, China does not have the same
oversight as American researchers are obligated to under an Institutional Review Board (IRB).44
What this means in practice is that Chinese researchers and entrepreneurs not only have
access to differentiated data sets, they can also work with them more easily than their
American counterparts can work with data assets that reside within their home country.
There are other rate limiting factors for the adoption of AI in healthcare, and it may well be that
China could develop AI faster not only because of those previously mentioned advantages, but
also because the healthcare delivery vehicles in China are so different, and already so
manpower constrained, as to make the patient, physician and payer willing to turn certain parts
of the workflow and patient experience over to technology, where an equivalent patient journey
in the United States would be actively resisted. Regardless of these considerations, the USCC
would
41
Luiza Ch. Savage and Nancy Scola, “’We are being outspent. We are being outpaced’: Is America ceding the
future of AI to China?” POLITICO, July 18, 2019, https://www.politico.com/story/2019/07/18/global-translations-
ai-china-1598442.
42
Luxia Zhang, “Big data and medical research in China,” BMJ 2018; 360:j5910.
http://dx.doi.org/10.1136/bmj.j5910.
43
Sui-Lee Wee and Paul Mozur, “Amazon Wants to Disrupt Health Care in America. In China, Tech Giants
Already Have,” New York Times, January 31, 2018. https://www.nytimes.com/2018/01/31/technology/amazon-
china-health-care-ai.html?partner=IFTTT.
44
Tom Simonite, “How Health Care Data and Lax Rules Help China Prosper in AI”, Wired, January 8, 2019.
do well to pay attention to how the era of healthcare-specific AI is informed and governed by,
asymmetric data access and privacy polices between the United States and China.
Recommendations for Congress

Given the current challenges in the US-China relationship, and the lessons that should be
taken from other high technology sectors and applied to healthcare, let me propose the
following five recommendations for Congress:
1. Deliberately gate Chinese FDI into American healthcare sectors based on the ability
of American healthcare companies and institutional investors to make equivalent
investments in China. If American companies cannot invest within a specific healthcare
sector in China, their Chinese competitors should not be able to make associated
investments in the United States. Healthcare services (hospitals in particular) require
attention on this front and have been part of the US Trade Representative’s negotiation
with Beijing over the last year.
2. Review America’s national formulary and determine how best to ensure supply
chain resiliency for specific likely public health crises. To the extent America has
taken a supply chain dependency on supply of pharmaceuticals manufactured in China,
American policymakers should revisit subsidies designed to encourage domestic
production of specific products organized around, and prioritize by, the most likely public
health crises.
3. Pursue harmonized standards around sharing of PHI. The first step should be a
bilateral agreement on the de-identification of PHI, and the mechanisms by which de-
identified PHI can be shared across borders. Ideally, this discussion should include
more than just the United States and China, as how PHI will be normalized serves as a
foundational element to how large data assets will be developed, curated and shared
globally. As with the first recommendation, if China is not willing to agree to bilateral
standards on this point, Congress should act to negate Chinese access to American
PHI, even if de-identified, by Chinese researchers. CFIUS already anticipates some of
this given its ability to deny proposed, or negate past, investments by foreign firms
where exposure of American PII might occur. Few things are more sensitive that an
individual’s personal health information, and as such, this matter will require significant
thought; however, the extent to which large data assets involving PHI constitute the
future of economic competitiveness and development of new medicines, both countries
would do well to begin thinking about how to ensure data sharing policies that address
their citizen’s privacy concerns.
4. Update trade policy to reflect the era of big data, cloud computing and AI to ensure
symmetric data access rights between American and Chinese companies and
academic research centers. Current trade protocols were built to address the needs of a
manufacturing economy. They have struggled to accommodate the era of cloud
computing, big data and AI. Congress should establish a specific review of current
USTR policy with a specific view on how to modernize trade protocols with the needs of
big data driven industries in mind.
5. Increase government led investment in the collection of large data sets for the
purposes of AI. Estimates vary as to China’s overall investment plans in AI, but as one
example, the Chinese city of Tianjin plans to spend $16 billion on a variety of AI
investments over the next several years. This is larger than the total amount the US
government plans to spend on the same. China has certain natural advantages in this
sector, not least of which is the large amount of available labor to label training data (a
key part of how machine learning systems develop new capabilities). To counteract
these unique capabilities, the US government must develop an AI strategy that includes
new investments spread across research institutions, government and industry. While
healthcare is the focus of today’s testimony, there are critical national security issues
involved in ceding the era of AI to China.
OPENING STATEMENT OF KATHERINE EBAN, AUTHOR, “BOTTLE OF LIES”
COMMISSIONER TALENT: Perfect timing. Ms. Eban.

MS. EBAN: I hope I can do as well with the timing. Thank you for having me. It's a
pleasure to be here today. I spent a decade investigating the overseas manufacturing plants
that are the principle suppliers of generic drugs to the U.S. market. That effort culminated in
the recent publication of my New York Times Best Selling Book, "Bottle of Lies: The Inside
Story of the Generic Drug Boom" which came out in May by Harper Collins.
The book takes readers into the overseas manufacturing plants where the majority of
our low cost generic medicine is made and reveals endemic fraud and dire conditions. To
report the book, I traveled to four continents. I was in China as well. Interviewed hundreds of
sources and obtained over 20,000 pages of confidential FDA documents.
The U.S. drug supply is 90 percent generic with the majority of those drugs coming from
overseas, principally India and China. As well, 80 percent of the active ingredients in all our
drugs, rather brand or generic, also come from overseas. The bulk of those from China and
India.
It is crucial to the health and safety of the American public that these drug products are
effectively regulated. No substandard drug products should be permitted to enter the U.S.
market. And yet China has been a continuing source of adulterated drug products, most
recently of active ingredients for the generic blood pressure medicine, Valsartan, that was
found to contain a carcinogen previously used in the production of liquid rocket fuel, which is
not good for you.
As well, FDA investigators have found widespread fraud and manipulation of quality
data in Chinese manufacturing plants. After extensive reporting on this topic, it is my conclusion
that the FDA is not effectively regulating the overseas manufacturing plants including in China
that export to the U.S. market. FDA officials are also allowing substandard drug products to
enter the U.S. market. They are making exceptions for reasons that include concern over drug
shortages and confusion about their own authority overseas. The FDAs investigators are
spread too thin with a depleted staff in China and a relatively small cadre of U.S. based
investigators willing to perform inspections overseas.
In conclusion, I believe the FDA must overhaul its foreign inspection system and more
strictly enforce its own regulations to ensure the safety of the American public. And with that,
I'd like to just give you three examples, which are from my book where I talk about inspections
in China.
I follow an investigator named Peter Baker who arrived in Beijing in 2015 of 38
manufacturing plants that he inspected in China. Of 48 plants he inspected in China, he found
fraud or data manipulation in 38 of those plants. We know that there is endemic fraud in
Chinese drug plants because Chinese regulators have found that themselves. In 2016, an
investigation by China's own National Medical Products Administration found that 80 percent of
clinical trial data submitted by Chinese companies to regulators to gain approval for new drugs
was fabricated.
So as an example, Peter Baker showed up at a plant called Zhejiang Hisun in Taizhou,
200 miles south of Shanghai, which was the site of a joint venture with Pfizer to make high
quality low cost medicine. Zhejiang Hisun was not a fly by night plant, it was already China's
largest exporter of drug ingredients to the U.S. Peter Baker instead of requesting documents
as many FDA investigators do, looked inside the computers of the plant.
And using rudimentary Mandarin that he learned in college, looked for Chinese symbols
for the words trial injection and experimental sample. Despite Pfizer's three year head start, it
took him about a day to figure out the plant was running an alternate and hidden laboratory
operation. And secretly pre-testing its drug samples and them masking the results in part by
turning off the audit trails to leave no evidence of the tests. The FDA followed up by putting the
plant under an import alert restricting its drugs into the U.S. But then lo and behold discovered
15 of those drugs were in short supply in the U.S. and lifted the restriction on those drugs.
I cite another example when an FDA investigator showed up at a plant called Zhejiang
Bangli Medical Products, which makes skin patches for pain. And the plant manager grew
increasingly concerned about the inspection and ended up holding the investigator hostage in a
conference room for hours. And the investigator was not released until the intervention of
Chinese police and Chinese regulators. Despite that incident, an actual hostage situation, the
FDA concluded that the plant did not make a specified refusal of the inspection. And so did not
impose an import alert on the plant after that inspection.
And a third example is what's happening right now, which is a worldwide recall of
Valsartan active ingredients, which were found to contain a carcinogen. An FDA investigator
went into that plant in 2017 and actually found that the plant was not investigating impurities in
its active ingredients, which showed up as peaks in chromatograms. And recommended to the
FDA, official action indicated which would have restricted those drugs from coming into the
U.S. But the FDA determined that the firm's response subsequently was adequate as it
concerned the observation pertaining to their investigation of aberrant peaks on HPLC
chromatograms. And demonstrated that the peaks did not impact product. So did not impose
an import alert. Less than a year later, that plant was under a worldwide restriction because its
drugs contained impurities.
So in closing, I would suggest that the FDA needs to overhaul its foreign drug inspection
program. It needs a go-to highly trained, well-funded cadre of foreign inspectors with a clear
career path. They should perform short notice or no notice inspections in China as opposed to
announcing them months in advance as they do now. And they should rarely overrule the
recommended sanctions of its own inspectors, which happens all too often now. Thank you
very much.
PREPARED STATEMENT OF KATHERINE EBAN, AUTHOR, “BOTTLE OF LIES”
Katherine Eban
Investigative journalist and New York Times bestselling author,
Bottle of Lies: The Inside Story of the Generic Drug Boom
“A Healthy Relationship? Assessing the Risks and Opportunities of China’s Medicine and Health
Development.”
July 31, 2019
Introduction
I spent a decade investigating the overseas manufacturing plants that are the principal suppliers
of generic drugs to the U.S. market. That effort culminated in the recent publication of my New
York Times bestselling book, Bottle of Lies: The Inside Story of the Generic Drug Boom
(Ecco/Harper Collins May, 2019).
The book takes readers into the overseas manufacturing plants where the majority of our low- cost
generic medicine is made. It reveals endemic fraud and dire conditions in an industry where
companies routinely falsify data and circumvent principles of safe manufacturing to minimize cost and
maximize profit. To report the book, I traveled to four continents, interviewed hundreds of sources
and obtained over 20,000 pages of confidential FDA documents.
The U.S. drug supply is 90 percent generic, with a majority of those drugs coming from overseas,
principally India and China. As well, 80 percent of the active ingredients in all our drugs, whether
brand or generic, come from overseas, the bulk of those from China and India.
It is crucial to the health and safety of the American public that these drug products are effectively
regulated. No substandard drug product should be permitted to enter the U.S. market. And yet China
has been a continuing source of adulterated drug products, most recently of active ingredients for the
generic blood pressure medicines valsartan, that was found to contain a carcinogen previously used in
the production of liquid rocket fuel. As well, FDA investigators have found widespread fraud and
manipulation of quality data in Chinese manufacturing plants.
After extensive reporting on this topic, it is my conclusion that: the FDA is not effectively regulating the
overseas manufacturing plants, including in China, that export to the U.S. market; FDA officials are
allowing substandard drug products to enter the U.S. market. They are making exceptions for reasons
that include concern over drug shortages and confusion about their own authority. The FDA’s
investigators are spread too thin, with a depleted staff in China, and a relatively small cadre of U.S.-
based investigators willing to perform inspections overseas.
In conclusion, I believe the FDA must overhaul its foreign inspection system, and more strictly enforce
its own regulations, to ensure the safety of the American public.
1. Chinese drug plants systematically engage in deceptive practices
One FDA investigator, Peter Baker, who I feature in my book, inspected 48 plants in China from 2014 to
2016, and found evidence of serious data integrity violations in 38 of them. As well, additional
evidence supports the view that fraud and manipulation of quality data is endemic in Chinese drug
plants.
In February 2015, Baker arrived in Beijing, where he became the FDA’s sole drug investigator
stationed in China, responsible for inspecting over four hundred factories approved to export drugs
or drug ingredients to the United States.
Within a month, he arrived at the massive Zhejiang Hisun plant in Taizhou, two hundred miles south of
Shanghai. The plant was the site of a joint venture with Pfizer, started in 2012, to create high-quality,
low-cost medicine under the umbrella of Hisun-Pfizer Pharmaceuticals. The company seemed like a
safe bet: it was already China’s largest exporter of drug ingredients to the United States.
The FDA’s investigators had been at the Zhejiang Hisun plant over a dozen times and had found little to
concern them. But Peter Baker had a different inspection style. Instead of requesting documentation,
as other FDA investigators do, he looked directly in the computer systems of the plants he inspected,
as was his right. At the Zhejiang Hisun plant, he went to the quality control laboratory. Using the
rudimentary Mandarin that he learned in college, he hunted through the forest of Chinese symbols in
the computer audit trails for the words “trial injection” and “experimental sample.”
Despite Pfizer’s three-year head start, it took Baker about a day to figure out that the plant was
running an alternate and hidden laboratory operation. The plant was secretly pretesting its drug
samples and then masking the results, in part by turning off audit trails to leave no evidence of the
tests. In one instance, Baker found that technicians had turned off the audit trail on February 6, 2014,
at 9:09 a.m., then proceeded to run eighty secret tests. The audit trail was turned back on two days
later at 8:54 a.m., and the tests— now rigged and with the outcomes assured— were repeated.
Baker found the telltale evidence in the software’s metadata. By the third day of inspection, the plant
managers and analysts were well aware of how devastating his inspection might be.
When Baker returned from a lunch break to the quality control laboratory, he saw an analyst quickly
remove a thumb drive from one of the HPLC machines and slip it into his lab coat. Baker demanded that
he hand over the thumb drive, but the man “began running and fled the laboratory premises,” he
documented in his inspection report.1 Fifteen minutes later, a manager returned to offer him the
thumb drive, but Baker had no idea whether it was the same
1
FDA, “Form 483: Inspectional Observations,” Zhejiang Hisun Pharmaceutical Co., Taizhou, China, March 2–7,
2015, 7.
one. He noted the incident as a refusal to share records— which was serious enough to get the plant’s
drug ingredients blocked from the United States.2
The prevailing attitude in the Chinese drug industry has long been, “we can always fool a foreigner,” as
one Western drug executive put it. Baker’s inspections cast a harsh light not just on Chinese drug
manufacturing, where fraud was endemic, but also on the FDA’s foreign inspection program. Four-
fifths of the plants he inspected in China were engaging in some sort of data manipulation or deceit to
conceal regulatory violations or substandard drug products from FDA regulators. “Every time he puts a
foot in a company, he’s finding more problems,” as one senior FDA official said of Baker. “What does
that say about an inspectional force that’s not finding this?”
Six weeks after the Zhejiang Hisun inspection, Baker went to Dalian in the Liaodong Peninsula and
inspected another plant; this one, owned and operated by Pfizer, was making finished doses for the
U.S. market. There, too, he found manipulated tests, unreported results, and loose batch records that
showed the plant using expired materials. One stack of documents disappeared entirely during his
inspection; he found them later on an upper floor, tucked inside a wooden crate.3
Most of the FDA’s investigators who are sent to China do not speak the language. They can’t read the
manufacturing records. The FDA does not always provide independent translators. Instead, the
companies provide translators who, more often than not, are company salesmen. Sometimes, FDA
investigators simply give plants a pass, deeming them to be No Action Indicated because they have no
way to tell otherwise.
The investigators also can’t read street signs, which make them vulnerable to wild manipulations.
Companies steer them to phony “show” plants, where everything looks compliant, but the companies
aren’t manufacturing there. Sometimes a group of companies pool their resources and invest in the
same “show” factory, so that different FDA inspectors return to the same plant at different times,
each one thinking they are inspecting a different facility.
2. Data shows that a large number of Chinese manufacturing plants are

engaged in deceptive practices
Data fraud is endemic in Chinese drug plants. In 2016, an investigation by China’s own State Food and
Drug Administration (SFDA) found that 80 percent of clinical trial data submitted by Chinese companies
to regulators to gain approval for new drugs was fabricated.4
2
FDA, “Warning Letter” to Zhejiang Hisun Pharmaceutical Co., Taizhou, China, December 31, 2015.
3
FDA, “Form 483: Inspectional Observations,” Pfizer Pharmaceuticals Ltd., Dalian, China, April 13–17, 2015.
4
Fiona Macdonald, “80% of Data in Chinese Clinical Trials Have Been Fabricated,” Science Alert, October 1, 2016,
https://www.sciencealert.com/80-of-the-data-in-chinese -clinical-trial-is-fabricated (accessed September 30,
2018).
A just-published analysis5 by an auditing expert on current good manufacturing practices (cGMP),
Barbara Unger, shows that drug plants in China get the most warning letters focused on data integrity,
from the U.S. FDA. Of the 85 warning letters the FDA issued to drug plants in 2018, 42 of those dealt
with the problem of data integrity. Of those, China received the most, with fifteen warning letters. It
has also received the most data-integrity warning letters over the last decade.
With her permission, I have included three tables from Ms. Unger’s data here.
Table 2: Number of Data Integrity Associated Warning Letters by Country, CY2008–

CY2018
5
Unger, Barbara. "An Analysis Of 2018 FDA Warning Letters Citing Data Integrity Failures." Outsourced Pharma.
June 12, 2019. Accessed July 19, 2019. https://bit.ly/2JH9Ftx.
Figure 1
Table 3: Geographic Totals and Percentage, 2015–2018 and 2008–

2018
In both raw numbers and percentages, Chinese drug plants have received the most warning letters
related to data integrity. These numbers are especially significant, in light of key differences in U.S. and
overseas inspections.
In the United States, in order to inspect drug plants, FDA investigators simply show up unannounced
and stay as long as is needed. But for overseas inspections—due to the complex logistics of getting
visas and ensuring access to the plant – the FDA has chosen to announce its inspections in advance.
Overseas drug plants typically “invite” the FDA to inspect and the agency accepts. Plant officials serve
as hosts to the visiting FDA investigators, who become their guests. It is not unusual for
manufacturing plants to arrange local travel for FDA investigators. This system has allowed
manufacturing plants to “stage” inspections, as one FDA investigator put it, and conceal evidence of
data fabrication.
Despite this favorable system, which works to the advantage of foreign manufacturing plants, the
violations in China’s plants are evident. But a major question remains: what does the FDA do with the
problems that it finds?
3. How the FDA Responds to Findings

The FDA has been irresolute in cracking down on Chinese drug plants when its inspectors find
problems. Below are several examples.
In May 2017, in Linhai, China, an FDA investigator inspected Zhejiang Huahai Pharmaceuticals, the
world’s largest manufacturer of the active ingredient for valsartan, a generic version of the blood
pressure drug Diovan. He found evidence at the plant that the company was failing to investigate
potential impurities in its own drugs, which showed up as aberrant peaks in its test results. The
investigator recommended the inspection be categorized as Official Action Indicated, which would
have required the manufacturing plant to urgently make changes or face further sanctions.
But in a September 7, 2017 memo, the agency downgraded the recommended classification to
Voluntary Action Indicated, which allowed the company to make non-urgent corrections. The memo6
concluded:
“The firm’s response is mostly adequate including as it concerned the observation pertaining to
their investigation of aberrant peaks on HPLC chromatograms. The firm provided data and
information to demonstrate the peaks did not impact product and timeframes for improving
their method and revising their investigation procedure.”
In fact, the peaks were a clue to a compromised product. Less than a year later, the company wound
up in the middle of a worldwide quality scandal. In July 2018, European regulators announced a
harrowing discovery: the active ingredient made by Zhejiang Huahai contained a cancer-causing toxin
known as NDMA.
In the United States, over a dozen drug manufacturers, all of which used the Chinese ingredient,
recalled their products, as did dozens more manufacturers around the world. The Chinese company
tried to defend itself by explaining that it had altered its production process in 2012 to increase yields
of the drug, a change that had been approved by regulators. In short, the change had been made to
maximize profit. But some patients had been consuming the toxin daily for six years. As the FDA tried
to reassure consumers that the risk of developing cancer, even from daily exposure to the toxin, was
extremely low, a second cancer-causing impurity was detected in the ingredients.
6
Tamara Felton Clark, Branch Chief, Global Compliance Branch 4, “Reclassification of Surveillance Inspection: VAI
as Inspection Classification,” CMS File—Work Activity 161861, Zheijiang Huahai Pharmaceutical
The FDA’s decision to overrule its own investigator and downgrade the Zhejiang Huahai inspection was
not unique. According to the FDA’s own data, which I obtained, from 2013 to 2018, out of 864
inspections in China that FDA investigators recommended as Official Action Indicated, FDA officials
downgraded 78 of those. By contrast, in the same time period, out of 11,642 inspections that FDA
investigators conducted in the U.S. and recommended as Official Action Indicated, only one inspection
was downgraded in that time. This reflects the FDA’s willingness to give foreign plants, particularly in
China, an opportunity to reform without sanctions.
Two months before downgrading the sanctions against Zhejiang Huahai, an even more troubling
incident unfolded during an FDA inspection in China. In July 2017, an FDA investigator and her
translator arrived at Bangli Medical Products in Zhejiang province. The plant manufactures lidocaine
and capsaicin skin patches for treating pain. There, as the FDA inspector moved through the plant –
requesting documents and taking photographs – the company’s general manager grew increasingly
upset. When the FDA employees returned to the conference room, he accused them of not actually
being with the U.S. government, announced they could not leave the conference room, demanded that
they destroy their photographs of the plant and called the local police.
In holding the FDA investigator hostage in a conference room, it seemed clear to the FDA’s staff in
China that the company had refused an inspection and its drugs needed to be blocked from import into
the United States. An FDA supervisor wrote back to officials at the agency’s Maryland headquarters:
“Needless to say, they first refused the inspections and refused to recognize our investigator’s authority
to inspect the premises. We need to immediately put this firm on import alert.”7 An import alert would
have prevented the company’s products from coming into the U.S.
But an official at FDA headquarters quickly sounded a note of caution about “declaring that we have
‘authority’ in the foreign arena.” Another official weighed in, stating that it didn’t appear the plant
manager who’d imprisoned the FDA’s investigator “was making a specified refusal.”
In China, the Bangli inspection underscored the confusion and difficulty that surrounds the FDA’s
“authority” in the overseas arena. As one FDA assistant commissioner emailed colleagues:
“…section 704(a)(1) of the Act gives an authorized employee the authority to enter and inspect
at reasonable times but it only applies in the domestic arena. This provision, if
7
The incident is documented in an internal FDA email: Kelli Giannattasio, “Re: For Cause Inspection of Bangli
Medical Products,” email to Susan F. Laska and Sherry Bous, July 27, 2016.
the inspection is declined/refused, allows for a warrant to be pursued. In the foreign arena,
since we don’t issue notices of inspection (482), the firm must give permission for us to enter
and inspect. To result in an Import Alert as suggested below, we have historically asked and
documented the refusal by the firm to allow FDA to enter and conduct its inspection, and we
have explained how this refusal could be evaluated and potentially result in an import alert.
Before an IA gets recommended, we may need to fully document this refusal which may have
related to concerns about if these were actually FDA employees. Once that is established, we
should determine if the firm is actually refusing the inspection and document the discussion
with the firm’s senior management.
The FDA did send a different investigator back the following month. He discovered that the plant was
not actually testing any of its products or ingredients to ensure their purity or strength and had no
cleaning procedures for its manufacturing equipment. The plant was then placed on an import alert,
restricting its products from entering the United States.
In some instances, manufacturing plants have figured out how to keep selling their drug products to
the United States, even after the imposition of strict regulatory sanctions. After Peter Baker’s
inspection at the Pfizer-affiliated Zhejiang Hisun plant, the FDA restricted the import of thirty of the
plant’s drug products. But fifteen of the drug ingredients were in short supply in the United States, so
the agency lifted the restriction on about half of the drugs, including a crucial chemotherapy drug for
treating leukemia and breast and ovarian cancers.8
To Baker, that decision made no sense. According to regulations, the drugs had no place in the
U.S. supply. They weren’t good or safe enough. Shortages didn’t change that fact.
The FDA’s investigators believe that companies committing fraud purposefully make drugs in short
supply, as a way to protect their bottom line. Those will not be restricted, whether made with dubious
methods or not, and can serve as a steady source of business, even if companies are caught making
unsafe drugs. “There are no consequences for companies that are shipping substandard product,”
Baker observed to a colleague. “It’s a win- lose situation— and [patients] are the losers.”
4. Suggested reforms to better safeguard drug products from China
 The FDA needs to overhaul its foreign drug inspection program
8
E. J. Lane, “U.S. FDA Ingredient Exceptions from Banned Zhejiang Hisun Plant Draw Scrutiny,” FiercePharma, July
25, 2016, https://www.fiercepharma .com/pharma-asia/u-s-fda-ingredient-exceptions-from-banned-zheji ang-
hisun-plant-draw-scrutiny (accessed June 9, 2018).
The FDA’s overseas offices are poorly staffed, and its cadre of U.S.-based investigators willing to
perform inspections overseas is relatively small and demoralized. The FDA needs a specialized and
highly trained workforce that can make a years-long commitment to serve overseas and become a
“go to” group for emergency assignments. This would remedy the problem behind the FDA’s
anemic recruitment to foreign posts: a lack of clear career progression and promotion
opportunities. Right now, those who serve overseas often return to the FDA’s U.S. headquarters
without a guaranteed job, and sometimes have to accept demotions. Instead, superior training,
pay, and a clear professional pathway, similar to that for State Department officers, would help
cultivate more elite investigators. The
U.S. government should demand that more of its investigators be given visas for work in China.
 The FDA should perform short-notice or no-notice inspections in China
The FDA’s current regimen of pre-announced overseas inspections is counter-productive and

ineffective. It allows Chinese manufacturing plants to stage-manage inspections. If the
U.S. government actually wanted to get tough with China, it could insist that U.S. FDA investigators
be allowed to inspect on short notice, or no notice. The model for this would be a highly
successful FDA pilot program that ran for 18 months in India, from January 2014 on. Under that
program of short and no-notice inspections, the FDA’s investigators exposed widespread
malfeasance that had previously been hidden.
By showing up unannounced, the investigators uncovered an entire machinery that had existed
for years: one dedicated not to producing perfect drugs but to producing perfect results. The
inspections led to an almost 60 percent increase in findings of Official Action Indicated. As a result
of the pilot program, drugs from 41 plants in India were restricted from the U.S. market.
 Downgrades should be rare
Too often, FDA officials at the agency’s headquarters in Maryland overrule the judgment of
investigators in the field, and downgrade recommended findings.
In the course of my reporting, an FDA spokesperson justified these downgrades as follows:
“The FDA can and does change assessments of a plant’s compliance. After the initial data
gathered by the investigator is reviewed by both the Office of Regulatory Affairs and the Center
for Drug Evaluation, additional information can be taken into account. Oftentimes, a firm is not
able to provide paperwork at the time of an inspection but can produce documents later on
that provide more insight into the matter. Assessments can also change based on how willing a
firm is to cooperate and fix issues that are found.”
However, the problem with this system is that it allows manufacturing plants to fabricate documents
and generate excuses for submission to the FDA. It has also allowed substandard
drug products to enter the market, as was the case with the Zhejiang Huahai plant. Downgrades
should be rare.
OPENING STATEMENT OF DR. YANZHONG HUANG, SENIOR FELLOW FOR GLOBAL
HEALTH, COUNCIL ON FOREIGN RELATIONS; PROFESSOR, SCHOOL OF DIPLOMACY
AND INTERNATIONAL RELATIONS, SETON HALL UNIVERSITY
COMMISSIONER TALENT: Thank you. Dr. Huang?

DR. HUANG: Thank you, Senator Talent and Commissioner Wessel and all the
commissioners. Thank you for inviting me to this important hearing. Thank you for inviting me
to this important hearing. I'm going to talk about the U.S. companies access to the Chinese
healthcare market. In my written testimony, I've talked about the Chinese healthcare market,
the
U.S. market -- the companies market share. My oral presentation today, I'm going to focus on
the challenges faced by U.S. health firms in selling to the Chinese market, as well as the
regular the phase. And I will conclude with some policy recommendations.
Basically despite some improved conditions for market access, the U.S. health firms
face some new challenges in selling to the Chinese market. The government industry policy
clearly target the Chinese domestic health industry to increase its comparativeness against
foreign firms, Made in China 2025 for example. Sixteen increased share of domestic content
of core components and materials of medical devices to 40 percent by 2020 and 70 percent by
2025.
Chinese pharmaceutical firms are also improving their competitiveness. As of January
2018, China has the third largest number of pharmaceutical firms developing new drugs. It was
reported that executives from some multinational pharmaceutical firms, including those in the
U.S. are leaving for new positions in Chinese pharmaceutical firms.
With the deepening of China's healthcare reform, foreign pharmas are also facing
increasing pressure to be cooperative by making their drugs more affordable under the single-
payer system, the new created a super agency called National Healthcare Security
Administration.
NHSA has been charged to lead everything healthcare-related in China. And possess
much more leverage than its predecessors in negotiating with foreign pharmas for price cuts.
So if China starts imitating the healthcare model of U.K.'s National Health Service, the NHSA
will replace the U.S. DoD to be the world's biggest employer. Indeed the negotiations with
foreign pharmas result in the average price cut of 44 percent across 36 products in 2017 and
57 percent across 17 products in 2018.
In late 2018, the government also introduced a new procurement scheme, which listed
31 drugs for procurement in the program that covers all public hospitals in 11 cities. That
combined represent a third of China's pharmaceutical market. Under this cutthroat winner
takes all bidding process, multinational pharmas stand to lose major market share for the high
cost of patent pharmaceuticals because quality assurance for their medicines are no longer the
guarantee to win hospital tenders.
In June 2019, NHSA launched a pilot program of diagnosis related groups we called
DRGs that classifies hospital cases into different groups in 30 cities. It is expected that this
program is going to be fully implemented nationwide in five to ten years. The new provider
payments reform measure aims to lower the cost of healthcare, including the cost of
pharmaceutical products. This poses new challenges for foreign pharmas marketing their
products. Because not only will they have to ensure their products be included in the treatment
protocol of different patient groups, but they need to lower the drug cost might discourage
Chinese doctors from prescribing new and innovative drugs.
The ongoing trade war also threatened U.S. pharmaceutical firms efforts to access the
Chinese market. We know that the list unveiled by the Chinese government to impose punitive
tariffs on imported U.S. goods included commonly used drugs and medical devices. A leading
Chinese economist in March even implied that Beijing should curb its exports of APIs and its
active pharmaceutical ingredients as a counter measure in a trade war with the United States.
I'm going to also talk about the regulatory burdens for the foreign pharmaceutical firms.
Well despite China's efforts to improve its regulatory process, its volatile and upscale regulatory
system continues to present significant burden to foreign pharmaceutical firms seeking to
operate in China. The onerous requirements also makes the market out of reach for small
startup companies with limited investment capital.
Foreign companies also face tough disclosure requirements in filing new applications for
their products. It is also difficult for foreign pharmaceutical firms to get their products to be
included in the National Reimbursement Drug List. Companies complain that pharmaceutical
tendering is too frequent, involving too many government agencies. And they have to be on the
go across the country to participate in tender. In centralized tendering and procurement system
pharmaceuticals actually contributes to additional regulatory burden for foreign firms.
For the sake of time, I'm going to go directly to the policy recommendations. I look at
the U.S. companies engagement in China's healthcare market reveals actually self-sustaining
dynamics that until recently -- I mean until 2017 -- enabled that engagement to expand and
thrive despite the fluctuation in U.S.- China relations. And today, the booming Chinese
healthcare market has created both opportunities and challenges for U.S. firms.
If history can teach us anything, it is that both sides should avoid putting the healthcare
industry at risk of collateral damage as a result of deteriorating bilateral relationship. The
USTR did the right thing by excluding pharmaceuticals, certain APIs, and select medical
goods from the proposed tariffs in May.
But I think it is also important that we keep in mind that as pharmaceutical industries
value chain become globalized and international collaboration and the health related research
becomes the norm, we should avoid looking at entire U.S.-China health related exchange and
investment through the prism of national security. In a nutshell, do no harm. And that principle
applies to both China and the United States. Thank you.
COMMISSIONER TALENT: Thank you. Mr. Allen?
PREPARED STATEMENT OF DR. YANZHONG HUANG, SENIOR FELLOW FOR GLOBAL
HEALTH, COUNCIL ON FOREIGN RELATIONS; PROFESSOR, SCHOOL OF DIPLOMACY
AND INTERNATIONAL RELATIONS, SETON HALL UNIVERSITY
July 31, 2019
U.S. Companies’ Access to Health

Industries and Market Opportunities in
China
Prepared statement by
Yanzhong Huang
Senior Fellow for Global Health, Council on Foreign Relations
Professor, School of Diplomacy and International Relations, Seton Hall University
Before the
U.S.-China Economic and Security Review Commission
Hearing on “A Health Relationship? Assessing the Risks and Opportunities of China’s Medicine and Health
Development.”
Changing Landscape for the China’s Healthcare Market
China’s healthcare market has expanded continually during the past five years. The market increased from $357
billion in 2011 to $761 billion in 2017. Growth is expected to continue and by 2020 it is estimated to reach $1.19
trillion. Driven by rapid population aging, a growing burden of noncommunicable diseases, emergence of a
sizable middle class, and advancement in technology, the trend is expected to sustain in the coming decade. At
present, however, heathcare spending in China still accounts for only 6.4 percent of its GDP, which is lower than
the average of OECD countries (9.0 percent).
According to China’s National Health Commission, the total size of China’s healthcare market will
reach $2.39 trillion by 2030. As far as pharmaceuticals are concerned, China is the second-largest market in the
world, valued at $123 billion in 2017. The pharmaceuticals market is projected to reach $175 billion by 2022.
An equally significant development is the growing competitiveness of Chinese domestic pharmaceutical industry.
Beginning in 2013, but especially after 2015, the number of Investigational New Drug (IND) applications
submitted by Chinese firms has increased significantly. In 2017, 162 applications were submitted, up from 73 in
2013. In 2018, the number of new drugs developed by Chinese firms and approved by U.S. FDA has hit 430. Since
2013, major Chinese pharmaceutical firms such as Fosan, Luye, Shanghai Pharma and Humanwell Healthcare
have been actively involved in cross-border mergers and acquisitions (M&As). Between 2013 and 2017, the
number of cross-border M&A cases increased from 7 to 52, and the amount involved increased from $1.2 billion
to $11 billion.
The Council on Foreign Relations takes no institutional positions on policy issues and has no affiliation with the U.S. government. All
statements of fact and expressions of opinion contained herein are the sole responsibility of the author.
Private hospitals in China have had rapid growth in numbers. Thanks to government support of the entry of
private capital in the healthcare sector, the number of private hospitals increased by 85 percent between 2013
and 2018, from 13,396 to 12,032. However, due to their inability to attract top physicians and the public’s lack of
trust in them, private hospitals in China tend to be small in size and provide only a limited number of services.
That might explain why general hospitals (almost all of them public) continue to expand in China. In 2018,
healthcare spending in those hospitals was estimated to be more than $350 billion, an 86 percent increase over
2013. It was estimated that by 2022 general hospitals’ market value will be 71 percent larger than the 2018
level.
Rapid growth of the global pharmaceutical industry has also boosted the expansion of contract manufacturing
organizations (CMOs) and contract research organizations (CROs) – two forms of outsourcing services from
providers – in China. Of the more than 1,100 CROs around the globe, nearly 30 percent are based in China.
Propelled by the relatively low R&D cost and favorable policies and capital, Chinese CRO industry scale is
expected to expand by more than 250 percent, from RMB68.7 bilion in 2018 to RMB242.5 billion in 2025. Being
one of the most comprehensive service platforms integrating discovery, research, and development of small-
molecule chemical drugs, WuXi AppTec claims 10 percent of the world’s CRO market. Driven by its complete
infrastructure, adequate raw material supply, and low operating cost advantage, China is also rapidly expanding
its CMO market share. Despite problems protecting human subjects and poor transparency, during 2007-2017
more than 11,000 clinical trials were launched in China, making it the fourth largest country in terms of the
number of clinical trials.
Overall, there are four major drivers in China’s healthcare market. First, changes in the global pharmaceutical
industries provide strong incentives for multinational pharmas to outsource their R&D and manufacturing
activities to China. Second, Chinese society is rapidly ageing, which is highly associated with non-communicable
diseases (NCDs), including cardiovascular diseases, cancer, hypertension, and diabetes. China’s population aged
65 and older is forecast to grow from 91 million in 2017 to 143 million in 2027 (US: 48.9 million in the same
year). The size of elderly population presents a huge market for healthcare industry. Third, health is now high on
Chinese leaders’ agenda. In August 2016, China held its National Health Conference, which was the most
important national meeting on health in twenty years. Following the meeting, China released the Healthy China
2030 Plan, which places public health as a policy priority. Finally, China’s healthcare reform has focused on
improving access and affordability. Health insurance schemes have been extended in China to cover virtually the
entire population, which also stimulates demand for more and better healthcare.
Government Support Measures
The Chinese government is committed to the development of China’s own health, biotech, and pharmaceutical
industries. An industrial policy document entitled “Made in China 2025” has identified pharmaceuticals and
medical devices as one of the 10 strategic industries to receive subsidies and other government support. In 2017,
China earmarked approximately $13.2 billion to pharmaceutical R&D, which accounts for 8.9 percent of the global
total in the same year. China's investment in this area is expected to reach $29.2 billion in 2021, which will lead to
the rise of its global share to 18.3 percent. It has also unveiled a number of initiatives to lure overseas Chinese
scientists living abroad home. It was reported that nearly one third of the recruits of the Thousand Talents Plan –
a high-profile, state-backed recruitment drive to attract overseas Chinese students and academics – have
expertise in life sciences and medicine. Thanks to government support, China is quickly rising as a powerhouse
in biomedical R&D. By the end of May 2017, China had nearly 300 biosimlars (a biosimilar is defined as a biologic
medical product that is almost an identical copy of an original product manufactured by a different company)
under research and development, making it the country with the largest number of biosimilars
in research and development. The Chiense biosimilar market is expected to hit more than $5.5 billion by 2025.
Beginning in late 2015, Chinese drug regulating agency – then China Food and Drug Administration (CFDA), now
the National Medical Products Administration (NMPA) – has also kicked off reforms to accelerate the approval
process for investigational new drugs (IND). Drug reviewers at the Center for Drug Evolution (CDE) increased to
more than 800 by the end of 2017, up from 70 in 2015. As a result, annual number of new drug approvals
increased from 5 in 2016 to 40 in 2017. In 2018, the government agencygreenlighted another 51 new drugs.
Since 2016, the government has also made efforts to consolidate its pharmaceutical industry. CFDA imposed
stricter quality standards (in terms of safety and efficacy) on the production of off-patent generic drugs, which
aims at weeding out over half of the nation’s 2,900 or so small domestic drug makers.
In 2018, the government reduced the tax burden on pharamacuetical products to make them more available and
affordable. In April, China announced it would cut the import value-added tax (VAT) on cancer drugs from 17
percent to 3 percent. From May 1, import tariffs on all common drugs and cancer drugs were reduced to zero.
This was followed by another decision in February 2019 to cut the VAT rate to 3 percent on medications for 21
rare diseases. Reducing VAT on these drugs will make the imported drugs cheaper in Chinese market, and
increase the demand for these drugs. Meanwhile, China
has promoted the research and availability of generic drugs that are in short supply, especially those used for the
treatment of major infectious diseases, rare diseases, and pediatrics. As a result, Chinese pharmaceutical firms
are increasingly focused on the development and production of finished pharmaceutical products (FPPs) for the
domestic market (rather than concentrate only on the production and export of active pharmaceutical
ingredients or APIs).
In addition, China has pursued the application of big data analytics in healthcare a national priority. Since 2014,
there has been growing investment in Big Data analytics for healthcare. In 2016, there were 66 such cases. In the
first quarter of 2018, there were 35, and more investment in this area is expected.
China seeks to take the lead in the nascent field of precision medicine. In 2016, China launched an initiative to
earmark $9 billion to sequence and analyze genomes over the next 15 years, which dwarfed the $215 million
precision-medicine initiative launched by the Obama administration the same year.
Artificial intelligence (AI) is set to play a bigger role in China’s hospitals. The technologies, for example, could be
used to provide initial diagnoses in a quicker, less intrusive but more accurate way. AI health market in China
was estimated to be more than $3 billion in 2018, a 53 percent increase over 2017.
U.S. Healthcare Firms’ Access to the Chinese Market
According to data from WTO, China is one of the world’s largest import market for pharmaceuticals and medical
devices. In 2017, it was the 6th biggest import market for pharmaceuticals, with shipments valued at $25.3
billion, and the 4th largest import market for medical devices, with shipments worth $7.4 billion. This does not
include pharmaceuticals and medical equipment produced and sold in China by mulitinatioanl pharmas.
According to a joint report fromMcKinsey and the Chinese Pharmaceutical Association, in 2016, multinational
firms claimed 35 percent market share in Level-III hospitals (i.e., urban health centers) and 27 percent market
share in Level-II hospitals (e.g., county-level hospitals).
They also claimed 44 percent market share in first-tier cities (Beijing, Shanghai, Guangzhou, Shenzhen) and 31
percent market share in second-tier cities (e.g., Hangzhou, Nanjing, Chongqing, and Jinan).
The lack of competitiveness of China’s domestic healthcare industry and Chinese consumers’ preference for high-
end, imported pharmaceutical products help boost sale of products developed and manufactured by U.S. firms.
About 95 percent of China’s registerd drugs are generic ones, which are prone to low- quality problems. Despite
the emergence of some large pharmaceutical firms (e.g., China Resources, SINOPHARM), China’s pharmaceutical
industry remains notoriously fragmented and uncompetitive. In 2016, the top 10 pharmaceutical firms
accounted for only 10 percent of industry sales, compared with 48 percent in the United States. Fragmentation of
Chinese pharmaceutical industry also keeps R&D investment as low as 5 percent of sales for Chinese firms,
compared with 20 percent for U.S. companies.
As far as medical device products are concerned, Chinese manufacturers dominate the domestic market, but they
deliver mostly low-tech and mid-range products. In 2014, 70 percent of the medical device products in the world
were made in China, but a large number of them were probably manufactured
for Original Equipment Manufacturers (OEM) (mostly MNCs).
Since 2017, a raft of government measures to smooth new drugs’ road to approval have facilitated U.S. access to
the Chinese market. In October 2017, the government announced plans to accept data of clinal trials carried out
overseas. This move would be welcomed by U.S. pharmaceutical companies because until 2017 stringent clinical
trial data requirements were responsible for the delay of more than 7 years for U.S. drugs to enter Chinese market.
The first licensed HPV vaccine in China, for example, was approved only in 2016, a decade after its US approval.
As a result of fasttrack approval and local study waiver, the drug lag has been reduced to 2.3 years. Merck’s
Gardasil 9 HPV vaccine was actually approved by the CFDA just nine days into the review process. According to a
report from Deloitte LLP, the number of approvals for new drugs developed by multinational pharmaceuitical
companies increased from 3 in 2016 to 39 in 2017 and 40 in 2018. China further opened up its pharmaceutical
market in May 2018 by exempting all cancer drugs from import tariffs. In October, the government approved 17
new cancer drugs – most of them imported drugs – to be included in its national health insurance system.
Additional pressures for opening the Chinese pharmaceutical market, especially the market for vaccines, built up
in the summer of 2018, after one of China’s largest domestic vaccine makers was found to have sold at least
250,000 substandard doses of vaccine for diphtheria, tetanus and whooping cough. The scandal seriously
undermined people’s confidience in the domestic vaccines. A survey of 300,000 parents suggested that 79
percent said that before the scandal, they would have given their children a Chinese made vaccine, but only 36
percent said they would still do so now. Sixty percent of respondents said they were considering having their
children inoculated outside mainland China.
Challenges Faced by U.S. Health Firms In Selling into the China Market
Despite conditions that facilitate market access, U.S. health firms face new challenges in selling into the China
market. The government industrial policy clearly targets Chinese domestic healthcare industry to improve its
competitiveness against foreign firms. Released in 2015, Made-in-China 2025 seeks
to increase the share of domestic content of core components and materials of medical devices to 40 percent by
2020 and 70 percent by 2025. The government has also put in place measures to encourage the development
and production of generic drugs by domestic Chinese pharmaceutical firms. Large Chinese pharmas such as Sino
Biopharmaceutical are beefing up their innovative capabilities. As of January 2018, China (tied with Canada and
trailing U.S. and U.K.) has the third largest number of pharmaceutical firms developing new drugs. It was
reported that executives from some multinational pharmaceutical firms are leaving for new positions in Chinese
pharmaceutical firms.
With the deepening of China’s healthcare reform, foreign pharmas are also facing increasing pressures to “be
cooperative” by making their drugs more affordable. Since 2016, Chinese government has organized a
nationwide drug price and reimbursement list negotiation, which determines what new and innovative drugs to
be included in the government reimbursement list. Under the single-payer system, the newly created National
Healthcare Security Administration (NHSA) possess much more leverage than its predecessors in negotiating
with foreign pharmas for price cuts. The negotions resulted in an average price cut of 44 percent across 36
products in 2017, and 57 percent across 17 products in 2018.
It is worth noting that despite significant price reductions, foreign pharmaceutical manufacturers have not seen
drops in their sales for these drugs. Because of the increasing volume of sales that comes from government
reimbursement, sales of the 36 drugs included in the government negotiations
actually increased by an average of 40 percent. For this reason, many foreign companies seem to be
willing to compromise on the price in order to gain access to the market in China.
In April 2018, the Chinese government unveiled measures that included authorizing the granting
of compulsory licenses to enhance the availability of innovative drugs. Beginning in July, public outcry also has
prompted the government to tame prices of cancer drugs sold by foreign pharmaceutical companies. This was
followed by a new procurement scheme introduced in late 2018 which aims to dramatically cut the amount of
payment for generic drugs covered by health insurance. The new policy listed 31 drugs for procurement in a
program that covers all public hospitals in 11 cities (which combined represent a third of China’s
pharmaceutical market). Pharmaceutical firms are invited to submit competing offers in the bidding process,
with the one that can offer the lowest tender price automatically chosen as the winner and collects the entired
guaranteed purchase amount from all 11 cities. Under the cut-throat, winner-takes-all bidding process,
multinational pharmas stand to lose major market share for their high-cost, off-patent pharmaceuticals because
quality assurances for their medicines are no longer the guarantee to win hospital tenders.
In June 2019, NHSA launched a pilot program of diagnosis-related groups (DRGs) that classifies hospital cases
into different groups, in 30 cities. It is expected to take five to ten years for the measure to be fully implemented
nationwide. The new provider payment reform measure aims to lower the cost of pharmaceutical products
(which now count as costs in DRG payment). This poses new challenges for foreign pharmas marketing their
products: not only will they have to ensure their products are included in the treatment protocols of different
patient groups, but the new provider payment method might discourage doctors from prescribing new and
innovative drugs in order to lower drug costs.
The ongoing trade war also threatens US pharmaceutical firms’ efforts to access the Chinese market. While the
tariffs on approximately $300 billion worth of Chinese products proposed by the United States Trade
Representative (USTR) in May 2019 excludes “pharmaceuticals, certain pharmaceutical inputs, and select
medical goods,” the list unveiled by the Chinese government to impose punitive tariffs on imported
U.S. goods included commonly used drugs and medical devices. A leading Chinese economist also implied early
this year that Beijing curb its exports of APIs as a countermeasure in the trade war with the United States. As
Washington tightens scrutiny of investment from overseas, Chinese venture capital investment in the U.S.
biotech firms fell by more than half in the first half of this year, raising fears that U.S. pharmaceutical start-ups
will encounter difficulties to raise funds and access the Chinese market.
Regulatory Burdens for Foreign Pharmaceutical Firms
Despite China’s efforts to improve its regulatory process, its volatile, obscure, and byzantine regulatory system
continues to present significant burdens to foreign pharmaceutical firms seeking to operate in China. The
onerous requirements also makes the market out of reach for small for start-up companies with limited
investment capital. Foreign firms are still required to renew their drug import license every
five years. Since the renewal is not guaranteed, the uncertainty has negative impacts on the long-term stability of
their operations in China. Foreign companies also face tough disclosure requirements in filing new applications
for their products. According to guidelines of China’s National Intellectual Property Administration (CNIPA), all
the relevant experimental data demonstrating the efficacy of the
product must be included at the time of application, and post-filing data cannot be used to defend against
invalidation. Such data requirements make it difficult for applicants to file new applications in a timely manner.
It is also difficult for foreign pharmaceutical firms to get their products included in the National Reimbursement
Drug List (NRDL), aka the China National Formulary (CNF). The list covers basic drugs, but it includes mostly
common and inexpensive drugs and is not updated very frequently.
Companies complain that pharmaceutical tendering is too frequent, involving too many government agencies and
they have to be on the go across the country to participate in a tender. Centralized tendering and procurement
system for pharmaceuticals contributes to additional regulatory burden for foreign firms. In addition, hospitals
may refuse to use the drugs that won the bid.
Foreign pharmaceutical firms are also increasingly subject to tougher enforcement of China’ anti-bribery laws.
China’s revised Anti-Unfair Competition Law (AUCL), which came into effect in January
2018, prohibits individuals and entities from bribing a business counterpart or public official, or using other
means to obtain a business opportunity or competitive advantage. It also prohibits bribery via a third party (an
individual or entity), and employers will be held liable for their employee’s bribery acts. In May, the newly
created State Administration for Market Regulation (SAMR) kicked off a campaign to crack down on unfair
competition and commercial bribery with a focus on activities in the pharmaceutical and medical device sector, a
sector which is traditionally prone to high bribery risks.
Because product prices of foreign firms are typically higher than those of domestic ones, it is not uncommon for
foreign firms to use agents to host academic conferences to entertain hospital managers or doctors in order to
have their products sold in Chinese hospitals. Such “hidden practices” are now the target of the crackdown as
China gears up its enforcement of anti-corruption law.
Enforcing Pharmaceutical Intellectual Property Rights
Although a large percentage of U.S. companies in China identified lack of protection of intellectual property (IP)
rights as a major regulatory challenge, disputes over pharmaceutical-related IP have not been a prominent
concern in U.S.-China economic relations. Driven by the need to join the World Trade Organization (WTO), China
not only extended all patent coverage to twenty years, but also capitulated to
U.S. demands on issues such as data exclusivity and patent linkage. Upon its WTO entry, China agreed to adhere
to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets standards for IP
protection. Unlike India, China has not used the flexibility offered in the WTO TRIPS regime and the Doha
Declaration on the TRIPS Agreement and Public Health (2001) to take an aggressive approach toward patent-
related issues, despite an AIDS epidemic, an unprecedented crisis of noncommunicable diseases, and a
pharmaceutical industry capable of producing generic versions of most patented drugs sold in China. Thus far,
there have been no successful applications for compulsory licensing of any patented drugs in China. Since 2014,
IP courts have been established in approximately 20 Chinese cities. In January 2019, the Supreme People’s Court
launched the appellate tribunal for IP disputes. Starting May 2018, China has also lengthened patent protection
on pharmaceuticals from 20 to 25 years. Thus far, concerns about China’s enforcement of IP rules appear not to
have had a significant impact on the flow of pharmaceutical-related investment into China.
Compared with pharamcetuical companies, U.S. medical devices manufacturers may be more concerned about IP
enforcement when selling their products in China. They may soon find their competitors in China offering a
similar product at much lower price (and very likely lower performance level as well). To some extent, the
OEM practice encourages product copycat in China. It is also relatively easy to challenge an established patent in
China. Anyone can challenge a patent’s validity in China without having to show up at a hearing in person. This
presents a potential blackmailing or money-making opportunity. According to a report, since 2015 nearly 75
percent of the challenges to pharma patents have resulted in at least one claim being invalidated.
Policy Recommendations
In October 1982, Bristol-Myers Squibb founded Sino-American Shanghai Squibb Pharmaceutical Ltd, the first
China-U.S. joint venture pharmaceutical firm. By the end of the 1990s, almost all the major U.S. pharmaceutical
and medical device firms had set up shops in China. A look at U.S. companies’ engagement in China’s healthcare
market reveals self-sustaining dynamics that until recently enabled them to expand and thrive despite the
fluctuation in U.S.-China relations. Today, the booming Chinese healthcare market has created both opportunities
and challenges for U.S. firms. If history can teach us anything, it is that both sides should avoid putting the
healthcare industry at risk of collateral damage as a result of a deteriorating bilateral relations. USTR did the right
thing by excluding pharmaceuticals, certain APIs, and select medical goods from the proposed tariffs in May, but
the on-and-off of key products used by U.S. drug makers from the trade tariff list is creating uncertainties for U.S.
biopharmaceutical companies.
Tightening scrutiny of Chinese investment in the U.S. biotech firms also may cripple US pharmaceutical start-ups’
ability to raise funds and access the Chinese market. It is important to urge China to enforce pharmaceutical-relatd
IP. As pharmaceutical industry’s value chain becomes globalized, and international collaboration over health-
related research becomes the norm, however, we should avoid looking at the entire US-China health-related
exchange and investment through the prism of national security. In a nutshell, do no harm. This principle applies
to both U.S. and China. We should deliver an explicit message to the Chinese side that healthcare products should
not be used as a weapon in the U.S.-China trade war.
However,the U.S. government can still do more. It should significantly step up investment in healthcare- realted
R&D, especially in areas such as AI health and precision medicine. It should continue supporting
U.S. companies’ access to the Chinese healthcare market. In the trade negotiations with China, the USG should
urge the adoption of effective measures to level the playing field and ensure fair treatment of U.S. companies,
which involves eliminating unnecessary or unreasonable regulatory burdens shouldered by foreign companies
operating in China. In urging China to open its healthcare market to foreign competition, we should let China
know that doing so would not only improve Chinese people’s access to safer, affordable, and effective
pharamcetical products, but also – given the strong public ourcry over substandard drug products made by
Chinese domestic firms – contributes to social and political stability. It is worth noting that none of China's
vaccine scandals have involved foreign manufacturers. It should also support the expansion of private hospitals
so that they become truly competitive actors in China’s healthcare market. The U.S. can also help China beef up its
regulatory capacities in the healthcare sector. This involves encouraging NMPA to further improve its review
process, helping improve oversight when conducting clinical trials and supporting the creating of an independent
IP court system. The U.S.-China Social and Cultural Dialogue, the only high-level forum to discuss U.S.-China
cooperation after 2017, should be reopened as an institutional venue to discuss these issues.
U.S. companies, meanwhile, should seize upon the opportunities provided by China’s regulatory reforms to
sustain its competitive edge in the Chiense market. Rather than view China as a “second-wave” market,
U.S. pharmaceutical firms should prepare to have their innovative new drugs included in the National
Reimbursement Drug List once they are approved by FDA. They need to ensure maximum protection of their
products by making use of the full IP framework that exists in China. They may also want to take a more
proactive role in China’s healthcare reform by making the most effective drugs more affordable in China. As
nogotitions that led to the inclusion of pharmaceuticals made by foreign pharmas in the NRDL showed, a win-win
outcome is indeed possible. The Chinese market is sufficiently large and diverse that there is always something
for everyone.
OPENING STATEMENT OF CRAIG ALLEN, PRESIDENT, US-CHINA BUSINESS COUNCIL
MR. ALLEN: Thank you for the opportunity to testify before the Commission today. I'm
here as the President of the U.S.-China Business Council, a private, nonpartisan, nonprofit
organization of approximately 220 American companies across all industry sectors that do
business in China, including the healthcare sector.
Also as noted, a former U.S. ambassador and a trade negotiator with the Department of
Commerce where I led the discussions to improve China's market access for medical devices
and pharmaceuticals. I've dedicated many, many years to increasing American jobs through
bolstering our export sector.
It is my belief that America remains among the most innovative nations because we
cultivate the free flow of ideas, information, and people. And we engage in a deliberative
process that encourages and respects different opinions in order to arrive at decisions that
benefit the greatest good.
As the Commission considers the relationship between the U.S. and Chinese Life
Sciences sectors, I'd like to highlight three main principles that underline my recommendations.
First, U.S. investments in China benefit the U.S. economy. U.S. companies have benefitted
greatly from the growth opportunities a rising China has provided mostly through rapidly
growing exports. It's important to note that most U.S. companies invest in China to access and
serve China's domestic market. But the revenue that they generate in China is also a driver of
growth and innovation in the United States.
So in 2015, our latest numbers, U.S. exports to China directly and indirectly supported
1.8 million jobs in the United States. If the economic benefits generated from U.S. investment in
China and Chinese investment in the U.S. are combined, the total jumps to 2.6 million American
jobs. The healthcare sector is an important part of this story. U.S. exports of pharmaceuticals
to China reached nearly $3 billion in 2018. And the biopharmaceutical industry supports 4.7
million U.S. jobs. The medical device industry supports 2 million U.S. jobs.
China has become the world's second largest market for pharmaceuticals and fourth
largest market for medical equipment. And this market is growing rapidly as China ages. It is
increasingly important that U.S. companies continue to participate in this space to support U.S.
job creation.
My second principle is that commercial challenges are best addressed through
engagement. It's my experience that Chinese healthcare regulators are properly focused on
safety and efficacy. And they want to learn from us and with us. Nonetheless, while U.S.
health companies see tremendous opportunities in China, there are remaining market access
barriers that effect our company's ability to equally compete as Dr. Huang has indicated.
The majority of these challenges are highly technical in nature and unique to the
healthcare industry. And they would include one, regulatory approval delays. Two, pricing and
reimbursement controls. And three, insufficiently effective intellectual property right protection
and implementation.
The U.S. government cannot arrive at or -- The most effective and sustainable
approaches to resolving these very important trade issues if private sector industry stake
holders and experts are not closely consulted. The most effective and sustainable way to
resolve specific commercial issues is through regular dialogue between key U.S. and Chinese
government and industry stakeholders. Technical commercial issues and barriers to trade
require regular, precise, and
technical discussions.
Also international fora provide critical opportunities to leverage our bilateral
negotiations. We must continue to use multilateral institutions to encourage China to adopt
international best practices and standards, which will indirectly support U.S. exports.
My third principle is that bilateral dialogue makes us stronger. The Chinese government
has strong incentives to improve basic healthcare and expand access to innovative treatments
for China's growing and rapidly aging population. And these are goals that U.S. companies
are very well positioned to support. There are mutually beneficial solutions to be had by
reducing technical barriers to trade through cooperation and engagement. But we need to
communicate regularly to compare best practices. And ideally, we need to build on a
foundation of respect, trust, and collaboration.
So for recommendations, I would submit to you four ideas. Firstly, we need to leverage
all available tools for engagement. The government should seek to engaged China through
bilateral, regional, and multilateral forums to help foster improvements in China's regulatory
environment. We need to get back to platforms such as the JCCT and the S&T to regularly
discuss these technical issues. And encourage the Chinese government to return to stalled
healthcare reforms. And find mutually agreeable solutions, which will improve healthcare and
safety. And will also help to expand U.S. exports.
Secondly, in these consultations, please continue to involve private sector industry
experts in the technical policy dialogues. It is essential that highly technical nuanced health
sector issues are systemically addressed through targeted policy discussions, not only
between governments in consultation with industry, but also with technical experts as well.
Thirdly, please strongly support missions like USTDA and the FDA. Those organizations
deserve continued financial support. And then finally, we must narrowly and precise define
emerging technologies and foundational technologies as additional export controls are rolled
out. It is imperative that our export control policies do not unduly limit innovation in American
exports if the ultimate goal is to maintain U.S. leadership, particularly in advanced sectors.
Thank you for your consideration.
PREPARED STATEMENT OF CRAIG ALLEN, PRESIDENT, US-CHINA BUSINESS COUNCIL
PREPARED STATEMENT OF
CRAIG ALLEN
PRESIDENT US-CHINA BUSINESS COUNCIL
Exploring U.S. Companies’ Access to Health Industries and Market Opportunities

in China
Testimony before the U.S. China Economic and Security Review Commission
July 31, 2019
Prepared Statement Submitted on July 24, 2019
Introduction
The US-China Business Council (USCBC) is a private, nonpartisan, nonprofit organization of

approximately 200 American companies that do business with China. From our headquarters in
Washington, DC, and offices in Beijing and Shanghai, China, we represent American
companies engaged in business across all industries and sectors in China, including
manufacturers and marketers of pharmaceutical and medical device products.
US life sciences companies see tremendous opportunities in China, but also continue to face
significant market access barriers there. These barriers include regulatory approval delays,
pricing and reimbursement controls, insufficiently effective intellectual property (IP) protection
and enforcement, and discriminatory localization requirements that advantage domestic
companies over foreign multinationals. Efforts to strengthen Chinese industries’ domestic
competitiveness also contribute to the unlevel playing field for foreign companies seeking to
participate in China’s healthcare market.
Because China is now one of the world’s largest and most dynamic markets for the health
industry, it is more crucial than ever that these market access barriers be resolved. Companies
that are not successful in China can no longer expect to be successful global players in the long
run. If US companies in the health space are to remain trusted, innovative, global industry
leaders, the challenges our companies face in China must be effectively addressed.
These issues are highly technical, unique to the health industry, and most effectively resolved
by involving industry experts with deep knowledge of the sector and policy implications. A
framework for regular dialogue between US and Chinese health regulators and industry
representatives is necessary to effectively and sustainably address these issues. Greater
engagement with Chinese regulators and industry representatives in international forums
should also be a priority, and opportunities to work together on enforcement and educational
efforts should be leveraged.
China health market: Overview & Opportunities
Growth in China’s health market is driven by a rapidly aging population, expansion of the
middle-class, and recent government reforms. China is the world’s second largest market for
pharmaceuticals after the United States, and fourth largest medical equipment market. China’s
medical device sector is among the country’s fastest growing, maintaining double digit growth
for over a decade.1
1
Export.Gov, Healthcare Resource Guide: China, (17/07/2019)
US exports of pharmaceutical products and medical or surgical equipment to China have
increased year-over-year for over a decade. Exports of pharmaceuticals went from just under
$400 million in 2008, to $2.8 billion in 2018.
US Pharmaceutical Product Exports to China By HS Code (Total Value

3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
20082009201020112012201320142015201620172018
30 Pharmaceutical Products All States
Source: US Census Bureau, U.S. Import and Export Merchandise trade statistics.
China’s total health expenditure is around five percent of Gross Domestic Product (GDP),
compared to 17 percent in the United States,2 indicating the sector is still in its infancy and
primed for growth. The size and growth potential of China’s healthcare market makes it one of
the most promising, long-term markets for US pharmaceutical and medical device
manufacturers. USCBC’s annual member survey consistently indicates that most American
companies invest in China to access and compete for Chinese customers. Though current
trade tensions will impact investment decisions, preliminary findings from USCBC’s 2019
survey indicate a majority of members plan to maintain their resource commitments in China in
the coming year.
The health sector is an increasingly prioritized area of strategic national interest for the Chinese
government. The 13th Five Year Plan, released in 2016, prioritizes health and innovation, and
President Xi Jinping’s Healthy China 2030 initiative made health an explicit national priority to
be included in all aspects of strategic planning.
2
The World Bank, Current health expenditure (% of GDP), (17/07/2019)
China is currently undertaking a comprehensive set of reforms to give citizens greater access
to healthcare services. US companies have substantial experience developing and operating
healthcare infrastructure and solutions in global markets. Allowing broader foreign participation
in China’s healthcare market and in its reform process would allow Chinese consumers greater
access to innovative technologies and products, international best practices, and high-quality
services—accelerating the reform process.
However, the opportunities the market and these initiatives present are tempered by the
challenge of competing in an environment where local or provincial government practices
unfairly favor domestic players. Biopharmaceuticals and high-performance medical equipment
are among the 10 strategic sectors included in Made in China 2025 (MIC 2025), a government
initiative to upgrade China’s domestic innovation-driven manufacturing sectors and create global
leaders. While the goal of improving Chinese capabilities and patient trust in local companies is
laudable, it is important to ensure such initiatives are WTO compliant and implemented
transparently, to ensure they do not unfairly discriminate against foreign companies. When
specific concerns are identified—such as domestic and international market share targets in
strategic industries—the United States should coordinate with like-minded trading partners to
ensure a coordinated response. A unilateral approach gives US negotiators less leverage and
exposes the US to the double-whammy of retaliation and seeing European and Japanese
competitors step into the void.
Regulatory Overview: Progress and Remaining Challenges
China’s healthcare market has evolved significantly over the last five years. The government
began a comprehensive reform of China’s health sector in 2016. The former China Food and
Drug Administration, now the National Medical Product Administration (NMPA), released a
series of draft policies collectively known as the “innovation policies.” The draft policies
encourage innovation in drugs and medical devices by accelerating the review and approval
for new drugs and medical devices, reforming clinical trial management, and enhancing
innovator rights.
If fully implemented, these policies have the potential to streamline market access and
improve the operating environment for US drug and medical device companies in China.
Several of these proposed reforms also address key outcomes outlined in previous US-China
trade negotiations. The 2016 US-China Joint Commission on Commerce and Trade (JCCT),
for example, reaffirmed China’s commitment to encouraging clinical-value-oriented innovative
drugs to be registered and marketed in China, and noted that China would further improve
related policies. While several revisions and guiding documents for the regulations have been
released, and implementation has begun in some cases, other reforms stalled after 2017.
The March 2018 mass reorganization of government institutions, including the key regulatory
agencies for life sciences and healthcare industries, is a contributing factor in slowed and
stalled implementation efforts. The China Food and Drug Administration (CFDA) and National
Health and Family Planning Commission (NHFPC) were dismantled, with core functions
integrated into the newly created National Medical Products Administration (NMPA), National
Health Commission (NHC), and the State Medical Insurance Bureau. The reorganization
placed NMPA under a new giant, market regulator, the State Administration for Market
Regulation (SAMR), a centralized authority overseeing regulation of intellectual property, anti-
monopoly, food safety and standards, testing and certification. Following the reorganization,
the former head of CFDA was appointed Party Secretary of SAMR. However, shortly thereafter
a major vaccine safety
scandal at a local manufacturer forced his resignation. The leadership turnover and departure of
a prominent health reformer also contributed to delays in health sector initiatives.
In the longer term, we hope the streamlining of regulatory oversight of the health industry, and
potential for greater cooperation between health and IP regulators, will ultimately help improve
efficiencies and enforcement. Encouragingly, at the end of 2018, health and IP related reforms
began to pick up again. While progress is still necessary, reforms appear to be moving in the
right direction.
Regulatory Approval System
One area directly benefiting US companies is China’s reforms strengthening its framework for
drug and device regulatory review and approval. This includes the launch of expedited and
priority review and approval mechanisms, moves to accept overseas clinical data, as well as
strengthening the capacity of reviewers to reduce China’s drug lag. These efforts are expected
to help streamline and significantly speed-up the market access process for US companies,
and are consistent with industry’s primary recommendations.3
In February and July 2018, NMPA issued technical guidance on the acceptance of overseas
clinical trial data for devices and drugs, respectively. Previously, China did not accept clinical
trial data developed overseas to support new medical product approval. This reform will
accelerate the lengthy and costly process of conducting additional clinical trials in China.
While the reform is welcome and there has been steady improvement, to date there has been
no tangible implementation or confirmation of companies receiving marketing approval based
on overseas clinical data. We encourage China to continue to make progress toward full
acceptance of oversees clinical trial data and eliminating this market access barrier.
China has also moved forward with the implementation of expedited approval pathways for
innovative and urgently needed drugs and devices. In August 2018, 48 foreign drugs already
approved and marketed in the US, EU and Japan received a green light from China’s Center for
Drug Evaluation (CDE) for accelerated approval. This list includes several highly innovative new
drugs brought to market as recently as 2017. In September 2018, NMPA issued a new
“Catalogue of Medical Devices Exempted from Clinical Trials,” bringing medical device clinical
exemptions more in-line with internationally accepted standards.
The NMPA is continuing to undertake reforms to accelerate the drug review and approval
process. November 2018 amendments to the draft Drug Administration Law (DAL) include an
implicit 60-day approval timeline for clinical trials, which is expected to improve time to market
for innovate new drugs, including those developed overseas. New channels to facilitate
stakeholder-NMPA communications during the drug and device approval process will help
reduce delays. Progress is also being made in training technical reviewers of new drug and
device applications to help reduce China’s drug lag.
We support China’s continuing effort to accelerate and simplify the regulatory approval process
for drugs and medical devices. While these initiatives represent welcome progress, the overall
drug development and approval process in China remains out of alignment with international
practice, as it takes much longer than is typical in other countries. Lengthy approval processes
result in significant loss of effective patent terms for biopharmaceutical products. China should
3
PhRMA, Special 301 Submission 2019, “The People’s Republic of China”
continue to align its regulatory framework with international standards to provide companies
greater regulatory consistency.
Pricing and Reimbursement
The general lack of transparency and the unpredictability in government pricing and
reimbursement decisions for new drugs and devices create significant challenges and
uncertainty for US and other foreign medical product companies.
Since 2017, China has issued more regular updates of its National Reimbursement Drug List
(NRDL), which designates medicines covered by state-sponsored medical insurance and has
significant implications for the access and affordability of new treatments for patients in China.
Prior to 2017, China had only undertaken two substantive updates to the NRDL, in 2004 and
2009. In October 2018, China added 17 oncology drugs to the NRDL, including several
relatively new innovative drugs from US companies. This year, the director of the National
Health Security Administration (NHSA) announced plans to add more drugs to the NRDL and
establish a dynamic adjustment model that would allow new drugs to be reviewed for
reimbursement on a regular or rolling basis.
New additions to the NRDL and moves toward a more regular and dynamic mechanism for
drug review are positive developments. However, the lack of transparency in the negotiation
process for new medicines creates uncertainty around the government’s pricing and
reimbursement system. The NRDL negotiation process often results in significant price cuts for
new medicines, and the government’s centralized volume-based tendering process puts
additional price pressure on innovative and generic drugs. Such practices often lead to a de
facto preference for domestic manufacturers over foreign companies.
Negotiations with the reimbursement regulator should be timely, transparent and predictable.
Evidence-based methodologies independent of economic considerations should be adopted for
clinical value assessments. A key outcome of the 2016 JCCT dialogue included an affirmation
that China would implement drug pricing commitments, including that drug registration review
and approval would not be linked to pricing commitments and not require specific pricing
information.4 However, the dialogues stalled, and the US lacks a forum to discuss China’s
progress or hold China accountable to these commitments.
Intellectual Property (IP)
China has taken steps to strengthen its IP system, including for the health sector. In 2017,
China proposed a series of policies that addressed long-standing health IP concerns around
the lack of Regulatory Data Protection (RDP), loss of patent term, ineffective patent
enforcement and inconsistent patent examination guidelines. Though China’s IP environment
as a whole has seen incremental improvements, health IP reforms have not progressed. The
lack of adequate health IPR protections and enforcement undermines the ability of US
companies to be successful, and threatens their continued growth here in the United States.
NMPA issued draft measures on the Implementation of Drug Clinical Trial Data Protection in
April 2018, proposing six and 12 years of data protection for innovative pharmaceuticals and
biologics, respectively. This protection would prevent generic product manufacturers from
4
USTR, “US Fact Sheet for the 27th US-China Joint Commission on Commerce and Trade,” November
2016, (Last visited 18/07/2019)
proceeding to clinical trials and health authorities from evaluating generic product market
authorization applications during this period. Following the State Council’s October 2017
proposal of RDP, this is a strong first step toward providing better protection of originator
pharmaceutical’s IP.5 However, the proposal also includes problematic location and time-based
eligibility requirements that undermine the stated goals of the proposed reforms and
disadvantage global companies. This includes China’s definition of a “new drug” as “new to the
world,” essentially requiring drugs to debut in China first in order to receive data exclusivity. This
“China First” approach is inconsistent with China’s international commitments under the WTO,
as well as its JCCT agreements dating back to 2012, when China committed to define new
chemical entities in a manner consistent with international best practices.6
In May 2017, NMPA also took initial steps to propose a patent linkage system, which would help
resolve patent disputes involving biopharmaceutical products before follow-on products are
marketed. Such an early resolution system would help promote fair competition and recognize
innovator’s rights and investments in R&D. However, as with RDP, progress toward
implementation has been disappointingly slow.
While recent draft revisions to the Patent Law extend patent term restoration for innovative
pharmaceuticals due to regulatory delays, there are no provisions in the new Patent Law
requiring RDP or patent linkage. Unfortunately, RDP and patent linkage also were not
included in recent draft revisions to the Drug Administration Law. Both laws are expected to
be finalized by the end of the year. The Patent Law may be released for another round of
public consultation, so there remain opportunities for progress on these issues in the final
version.
While China has taken important first steps towards recognizing innovators’ rights, stronger,
more transparent and efficient IP enforcement mechanisms are needed. Hopefully,
coordination between NMPA and China’s National Intellectual Property Administration
(CNIPA) will improve IP enforcement in the health sector, as both regulators are now under
SAMR.
Opportunities for Engagement
International regulatory and standards setting bodies

International forums offer valuable opportunities to enhance global policy dialogue and best
practice sharing that promote greater regulatory consistency globally and provide businesses
more operational certainty around the world.
Encouragingly, China has been consulting more frequently with the international pharmaceutical
and biotech communities, and this engagement is increasingly reflected in China’s standards
setting and efforts to improve regulatory capabilities. In June 2017, China joined the
International Council on Harmonization (ICH), whose mission is to make standards and
regulations more consistent globally. Since China became an ICH regulatory member,
NMPA has pledged to adopt international technical standards and guidelines and keep
abreast of the latest regulatory scientific outcomes and advanced regulatory concepts globally.
China also joined the International Medical Device Regulatory Forum (IMDRF) in 2013, and
is a member of the managing committee, a move that has similarly improved Chinese
understanding of
5
Originator pharmaceutical products is a product that is first authorized worldwide for marketing, normally
as a patented product, on the basis of documentation of its efficacy, safety, and quality according to the
requirements at the time of authorization.
6
USTR, “Fact Sheet: 23rd US-China Joint Commission on Commerce and Trade,” December 19, 2012
(Last visited 22/07/2019)
international medical device regulatory norms and helped influence the direction of China’s
policy development.
Joint education and enforcement campaigns

Public-private cooperation and engagement between industry and various arms of US and
Chinese government have also helped reduce market access barriers and improve the
operating environment for US companies. For example, US Trade and Development Agency
(USDTA) launched the US-China Aviation Cooperation Program (ACP) with US and Chinese
governments and US industry partners in 2003 to help promote technical, policy and
commercial cooperation. The ACP helped improve the safety and efficiency of China’s aviation
infrastructure, which in turn improved the operating environment and opened new commercial
and cooperation opportunities for US firms. USTDA also regularly hosts a healthcare
cooperation program to facilitate public-private partnerships focused on improving healthcare
delivery through training programs in both the US and China. On the IP front, the US Patent
and Trademark Office frequently engages with China’s IP office to discuss policy development
and enforcement issues, and share best practices in support of US rights holders. Chinese
government stakeholders are often eager to learn from the experience of US government
regulators and industry as they work to design a system that is safe, efficient, and enables
innovative economic development.
China’s regulators have also remained committed to cooperating on joint special enforcement
campaigns, particularly targeting counterfeited products. The manufacture and distribution of
counterfeit medicines continues to be a serious challenge in China, both to public health safety
as well as US companies. China’s Public Security Bureau works with US companies to learn
best-practices and technical standards to strengthen their ability to crack down on drug
counterfeiting and improve public trust in the industry.
Bilateral cooperation is essential to the US Food and Drug Administration (FDA) mission of
strengthening the safety, quality, and effectiveness of food and medical products produced in
China for export to the United States. In 2008, the FDA opened its China Office with posts in
Beijing, Shanghai and Guangzhou. From this platform, FDA specialists, technical experts in
medicines and medical devices, and inspectors, worked with Chinese authorities to strengthen
the capacity of Chinese regulatory bodies, increase FDA inspections and help the Chinese
industry understand FDA standards and expectations. This work is essential to the health and
safety of US consumers, and to fostering a regulatory environment aligned to US standards.
We encourage the US government to strengthen support for FDA’s overseas engagement,

and to continue to pursue mutually beneficial engagement with Chinese government bodies
across industry sectors. Sharing US experience and best practices for developing and
implementing policies will encourage China to foster a regulatory environment that is
favorable for US companies.
Regular, industry-specific bilateral engagement

American companies value the high-level engagement that bi-lateral meetings like the US-China
Joint Commission on Commerce and Trade (JCCT) provide. Established in 1983, the JCCT was
a mechanism for consistent, year-round engagement between US and Chinese government
leaders, and was one of the principle vehicles for addressing specific commercial issues in the
bilateral trade relationship. The JCCT medical device and pharmaceutical working group was
particularly successful. Launched over a decade ago, the Med-Pharm working group was one of
the longest standing JCCT subgroups. It also was the only working group to include industry
representatives in the negotiations – a reflection of the highly complicated, technical issues in
the sector.
In 2014, I served as the US Medical Device Working Group Co-Chair. Since then, China has
made progress on several of the outcomes we reached that year, including efforts to reduce the
drug lag and accelerate the medical device and pharmaceutical regulatory review and approval
system, as well as accelerating the adjustment of medical device clinical trial exemption
catalogues. US industry representatives participating in the 2014 discussions also shared best
practices, including the development and implementation of America’s Unique Device
Identification system, and China has since made progress in developing its own device and
drug traceability system. That system has been developed with reference to international
standards and has incorporated industry feedback received during public consultation periods.
Real structural change takes time and requires precise negotiations. Critical to the progress
achieved during the JCCT era were the release of Joint Fact Sheets and agreements to
continue the dialogue the following year. The Joint Fact Sheets outlined specific outcomes by
industry sector and cross-cutting issues. They also helped reduce misunderstandings or
misinterpretations as to what was agreed. In 2014, agreeing to further dialogue was also
specifically included in the Med-Pharm outcomes: “China and the United States agree to
engage in enhanced dialogue with expert and high-level officials of relevant Chinese and US
agencies in 2015 to promote efficient pharmaceutical and medical device regulation and
market access.”7 This joint commitment to future rounds of dialogue and engagement helped
to create accountability, and allowed us to track China’s progress, however slow, toward
implementing the prior years’ commitments.
Most importantly, the JCCT platform enabled us as negotiators to build trust with our Chinese
counterparts. Trust is crucial to finding mutually beneficial solutions across industry sectors and
issues. Regular dialogue offered important opportunities to build an understanding of each
other’s policymaking considerations and processes. With more nuanced mutual understanding,
we were able to develop mutually agreeable policy proposals and implementation timelines, and
ultimately achieve more sustainable results.
USCBC Recommendations
China is and will remain an important market for US health sector companies. While there are
challenges that impact the ability of US health companies to equally compete in the China
market, China’s general direction of reform is pointing in the right direction. China has made
improvements in accelerating time to market for innovative drugs and devices, and has
proposed policies that would more adequately recognize innovators rights. However, much
needs to be done to enhance transparency and enforcement, particularly in pricing and
procurement and in protecting IP rights. Holding China accountable to WTO commitments
would be a good start.
The long-term growth and global leadership of innovative US life sciences companies will
depend on our ability to effectively address the issues US companies face in China. However,
the issues of the health sector are highly technical, nuanced and often unique to individual
companies. It is essential that these issues are systematically addressed through targeted
policy discussions between our two governments, and regular government consultation with
7
USTR, “US-China Joint Fact Sheet on the 25th US-China Joint Commission on Commerce and Trade,”
December 2014, (last accessed 07/22/2019)
industry and technical experts. Re-launching a platform like the JCCT to facilitate regular
dialogue on industry specific topics is necessary to address the specific commercial issues of
US health companies. Strengthening congressional support for the US FDA’s overseas efforts
to improve Chinese regulatory standards and product quality and safety is also critical.
Cooperative initiatives such as these would also help produce mutually beneficial results for the
broader US-China relationship.
The opportunity for public-private engagement provided by organizations such as the US

Trade and Development Agency is also invaluable as a mechanism to help build and inform
Chinese capacities around US norms and practices. Chinese government stakeholders are
more willing to engage in this process when the platform has the explicit support of the US
government. We encourage US policy makers not to overlook such platforms, and to strongly
support the engagement initiatives of various government agencies.
Finally, it is important that the growth and development of the US health and life sciences
industry is not unintentionally restricted by overly broad policies. As the Department of
Commerce Bureau of Industry and Security considers new export control measures, Congress
should ensure that “emerging and foundational technologies” are defined as narrowly as
possible so as not to hamper continued US job growth and collaboration in the sector.
The US-China bilateral commercial relationship is at a critical juncture. Trust is at an all-time

low. USCBC encourages the US government to leverage all available tools to pursue
enhanced engagement and cooperation with China to help build trust across the relationship.
PANEL III QUESTION AND ANSWER
COMMISSIONER WESSEL: Thank you. Thank all of your for your timeliness of your
testimony. Commissioner Cleveland?
VICE CHAIRMAN CLEVELAND: I just have one question to start. Ms. Eban, you
noted that 80 percent of the data from CROs was estimated to be fraudulent. And we heard
this morning that American companies are increasing relying on the CROs. Can any of you
speak to the regulatory process? What confidence can we have in that system? Where did
the data come from that you mentioned in terms of 80 percent fraud? Because that's troubling.
We've talked a lot about the ingredients in pills. But if clinical trials are fraudulent, that raises a
new level of concern.
MS. EBAN: In my investigation, I found that there is extensive fraud in CROs. And in
fact, the major fraud at an Indian company called Ranbaxy that I followed, was first triggered by
a finding of fraud at a CRO. But generally overseas, you know, we are relying for drug
approvals on the data that these CROs are providing. And of course it is the drug companies
themselves that are paying the CROs.
And it is a very sort of very frequent thing to have a back channel agreement to make
the data work out okay.
So my finding is that there is endemic fraud. The FDA is not up to the task necessarily
of detecting it and inspecting it. And even more troubling, it's the FDAs sort of practice that for
almost all overseas inspections, it announces its inspections in advance. So it gives companies
six to eight weeks of advanced notice that it's coming, which lets the companies, whether
they're CROs or whether they're drug companies, to stage manage these inspections.
The companies are making travel arrangements for the FDA. They're taking FDA
investigators out to dinners. And often it's just one FDA investigator with a handful of days to
inspect these firms. So I think that there's a tremendous amount of fraud that we are not
detecting in our drug supply from overseas is based on the data that's getting produced in that
manner.
VICE CHAIRMAN CLEVELAND: Dr. Huang, you talked about CROs in your testimony.
DR. HUANG: Yes, yes. Sorry, thank you. I think here we have the CROs certainly
about that as in one of the two forms of the pharmaceutical -- the outsourcing services actually
is booming in China. And as I pointed out in the written statement, China's -- there are like
more than 1,100 CROs around the globe and nearly 30 percent based in China.
We have actually the largest -- it's one of the largest, the WuXi AppTec is based in
China. They claim more chemists than any CROs in the world. Ten percent of the world's
CRO market, so it is very large. And certainly I agree that there's some endemic problems in
terms of oversight and quality of the clinical trials, you know, for example.
But in the meantime, I think it is also important to point it out that China, over the past
two years, has indeed made efforts trying to improve the quality of developing the
manufacturing of the drugs. One of the important measures launched by the former CFDA is
this -- they call it the consistency requirements. You know, they want to basically -- that is
down through these efforts to consolidate, the Chinese, like around 3,000 pharmaceutical firms,
you know, so they want to build some big companies, you know, using these measures.
Trying to -- the requirements on the efficacy and safety of the generic drugs.
They're trying to weed out at least half of these 3,000 small pharmaceutical
firms. So they indeed, they realize this is a problem. And they making -- seem to be making
efforts in that respect.
VICE CHAIRMAN CLEVELAND: If there's another round, I'll come back.
COMMISSIONER WESSEL: Thank you, all. I'm struck somewhat by the discussion
today and on this panel. And Mr. Allen, understanding all your points about engagement, et
cetera and I appreciate that. But the core issue we're talking about here is the safety of the
products we're importing. That's not a question of fair or unfair. It's a question of life or death.
And I don't mean that in any -- to besmirch you in any way.
I don't understand why our desire to have a regulatory system in China, our desire to
potentially block imports of APIs or anything else, if they can't be validated as safe should be
viewed as an unfair approach by China. And I'm not saying you said that. But that's sort of
what I'm feeling. That you know, if we're asking them to be up to world class standards -- we're
not doing that for a protectionist issue. We're doing that for health and safety for our people.
Protecting their health and safety, yes. But not protecting market share or businesses or et
cetera. Can you help me in terms of how the Chinese view this?
MR. ALLEN: Sure.
COMMISSIONER WESSEL: Do they view us as being unfair?
MR. ALLEN: Thank you, commissioner. So, my approach to this subject for the last 25
years has been as a process of trying to promote exports. And one of the key factors there has
been the U.S. FDA trying to increase standards across the board.
From 25 years ago, they started out with good manufacturing practices, and then good
clinical practices. And they've really done a yeoman's work to try and increase standards
across the board. And I think that's -- and that process benefits U.S. consumers, obviously, as
well as Chinese consumers.
There has been a virtuous cycle of consultation between the FDA, the Department of
Commerce, and USTR for many, many years so as to try and improve standards for all, up to
U.S. standards, or global standards. The higher Chinese standards are, the better it is for
American companies and American exporters.
So there is a commonality of interest here with Chinese regulators who wish to advocate
for and to ensure the safety for Chinese consumers, along with us.
I would also note that because of the doubts of Chinese drug and consumer medical
device products, therefore, foreign -- and particularly American -- companies have a very high
reputation for quality, and thus, our market there is very strong, and has been strong for a long
time.
So, my -- I would posit with you that there has been a virtuous cycle over many years.
That cycle has, at least temporarily, stopped.
I would argue that it is in our interest to renew that cycle and to engage in -- with the
Chinese regulators and American companies to address many of -- or some of the failings
within Chinese manufacturing and the Chinese regulatory space.
The Chinese regulators face terrible problems in trying to regulate their own country.
And the FDA has helped them to do that, benefitting not only them, but benefitting all of us.
Thank you.
COMMISSIONER WESSEL: I -- I'm sorry. Go ahead, please.
DR. HUANG: Just a quick follow-up of Mr. Allen's comments. You know, that the
Chinese -- the drug safety issue is indeed a big problem.
You have probably heard all those scandals, the vaccine scandals. Over the past year,
there was a couple of them.
But in the meantime, it also provides opportunities for the U.S. companies to break into
the Chinese market.
In fact, we saw these additional pressures for opening the Chinese pharmaceutical
market build up in the summer of 2018.
Right after this, they just -- when this -- one of the Chinese largest vaccine makers were
found to have sold -- you know, there's the substandard doses of vaccines in, you know,
diphtheria, tetanus, and whooping cough.
And so, they did a survey of more than 300,000 parents, and they found that 79 percent
said that before the scandal, they would have given their children a Chinese-made vaccine.
And that today still account for 95 percent of the Chinese market.
But the -- after that incident, they say it's only 60 percent still say -- only actually 40
percent still say they want U.S.-Chinese medicine after this scandal.
In fact, 60 percent say they were considering having their children inoculated outside
mainland China.
MS. EBAN: May I?
COMMISSIONER WESSEL: Ms. Eban, yes?
MS. EBAN: In the course of my reporting, I came across example after example of the
FDA essentially pulling its punches with Chinese plants, detecting fraud, detecting substandard
-
- potentially substandard products, and choosing not to sanction those plants.
And what seemed clear to me is that diplomatic concerns are interfering with public
health and safety. You know, you -- we don't have this problem in the U.S.
Inspectors show up unannounced, they stay as long as they need to, they find what they
find. And what's going on in China is very, very different.
So, I would basically say if we actually choose to get tough on China, then the way to
do it is to say, look, you want to sell your drugs into our market. You're going to give our
investigators -- our FDA investigators visas, they're going to come over, they're going to inspect
unannounced or on short notice, and that's how it's going to go if you want to sell into our
market.
COMMISSIONER WESSEL: I understand. Just as a side note, it's
sometimes hard for people here to understand when they see the activities being taken
against Chinese Uighurs, more than 50,000 internet police, et cetera, et cetera, that if China
wanted to regulate and ensure the efficacy and safety of its products, it could do it. It just
chooses not to. Commissioner Fiedler?
COMMISSIONER FIEDLER: So, let me -- I don't want to beat a dead horse on
unannounced inspections, but in the context of engagement, if a nation -- or if the people you
are negotiating with and engaging with do not accept the premise of unannounced inspections,
why would you waste your breathe after that on an issue like this?
So there's a -- I would agree to engage them if they agreed to do unannounced
inspections, and I would engage them after they proved that I could do unannounced
inspections.
Does anybody know any regulatory system anywhere in the world that is robust, that
doesn't include unannounced inspections? Now -- is there one? Okay. Now B-
MS. EBAN: No, there isn't.

COMMISSIONER FIEDLER: How many of you therefore are comfortable with the fact
that 80 percent of the APIs produced in the world -- or that are coming into the United States, in
our drugs, are produced by those folks?
Are you comfortable, personally?
MS. EBAN: I am definitely not comfortable with that, which my book reflects.
I will just say that the FDA did do a pilot program in India of unannounced inspections
from beginning 2014 through to mid-2015.
And as a result of those unannounced inspections that they did, the rate of official
action indicated findings, which is the most severe finding, increased by almost 60 percent.
Now, the FDA inexplicably -- and I never got an explanation from them -- discontinued
that program and went back to pre-announced inspections in India.
However, there is no -- as I understand it, there is no law on the books that is preventing
them from doing this.
COMMISSIONER FIEDLER: Yeah, I'm -- thank you.
Are you comfortable with the -- with Chinese supplying all the APIs, basically, in the
world, without unannounced inspections? Does that make anybody comfortable?
DR. HUANG: I think -- well, nobody -- no Americans would feel comfortable with that.
COMMISSIONER FIEDLER: I don't think it's an American issue.
(Simultaneous speaking.)
DR. HUANG: -- of the Chinese APIs, especially considering that there’s quality,
efficacy problems in the country.
But what I'm kind of, slightly different opinion here, is that we don't want to securitize
that dependence on Chinese drugs, in that we don't want to make that a national security
problem for the following reasons.
First, the U.S. is relying on China for those drugs because of the shifting global
pharmaceutical supply chain.
And also because of the 2000 U.S.-China Fair Trade Agreement that enabled the U.S.-
based multinational pharmaceutical firms to buy ingredients for critical drugs, you know, made
in the United States.
And also, we -- because of China, their lack of competitiveness of their pharmaceutical
industry because they have to focus on those lower end APIs or generic drugs, you know?
So, it does not reflect the conscious, clear strategy, like China against the United States.
And second, the technologies used to make those drugs are not monopolized, in China,
certainly. Right? Neither is China the only country that can make those drugs, you know?
And China become the leading API producer and exporter because the cost used to
make it is low.
So, we do have the alternative sources available, it's just that they are more expensive.
COMMISSIONER FIEDLER: So, perhaps the President should throw tariffs on --
DR. HUANG: Consider other options. Explore other options.
COMMISSIONER FIEDLER: -- to drive the production somewhere else where they do
unannounced visits.
DR. HUANG: Right. The --
COMMISSIONER FIEDLER: But let me just say something. I mean, national security
is widely defined. And let's understand something. The drug ingestion security of the American
people is a national security problem.
Whether it's a traditional national security problem or not, it is a national security
problem.
And I think we view that this way -- at least I do. If we're talking unsafe, this -- it's a
problem.
It's a serious problem. I'm done for now. For now. I mean -- but I mean, look, you didn't
answer my question about -- some of you did -- how comfortable you are, okay, with us being so
dependent for APIs on a country that is not allowing the most fundamental premise of inspection
to exist.
That -- I'm not addressing the question whether 16 inspectors are sufficient. I know
they're not. And I'm not addressing the question of whether we spend $100 billion.
I am questioning the fundamental premise of the inspection system. Yeah.
MS. EBAN: I'm not even certain that China has said no to unannounced inspections.
It's the U.S. FDA which has said no to U.S. -- to unannounced inspections.
And in email after email that I obtained in the course of my reporting, they are
concerned about diplomatic incidents, and that's why they don't want to do it, in part.
COMMISSIONER FIEDLER: Just to -- well, there's a long history of various other
subjects where the U.S. has sought to inspect, that unannounced doesn't happen, whether it be
forced labor imports that take two years to get an inspection, not six to eight weeks.
All kinds of other forms. It's a sovereignty issue they expressed sometimes, it's a this,
that, and the other thing.
The fact of the matter, it doesn't matter what they explain it as. Yeah.
DR. HUANG: Well, I think in terms of unannounced visit, right, the Chinese -- the FDA,
righ
t?
Now it's no longer called the Chinese FDA, but this health regulation -- they do now
actually use more -- rely more and more frequently on those unannounced visits -- you know,
inspections.
You know, actually the Changsheng -- the vaccine scandal was uncovered indeed by
that unannounced visit, you know.
So we should encourage China to use more of those, what they call flight visits, flight
inspections. More and more.
And potentially we could also have our FDA office in China to join those inspections,
you know?
So, we could use our leverage, right, in the trade negotiations with China, to actually ask
maybe China to allow the U.S. FDA to join those inspections.
In the meantime, I also want to point out in terms of whether we feel uncomfortable on
that, is that we talk about we are relying on China, right, for those APIs, generic drugs.
But in the meantime, let's look at the other side of the coin. China also is relying on us,
too, for those most effective innovative drugs.
This is especially important if you -- it's not just about the market of 11 billion market in
terms of Chinese exports, medicine -- medical and pharmaceutical products, right?
It is also about legitimacy because the government legitimacy is performance-based. It
hinges upon delivery, good health to the people.
Here, it's also about delivering effective medicine to the people that currently can only
be provided by multinational pharmas, including the U.S. pharmaceuticals.
COMMISSIONER WESSEL: Commissioner Talent?
COMMISSIONER TALENT: Dr. Huang, you talked about -- or Huang, you talked
about consolidation, and I've had other witnesses in other panels talk about consolidation as
well
-- that the Chinese government wants to consolidate.
What -- nobody went into any detail. So, what have they done? What numbers are
available? Have they announced any concrete plans?
Can you fill that in a little bit? I mean, what are they going to do in -- or have they done
to consolidate companies in pharmaceuticals?
DR. HUANG: Well, thank you. That -- if you look at the Chinese -- the domestic -- the
pharmaceutical industry, right, that is the -- the government started to note that industry since
the 1980s, you know?
So, but that is very fragmented, you know, despite the introduction of the GMPs, the
good manufacturing, you know, practices, you know, that -- it's very fragmented.
It's also, in terms of competitiveness, is not that competitive.
You know, they have -- even today, you know, with all those government measures to
consolidate those, there's still around like, 3,000, you know, pharmaceutical firms.
Many are small. If you -- there are just ten important players, right, in the Chinese
pharmaceutical market, that only account for ten percent of the entire market, you know?
So, that shows how fragmented the Chinese market is.
So the government want to, you know, consolidate those pharmaceutical industry in
order to build some, you know, like the big pharmas, the U.S. type of big pharmas -- you know,
they -- that can be more competitive internationally.
But in the meantime, they want also to improve the quality, you know, the efficacy, the
safety of the Chinese drugs, you know?
So, they introduced the -- those -- this new regulation, the requirements on the quality of
their generic drugs.
For example, you know, so that if you have -- you will produce a generic drug, you
know, the same types, you know, that you have to achieve the highest standards of that -- the
-- that same generic drug. And so that way, they want to weed out at least half of these -- the
pharmaceutical firms.
COMMISSIONER TALENT: Okay. So, but what I'm getting at is, you're saying since
to -- and anybody can answer this question if you know. I'm not -- not a trick question.
I'm just trying to find out what they're actually doing to consolidate.
Since 2016, the government has also made efforts to consolidate its pharmaceutical
industry. Somebody in the previous panel testified to the same thing.
Normally, you know, it's -- you read a statement like that in a written statement, then they
follow up and say, okay, they did this and this and this.
Are there any concrete plans that they have to consolidate? I mean, are they
subsidizing acquisitions, or what?
Or are you saying that their efforts to impose higher safety standards, that's their
consolidation?
Okay, so they're hoping that by imposing higher safety standards, some of these firms
will have to drop out?
DR. HUANG: They also encourage the acquisitions and mergers.
You know, we have seen some of the biggest pharmaceutical firms in China actually
significantly increased their merger and acquisitions activities internationally.
COMMISSIONER TALENT: So how is the government encouraging that, though? Are
they -- are there special funds?
I mean, they know how to encourage something when they want to encourage it, right?
I mean, we've seen Made in China 2025.
There really are no plans, then -- or concrete policies specifically directed at
consolidating the pharmaceutical industry? I mean, are there any? I mean, I B-
DR. HUANG: To my knowledge, I haven't seen any, like, particular, specific
government, like industry or policy type of measures.
COMMISSIONER TALENT: Okay. So, they'd like it to be consolidated, but they're not
really doing anything to consolidate, yes?
MR. SHOBERT: In addition to what Professor Huang has mentioned, it's also about how
they're reforming the tendering process for the hospitals.
That's a significant forcing function, in addition to quality standards and inspection.
I think it's an important contextual factor that we not lose sight of, that the NMPA now --
formerly the SFDA -- is a new ministry, and that this type of technocratic capacity that they
possess should not be overstated.
But they view the tendering process for the public hospitals as another mechanism by
which they can start to winnow the list of pharmaceutical companies that persist in the supply
chain, because if you're not part of the procurement and the tendering, then you're not going to
be able to sustain yourself as an -B
COMMISSIONER TALENT: So they're going to do it through the control of demand?
MR. SHOBERT: So, I think --
COMMISSIONER TALENT: Primarily through the hospitals? MR.
SHOBERT: Yes. I think you have two vectors. You have --
COMMISSIONER TALENT: Is that in your statement? I'm trying -- did you --
MR. SHOBERT: I don't know that it was.
COMMISSIONER TALENT: I don't think --
MR. SHOBERT: Yeah. It's just got two levers, if you think about it.
One is the continuing to empower the NMPA to have additional inspection capacity
across the country, and the second is how they're utilizing the tendering process.
COMMISSIONER TALENT: Okay. Thank you.
If you all think of something else, we write these reports, and we're going to have a
section on, you know, Chinese -- the rest of it. And we don't want to say anything that we can't
document.
So I don't want to say that they're trying to consolidate if they're really not trying to
consolidate, if it's just an aspirational goal. Thank you.
COMMISSIONER WESSEL: Commissioner Kamphausen?
COMMISSIONER KAMPHAUSEN: Thank you very much, and thanks to the panel.
Three quick points.
First, for Ms. Eban, as I read your testimony and then listened to you, I was struck with
your emphasis on the role of the -- of our FDA.
And I wanted to provide you a chance to comment. I mean, the impression one gets is
that our FDA is the problem.
And I would offer for your comment, maybe it's the second order problem.
The first order problem is Chinese in origin, and while we need to do a better job, I'm sort
of with Commissioner Fiedler that there are limits to what the FDA can accomplish.
So, any points of clarification you'd like to make would be good.
MS. EBAN: You know, well first of all, we have this model where we're sourcing our
pharmaceuticals from overseas. So, you know, that's the sort of number one issue or problem.
We don't necessarily have -- I mean, the question here that's being debated is what sort
of
levers of control do we have to get a different result from China?
But, you know, the U.S. FDA is in charge of protecting U.S. consumers from
substandard drug products.
So, you know, as an investigative journalist, that's where I focus my attention, but
there's no question that, you know, we're facing a tsunami of compromised drug products in
China.
I mean, it's just proven over and over again, and we have a current, ongoing quality
crisis right now with this recall of generic blood pressure medicine that millions of Americans
got, and it came from China. So, you know --
COMMISSIONER KAMPHAUSEN: Good, thank you.
MS. EBAN: -- I focused on U.S. FDA.
COMMISSIONER KAMPHAUSEN: Thank you. MS.
EBAN: Yeah.
COMMISSIONER KAMPHAUSEN: Ambassador Allen, Dr. Huang said we ought not
securitize the trade of either APIs or high-end pharmaceuticals.
Are you aware of any impediments, structural or otherwise, to U.S. export of the very
high-end pharmaceuticals to China?
MR. ALLEN: Yeah, thank you. In my testimony, I mentioned a couple of things.
Incomplete intellectual property right enforcement, and the implementation of the
intellectual property right regime -- the patent regime, specifically.
There are, of course, pricing issues. Dr. Huang mentioned provincial pricing
mechanisms and an urge to tamp down pricing to keep healthcare expenditures relatively low.
And then third, the approval process for new drugs, which can be slow, leading to long
delays for American patented products.
And occasionally, a Chinese generic coming up very quickly, soon after the patented
product is approved, giving the Chinese manufacturer some advantages.
And so, American pharmaceutical manufacturers have a good number of issues in
China. Nonetheless, it is either their second -- first, second, or third largest market in
the world,
and it's a rapidly growing market for virtually all of them. And therefore, an important market for
American jobs and growth. Thank you.
COMMISSIONER KAMPHAUSEN: And I guess to complete the thought, then, with
Professor Huang, the impediments are Chinese side, they're not U.S. policy impediments.
Then, Mr. Shobert, just a last question on data. You introduce it -- there's kind of two
levels I think that you addressed of that.
The first is sort of existential, how are we going to think about data in the future. And
then secondly, you maybe somewhat indirectly suggest we ought to hedge our bets with regard
to how China -- how we share data with China, and how they use our data.
And I was hoping you might elaborate on that a bit.
MR. SHOBERT: Yeah, and maybe with just a little bit more time to explain why this
issue matters.
As we think about the economy -- the global economy over the next 100 years, one of
the most important areas that we get right in the United States and globally is precision
medicine.
And precision medicine is predicated on the development of these large data sets, these
curated data sets.
And to the extent there continue to be asymmetries in what American researchers can
do in China, and Chinese researchers can do here. That's one of the more basic learnings, that
we should be pulling out of other high technology sectors that have struggled with
asymmetries
relative to what they can do in China versus what a Chinese competitor can do here.
And so again, I don't think we have to approach that in a particularly militaristic manner.
I think it's -- it needs to be acknowledged as one of the ways in which trade protocols
that were designed to anticipate an era of cast metal and aluminum sheeting don't necessarily
do well in an era of big data, cloud computing, artificial intelligence.
And so I think this needs some additional attention in the space that we're talking about
in particular. It's relevant in not just precision medicine, but in things like machine vision, and
how that'll be applied in oncology use cases.
So, it's hard to overstate how important it is that we get this issue right very quickly.
COMMISSIONER WESSEL: Thank you. Commissioner Bartholomew?
CHAIRMAN BARTHOLOMEW: Thanks very much, and thanks to our witnesses for a
really interesting panel.
I have so many questions. I'm not going to be able to ask all of them, at least in this
rou
nd.
But very quickly, first, Ms. Eban, do the FDA inspectors that are on the ground have
Chinese language skills?
MS. EBAN: So, you've touched on a huge issue, and in fact, because it was only seven
minutes, I couldn't get into it, I do in my testimony.
Mostly they don't. And often, the translators are provided by the companies that they're
inspecting, and they're company salesmen. And I was even able to document instances where
there are just wild deceptions because of that.
So, sometimes Chinese companies will pool resources and pay for one show factory
that looks like, you know, out of central casting, and because the FDA investigators can't even
read the street signs, they're each inspecting the same facility, but they think it's for different
companies.
So, I mean, it's really -- the language barrier has created an opportunity for really wild
dec
eit.
CHAIRMAN BARTHOLOMEW: I guess for all of you, I'm really trying to -- thank
you, first, but I'm trying to understand how the Chinese got to the point that they are the lowest
cost producer on these things, right?
I mean, it's really rather stunning that they can produce at a lower cost than India. So,
government subsidies? I mean, what is the pattern that has allowed them to be able to produce
at the lowest cost?
MS. EBAN: In my reporting, I sort of traced the rise of China as the leading
manufacturer of antibiotics, which was really sort of the rise of China in the pharmaceutical
space.
Part of that was because of very lax environmental regulations, and these
pharmaceutical plants create a lot of pollution.
But also because they had hundreds of years of expertise in fermentation with soy
sauce, and there's fermentation processes in the making of antibiotics.
So that was sort of like opening the door to them as a go-to producer of very, very
cheap pharmaceuticals, and it went on from there.
CHAIRMAN BARTHOLOMEW: So, Mr. Allen?
MR. ALLEN: But Chairman, I would note that you see similar patterns throughout all of
the chemical industries. All from petrochemical to fine chemical, to dyes for textiles.
China would probably be the low cost producer around the world, but I think nothing
nefarious there.
Rather, it has to do with the cost of capital being relatively low, and very large
economies of scale, as well as an entrepreneurial culture, universities that are just pouring out
engineers.
China, I -- as I understand will graduate 1.8 million engineers this year, and years into the
futu
re.
So it's not unnatural that China would have a very large industry here, nor that they
would be the low cost producer.
CHAIRMAN BARTHOLOMEW: Well, again, I'll point to India as an example. They
have all of the factors that you have just mentioned.
But also, I mean, biochemical -- biomaterials, of course, are part of Made in China 2025,
which means that the Chinese government is focused on building this industry.
That, I guess, is some of what I'm trying to understand. In addition to lax environmental
regulations, are there subsidies?
Are there -- you know, what advantages are they providing to their companies that have
allowed them to do it?
It's not just the low cost of labor. But you know, what other advantages are they doing
to build this industry?
MR. SHOBERT: Massive investments, which I think we've covered -- or I've covered in
previous testimony to the commission.
There's just a massive amount of state-led investment in the creation of new biotech
industrial parks. Early on, characterized by digging holes and pouring concrete to create
infrastructure and jobs, and then tax monies.
But now, it's starting to actually become the home to where a lot of novel molecules are
being developed as a result of people returning back to China because they view this as an
opportunity for them to grow professionally and personally.
So it's -- there's no way to talk about this without talking about the massive amount of
state investment that's gone into the --
CHAIRMAN BARTHOLOMEW: Right. Which means, of course, that what we are
seeing in this industry is that what we have seen in industry after industry after industry, right?
I mean, China is moving up the value added chain, but you mentioned cast metals,
right? It's -- we have seen this process all along, and we have seen what it does to our
economy. In this case, it is not just our economy that's being affected, as Fiedler --
Commissioner
Fiedler said.
I mean, it is also -- this is really a national security issue. It's the health and well-being of
all of us and all of our population.
I have questions for a second round, if we have a chance to get to them. Thank you.
COMMISSIONER WESSEL: Commissioner Wortzel?
COMMISSIONER WORTZEL: One of the interesting things that came out of a short
visit to China at the end of May, and some meetings here in the U.S. with the American
Chamber of Commerce, is that corporations, as a result of the tariffs, are realizing that they are
entirely too entangled in China and supply chains. And they're disentangling, they're
decoupling. I personally think that's a great thing.
Now, it creates some problems over a short period of time. And so, I want to pose a
question -- and I don't know that there's a right answer, but I think there's two ways that that
decoupling to protect American health, security, and the economy could be imposed by the
President.
One are really high tariffs on any drug that comes in that uses Chinese APIs.
The second would be to invoke the International Emergency Economic Powers Act, so
that the President has the authority to declare an unusual and extraordinary threat to the
national security, foreign policy, or economy of the United States that originates outside the
United States. So the President has the authority to say, we're done, we're decoupling on this
issue.
Give me your -- you all are involved more or less in looking at the industrial side. What
would that do to companies? How long do you think it would take? If you looked three months
from the day that order was given, six months, and nine months, where would they go, and
how would they reinstitute supply chains?
MS. EBAN: I think one of the challenges for companies -- so if you take drug companies
that are reliant on API, and their -- the API manufacturers that they're buying from are all listed
in their drug master files with the FDA.
And so, if you have to get a change of supplier approved by the FDA, you can't just
change where you're procuring.
It has to be approved by the FDA, and so B-
COMMISSIONER WORTZEL: Well, that's a regulation. If congress worked with the
executive, we could have a new law.
CHAIRMAN BARTHOLOMEW: Any of us would want the unregulated drugs to be -B
MS. EBAN: Right, but wouldn't you want the FDA to be inspecting those API
providers?
Because that is exactly what happened in the heparin crisis -- is that a provider of API
was not inspected by the FDA because of a glitch, and over 81 Americans were killed by
adulterated heparin.
MR. SHOBERT: I'm struck in the question that we're wrestling with how to put the
toothpaste back in the tube, which is maybe an imperfect metaphor, but in the same space as,
drugs and pharmaceuticals.
I think that we have to ask the right question to get the right answer.
And I think the right question is perhaps broader than this hearing is designed for, which
is, did we properly gate how certain industries were stood up in China?
And to some extent, shame on us for not paying more attention to something as critical
as was referred to earlier as a national security issue.
And assuming, as has been the political orthodoxy for a long time, that industries would
somehow self-regulate themselves.
There is a role here for a strong FDA, and especially a -- perhaps a different version of
the FDA would've been required to enforce FDA principles across to another country's border.
These are nontrivial matters, and so perhaps that suggests to us today that we have a
very uncomfortable question, which you just asked, which is what do we do now?
My answer to your question is that it would be a really good time to be in the Indian
pharmaceutical business, because more or less what would happen is a bunch of precursor
plants would get stood up in India, probably in about 30 days.
And I think the point that's made about other corners that would potentially get cut to
bring these new supply chains online, and then in turn supply Americans -- I don't think we
should have any reason to believe those wouldn't lead to even more serious patient safety
issues.
CHAIRMAN BARTHOLOMEW: All right. Who's next?
COMMISSIONER WESSEL: Commissioner Talent?
PARTICIPANT: So we're on round two.
PARTICIPANT: Round two.
COMMISSIONER TALENT: Okay. So, I'm trying -- what I'm trying to do is to determine
what we can authoritatively -- not that we're the final authority as a commission, but what we
can say in this report with a high confidence level it's true.
So, Ms. Eban, in her testimony said -- she wrote a book, and I think this sums up your
conclusion. It's the second paragraph of your testimony.
You say your investigation reveals endemic fraud in dire conditions in an industry where
companies routinely falsify data and circumvent principles of safe manufacturing. Okay. That's
your conclusion.
So, the rest of you on the panel, would you agree or disagree with that, or would you say
it may be true, but I don't know?
I'd like to see how much agreement we have on that basic factual conclusion.
COMMISSIONER FIEDLER: I tried using the word comfortable.
COMMISSIONER TALENT: Well, I'm going to -- yes, no, or I don't know? MR.
SHOBERT: I would say I agree with the characterization of the problem.
I agree that it needs the attention of U.S. regulators, and I agree with every
recommendation that was made initial.
COMMISSIONER TALENT: Okay.
MR. SHOBERT: I think it's all right.
COMMISSIONER TALENT: Nobody has to answer, but I mean, either yes, no, or I
don't know?
MR. ALLEN: I'm not qualified to say.
COMMISSIONER TALENT: Yeah.
DR. HUANG: From my examination of the Chinese -- their history of regulating its drug
and food products, I believe that is indeed a systematic issue.
And there's actual reasons for reasons beyond the regulatory control. And I mean, it's
just political economic reasons behind that.
We haven't elaborated, but in the meantime, we also need to recognize that not just we
are caring about this safety issue.
It's -- actually the Chinese government has also reasons to be concerned about the
safety of their products, as well.
COMMISSIONER TALENT: Right. And I think you made that point in your -- I think
everybody here would agree with that, that they do care about their own reputation amongst
the Chinese people.
Either one of you all, or a different witness said this is a big motivator for them because
the Chinese people expect the government to deliver on this.
DR. HUANG: Yeah.
COMMISSIONER TALENT: Right? So that's motivating them.
And I'll just say -- and then I'm done with my second round -- I don't see in particular
why anybody should be shocked that what Ms. Eban found is true.
I mean, we have a system where there are tremendous incentives not to worry about
safety. Right?
And it generates externalities or costs that are never brought home to the people
generating them. Right?
These companies never pay any price for this. So, yes, of course, under those -- and
they don't have a liability system.
They don't even have a common law liability system. Right?
I mean, here, even if there were no FDA, if people were doing this, eventually
Commissioner Goodwin or some other really good litigator would get hold of them and they'd
pay a price.
So, I don't -- I'm -- I don't see why anybody should be uncomfortable concluding what is
obviously going to happen when you set the system up this way.
Please, go ahead. I'm testifying now. You.
MS. EBAN: Yeah, I just want to add from, you know, my testimony that I've submitted
that the FDA investigators really believe that these companies have figured out how to game
our system down to the issue of drug shortages, because they know that if -- even if they're
caught committing fraud, they know that if they're making drugs in short supply, it's going to
function essentially like a get out of jail free card, and the FDA is not going to restrict those
drugs, and they can continue sort of, you know, with an income flow there.
So, they specifically feel that they are choosing to make drugs in short supply to protect
their bottom lines.
COMMISSIONER TALENT: And -- but Mr. Shobert put his finger on what I think is an
essential aspect of that problem, which is how big are the barriers to entry? Right?
Because if a market opens up, how quickly could somebody else set up shop in
compliance?
And you implied that in India, or a low cost country like that, this could be done quickly.
MR. SHOBERT: On the API front, for sure. I mean, on the API front, that supply chain
at one point persisted in India.
And I think it was two or three years ago, there was this white paper circulated in India
that more or less pointed out that, hey, did you know all of the Indian pharmaceutical industry is
more or less captive to APIs coming from China?
And that was a nontrivial moment of truth for the Indian pharmaceutical sector.
COMMISSIONER TALENT: Thank you.
COMMISSIONER WESSEL: I'm going to raise a politically sensitive topic without a --
without trying to be politically sensitive. Let me ask you this.
CHAIRMAN BARTHOLOMEW: You think we’re being insensitive? Is that what you're
saying?
COMMISSIONER WESSEL: No. The ACA. What if we were to have a requirement
that the only way an insurance company could reimburse you is if the products -- the APIs, et
cetera, all came from regulated or inspected facilities?
It seems to me that the insurance companies have every interest in getting you to use
generics.
Formularies, they try and move you off as quickly as they can.
And because this is where all the money is in the system, if they know that they are
required to only allow their patients to buy inspected products, it seems we drive the inspection
system.
Either China will do what it should be doing because it wants to continue to sell, India
will, you know, build up its capacity, or we will.
I'm not trying to get into the question of, you know, where these products should come
from, but rather, they should come from regulated inspected facilities.
Do any of you have a view? Ms. Eban?
MS. EBAN: I'd like to say that everything we're talking about today is the regulated
system.
Every plant that I've mentioned, everything, it's all subject to FDA regulation, so this is
supposedly the regulated drug supply, which is why it is so worrying.
COMMISSIONER WESSEL: But if you were to require, you know, a greater -- you
know, inspections on a regular basis, some kind of inspection protocol for those B-
MS. EBAN: They are required.

COMMISSIONER WESSEL: But it's not happening.
MS. EBAN: They are required. And under GDUFA, they are required to B-
COMMISSIONER WESSEL: GDUFA? I don't know. What B-
MS. EBAN: I'm sorry. It's the Generic Drug User Fee Act.
COMMISSIONER WESSEL: Okay.
MS. EBAN: So, under that, they are required to achieve parity. Foreign inspections are
supposed to have parity with U.S. inspections.
Partly to achieve that, the U.S. FDA reduced their U.S. inspections to achieve parity.
COMMISSIONER WESSEL: So --
MS. EBAN: But, all of the plants that we're talking about are supposed to be inspected
roughly every two years.
COMMISSIONER WESSEL: So, what you're describing to me is maybe a GDUFA B if
I'm pronouncing it correctly?
MS. EBAN: Yeah.
COMMISSIONER WESSEL: Review by congress to make sure that flowing through the
inspections are happening on a regular basis, without the diplomatic --
PARTICIPANT: Inspections being defined as unannounced.
COMMISSIONER WESSEL: Oh, no -- yes, agreed.
MS. EBAN: Right, so the -- but -- so, just to be clear, the inspections are happening,
but what we're talking about is the quality of those inspections. Yes.
COMMISSIONER WESSEL: No, I -- meeting certain protocols about what a good
inspection, which is unannounced on X basis, by individuals who actually speak the language,
and a number of other things.
MS. EBAN: Yes.
COMMISSIONER WESSEL: So we have the existing mechanism. You're saying it's a
question of improving it in some way?
MS. EBAN: Really --
COMMISSIONER WESSEL: Is that what you’re saying?
MS. EBAN: -- overhauling the FDA's foreign inspection program and making it less
credulous and less honor-based, and making it rigorous, and making sure that the standards
are verifiable. Yeah.
COMMISSIONER WESSEL: And do you think China would have a problem with that?
MS. EBAN: You know, I think I'm maybe not enough of a China expert to say, but they
certainly want into our market, and I think that they do have a political and image problem at
home about appearing to be, you know, effectively regulating things.
And some of the FDA investigators that I interviewed for my book said that they found
Chinese regulators more cooperative than the Indian regulators.
COMMISSIONER WESSEL: Mr. Shobert?
MR. SHOBERT: Yeah, I would encourage the commission and its recommendation to
congress to believe that really leaning in on this area about enforcement is something where
China's domestic ambitions, in terms of securing public safety, its domestic economic
development ambitions, and also its role in being part of the global supply chain all align in a
very virtuous way.
I think as is in the case with many of the conversations we're having with China right
now, there's probably a bit of nuance that's needed to approach this in the right way.
But I would encourage the commission to say to congress, this is something that we can
be much more declarative and definitive about in terms of what we want.
COMMISSIONER WESSEL: It's hard once you injected the word nuance, but B-
MR. SHOBERT: I mean, I'm aware.
COMMISSIONER WESSEL: -- I'll stay away from that. Ms. Bartholomew?

CHAIRMAN BARTHOLOMEW: Thank you. Gosh, again, so many things. I'll just note
Rosemary Gibson earlier talked about pig intestines are the new rare earth.
And we have to remember as we just hear about when the Chinese are the only
producers of some things, that their ability to use those things as leverage is something we
need to be concerned about.
Not my question. I have two questions.
One, Dr. Huang, you talked about the Chinese industry relying on U.S. innovation.
And I wondered there what specifically you were meaning, and then is it -- is the
Chinese industry sort of monetizing the R&D that's being done here in the United States on
innovation in this sector?
Either by buying it, or by stealing it, or by sending graduate students over who are
replicating people's labs?
And also, the issue of hiring leading American scientists.
They're different categories of things, but how are they trying to get access to our
innovations?
Because again, if this industry follows the pattern of other industries, we will be
displaced even in our innovation.
DR. HUANG: Thank you for the questions. I think for now, I think the U.S. is
undoubtedly the leader in the high tech -- the pharmaceutical industry.
Just look at the number of innovative original drugs, you know, that is -- that are
developed, and it clearly -- I mean, the U.S. is the -- a leader in the field.
But China, you know, obviously they want to improve their competitiveness of their
pharmaceutical industry.
That is why they have that -- the Made in China 2015 with -- 2025 -- I'm sorry -- which
identified biomedicine as one of the top ten industries for the government to take note of.
Right?
So, they clearly -- they have the ambitions to be a leader, but what approach they use
-- but that's certainly right, they have various, right, approaches, right, to note, to develop this
pharmaceutical industry, right?
That the -- they certainly also pay close attention to the development of the R & D in this
field
.
But what specific measure they use, that's out of my -- the knowledge.
And I think if you look at the -- when I say that the -- we are -- the Chinese also are
relying on us, we -- in terms of the ability to develop -- deliver this effective medicines.
You -- just look at China, they have a huge NCD, called noncommunicable diseases,
crisis, right?
The hypertension, right? The diabetes, cardiovascular diseases, cancer.
You know, they're -- just if we look at the cases, right, that they're just increasing
significantly over the past year.
So there's a huge demand for these most effective pharmaceutical products, which can
only be made by the multinational corporations, unfortunately, because the -- those most
effective -- for example, anti-cancer drugs, right, the -- until very recently, right, they're only
made by the big pharmas.
You know, the Chinese has produced some -- those me-too drugs in 2011, that -- like a
common -- right, that is produced by the Betta Pharmaceutical firm based in Zhejiang.
But now, is the -- the new drugs now in the market -- you -- in the market, there you see,
their revenue actually dropped significantly.
That is an example that shows that there's still a very huge dependence, you know, on the
U.S. products, you know, and U.S. -- you know, their drug industry still very competitive.
You know, we -- so we don't want to underestimate their resilience, the capabilities, the
leadership of our pharmaceutical industry when we talk about our dependence on the Chinese
drugs.
CHAIRMAN BARTHOLOMEW: Thank you. Do I have time for one more? One more
question? No, yes, no?
COMMISSIONER WESSEL: You have 30 seconds. Sure.
CHAIRMAN BARTHOLOMEW: I can't. Mr. Shobert, I was going to ask about the --
people's individual health information, and that's not a 30 second question or a 30 second
answer.
CHAIRMAN BARTHOLOMEW: Were you going to ask about it? All right.
MR. SHOBERT: No, but for the record, I am married into a family of hog farmers, and
they are going to be very excited to know that hogs are the new rare earths. So that's what I'm
taking back.
COMMISSIONER WESSEL: Data is the new oil, as they say. Commissioner Lewis?
COMMISSIONER LEWIS: The only question I have --
COMMISSIONER LEWIS: Yes. The only question I have is how aware is the top
Chinese leadership -- aware of what you've been telling us today?
MS. EBAN: My understanding is that it is, and the FDA over in China did do a series of
workshops with the industry and with government officials to try to talk to them about data
integrity issues, and what these sort of good manufacturing practice standards are.
I should also add that I have been made an offer for publication of my book in China, so
if they aren't aware of it right now, maybe they will be.
MR. ALLEN: This is a -- if I may, this is an intensely political issue. Quality of drugs
and quality of healthcare in China.
And from the premier down, there is a mandate to improve quality, and improve safety,
and improve efficacy.
As recently as two months ago, the premier himself spoke about the demand of the
Chinese people for quality healthcare. And also education and environment, and food.
So this is something that the Chinese leadership is intently focused on, and wishing to
improve.
COMMISSIONER LEWIS: When they find out -- as you just said, with the meetings
that you've been at, do they do anything to the companies that are violating what they want?
MR. ALLEN: So, there are many different types of problems that the SFDA or the
Chinese regulators face.
Corruption is one. Their ability to get out to the factories is another one. The
subcontracting is a third type of problem.
I would note to you, however, that at least on the corruption side, that if Chinese
regulators of pharmaceuticals are found to be corrupt, it's a bullet in the head as punishment.
It's very severe, so that is indicative of the importance to which the Chinese government
looks at this issue.
And that has not resolved the problems yet, but I think it is probably inaccurate to
suggest that the officials responsible for safety and efficacy are not trying to address this issue.
COMMISSIONER LEWIS: Mr. Shobert, do you have anything to add to that?
MR. SHOBERT: No, just the bullet in the head metaphor is perhaps overly apt in this
case. This has the highest real visibility.
The vaccine scandal I think led to the premier making a visit, and well, I mean, I -- this
has the highest priority, highest attention of the Chinese government at the highest of levels.
COMMISSIONER LEWIS: Because we heard before that when Chinese companies
violate, there's nothing being done about that.
MR. SHOBERT: I would not -- I think, again, the way that I would look at the
enforcement of a violation is that -- and this is unfortunately a -- I think an honest statement --
the higher the visibility of the problem, the more direct the Chinese government's involvement is.
But, you know, broadly speaking, again, as I think has been consistent in everyone's
testimony today, the government is trying to do what it can to crack down on these, and does
kill the occasional monkey to make a lesson for the chickens.
I think I got that right.
COMMISSIONER WESSEL: Commissioner Cleveland?
VICE CHAIRMAN CLEVELAND: Mr. Shobert, this morning -- well, let me start by
saying the idea that we would shift manufacturing or production from China to India causes me
as much pause as leaving the system in place in China, because during my tenure at the bank,
we had a series of horrific scandals that involved the bank financing the production of false
testing kits that produced significant risk and harm in India.
So, I think globalizing safety standards is probably the better approach, rather than
making assumptions about shifting from China to India.
Mr. Shobert, I was really interested in your discussion about PHI.
And this morning, a witness did say that there is concern about the possibility or the
risk of health information being used to target specific Americans, and you note that that's sort
of in the category of science fiction.
So, I think I'd be interested in your comments about the risk. What data do the Chinese
currently have access to, and how are they using it?
And in particular, I'm interested in your follow on discussion about use of AI in the
healthcare sector.
So, if you could sort of lay out for us what you see as the data they're after, how they
may be using it, you -- what we do not have access to in a symmetrical way.
You note de-identification is the critical issue.
Do you really believe that they're going to be willing to engage in that kind of a protocol
discussion?
And then, how will they use AI in this area? It's a lot of questions.
MR. SHOBERT: It's a lot of questions. Let me see what -- to -- if I can do them justice.
So, maybe start with the higher order question, which is what is the objective of the data
access itself?
And I would argue that it's nothing deleterious.
I would argue that it's just a hunt for data because data enriches what an artificial
intelligence system can do, whether we're talking about computational biology, or machine
vision for tumor morphology.
It's just -- it's a hunt for data, right?
And China, as I think this commission will know well, has a history of doing things on a
really big scale, but questions about quality are always good to keep in mind.
So, China might very well -- or Tianjin might very well spend $16,000,000,000 on AI, as
they plan to do, but the question of the quality of that investment needs to be asked and
answered.
So I think the objective of what the data -- what they're trying to do with the data -- I
would assume it should be understood largely through economic development prism. Right?
The desire to stand up new -- a new industry in China, where they can have a
sustainable competitive advantage.
Now, the question that then leads us to is what type of investments are both countries
making?
And I argue -- and this is not unique to my point of view, I think it would be fair to say
it's widely held -- that China's appetite for investing in this space significantly outpaces ours for
lots of reasons.
And again, I think you always have to ask the question of whether or not this is an
effective use of capital.
But with that having been said, China has some other inherent advantages in an era of
artificial intelligence that are worth noting.
One of the predicate steps you take as you're building an artificial intelligence system is
you have to not just capture the data -- which I've said they have perhaps an advantage -- but
then you have to annotate the data.
The annotation and labeling is what then in turn allows you to build the system in
question, or build the models in question.
And that's interesting because that's inherently a very high labor content job.
So that's another aspect to which the -- China's investment in AI has some advantages
that we perhaps don't have in the United States.
So, all -- if you net that all out, it starts to draw our attention to this question that the
commission I think rightfully asked, which is what are the risks and opportunities that we should
be thinking about as it relates to this space versus other high technology sectors?
And I think it's important that we not be naive.
That I think we owe it to ourselves, we owe it to our multinational corporations to make
sure that we're thinking about data access through a twenty first century lens.
And to maybe reduce that down to a vernacular that D.C. will be familiar with, and we
need to kind of not view China in this space as a developing nation.
Their capabilities here are on par with ours, if not perhaps better.
And so, we need to set all of that legacy way of looking at China aside and view them
as a competitor, I would submit in a healthy way.
In a way that should inform companies on both sides of the Pacific, and should lead to
good, new economic development opportunities, and new therapeutics.
So again, maybe let me land on the last question you asked.
I think I say in my testimony that some of the fears that I've heard -- I think at the last
panel that I served on, there was a question as to whether or not China would have the ability to
mine American PHI to design the perfect bioweapon.
And I want to really encourage us to see that as science fiction and not science fact.
I think the much bigger principle that this commission should pay attention to is whether
or not asymmetric data access policies are leading to disadvantages to American
entrepreneurs,
to American researchers, and whether or not we're making the sort of systemic investments in
the development of these large biobank initiatives and curated data sets that will lead to the
twenty first century economy.
VICE CHAIRMAN CLEVELAND: So, how would you do that?
I mean, you talk about the fact that the barriers in place, in terms of requirements on the
Chinese side, that it has to be a Chinese entity or a Chinese institution.
What are the sort of concrete steps you would recommend in terms of assuring
symmetry and sharing data?
MR. SHOBERT: Yeah, so we need to align on how PHI is going to be handled. And I
think that's a very simple answer. That's a really hard thing to do. Right?
There are competing standards, right? China has one view interpreted through a
couple of policies.
The United States obviously leans very heavily on HIPAA and the HHS Safe Harbor Act,
which more or less lays out 18 identifiers that are -- that if all -- if your PHI has all those 18
identifiers, it's considered your data, it's not been properly de-identified.
So I think we need to globally align on that standard if we really want to have PHI flow
across borders.
That would likely lead to a conversation about some sort of global norm around de-
identification in general.
And right now, I think it's fair to say that the United States has a much more lax view on
what constitutes whether data's been de-identified, and what you can do with that data, i.e.,
how you can ship it outside of our borders, than other countries do.
COMMISSIONER WESSEL: Sci-fi today may not be sci-fi tomorrow.
You know, we've heard some pretty interesting things over the 18 years I guess this
commission has been in business, including teleportation, quantum commute -- computing
leaps, and a number of other things that just a couple of years ago were viewed as, again, sci-
fi but seem to be on the horizon.
Number one, number two, I think there is a concern about some of this data as it relates
certainly to DNA.
I think we have already seen targeting of dissidents of those who the Chinese
leadership views as a risk to the country. The DNA for family members, a number of other
things.
So, I agree in general, but I don't think we should diminish the potential threats that are
out there, and we always need to be willing to discuss them to try and make sure that they are
just in the future and not, you know, within our grasp.
Are there any -- Commissioner Wortzel, then Commissioner Kamphausen.
COMMISSIONER WORTZEL: I'd like to, if I could, throw -- it looks like three linked
questions out to the four of you, and just see what that stimulates or what I get back.
Because I have no idea, but the first is, the European countries seem to have the same
problem we do with things coming out of China.
Second, if so, how do they approach the problem, and is there anything to learn from
the
m?
And then the third would be, it seems to me that if we share the same problem, what's the
possibility of a coalition approach?
Either to developing other suppliers, you know, Ireland, you name it -- or to resolving it
with China.
PARTICIPANT: James?
PARTICIPANT: Do you want to start, then?
MS. EBAN: So, the carcinogen NDMA that was detected in the generic valsartan was
actually first flagged by European regulators. The U.S. FDA didn't catch it, the Europeans did.
One thing that the Europeans do that I -- we don't do is routine surveillance testing of all
the drugs that are coming in through their ports.
And you know, there's quite a bit of surprise, I found, that the FDA is not engaged in any
kind of routine surveillance testing. So, that's number one.
And number two, I mean, there has long been discussion of having sort of global
treaties on pharmaceutical quality, to which various countries would be signatories, and the
model for that is the aviation industry.
And that has been sorely lacking. So, that is something that, you know, various
countries have worked on through, I think, an organization called PIC/S, but it hasn't really
happened yet.
One of the ways that countries cooperate in this space is through what's called mutual
recognition, which is to say, you know, I -- European regulators, if you go inspect, you know, a
plant, what you find, you share it with me, and that's good enough for me.
Of course, one of the -- and so, we have recently signed a mutual recognition
agreement with Europe.
The problem with that the people are concerned about is then you would have, you
know, regulators from the Baltic states who are not as nearly well-equipped to detect things as
our own regulators, giving us the okay on plants that we ourselves haven't seen.
But, you know, there is no question that there is -- could be some sort of global
regulatory approach, and maybe you could do that with the question of unannounced
inspections, to say that that's going to be a global standard.
COMMISSIONER WORTZEL: It strikes me as you said that, it wouldn't have to be all
yea
r.
I mean, it could be like the intelligence community in Five Eyes. We've got four or five
or six trusted countries, and the hell with the rest of you.
COMMISSIONER WESSEL: There -- up for your next diplomatic post, right?
COMMISSIONER FIEDLER: You apparently ingested too much rocket fuel.
COMMISSIONER WESSEL: Commissioner Kamphausen?
COMMISSIONER KAMPHAUSEN: The title of this panel is U.S.-China links and
health and medical products, risk and opportunities.
We spent a fair amount of time talking about risks.
Ambassador Allen, you inserted a sentence in -- at the very end of your answer to my
last question about the opportunities for American pharmaceutical companies in China.
Can you elaborate a little bit? What are you hearing from your member companies
going forward?
MR. ALLEN: Yeah, thank you very much for the opportunity. You know, China is 20
percent of the world's population. They're facing a terrible demographic problem, especially
exacerbated by the one child policy.
And thus, their demand for high quality pharmaceuticals is growing very rapidly, well
above global growth rates.
We have done very well in that market, and we will continue to do well, provided the
bilateral overall relationship remains stable.
It is a matter of fact that Chinese patients who are able to obtain foreign pharmaceuticals
or medical devices will prefer them.
And this offers a tremendous opportunity.
Moreover, it is a matter of fact that a large percentage of global engineers that will
contribute in this industry are coming from China and are Chinese, and they will be innovating in
the future, and our companies are wishing to work with them to grow global businesses with
them.
It is a fact that our pharmaceutical industries are quite well-integrated.
They are synergistic and they are interdependent, and the future of American
pharmacy has -- is at least to some extent predicated on the ability to be able to serve
Chinese customers, and to sell into that market.
And anything that reduces our ability to take advantage of a very large
pharmaceutical market will have an unintended consequence on the productivity, and on the
competitiveness, and on the profitability of American pharmaceutical firms.
So, we should be very careful as we regulate so as not to -- as to avoid unnecessary
negative -- and unintended negative consequences.
COMMISSIONER WESSEL: Commissioner Lewis?
COMMISSIONER LEWIS: Ms. Eban, you mentioned that the European country found
the carcinogen in that drug. Which country was that?
MS. EBAN: Well, I think it was the overall EU regulator that announced it.
COMMISSIONER LEWIS: Okay, and you said also that we do not do the inspections in
the United States?
MS. EBAN: We don't do surveillance testing of drugs that are coming into our ports.
COMMISSIONER LEWIS: Would you recommend we do do that?
MS. EBAN: Yes.
COMMISSIONER LEWIS: Would the pharmaceutical industry oppose that?
MS. EBAN: Sure.
COMMISSIONER LEWIS: Thank you.
COMMISSIONER WESSEL: A moment's hesitation. COMMISSIONER
LEWIS: Not much.
COMMISSIONER WESSEL: We have come to the end of our day. We are very
appreciative of all your time, your testimony, your participation.
I want to thank -- Senator Talent and I want to thank Nargiza and Brittney for a great job
putting this hearing together, and Brittney for stepping in midstream.
So, thanks to our staff. And we are adjourned until September 4th.
(Whereupon, the above-entitled matter went off the record at 3:18 p.m.)
STATEMENT OF MARK ABDOO, ASSOCIATE COMMISSIONER FOR GLOBAL POLICY
AND STRATEGY, FOOD AND DRUG ADMINISTRATION
B
1
TESTIMONY
OF
MARK ABDOO
ASSOCIATE COMMISSIONER FOR GLOBAL POLICY AND STRATEGY
FOOD AND DRUG ADMINISTRATION
DEPARTMENT OF HEALTH AND HUMAN SERVICES
BEFORE THE
U.S.-CHINA ECONOMIC & SECURITY REVIEW COMMISSION
“EXPLORING THE GROWING U.S. RELIANCE ON CHINA'S
BIOTECH AND PHARMACEUTICAL PRODUCTS”
JULY 31, 2019
RELEASE ONLY UPON DELIVERY

Introduction
Chairman Bartholomew, Vice Chairman Cleveland, and distinguished Members of the

Commission, thank you for the opportunity to submit written testimony to the Commission. We
appreciate the Commission’s thoughtful consideration of the national security implications and
the opportunities that arise from the trade of products regulated by the Food and Drug
Administration (FDA) between the United States and the People’s Republic of China.
FDA is responsible for protecting public health by ensuring the safety, effectiveness, quality, and
security of human and veterinary drugs, vaccines, and other biological products for human use,
and medical devices. The Agency also is responsible for the safety and security of our nation’s
food supply, cosmetics, dietary supplements, and products that emit electronic radiation; and for
regulating tobacco products. Imported products generally must meet the same standards as
those produced domestically.
Sweeping economic and technological changes have revolutionized international trade over the
last several decades creating a truly global marketplace for goods and services. Many of the
challenges associated with globalization are observed in China and mirror the challenges we
see in other countries. FDA has engaged in a variety of efforts to help address these
challenges.
For example, in China, FDA conducts risk-based regulatory inspectional activities; capacity-
building and confidence-building activities with Chinese regulatory authorities; and focused
engagements with key in-country stakeholders, including regulatory counterparts, regulated
industry, U.S. government agencies, multilateral organizations and academia. FDA monitors
and reports regulatory trends, conditions, and emerging public health events/incidents that
have the potential to impact the safety of FDA-regulated products produced in China intended
for U.S. consumption. FDA also coordinates with other agencies to support U.S. interests,
including national security interests.
Scope of medical product & supplement manufacturing taking place in China
As of 2018, China ranks second among countries that export drugs and biologics to the United
States by import line (13.4 percent). An import line is a distinct regulated product within a
shipment through customs. A single shipment may include multiple lines of varying sizes.
Approximately 83 percent of these Chinese import lines for drugs and biologics were human
finished dosage forms (finished drugs) and 7.5 percent were active pharmaceutical ingredients
(APIs), the remaining 10 percent were animal drugs and medicated animal feed. In addition to
these import lines, APIs manufactured by China also come to the U.S. as part of finished drug
products manufactured in other countries, for example, India. Therefore, the percentage of APIs
produced by China for the United States marketplace is likely underrepresented by our numbers
as China is a major supplier of APIs for other countries. It is important to note, FDA’s Drug
Shortages Staff continuously monitor drug supply chains for potential shortage issues, including
for drugs and APIs sourced from China. With respect to registered foreign human drug
manufacturing facilities that are subject to CGMP (current good manufacturing practices)
surveillance inspections, approximately 22 percent of the API manufacturing facilities and 14
percent of finished dosage form manufacturing facilities are located in China.
China provides 39.3 percent of the medical device import lines, and ranks first among
countries that export devices to the United States by import line. It is imperative FDA
continues to ensure the quality and availability of FDA regulated medical products.
Risk-based Oversight
The Agency electronically screens imports using an automated risk-based system to determine
if shipments meet identified criteria for physical examination or other review. To enhance our
ability to target high-risk products, FDA developed the Predictive Risk-based Evaluation for
Dynamic Import Compliance Targeting application, or PREDICT. This is a sophisticated
screening application that uses information from many sources—such as intrinsic product risks,
past inspection results, intelligence data, and even information about threats such as extreme
weather that could spoil a shipment—to provide FDA entry reviewers with risk scores on every
import line.
FDA maintains global vigilance of manufacturing facilities through a risk-based inspection

strategy to focus inspectional resources on higher risk facilities and works closely with our
international regulatory partners in Europe to avoid duplication of inspections. Among other
things, the number of inspections in any given country reflects our risk-based prioritization of
our inspections and improvements in our targeting; our increasing ability to leverage inspectional
work done by trusted partners, especially in Europe; and a higher number of foreign pre-
approval inspections.
Our policy for prioritizing drug manufacturing surveillance inspections is based on factors such
as a facility’s compliance history, recall trends, time since last inspection, inherent risks
associated with the drug being manufactured, processing complexity, and other factors, which
are all carefully weighed and considered. FDA is maintaining global vigilance by concentrating
inspections on higher risk facilities, both for routine surveillance and in evaluating new drug
applications. As global compliance trends change – and standards in some sectors improve –
we should expect to see an evolution in our inspection priorities.
In regard to food products, FDA recently published its Strategy for the Safety of Imported Food.
FDA applies the same U.S. food safety requirements to all food consumed in the United States,
regardless of whether the facility or farm that produces the food is located within the United
States or half way across the globe. Because FDA’s enforcement tools abroad differ from the
Agency’s tools domestically, Congress directed FDA to develop certain programs to ensure the
safety of imported food. As with domestic oversight, FDA’s strategy for overseeing the safety of
imported food is to maximize agency public health impact by aligning resource allocation to risk
level, tailoring the use of new and existing regulatory tools accordingly. FDA will work to
optimize oversight of foreign firms and the portion of imported foods that receives FDA
oversight, including leveraging the work of partners with strong regulatory systems or
responsible parties in the food supply chain. However, based on our experience, the process of
negotiating arrangements is time- and resource-intensive, requiring funding over a long period,
and could potentially detract from resources for other inspection approaches and activities.
In addition, FDA also recently published the Plant and Animal Biotechnology Innovation Action
Plan to implement and clarify risk-based policies with the goals of ensuring that developers
know what they need to do to efficiently bring a plant or animal biotechnology product to
market, and that consumers and the public understand how FDA’s regulatory system helps
ensure the safety of such products. FDA has already evaluated a genetically engineered crop
(a rice variety) developed in China. The Agency anticipates other Chinese developers will
engage FDA as part of the Agency’s voluntary consultation process for biotechnology-derived
plant varieties. FDA is well prepared to support a global marketplace focused on innovation in
plant and animal biotechnology and to advance the Agency’s public health mission.
On-going challenges
Substantial improvements have been made in the inventory of registered pharmaceutical

manufacturing firms in recent years. However, there are remaining gaps in this inventory that
should be addressed to ensure visibility of all Chinese manufacturers that produce drugs or
active pharmaceutical ingredients of drugs that are ultimately shipped to the United States.
The President’s FY2020 budget includes a legislative proposal to address information gaps
relating to foreign drug manufacturers. This full information on the drug supply chain, while
available domestically, can be enhanced for foreign sites. Closing this gap will help ensure
FDA has the information needed for effective shortage mitigation, provide more complete data
for risk-based surveillance inspection planning, and help ensure prompt detection and
intervention of unsafe drugs in the marketplace.
Coordination with other agencies
In addition to these efforts, FDA is also actively engaged in a number of collaborative efforts
with other agencies. In general, for complicated issues that involve trade or scientific dispute,
interagency (e.g., the Department of Homeland Security, the Office of the United States Trade
Representative, the Department of Agriculture, and others as appropriate) coordination is
pivotal in ensuring FDA’s overall mission is advanced. While FDA depends on the major
national security agencies and the Department of Health and Human Services’ (HHS) broad
national security efforts to protect our national security interests, FDA and the regulated
industry at large have a vested interest in preventing unacceptable breaches of trust and
confidentiality that can undermine the integrity of U.S. biomedical innovation and research. To
that end, FDA has safeguards to prevent diversion of intellectual property in product
applications to other entities, including other countries, and restricts the sharing of confidential
information by FDA staff with others, including in some instances with foreign entities.
Foreign acquisitions, or investments by a foreign entity involving over 10 percent, of a U.S.

company triggers a review of the transaction by the Committee on Foreign Investment in the
United States (CFIUS) under 31 CFR § 800-806. While normally voluntary in nature, notices to
CFIUS may be mandated (or even unilaterally filed by CFIUS) in the event a transaction not
submitted to CFIUS but involving national security risk is identified. FDA provides input to the
larger HHS response to CFIUS cases involving the Healthcare and Public Health, and Food and
Agriculture, critical infrastructure sectors where FDA has a potential interest involved or may be
impacted by the transaction. This includes, but is not limited to, acquisitions by Chinese entities.
When applicable, CFIUS has the ability to refer the matter to the President, certify to Congress
that the transaction does not present an unmitigated national security concern, or negotiate a
risk mitigation agreement with the company that can require up to and including the complete,
total, and permanent divestiture of the U.S. portions of the acquired or invested company. In
the event of a mitigation agreement, CFIUS can also institute a mitigation monitoring
agreement wherein compliance with the mitigation agreement is monitored by involved Federal
agencies, generally with severe monetary damages imposed in the event of a breach of the
mitigation agreement.
CFIUS cases are not limited to any particular sector or industry; any transaction potentially
involving national security risk and foreign control can be pulled into the process. CFIUS
controls are sufficient to address merger and acquisition risks when identified and applicable;
they cannot cover transactions or company creation efforts that fall outside CFIUS’ purview.
For dietary supplements, there are no formal agreements. For biotechnology, there are no
formal agreements. However, the U.S. and China have a Biotechnology Working Group and a
Technical Working Group that foster bilateral dialogue and are focused on trade and
information sharing.
Another item of note is the Department of Defense’s (DoD)
access to FDA’s Compliance Status Information System
(COMSTAT) to evaluate a facility’s ability to produce medical
products in accordance with FDA’s regulatory requirements.
COMSTAT displays the status of medical product firm profiles
using profile class codes based on categories of products
produced by a firm. Profile class codes and statuses indicating
if they are in accordance with FDA’s regulatory requirements
are determined during FDA inspections. Although COMSTAT
requires an account for access and DoD personnel have
accounts, COMSTAT does not have a reporting mechanism to
determine when DoD accesses the system or what records are
viewed.
Conclusion
Thank you for giving FDA the opportunity to describe the

Agency’s efforts to address the challenges of our globalized
marketplace and to discuss our work in China. FDA is
implementing a comprehensive strategy to enhance the safety
of imported products and to establish an effective global safety
net.
Our priorities in China are consistent with our priorities

everywhere. The best way to ensure food safety and the
integrity of medical products is to make sure firms consistently
follow appropriate processes for safeguarding safety and
quality in production. Manufacturers are best situated to
ensure these processes, and regulatory bodies should hold
companies accountable for lapses in the production process
and not simply rely on testing after the fact to detect
flaws. Inspections and testing play an important role in that
process, but they need to be used as part of a larger system
that emphasizes a systematic, proactive, preventive approach to
strengthen the production of safe food and safe and effective
medical products produced in China for export to the United
States. And in our globalized world, it is increasingly important
that regulatory partners work together to ensure the safety of
products as they move across borders.
While many future challenges remain as we engage Chinese
regulators and industry on these key issues, we will continue to
expand on successes attained in recent years.
SECTION 3: GROWING U.S. RELIANCE ON
CHINA’S BIOTECH AND PHARMACEUTICAL
PRODUCTS
Key Findings
• China is the world’s largest producer of active
pharmaceutical ingredients (APIs). The United States is
heavily dependent on drugs that are either sourced from
China or include APIs sourced from China. This is
especially true for generic drugs, which comprise most
prescriptions filled in the United States. Drug companies
are not required to list the API country of origin on their
product labels; therefore, U.S. consumers may be
unknowingly accepting risks associated with drugs
originating from China.
• The Chinese government has designated biotechnology as
a priority industry as a part of its 13th Five-Year Plan and
the Made in China 2025 initiative. The development of
China’s pharmaceutical industry follows a pattern seen
in some of its other industries, such as chemicals and
telecommunications, where state support promotes
domestic companies at the expense of foreign competitors.
• China’s pharmaceutical industry is not effectively regulated
by the Chinese government. China’s regulatory apparatus is
inad- equately resourced to oversee thousands of Chinese
drug manufacturers, even if Beijing made such oversight a
greater priority. This has resulted in significant drug safety
scandals.
• The U.S. Food and Drug Administration (FDA) struggles to
guarantee the safety of drugs imported from China
because of the small number of FDA inspectors in country,
the large number of producers, the limited cooperation
from Beijing, and the fraudulent tactics of many Chinese
manufacturers. Because of
U.S. dependency on China as a source of many critical
drugs, banning certain imports due to contamination risks
creating drug shortages in the United States.
• As a result of U.S. dependence on Chinese supply and the
lack of effective health and safety regulation of Chinese
producers, the American public, including its armed forces,
are at risk of exposure to contaminated and dangerous
medicines. Should Beijing opt to use U.S. dependence on
China as an economic weapon and cut supplies of critical
drugs, it would have a serious effect on the health of U.S.
consumers.
• Lack of data integrity in China presents challenges for
U.S. and Chinese health regulators. In 2016, the China
Food and Drug Administration investigated 1,622 drug
clinical trial pro-
(248)
grams and canceled 80 percent of these drug applications
after it found evidence of fraudulent data reporting and
submissions of incomplete data, among other problems.
• China places great emphasis on genomic and other
health-related data to enhance its biotech industry.
Domestically, China established national and regional
centers focused on big data in health and medicine.
Investment and collaborations in the U.S. biotech sector
give Chinese companies access to large volumes of U.S.
medical and genomic data, but U.S. companies do not get
reciprocal access.
• Foreign firms continue to face obstacles in China’s health
market. These obstacles include drug regulatory
approval delays, drug pricing limitations, reimbursement
controls, and intellectual property (IP) theft. U.S.
companies must also compete with Chinese drug
companies that introduce generic products or counterfeit
drugs to the Chinese market shortly after a foreign patented
drug is introduced.
• China is the largest source of fentanyl, a powerful synthetic
opioid, in the United States. Although the Chinese
government made multiple commitments to curtail the fl of
illicit fentanyl to the United States, it has failed to carry out
those commitments.
Recommendations
The Commission recommends:
• Congress hold hearings assessing the productive capacity of
the
U.S. pharmaceutical industry, U.S. dependence on Chinese
pharmaceuticals and active pharmaceutical ingredients
(APIs), and the ability of the U.S. Food and Drug
Administration (FDA) to guarantee the safety of such
imports from China, with a view toward enacting legislation
that would:
○ Require the FDA to compile a list of all brand name and
generic drugs and corresponding APIs that: (1) are not
produced in the United States; (2) are deemed critical to
the health and safety of U.S. consumers; and (3) are
exclusively produced—or utilize APIs and ingredients
produced—in China.
○ Require Medicare, Medicaid, the U.S. Department of
Veterans Affairs, the U.S. Department of Defense, and
other federally funded health systems to purchase their
pharmaceuticals only from U.S. production facilities or from
facilities that have been certified by the FDA to be in
compliance with U.S. health and safety standards and
that actively monitor, test, and assure the quality of the
APIs and other components used in their drugs, unless
the FDA finds the specific drug is unavailable in
sufficient quantities from other sources.
○ Require the FDA, within six months, to investigate and
certify to Congress whether the Chinese pharmaceutical
industry is being regulated for safety, either by Chinese
authorities or the FDA, to substantially the same degree
as U.S. drug manufacturers and, if the FDA cannot so
certify, forward to Con- gress a plan for protecting the
American people from unsafe or contaminated drugs
manufactured in China.
• Congress direct the U.S. Government Accountability Office to update
its 2016 report, Drug Safety: FDA Has Improved Its For- eign Drug
Inspection Program, but Needs to Assess the Effec- tiveness and
Staffing of Its Foreign Offices. The updated report should focus on the
U.S. Food and Drug Administration’s ability to conduct inspections of
Chinese drug manufacturing facilities.
• Congress consider legislation requiring generic drug
manufacturers that sell medicines to the U.S.
Department of Defense and U.S. Department of Veteran
Affairs to disclose which essential drugs are at risk of
shortage or supply disruption because the relevant
products, active pharmaceutical ingredients, chemical
intermediates, and raw materials contained in them are
sourced from China.
• Congress enact legislation requiring drug companies to list
active pharmaceutical ingredients and their countries of origin
on labels of imported and domestically produced fi drug
products.
• Congress enact legislation creating a risk-based system
making importers of active pharmaceutical ingredients
(APIs) and finished products liable for any health risks
incurred by consumers in the event the product is proven
unsafe due to contamination, mislabeling, or other defects.
Special attention should be paid to finished drug products
imported from China or containing APIs sourced from China.
Introduction
China is a global source of critical generic drugs and
pharmaceutical ingredients, as well as health-related products
like dietary supplements, biotechnology products, and medical
devices. It is also the main source of APIs globally. Even India
—the world’s leading supplier of generic drugs—relies on
China for 80 percent of its APIs.1 The United States sources
80 percent of its APIs from overseas,2 and a substantial
portion of U.S. generic drug imports come either directly from
China or from third countries like India that use APIs sourced
from China.3 Drug companies are not required to list the API
country of origin on their product labels; therefore, U.S. con-
sumers may be unknowingly accepting risks associated with
drugs originating from China.
China’s government has invested significant resources into
the development of biotechnology products and genomics
research, but has not allocated the same resources toward
developing necessary regulatory oversight. As a part of this
effort, the Chinese government and affiliated companies and
institutions have used licit and illicit means to accumulate
personal and medical data on millions of
U.S. persons in the process. China’s government also
encourages investments—including mergers and acquisitions,
as well as venture capital (VC) investments—in U.S. biotech
and health firms, leading to technology transfer that has
enabled the rapid development of China’s domestic industry.
U.S. health and biotech firms in China, meanwhile, continue
to face regulatory and other market barriers that limit their
ability to compete with Chinese firms. The Chinese government
has taken steps in recent years to streamline regulatory
procedures and allow
foreign medical products to enter the market more quickly.
However, concerns remain over China’s commitment to
protecting IP rights and its continued favoritism of domestic
providers of health products.
This section explores China’s role in global health industries
and the risks and opportunities posed for U.S. public health and
national security. It also examines the activities of Chinese
health and biotech firms in the United States and the ability of
U.S. health and biotech firms to operate in China. Finally, the
section discusses U.S.-China global health cooperation and
analyzes remaining challenges in the relationship that have the
potential to impede further cooperation. The section draws from
the Commission’s hearing on “Exploring the Growing U.S.
Reliance on China’s Biotech and Pharmaceutical Prod- ucts,”
consultations with global health, pharmaceutical, and biotech
industry experts, and open source research and analysis.
Definition of Key Terms

This section uses several key terms in the pharmaceutical
production process. Pharmaceutical products can generally
be broken down into:
• APIs: The FDA defines an active ingredient as “any
component that provides pharmacological activity or
other direct effect in the diagnosis, cure, mitigation,
treatment, or prevention of disease, or to affect the
structure or any function of the body of man or animals.”
4
• Finished dosage forms: Finished dosage forms (FDF) are

pills, capsules, and other finished products ready for sale
and use. Finished dosage drug facilities produce drugs
in their finished forms (e.g., tablets or capsules). The
finished dosage of a drug usually contains some kind
of API and inactive ingredients. Finished dosage forms
can be brand name or generic drugs.
• Biologics: Biologics (also referred to as biological drugs or
biopharmaceuticals) are products created using living
organisms and can range from vaccines and tissues used
in transplants to cell and gene therapies. Biologics are
produced using biotechnology.
• Biosimilars: According to the FDA, biosimilars are
biological products that are “highly similar to and have
no clinically meaningful differences from” a biologic that
has already been approved by health regulators.5
U.S. Reliance on Chinese Pharmaceutical and Medical

Prod- ucts
China’s share of U.S.-bound exports of biotech products,
medical equipment and supplies, and pharmaceuticals has been
on a steady increase (see Figure 1). In 2018, U.S. imports of
Chinese biotech products were $266 million, up from $194
million in 2017.6 U.S. imports of Chinese medical equipment
have also increased significantly over the past decade. In
2018, for example, they increased to $5.9
billion, up 78 percent since 2010.7 U.S. imports of
pharmaceuticals directly from China increased to $3.1 billion in
2018, up 17 percent year-on-year, and 76 percent since 2010.8
Figure 1: U.S. Imports of Health Products from China, 2010–2018
$6
$5
US$ billions
$4
$3
$2
$1
$0
201020112012201320142015201620172018
Source: Biotech Products

U.S. Census Bureau, Medical Equipment
USA Trade and June
Online, Supplies
17, 2019. Pharmaceuticals
https://usatrade.census.
gov/data/Perspective60/View/dispview.aspx ; U.S. Census Bureau, U.S. Trade with China in Advanced
Technology Products, December 2018. https://census.gov/foreign-trade/statistics/
product/atp/2018/12/ctryatp/atp5700.htm.
According to the FDA, in fiscal year 2018, 13.4 percent of all

U.S. drug imports, by import line,* originated directly from
China.† This makes China the second-largest exporter of
drugs and biologics to the United States behind Canada.‡
However, the FDA acknowledges these figures understate U.S.
dependence on Chinese pharmaceuticals because China is
also the primary supplier of APIs for producers located in
other countries.9 Given China’s dominance of the global market
for APIs, it is highly likely that most generic drugs imported
into the United States contain active ingredients sourced from
China.
China as a Global Source of Generic Drugs and APIs
China’s pharmaceutical industry consists of more than 4,000
drug manufacturers, which in 2017 recorded revenues of $127.8
bil-
* Import lines are products listed as separate items on entry documentation that an importer submits to
U.S. Customs and Border Protection. U.S. Customs and Border Protection transmits this information to the
FDA for those products that are FDA regulated. Federal Register, Submis- sion of Food and Drug
Administration Import Data in the Automated Commercial Environment, July 1, 2016.
https://www.federalregister.gov/documents/2016/07/01/2016-15684/submission-of- food-and-drug-administration-
import-data-in-the-automated-commercial-environment.
† According to the FDA, approximately 83 percent of drug imports from China are FDF drugs,
7.5 percent are APIs sourced directly from China, and 10 percent are animal drugs and medicated animal feed.
See U.S.-China Economic and Security Review Commission, Hearing on Exploring the Growing U.S.
Reliance on China’s Biotech and Pharmaceutical Products, written testimony of Mark Abdoo, July 31, 2019,
1.
‡ In fiscal year 2018, 19.4 percent of all imported drugs to the United States, by import line, came from
Canada. U.S. Food and Drug Administration, interview with Commission staff, October 3, 2019.
lion.10 Its national pharmaceutical market is the second-largest
in the world by domestic health expenditures (behind only the
United States), and is expected to expand to $145–$175
billion by 2022.11 Unlike the United States, which produces
costly, high-value compounds, China’s pharmaceutical
industry primarily produces inexpensive generic drugs and
pharmaceutical ingredients.12
Government subsidies, a robust chemical industry, IP theft,
lax environmental protections, and regulations favoring
domestic companies contributed to China’s emergence as the
world’s largest producer of APIs. In 2008, the Chinese
government designated pharmaceutical production as a “high-
value-added industry” and bolstered the industry through
subsidies and export tax rebates to encourage pharmaceutical
companies to export their products.13 In 2017, Chi- na
earmarked approximately $13.2 billion for pharmaceutical re-
search and development (R&D), and its investment in this
area is expected to reach $29.2 billion by 2021.14
China’s drug industry is built on the foundations of its robust
chemical industry—which accounts for 40 percent of global
chemical industry revenue—the world’s largest.15 China’s
chemical companies have the capacity to produce a range of
products, from fertil- izer to drug ingredients, with relatively little
regulatory oversight.16 Lack of robust environmental and labor
protections, coupled with poor enforcement of IP laws, have
also fueled the growth of China’s pharmaceutical industry.17
With the growth of China’s chemical industry and its
subsequent dominance in API manufacturing, the world is
becoming increasingly dependent on China as the single
source for life-saving drugs. The U.S. generic drug industry can
no longer produce certain critical medicines such as penicillin
and doxycycline, and the APIs needed to make these
antibiotics are sourced from China.18 The vastness of the global
medicine supply chain and the lack of sourcing transparency
for key drug ingredients can obscure early indicators of supply
chain problems.19
Rosemary Gibson, senior advisor at the Hastings Center and
author of China RX, noted in her testimony before the
Commission that the United States is losing its ability to
produce generic drugs because Chinese drug companies
dumped low-price products into the global market, which in
turn pushed U.S., European, and Indi- an producers out of the
generic drug manufacturing business.20Ac- cording to Ms.
Gibson, China is seeking to disrupt, dominate, and displace
U.S. pharmaceutical and other medical companies, and in
doing so limit the United States’ ability to produce its own
medicines, including critical antibiotics such as penicillin and
even generic aspirin.21 She believes the United States could
see its generic drug industry made uncompetitive within five to
ten years due to the Chinese government’s policies (including
subsidies and export incentives) that allow Chinese
pharmaceutical firms to undercut prices and drive U.S. firms out
of business.22
Dependency on China Creates Supply Chain Disruption Risks
Approximately 40 percent of the generic drugs sold in the
United States have just one manufacturer each, and a supply
chain disruption could cause a serious drug shortage.23 The
American Medical
Association has called on the federal government to address
the potential for critical drug shortages as a national security
concern and offer incentives to boost domestic production of
these drugs.* 24 The American Medical Association suggests
mitigating drug shortages would require drug manufacturers to
increase transparency in the global pharmaceutical supply
chain by sharing information about the location of drug
production sites and the causes and duration of drug
shortages.25 The American Medical Association also called on
the U.S. government to include important drug production sites
in critical infrastructure planning.26
U.S. dependence on drugs from China—or drugs that use
APIs from China—raises the likelihood of drug shortages should
the Chi- nese supply be disrupted. For example, in 2017 an
explosion at a Chinese factory producing APIs for the
antibiotic piperacillin/tazo- bactam, a drug given to patients
with severe infections, led to a global shortage.27 Occurrences
of adulteration or supply disruption not only highlight the risks of
relying on China as the only source of important pharmaceutical
ingredients, but also raise concerns that these drugs and other
medical products could lead to adverse health impacts in the
United States and elsewhere around the world. U.S.
policymakers have also expressed strong concern about the
impact of substandard health products on U.S. public health,
and the national security implications of relying on China as a
“single supplier for such lifesaving goods.” 28
In the past decade, U.S. consumers have been exposed to
adulterated drug products made by Chinese manufacturers
who employ dangerous manufacturing practices to save on
cost. Last year, the FDA announced that a probable
carcinogen once used in the production of rocket fuel was
found in valsartan 29 and two other blood pressure medicines
used in 30 countries by millions of people, including in the
United States.† 30 The companies selling the contaminated
medicine sourced APIs from one of China’s leading generic
drug companies, Zhejiang Huahai Pharmaceutical Co., where
employees ignored signs that the company’s manufacturing
practice resulted in contaminated product.31 (For more
information, see Ad- dendum I, “FDA Letter to Zhejiang Huahai
Pharmaceutical.”)
U.S. Armed Forces Vulnerable to Drug Shortages
China’s dominance as a global API producer and the United
States’ growing reliance on Chinese pharmaceutical products
puts U.S. consumers—including active service members and
veterans—at risk if China cuts off drug supplies or hikes the
cost of a given medicine during heightened geopolitical
tensions. Christopher Priest, principal deputy to the deputy
assistant director of healthcare operations of the Defense
Health Agency, stated, “The national security risks of increased
Chinese dominance of the global API market cannot be
overstated . . . Should China decide to limit or restrict the
delivery of APIs to the U.S. it would have a debilitating effect on
U.S. domestic
* U.S. drug production involves a broad array of international players, including top international
generic drug companies such as Fresenius Kabi, Apotex, and Cipla.
† As of September 2019, 140 lawsuits have been filed against Zhejiang Huahai Pharmaceutical Co., other
drug manufacturers whose products were recalled, and pharmacies that filled prescriptions for valsartan.
See Anna Edney et al., “Carcinogens Have Infiltrated the Generic Drug Supply in the U.S.,” Bloomberg,
September 12, 2019.
production and could result in severe shortages of
pharmaceuticals for both domestic and military uses.”32 Many of
these products may be critical to life-saving or disease
management regimens.
Supply shortages could significantly delay the delivery of critical
medicines to the battlefield. Mr. Priest emphasized the
importance of bolstering U.S. domestic manufacturing capability
to provide an alternate source for critical medicines. U.S.
dependence on drugs that contain APIs sourced from China
can affect the availability of remedies needed to respond to a
public health crisis, including incidents involving a chemical,
biological, or radiological/nuclear threat.33 For example, in 2001
the U.S. government purchased 20 million doses of
doxycycline, an antibiotic used to treat individuals exposed to
anthrax, from a European manufacturer that sourced the API in
its drug product from China.34
The Department of Defense (DOD) is responsible for
purchasing pharmaceuticals and medical devices used by U.S.
military hospitals both in the United States and overseas.
All pharmaceuticals purchased for use in military hospitals are
required to be manufactured in countries that have signed on
to the Trade Agreements Act (TAA) * of 1979, to which China is
not a signatory.35
Although China is a non-TAA country—and is not eligible to di-
rectly receive U.S. government contracts—in the absence of
other suppliers, drugs and ingredients from China may
receive exemptions. The U.S. Defense Logistics Agency,
which operates under DOD, estimates 25 percent of
pharmaceutical ingredients used in U.S. military hospitals
originate from China, even if the drugs themselves are
manufactured elsewhere.36 This occurs because companies in
TAA signatory countries like India rely on APIs from China. In
some cases, pharmaceutical companies with DOD contracts
may even be manufacturing products in China, despite the
company being headquartered in a TAA signatory country.†
DOD contracts require that pharmaceutical suppliers disclose
where they manufacture their drugs and where they source
their APIs. However, since there is no national registry for API
sources, Defense Logistics Agency has no means to
independently determine the origin of APIs.37
Mr. Priest expressed concern about supply chain disruptions
and the potential for drug shortages as a result of China’s
control over critical APIs.38 Of the approximately 6,800 drugs
DOD purchases annually, 147 are sourced from non-TAA
countries.39 According to Mr. Priest, the Trump Administration is
in the process of identifying which of these drugs are most
vulnerable to risks associated with the U.S. reliance on
Chinese drug and medical products.40
* The TAA requires products used by the U.S. government to be manufactured in the United States or in
a designated country with which the United States has a free trade agreement or special trade-related
arrangement. The U.S. government is able to source non-TAA-compliant products when TAA-compliant
products are not available.
† The TAA requires the end product being delivered to the U.S. government to be “substantially
transformed” in the United States or a “designated country identified in the Federal Acquisi- tion
Regulation (FAR).” Therefore, the location where a finished drug product is manufactured, rather than the
origin of the drug’s APIs, determines whether a drug product is TAA compliant. U.S.-China Economic and
Security Review Commission, Hearing on Exploring the Growing U.S. Reliance on China’s Biotech and
Pharmaceutical Products, oral testimony of Christopher Priest, July 31, 2019, 21.
Illicit Fentanyl Flows from China
According to the U.S. Department of Justice, China is the
largest source of illicit fentanyl and fentanyl-like
substances in the United States.41 Fentanyl is a synthetic
painkiller about 50 times more potent than heroin and 100
times stronger than morphine.42 Fentanyl has legitimate
medical uses,43 but has also become one of the most
frequently abused drugs. Synthetic-opioid-related deaths in
the United States rose from approximately 3,000 in 2013 to
more than 30,000 in 2018, and fentanyl is now the cause of
twice as many deaths as heroin.44
As a result of ongoing U.S.-China counternarcotic
negotiations, the Chinese government implemented new
comprehensive measures to control “all fentanyl-like
substances” in May 2019.* In September 2019, the Chinese
government released a statement on fentanyl, saying that it
has broadly defined “fentanyl-like substances” in order to
prevent drug producers from creating new fentanyl
substances not covered by the ban.45 The statement claims
that the ban has been a success thus far: “Thanks to ear-
nest implementation of various measures, significant progress
has been achieved. China’s law enforcement authorities have
obtained information about 91 key enterprises and 234 key
individuals involved with fentanyl-like substances across
the county, and put all of them under strict supervision.” 46
The Chinese government’s decision to control all fentanyl-
type substances is an important step in U.S.-China
counternarcotic efforts. However, concerns remain about
the Chinese government’s willingness and commitment to
effectively curtail the flow of illicit fentanyl to the United
States.47 Although the Chinese government made multiple
promises to the United States to address the fentanyl
problem, three troubling trends speak to its failure to carry
through on those commitments:
• First is a recent resurgence in fentanyl flows into the
United States. In fiscal year 2019 through August, the
U.S. Customs and Border Protection Office of Field
Operations seized 2,350 pounds of fentanyl, a 32
percent increase over seizures in fiscal year 2018.48
• Second is the Chinese government’s failure to arrest
individuals indicted for illicit fentanyl production and
trafficking. Between 2017 and 2018, the U.S. Justice
Department indicted eight individuals from China for
crimes related to fentanyl production, trafficking, and
financing.49 As of September 2019, all of the individuals
charged remain free.50
* According to a Chinese government announcement: “Fentanyl-type substance” means a substance

having one or more of the following chemical structures compared to fentanyl: (1) the use of other acyl
groups in place of propionyl groups; (2) the use of any substituted or unsubstituted monocyclic aromatic
groups; a group replacing a phenyl group directly bonded to a nitrogen atom; and a substituent such as
an alkyl group, an alkenyl group, an alkoxy group, an ester group, an ether group, a hydroxyl group, a
halogen group, a halogenated alkyl group, an amino group, and a nitro group; (3) the use of any other
group (except hydrogen atoms) instead of phenethyl. See People’s Daily, “Three Departments Make Joint
Announcement: Regulations on
Fentanyl-Type Substances to Go Into Effect May 1st,” (三部门发布公告 5 月 1 日起对芬太尼类物质实
施整类列管(权威发布)) April 2, 2019. Translation. http://paper.people.com.cn/rmrb/html/2019-
04/02/nw.D110000renmrb_ 20190402_ 4-02.htm.
Illicit Fentanyl Flows from China—Continued
• Third, the Chinese government continues to provide value-added
tax (VAT) rebates and other incentives to chemical producers,
including fentanyl manufacturers.51 As of Septem- ber 2019, China’s
State Administration of Taxation’s website shows fentanyl receives a
10 percent VAT rebate and several other fentanyl-related products
receive a 13 percent VAT rebate.52
U.S. Government Oversight of Health Imports from

China
Both Chinese and U.S. health regulators face challenges in
inspecting Chinese drug manufacturing facilities for quality
and ad- herence to manufacturing standards. The sheer size of
China’s pharmaceutical industry, further enlarged by the
integration of China’s pharmaceutical and chemical industries,
impacts regulatory capacity. Corruption and fraud persist in
China’s drug industry due to poor regulatory oversight, leading
to the production of adulterated and ineffective medicine.
These regulatory issues have directly impacted the health of
consumers.
In bilateral forums, such as the now discontinued U.S.-China
Strategic and Economic Dialogue (S&ED),* China has
acknowledged the need to work toward improving the quality of
its generic drug and API exports. During the sixth meeting of
the S&ED in 2014, the United States and China agreed to
“advance the shared goal of ensuring access to safe and
high-quality medicines for patients and protect supply chain
integrity ... and to fight against illegal actions to manufacture,
distribute, and export counterfeit and substandard active
pharmaceutical ingredients.” 53 Although China has committed
to better oversight of its drug industry, poor manufacturing
practices, corruption, and product contamination persist five
years later.
Chinese Health Regulators Struggle with Oversight
As China’s pharmaceutical industry expanded rapidly over
the years, its regulatory framework struggled to maintain strong
oversight. Understaffing and retention issues have impacted
the ability of China’s Food and Drug Administration (renamed
China’s Nation- al Medical Products Administration in 2018), the
government entity responsible for oversight of food and drug
imports and products, to regulate effectively. Furthermore, the
fragmented nature of China’s regulatory framework itself has
caused difficulties with intergovern- mental coordination and
created unclear jurisdictions for oversight responsibilities.54
Corruption, fraud, poor product quality, or contamination have
occurred due to weak oversight capacity. In her testimony
before the Commission, Katherine Eban, investigative
journalist and author of Bottle of Lies: The Inside Story of the
Generic Drug Boom, cited data that show Chinese drug
manufacturers received more
* The S&ED, established during the Obama Administration, was a bilateral forum for the Unit- ed States and
China to discuss issues within U.S.-China relations. The dialogue was held annually from 2009 to 2016.
warning letters * from the FDA over the past decade than
any other country.55
One of the most notorious scandals occurred in 2007, when
the former head of China’s then State Food and Drug
Administration, Zheng Xiaoyu, confessed to accepting bribes
from drug companies to approve hundreds of untested
medicines.56 A number of food and drug quality scandals have
arisen since then, including a vaccine scare in 2018 after
health regulators discovered that Changsheng Biotechnology
Co. and a separate company in Wuhan falsified data to obtain
approval for a diphtheria, pertussis, and tetanus (DPT)
vaccine, affecting over 250,000 dosages and 400,000
injections, respectively.57 The incident stirred up public distrust
in China toward Chinese drugs, especially after faulty vaccines
led to the hospital- ization of hundreds of children and some
deaths in China in 2010 and 2013.58
The Chinese government has made efforts to crack down on
corruption and consolidate its food and drug regulatory
regime to improve drug quality and bolster China’s image as
a global producer of pharmaceuticals. In 2016, China’s Food
and Drug Administration investigated 1,622 clinical trial
programs of drugs that were pend- ing production approval
and canceled 80 percent of these drug applications after it
found evidence of fraudulent data reporting and submissions of
incomplete data, among other issues.59 The following year,
Chinese courts determined that penalties should be strength-
ened for researchers who submit faulty data to obtain drug
approvals, which could include the death penalty for
instances where a drug causes harm to consumers.60 The
Chinese government is increasing oversight of its
pharmaceutical industry by requiring generic drugs approved
for production prior to 2008 to be evaluated for quality and
revoking licenses or denying government tendering for products
that fail to pass the evaluation. This effort could close smaller
manufacturers that produce low-quality drugs out of the
market.61
In 2018, the 13th National People’s Congress approved a
plan to form the State Market Regulatory Administration in
order to strengthen China’s regulatory system. The
restructuring involved consolidating China’s Food and Drug
Administration; the General Administration of Quality
Supervision, Inspection and Quarantine; the State
Administration of Industry and Commerce; and subdivi- sions
of other agencies into one ministry called the State Adminis-
tration of Market Regulations.62
FDA Faces Impeded Access in China
The FDA is the primary U.S. government agency tasked with
ensuring commercial pharmaceutical and health products
meet U.S. health and safety standards. The FDA maintains
one field office (with 16 FDA officials) in Beijing to train local
Chinese regulators
* The FDA issues a warning letter to manufacturers when they have “significantly violated FDA
regulations.” The letter documents the nature of the violation, which can include but is not limited to “poor
manufacturing practices, problems with claims for what a product can do, or incorrect directions for use.”
A company that is issued a warning letter must respond with how it will remedy the issue and provide a
timeline for next steps. The FDA then verifies whether the corrections were made. See U.S. Food and Drug
Administration, “About Warning and Close-Out Letters.” https://www.fda.gov/inspections-compliance-
enforcement-and-criminal-investigations/ warning-letters/about-warning-and-close-out-letters.
and share information with Chinese counterparts.* FDA
officials have had difficulty securing visas for new inspectors
deploying to China and have also faced obstacles conducting
unannounced factory inspections, which are routine in the
United States.63
In 2016, a U.S. Government Accountability Office (GAO)
investigation found the FDA may have never inspected
approximately 1,000 overseas drug manufacturing facilities, 243
of which were located in China.64 The GAO report states
these facilities lacked an inspection history due to FDA data
management issues, and the FDA was in the process of
inspecting all facilities in its catalog with no prior inspection
history.65 The GAO report also states,
FDA does not know whether or for how long these establishments
have or may have supplied drugs to the U.S. market, and has little
other information about them. While the agency has made progress
in reducing this knowledge gap, it is important to note that the overall
number of foreign establishments with no surveillance inspection
history ... remains large.66
Since 2015, there have been 87 cases involving Chinese firms
that have either refused FDA inspections or caused a delay
in inspections.67 Denial of inspection by a foreign facility may
cause the FDA to deem a drug product adulterated and place
the drug on import alert, which “allows FDA to refuse
admission of future shipments of an imported drug product.” 68
There are currently 51 Chinese companies that export to the
United States medical devices, dietary supplements, and drug
products placed on import alert due to inspection refusal or
poor manufacturing practices.†
Beginning in 2012, the FDA established a team responsible
for reporting on and assessing drug shortages for high-risk
pharmaceutical and medical products.69 By ensuring potential
shortages are detected and addressed immediately, the FDA
has additional time to work with manufacturers and other
stakeholders to identify ways to maintain treatment options and
prevent a shortage.70 As of Oc- tober 2019, the FDA has
determined 113 drugs were in shortage in the United States.71
There is insufficient information to determine which of these
113 drugs are sourced from China either in their finished
form or as active ingredients. The risks of these shortages
have been exacerbated by a growing reliance on China as the
source of U.S. generic pharmaceuticals.
FDA Inspection Regime

The FDA follows the same protocols for domestic and overseas
inspections, including drug preapproval review processes, premarket
inspections, and surveillance inspections.
Drug preapproval review process and premarket inspections: The
FDA can examine the process and technology used to manufacture
generic and/or brand name drugs before the drug is
* In the past, the FDA also had offices in Shanghai and Guangzhou; however, these offices closed in
2014. U.S. Food and Drug Administration, interview with Commission staff, July 22, 2019.
† For a full list of companies, see U.S. Department of Health and Human Services, Import Alert 99–32,
September 30, 2019. https://www.accessdata.fda.gov/cms_ia/importalert_ 521.html.
FDA Inspection Regime—Continued
approved and introduced to the market. This preapproval
review process allows the FDA to assess the quality of the
manufacturing process as well as the quality of the product
itself.72
The FDA can also conduct premarket inspections, which
involves assessing whether a drug manufacturing facility is
in compliance with regulations.73 The FDA additionally
requires drug producers to provide notification of changes to
their manufacturing process or facilities before or after the
drug is introduced to the market.74 After market introduction,
the FDA tests selected finished drug products and APIs to
ensure the “potency, quality, and consistency of generic
medicines meets the standards established for the specific
drug.” 75
Current Good Manufacturing Practice (CGMP) surveillance
inspections: FDA officials conduct surveillance inspections of
foreign drug manufacturing facilities using a risk-based site se-
lection model that maximizes resources by prioritizing
inspections of sites that “pose the greatest potential risk for
problems that could harm patients.” 76 Sites that produce
inactive ingredients or drugs only for clinical trials are not
prioritized unless deemed necessary. If a quality issue is
suspected, there are a number of ways the FDA can
respond, including: making an unannounced visit to the
facility for further inspection, placing companies on import
alert, seizing products from warehouses or facilities, or
testing imports at points of entry, among other actions.77
According to Ms. Eban, the FDA and other regulators have

struggled to properly inspect the manufacturing and export
of Chinese pharmaceutical and medical products brought to the
United States.78 Around 90 percent of U.S. dietary supplement
products, for example, are imported from China.79 However,
because its jurisdiction does not extend to pre-inspection of
dietary supplements, the FDA does not approve their safety
before they enter the U.S. market, potentially exposing U.S.
consumers to products that are unsafe or do not contain the
proper ingredients.*
In her book, Ms. Eban documents FDA officials in China frustrat-
ed by pharmaceutical companies’ efforts to manipulate or
obscure their operations.80 Chinese pharmaceutical firms
sometimes invest in “show” factories, or factories that are open
to inspectors but are not the true source of the company’s
products.81
The FDA has the authority to inspect Chinese
pharmaceutical facilities and withhold import licenses from
Chinese companies that do not comply with U.S. regulatory
standards. However, Ms. Eban’s research demonstrates that
when the FDA does find safety violations in Chinese plants,
it sometimes does not sanction them for fear of creating drug
shortages in the United States.82 For example,
* The FDA regulates dietary supplements under a different set of regulations than those cov- ering drug
products. Firms are responsible for evaluating the safety and labeling of their dietary supplement products
before they reach the market, but the FDA is responsible “for taking action against any adulterated or
misbranded dietary supplement product after it reaches the market.” See U.S. Food and Drug Administration,
Dietary Supplements, August 16, 2019. https://www.fda. gov/media/104838/download.
Ms. Eban reports that in May 2017, an FDA inspector
determined that Chinese drug manufacturer Zhejiang Hisun was
hiding the results from pretests of its drug samples.83 The FDA
initially restricted imports of 30 Zhejiang Hisun products, but
lifted the restriction on half of the drugs because those
particular drugs, used in cancer treatments, were in short
supply in the United States.84
China’s Pharmaceutical and Biotech Activities in the
United States
China maintains a comprehensive, long-term strategy to
become a leader in biotechnology, seeking to create globally
competitive domestic biotech firms and incentivize
biotechnology manufacturing, design, and operations to move
to China. The Chinese government designated biotechnology
as a Strategic Emerging Industry in 2010, and prioritizes state
support for this industry in state plans such as Made in China
2025 and the Precision Medicine Initiative.85 As part of the
goals set out in the Made in China 2025 plan, the Chi- nese
government identified the kinds of medicines and technology it
aims to develop (e.g., new vaccines and antibody drugs), and
plans to increase the domestic market share for
biopharmaceutical core components to 70 percent by 2020.86
Through the Precision Medi- cine Initiative, the Chinese
government is investing $9.3 billion in various genome
sequencing and clinical data acquisition projects over a 15-
year period.87
In biotechnology as in other high-tech industries, the Chinese
government wants to move away from reliance on foreign
companies and imports for both economic and national
security reasons. Al- though the United States is currently the
world’s leading developer of biotech products, China is an
increasingly important player in this space. According to a
Gryphon Scientific report prepared for the Commission in 2019,
China’s biologics market revenue in 2016 was between $4.7
billion and $6.2 billion, while its agricultural biotech market
revenue was around $8.1 billion, compared to U.S. biologics
and agricultural biotech markets at $118 billion and $110 billion,
respectively.88 China’s government prioritized biotechnology as
a Stra- tegic Emerging Industry for two overlapping reasons.
First, there is a high demand for biopharmaceuticals in the
Chinese health market because noncommunicable diseases are
a major public health concern with roughly 85 percent of
deaths linked to noncommunicable diseases such as cancer,
cardiovascular diseases, and respiratory diseases.89 Second,
biotechnology is a high-tech, high-value industry, with potentially
significant long-term economic benefits.
China’s biotechnology development is focused on three areas:
(1) creating biopharmaceuticals to treat chronic diseases; (2)
implementing contract research and manufacturing; and (3)
conducting DNA sequencing.90 A number of biologics used in
China are imported, and Chinese companies aim to increase
domestic market share.91 Many of these drugs are not
innovative, but rather are biosimilars.92 Drug companies in China
often rely on contracted research organizations * to navigate
China’s regulatory framework and provide preclinical
* A contract research organization is a company that provides support to the pharmaceutical,

biotechnology, and medical device industries in the form of research services outsourced on a contract
basis.
and clinical drug testing services for drug candidates.93
According to research by Gryphon Scientific, of the 1,100
contracted research organizations worldwide in 2017, 400
were based in China.94 Several key DNA sequencing
companies are also based in China, including BGI, the third-
largest DNA sequencing company in the world, ranking behind
U.S. companies Illumina and Thermo Fisher.95
Chinese Investment Flows to U.S. Health and Biotech
Indus- tries
Chinese investment and trade ties in U.S. medical and
biotech industries have increased steadily in recent years.
According to the economic consultancy Rhodium Group,
Chinese foreign direct investment (FDI) flows to U.S. health
and biotech industries increased from $125 million in 2010—2.7
percent of China’s total investments in the United States that
year—to $2.5 billion in 2017, 8.5 percent of total Chinese
investment in the United States (see Figure 2).96 In 2018,
Chinese investments in U.S. health and biotech industries
totaled $1.45 billion, 27 percent of China’s total investments in
the United States.97
Figure 2: Chinese FDI in U.S. Health, Pharmaceuticals, and Biotechnology Industry, 2010–
H1 2019
$2.5 30%
US$ billions
$2.0 25%
$1.5 20%
15%
$1.0
10%
$0.5 5%
$0.0 0%
Value Percent of Total Chinese Investment in United States

Source: Rhodium Group, “China Investment Monitor,” August 16, 2019.
The U.S. Committee on Foreign Investment in the United

States (CFIUS) has been stepping up its scrutiny of Chinese
investments, especially in high-tech sectors. In 2019, for
example, CFIUS forced the Chinese tech firm iCarbonX to
divest from its 2017 stake in
U.S. health firm PatientsLikeMe after security concerns were
raised about the deal.98 In an effort to avoid CFIUS scrutiny,
Chinese investors in U.S. health, pharmaceuticals, and
biotechnology companies are increasingly routing their
investments through VC funds.99 Health, pharmaceutical, and
biotech were the industries Chinese VC investors targeted
most frequently in 2018, along with infor-
mation and communications technology firms.100 The enactment
of the Foreign Investment Risk Review Modernization Act
(FIRRMA) in 2018 expanded the authority of CFIUS to review
VC investments that may threaten U.S. national security
interests.* 101 The possibility of increased CFIUS scrutiny of
VC investments has prompted a drop in the overall Chinese VC
investments in the United States.102 In the first nine months of
2019, Chinese VC investment fell to approximately $4 billion,
a $5 billion decrease from the same period in 2017.103 This fall
notwithstanding, health, pharmaceuticals, and biotechnology
received the highest level of Chinese VC investment in the
United States the first half of 2019 (about $330 million).104
These sectors also saw the highest number of transactions
involving Chinese investor participation.
Chinese Biotech Firms’ Collaboration with U.S.
Companies and Universities
Decades-long collaboration with U.S. firms and research
institutions has been critical to China’s biotech development.
Chinese investments and research partnerships with U.S.
institutions not only provide Chinese biotechnology companies
with technologies crucial to advancement in the field, but also
allow them to amass large collections of clinical and genetic
data on U.S. residents.105 These partnerships are typically
focused on developing expertise in cancer therapeutics or
precision medicine.106
Gryphon Scientific’s research shows six of the top ten
ranking
U.S. research institutions † have established “at least one life
science biotechnology partnership with Chinese institutes.”107
Chinese biotech companies access U.S. assets through a
variety of channels, including investment, corporate and
academic partnerships, and recruitment of U.S.-trained
researchers. In his testimony, Mark Ka- zmierczak, expert at
Gryphon Scientific, noted that some Chinese biotechnology
firms have opened R&D facilities and incubators in strategic
biotech hubs such as Boston, San Francisco, and North
Carolina’s Research Triangle region, which gives these
companies access to “advanced technology and expertise [and]
a well-educated workforce.” 108
Chinese Companies’ Access to U.S. Healthcare Data
Raises Concerns
The acquisition of U.S. personal and health data by the
Chinese government and companies presents national security
risks. China’s access to U.S. health data provides China with
the tools to exploit Americans’ personal health records and
displace U.S. leadership in biotechnology and other fields.
Protecting U.S. health data is a serious concern, particularly
due to the Chinese government-linked
* The U.S. Department of the Treasury published proposed regulations to implement FIRR- MA on
September 17, 2019. The final regulations will become effective no later than February 13, 2020. U.S.
Department of the Treasury, The Committee on Foreign Investment in the United States (CFIUS).
https://home.treasury.gov/policy-issues/international/the- committee- on-foreign- investment-in-the-united-
states-cfius; U.S. Department of the Treasury Office of Public Affairs, Fact Sheet: Proposed CFIUS
Regulations to Implement FIRRMA, September 17, 2019. https://
home.treasury.gov/system/files/206/Proposed-FIRRMA-Regulations-FACT-SHEET.pdf.
† The top U.S. research institutions with at least one biotechnology partnership with a Chinese institution
are: Harvard University, Massachusetts Institute of Technology, University of Califor- nia Berkeley, University
of Michigan, University of California at Los Angeles, and Yale University.
cyberespionage and hacking campaigns aimed at obtaining
sensitive
U.S. personally identifiable information, including personal
health data and clinical trial data. The 2015 hacking of Anthem
Inc. by Chi- nese nationals serves as an example: the
cyberattack on the health insurance giant allowed hackers to
gain access to up to 80 million patient records, not simply
personally identifiable information.109
The Chinese government and companies also carry out a
vast personal and health data collection through legal means.
Chinese biotech companies gain access to U.S. healthcare and
genomic data through investments and partnerships with
health companies and research institutes. For example, the Wall
Street Journal reported in June 2019 that Twist Bioscience
Corp., a synthetic DNA manufacturer that had received $5
million in funding from DOD, partnered with a Chinese
company and planned to expand its manufacturing in
China.110 Policymakers expressed concern that the potential
partnership could lead to the transfer of valuable IP and data
on synthetic DNA production.111 By acquiring large datasets of
health information, Chinese companies can make their drug
discovery and clinical trials more reliable and cost efficient,
putting them at an advantage against U.S. health and biotech
firms.112
In his testimony before the Commission, Benjamin Shobert,
director of strategy for health business strategy at Microsoft,
argued asymmetric data-sharing policies between the United
States and China weaken the U.S. competitive advantage in
medicine innovation and artificial intelligence.113 Investment
and collaborations in the U.S. biotech sector give Chinese
companies access to large volumes of U.S. medical and
genomic data, but U.S. companies do not get reciprocal
access.114 Mr. Shobert believes “protocols specific to de-
identification and bilateral cross-border data sharing [are
needed] . . . to ensure the pace of progress in healthcare
continues to accelerate.” 115 The Chinese government is also
formulating policies to support the acquisition and use of large
healthcare genomic and other personal health data sets.116
The Chinese government places great emphasis on collecting
domestic genomic and other health-related data for purposes
beyond developing its biotechnology sector. In many cases, the
Chinese government has taken data from its citizens without
informed consent * in order to enhance surveillance of
targeted groups. For example, in 2016 local authorities in
Xinjiang began implementing a program called “Physicals for
All,” which involved conducting free annual health exams for
residents with the stated purpose of improving healthcare
services and creating digital health records for participants.117
Although official documents describing this health program did
not state DNA would be collected, health authorities collected
DNA samples from approximately 36 million people in
* The “Personal Information Security Specification,” China’s law on personal data governance, took effect
in May 2018, and provides guidelines for consent and the collection and use of personal data, including
biometric data. The law’s consent principle states that compliance requires “obtain[ing] authorized consent
from the PI [personal information] subject after expressly providing the PI subject with information
including the purpose, method, scope, and rules of the processing.” Despite the drafting and adoption of
guidelines for consumer data collection and use, misuse of data by Chinese law enforcement and government
entities remains a concern. Mingli Shi et al., “Translation: China’s Personal Information Security
Specification,” New America, Feb- ruary 8, 2019; Human Rights Watch, “China: Big Data Fuels Crackdown
in Minority Region,” August 25, 2017.
2016–2017.118 Despite Chinese media reports stating the
program was voluntary, members of the Uyghur community
claimed police and local officials coerced them into
participating in these medical checkups, and they were not
aware of how their biometric data would be used or even able
to access the results of their medical tests.119
U.S.-made equipment and research conducted by U.S.
scientists have been used to advance the Chinese
government’s mass biometric data collection campaign and
bolster surveillance and control of vulnerable populations,
including the Uyghur community.120 In 2017, human rights
activists discovered that Xinjiang law enforcement used
genetic sequencing equipment manufactured by U.S.- based
company Thermo Fisher to collect biometric data from Uy-
ghurs.121 The New York Times reported that a visiting scholar
from China working on a research project at Yale University
accessed DNA samples that were later used to enhance
China’s Ministry of Public Security’s ability to sort DNA
samples based on ethnicity.122 These DNA samples were used
by authorities with the purpose of identifying and tracking
individuals.123
U.S. Companies’ Access to Health Industries and
Market Op- portunities in China
China is the world’s second-largest market for
pharmaceuticals and the fourth-largest for medical equipment
in terms of domestic sales.124 U.S. exports of
pharmaceuticals to China reached approximately $3.3 billion
in 2018 (see Figure 3).125 As China’s health and medicine
demand has grown, U.S. exports of biotech products, medical
equipment and supplies, and pharmaceuticals have also
increased (see Figure 4). However, the vast potential of China’s
healthcare market remains out of reach for U.S. and other
foreign companies.
Figure 3: Major Destinations of U.S. Pharmaceutical and Medical Equipment
Exports, 2018
$5
US$ billions
$4
$3
$2
$1
$0
Netherlands Germany Japan BelgiumCanada China
Pharmaceuticals
Source: U.S. Census & Medicines
Bureau, USA Trade Medical
Online, September Equipment & Supplies
17, 2019.
In 2018, China made up only 5 percent of the United States’
global biotech exports, 7.1 percent of medical equipment
exports, and
6.7 percent of pharmaceuticals exports.126 Government policies
favoring domestic producers give China’s generic drug
manufacturers a competitive edge over foreign drug
companies.127 As a result, U.S. drug companies struggle to gain
a large market share in China.128 However, the United States is
a leading source among Chinese imports of medical products,
especially at the higher end of the market. U.S. exports of
biotech products * reached $1.1 billion in 2018, an increase of
11.4 percent year-on-year.129
U.S. medical equipment and supply exports to China in
2018, meanwhile, increased 10 percent year-on-year to $1.9
billion, while
U.S. pharmaceutical exports to China increased 10.1 percent
year- on-year in 2018 to $3.3 billion (see Figure 4).130
Figure $4.0
4: U.S. Exports of Health Products to China, 2010–2018
$3.5
$3.0
US$ billions
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
201020112012201320142015201620172018
Biotech ProductsMedical Equipment and SuppliesPharmaceuticals
Source: U.S. Census Bureau, USA Trade Online, June 17, 2019; U.S. Census Bureau, U.S. Trade with China
in Advanced Technology Products, December 2018.
The Chinese government is making substantial investments

to expand the country’s health infrastructure, which could create
new opportunities for foreign health and pharmaceutical
providers. It is also providing incentives for multinational
corporations to operate in China.† The reforms aim to achieve
nearly universal health insur-
* Biotechnology product exports include products with medical and industrial applications in genetics for
the creation of new drugs, hormones, and other items for agricultural and human use.
† Pfizer opened a global headquarters for Pfizer Upjohn, one of its divisions, in Shanghai in 2019,
making it the first multinational drug company with a main office in China (the headquarters of Pfizer, the
parent company, remain in the United States). Thermo Fisher, a leading U.S. biotechnology company, is also
setting up a new production base in China. See Teng Jing Xuan, “Pfizer Upjohn Becomes First Multinational
Drug Company to Open HQ in China,” CX Tech, May 30, 2019; Xinhua, “U.S. Leading Biotech Provider to
Set Up Production Base in China,” August 22, 2019. http://www.xinhuanet.com/english/2019-
08/22/c_138329967.htm.
ance coverage,* promote more equal access to public health
services, and lower costs for innovative drugs.131 As part of
these efforts, the Chinese government has taken several steps
to ease the approval processes for foreign firms looking to get
their drugs to market in China, which has reduced the time it
takes for foreign medicines to become accessible to Chinese
patients.
According to Yanzhong Huang, senior fellow for global health
at the Council on Foreign Relations, key reform efforts
undertaken in recent years include:
• Updating the national reimbursement drug list: In 2017, the
Chinese government updated the list of pharmaceuticals
eligible for government reimbursement to include more
innovative foreign medicines. The national reimbursement
drug list was introduced in 2004 and last updated in 2009.
The 2017 update increased the number of medicines
(excluding traditional Chi- nese medicine) eligible for
reimbursement in China by 11 percent to 1,297 drugs.132
It was supplemented by a new Essential Drug List, a
shorter compendium of generic drugs to be sold by local
clinics at government-controlled prices.133 Prior to the
national reimbursement drug list being updated, 1,164
medications (excluding traditional Chinese medicine)
could be reimbursed.134 The list was further updated in
August 2019, with 47 new medications added to the list and
150 medications removed due to being determined of low
clinical value of inferior to other products from the list.135
China has laid out plans to require bi-annual updates to
the reimbursement list.136
• Establishing a drug price negotiation mechanism: The system,
introduced nationally in 2017, allows Chinese patients to
access over 50 medicines—including cancer drugs and
other innovative medicines manufactured overseas—at
dramatically reduced prices.137 The negotiations are led by
an arm of the Chinese government, which negotiates with
pharmaceutical companies for lower prices and in return
includes the drugs on the national reimbursement drug list
so more patients can afford them.138 The price negotiation
mechanism has helped to reduce drug prices by more
than 75 percent for those patients covered by the plan;
however, only 44,600 people had benefited from the
policy by the end of 2018.139
• Joining the International Council on Harmonization: In 2017,
China joined the International Council for Harmonization
of Technical Requirements for Pharmaceuticals for Human
Use (ICH), an international organization tasked with
bringing together global regulatory authorities to ensure
efficient and effective procedures for developing and
registering new medicines.140 In 2018, China became an
ICH management committee member, signaling Beijing’s
desire to harmonize its drug and medical equipment
approval processes to match that of other large
pharmaceutical markets around the world.141
* Although a significant portion of China’s population has health insurance, out-of-pocket costs for medical
care remain high and access to critical drugs and hospital treatment limited, especially for patients living in
rural areas. See World Bank and World Health Organization, “Healthy China: Deeping Health Reform in
China,” 2019, 40–42. https://openknowledge.worldbank.org/
bitstream/handle/10986/31458/9781464812637.pdf?deliveryName=DM11894.
• Accepting foreign clinical trial data: In October 2017,
Chinese regulators began accepting overseas clinical trial
data when evaluating and approving new imported
innovative drugs and medical devices for use in China.142
Previously, medicines and health equipment were required
to undergo clinical testing in China before Beijing would
approve the product for use, slowing the approval process
for foreign drugs seeking to enter the Chi- nese market.143
This change contributed to the approval of 30 innovative
foreign drugs through the first nine months of 2018, up from
just three approvals for foreign drugs in all of 2016.144
Regulatory Challenges and Market Barriers Remain
While the Chinese government is changing regulations to
allow for more innovative drugs to enter its market, barriers
remain for foreign drug companies in China. IP transfer, both
legal and illegal, has become a regular cost of doing business
in China’s pharmaceutical and medical industries. There have
been notable cases of Chi- nese pharmaceutical companies
conspiring to steal foreign medical firms’ IP. In 2018, two
former scientists at the pharmaceutical firm GlaxoSmithKline
pleaded guilty to stealing the company’s biopharmaceutical
data and research to benefit a rival Chinese pharmaceutical
company.145 In its 2018 midyear report on cyberintrusion
trends, the cybersecurity firm CrowdStrike also noted they had
observed an uptick in Chinese cyberintrusion attempts against
foreign pharmaceutical firms.146
In addition, Beijing has proposed several new policies that, if
implemented, would undermine U.S. pharmaceutical
companies’ IP rights. Most notably, China has proposed
measures that would expand and enhance patent
protections only for foreign drug firms that go to market
concurrently in China and another country (e.g., the United
States, Japan, and the EU). If the proposal is implemented,
companies must submit applications for market approval of new
products in China and a second country; otherwise, they will
not qualify for patent term extension.147 This law would apply to
those drug companies that experienced a delay in the drug
approval process; a patent term extension of up to five years
would be granted to these companies under the condition that
the patent term could not exceed 14 years after the drug is
approved.148
Finally, asymmetric data access policies between the United
States and China negatively impact U.S. competitiveness in
medicine and biotech. U.S. researchers and companies do
not have the ability to work with Chinese data assets in the
same way their Chinese counterparts do in the United
States. The Chinese government restricts cross-border data
sharing through regulations including its 2017 cybersecurity
law, which requires companies that are designated “critical
information infrastructure” to store certain data on servers in
China. 149 The data must be assessed before being
transferred overseas, and the government can deny transfers
if deemed a threat to national security or public interest.
The United States does not prioritize curating health data
sets or protecting health data.150 In addition, to date the
United States has not enacted laws that outline trade
protocols for big data and health data sharing.151
U.S.-China Global Health Cooperation
Over the past 50 years, China has participated in international
health initiatives and infrastructure development in several
small but growing areas. In the past, most Chinese assistance
took the form of building health infrastructure in foreign countries
using Chinese firms and workers.152 Some of China’s global
health projects, and particularly hospital construction, are tied
to the Belt and Road Initiative (BRI).153 In the last two
decades, however, China has worked more closely with the
United States to address global health crises.154
Important examples of U.S.-China global health collaboration
include developing a coordinated response to the HIV
pandemic in the early 2000s, and establishing a research
partnership between the U.S. National Institutes of Health and
China’s National Science Foundation in 2010.155 The U.S. and
Chinese governments continue to work together on medical
research and projects in developing countries (primarily in
Africa and Asia). The FDA and U.S. Centers for Disease
Control collaborate with their counterparts in China to prevent
and detect infectious diseases and build more robust reg-
ulatory systems for food and drug safety.156 However, issues
such as China’s treatment of healthcare data as a national
security tool can limit opportunities for information sharing and
make bilateral cooperation with the United States more difficult.
According to Jennifer Bouey, Tang Chair in China policy
studies at the RAND Corporation, the Chinese government is
seeking to expand its role in overseas health markets for three
reasons. First, Beijing wants to ensure that pandemics and
health-related mass migration do not spread into China and
threaten the health and security of the Chinese people.157
Second, Beijing wants to protect its investments in countries
hosting BRI projects. If BRI host countries experience a public
health crisis, it could endanger the Chinese nationals living
and working in the country and threaten the economic viability of
the investment.158 Finally, Beijing wants to play a larger role in
international governance and sees global health issues as
one area where it can assert itself as a major player.159
As development aid from the United States and other high-
income countries plateaued in recent years,160 multilateral
organizations are looking to China as a new funder for health
initiatives.161 In 2017, China and the World Health Organization
(WHO) signed a memorandum of understanding to partner on
health projects vis-a- vis BRI, naming the partnership the
“Health Silk Road.” 162 In 2018, WHO’s director general lauded
China for the BRI and global health investments, calling China
“a model for universal health coverage, a bulwark against
health emergencies, and a reminder that trans- formations can
be far-reaching.” 163
Implications for the United States
Nurtured by subsidies and protected from foreign competition,
China’s pharmaceutical companies have emerged as
preeminent manufacturers of pharmaceuticals and their
ingredients. This presents a direct threat to U.S. economic
competitiveness and national security in a number of ways. First,
China’s lax regulations put every
U.S. consumer taking medicine imported from China, or made
with
Chinese APIs, at risk. Over the past decade, the U.S. market
has been rocked by high-profile recalls of Chinese drug
products, such as the FDA’s recall of contaminated heparin, a
blood thinner commonly used in U.S. hospitals, which has
been linked to 246 deaths in the United States.164 The 2018
valsartan recall serves as another cautionary tale with global
implications, considering the widespread use of the drug.165 As
China’s health market continues to grow, bolstering Chinese
regulatory capacity will become ever more critical in order to
address poor manufacturing practices and the production and
export of illicit drugs.
Second, U.S. dependence on drugs from China exacerbates
the risk of drug shortages, especially because the Chinese
government has not effectively regulated the high volume of
drugs, APIs, and other medical products the country produces.
U.S. reliance on China for critical drug products presents a
dilemma for U.S. health regulators, who have to weigh the
consequences of a shortage against the ramifications of
allowing U.S. consumers to use a substandard product. For
example, in 2015 the FDA banned imports of 29 pharma-
ceutical products from a manufacturer in China after it received
61 complaints about impurities in the company’s products.166
However, 14 of those pharmaceutical products were exempted
from the import ban due to concerns about drug shortages.167
Although DOD maintains stockpiles of some drugs critical
for national security, these drugs only include finished
pharmaceuticals, not the ingredients needed to make them. If
China were to cut off its supply of drugs or APIs to the United
States, it could lead to a public health crisis.168 Finally, although
China’s large, rapidly aging population is an attractive market
for U.S. health companies, market barriers continue to deny
U.S. products a level playing field.169 Meanwhile, China’s
biotechnology sector has reaped tremendous benefits from
collaboration with U.S. firms and research institutions by
accessing U.S. technology and biometric data. U.S.
companies’ ability to use Chinese biometric data is restricted
by China’s stringent data regulations. In other words, Chinese
companies profit from collaboration while U.S. companies do
not get reciprocal advantages. There are risks that data on
U.S. patients and drug trials could fall into the hands of the
Chinese state or companies that will seek to exploit it for
economic or strategic gains. There is a dark side to China’s
advancements in cutting-edge biotechnology. In Xinjiang and
other parts of China, the Chinese government is using U.S.
technology and biometric research not only for economic gain,
but also to monitor and control Uyghurs
and other Turkic Muslim minorities without their consent.
Addendum I: FDA Letter to Zhejiang Huahai Pharmaceutical
Via UPS Warning Letter: 320-19-04

Return Receipt Requested
November 29, 2018 Mr.
Jun Du
Executive Vice President
Zhejiang Huahai Pharmaceutical Co., Ltd.
Coastal Industrial Zone, Chuannan No. 1 Branch No. 9 Donghai Fifth
Avenue, Linhai, Taizhou Zhejiang 317016 CHINA
Dear Mr. Du:
The U.S. Food and Drug Administration (FDA) inspected your drug manufacturing facility,
Zhejiang Huahai Pharmaceutical Co., Ltd., located at Coastal Industrial Zone, Chuannan No. 1
Branch No. 9, Donghai Fifth Avenue, Linhai, Taizhou Zhejiang, from July 23 to August 3, 2018.
This warning letter summarizes significant deviations from current good manufacturing
practice (CGMP) for active pharmaceutical ingredients (API).
Because your methods, facilities, or controls for manufacturing, processing, packing, or holding
do not conform to CGMP, your API are adulterated within the meaning of section 501(a)(2)
(B) of the Federal Food, Drug, and Cosmetic Act (FD&C Act), 21
U.S.C. 351(a)(2)(B).
We reviewed your August 26, 2018, response in detail and acknowledge receipt of your
subsequent correspondence.
During our inspection, our investigators observed specific deviations including, but not limited
to, the following.
1. Failure of your quality unit to ensure that quality-related complaints are investigated
and resolved.
Valsartan API
Your firm received a complaint from a customer on June 6, 2018, after an unknown peak was
detected during residual solvents testing for valsartan API manufactured at your facility. The
unknown peak was identified as the probable human carcinogen N-nitrosodimethylamine
(NDMA). Your investigation (DCE-18001) determined that the presence of NDMA was
caused by the convergence of three process-related factors, one factor being the use of the
solvent (b)(4)). Your investigation concluded that only one valsartan manufacturing process
(referred to as the (b)(4) process in your investigation) was impacted by the presence of
NDMA.
However, FDA analyses of samples of your API, and fi drug product manufactured
with your API, identifi NDMA in multiple batches manufactured with a different process, namely
the (b)(4) process, which did not use the solvent (b)(4). These data demonstrate that your
investigation was inadequate and failed to resolve the control and presence of NDMA in valsartan
API distributed to customers. Your investigation also failed:
• To include other factors that may have contributed to the presence of NDMA. For
example, your investigation lacked a comprehensive evaluation of all raw materials used
during manufacturing, including (b)(4).
• To assess factors that could put your API at risk for NDMA cross-contamination, including
batch blending, solvent recovery and re-use, shared production lines, and cleaning
procedures.
• To evaluate the potential for other mutagenic impurities to form in your products.
Our investigators also noted other examples of your firm’s inadequate investigation of
unknown peaks observed in chromatograms. For example, valsartan intermediates (b)(4) and (b)
(4) failed testing for an unknown impurity (specification ≤ (b)(4)%) with results of (b)(4)%
for both batches. Your action plan indicated that the impurity would be identified as part of the
investigation; however, you failed to do this. In addition, no root cause was determined for the
presence of the unknown impurity. You stated that you reprocessed the batches and released
them for further production.
Your response states that NDMA was difficult to detect. However, if you had investigated
further, you may have found indicators in your residual solvent chromatograms alerting you to
the presence of NDMA. For example, you told our investigators you were aware of a peak
that eluted after the (b)(4) peak in valsartan API residual solvent chromatograms where the
presence of NDMA was suspected to elute. At the time of testing, you considered this
unidentified peak to be noise and investigated no further. Additionally, residual solvent
chromatograms for valsartan API validation batches manufactured using your (b)(4) process,
with (b)(4) in 2012 ((b)(4), and (b) (4)) show at least one unidentified peak eluting after the
(b)(4) peak in the area where the presence of NDMA was suspected to elute.
Your response also states that you were not the only fi to identify NDMA in valsartan API. In your
case, FDA analyses of samples identifi amounts of NDMA in valsartan API manufactured at your fi
that were signifi higher than the NDMA levels in
valsartan API manufactured by other fi . FDA has grave concerns about the potential presence of
mutagenic impurities in all intermediates and API manufactured at your facility, both because of the
data indicating the presence of impurities in API manufactured by multiple processes, and because of
the signifi inadequacies in your investigation.
In response to this letter:
• Submit risk assessments for all APIs and intermediates manufactured at your facility for
the potential presence of mutagenic impurities.
• Provide an update on investigations and CAPA plans initiated to address the presence of
NDMA and other potential mutagenic impurities in all APIs manufactured at your firm.
• Provide a thorough, independent assessment of your overall system for investigating
deviations, discrepancies, out-of-specification (OOS) results, complaints, and other
failures. In addition, provide a retrospective review of all distributed batches within expiry
to determine if your firm released batches that did not conform to established
specifications or appropriate manufacturing standards.
• Provide test results for all (b)(4) and intermediates for the presence of NDMA, N-
Nitrosodiethylamine (NDEA), and other potentially mutagenic impurities.
(b)(4) API
Your firm received a customer complaint on September 13, 2016, concerning (b)(4) API
batches ((b)(4) and (b)(4)) that exceeded the specification for (b)(4) (≤ (b)(4) ppm). (b)(4)
has been classified as a probable human carcinogen. Your customer’s test results conflicted
with your (b)(4) test results, which showed the two batches meeting the specification upon
release. Your complaint investigation (CC-16008) identified no clear laboratory error, and no
anomalies were detected during the production of the batches. Your investigation failed to
evaluate other (b)(4) API batches to determine if the presence of excess (b)(4) was an adverse
trend. For example, (b)(4) batches (b)(4), and (b)(4) were OOS for (b)(4) because of production
errors; however, they were not discussed in your complaint investigation.
Your response states that (b)(4) API batches (b)(4) and (b)(4) were returned, reprocessed, and
released to customers in non-U.S. markets.
Your response also states that in August 2017 you implemented a new (b)(4) test method that uses
a (b)(4) LC-MS/MS method, to replace the (b)(4) LC-MS method that was prone to erroneous OOS
results. You failed to verify the reliability of the (b)(4) results for all (b)(4) API batches (including
(b)(4) batch (b)(4)) originally released using your (b)(4) LC-MS method, which you indicated was
inferior to your updated method.
In response to this letter, provide:
• A risk assessment for all (b)(4) API batches manufactured within expiry.
• A revised complaint handling procedure and details of any further controls your facility has
implemented to ensure that all complaints are adequately documented and thoroughly
investigated.
• Procedures for accepting and reprocessing returned drugs.
• Results of (b)(4) testing of all (b)(4) API batches released to the U.S. market using your
updated (b)(4) LC-MS/MS (b)(4) test method.
Addendum I: FDA Letter to Zhejiang Huahai Pharmaceutical—Continued
2. Failure to evaluate the potential effect that changes in the manufacturing process may
have on the quality of your API.
In November 2011 you approved a valsartan API process change (PCRC - 11025) that included
the use of the solvent (b)(4). Your intention was to improve the manufacturing process, increase
product yield, and lower production costs. However, you failed to adequately assess the potential
formation of mutagenic impurities when you implemented the new process. Specifically, you
did not consider the potential for mutagenic or other toxic impurities to form from (b)(4)
degradants, including the primary (b)(4) degradant, (b)(4). According to your ongoing
investigation, (b)(4) is required for the probable human carcinogen NDMA to form during the
valsartan API manufacturing process. NDMA was identified in valsartan API manufactured at
your facility.
You also failed to evaluate the need for additional analytical methods to ensure that
unanticipated impurities were appropriately detected and controlled in your valsartan API
before you approved the process change. You are responsible for developing and using
suitable methods to detect impurities when developing, and making changes to, your
manufacturing processes. If new or higher levels of impurities are detected, you should fully
evaluate the impurities and take action to ensure the drug is safe for patients.
Your response states that predicting NDMA formation during the valsartan manufacturing
process required an extra dimension over current industry practice, and that that your process
development study was adequate. We disagree. We remind you that common industry practice
may not always be consistent with CGMP requirements and that you are responsible for the
quality of drugs you produce.
Your response does not describe sufficient corrective actions to ensure that your firm has
adequate change management procedures in place: (1) to thoroughly evaluate your API
manufacturing processes, including changes to those processes; and (2) to detect any unsafe
impurities, including potentially mutagenic impurities. For FDA’s current thinking on control of
potentially mutagenic impurities, see FDA’s guidance document M7(R1) Assessment and Control
of DNA Reactive (Mutagenic) Impurities in Pharmaceuticals To Limit Potential Carcinogenic
Risk for approaches that FDA considers appropriate for evaluating mutagenic impurities, at
https://www.fda.gov/down-
loads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM347725.pdf.
In response to this letter, provide:
Detailed revised change management procedures describing how your firm will assess and
control all impurities, including mutagenic impurities, in API and intermediates manufactured
at your facility.
Detailed procedures describing how your firm establishes impurity profiles for products
manufactured at your firm. These procedures should contain instructions for comparing at
appropriate intervals against the impurity profile in the regulatory submission, or for
comparing against historical data, to detect changes to the API resulting from modifications
in raw materials, equipment operating parameters, or the production process.
A retrospective analysis of other API and intermediates manufactured at your firm to determine
if they were adequately evaluated for anticipated and unanticipated impurities, including
potentially mutagenic impurities.
CGMP consultant recommended
Based upon the nature of the deviations we identified at your firm, we strongly recommend
engaging a consultant qualified to evaluate your operations and assist your firm in meeting
CGMP requirements. Your use of a consultant does not relieve your firm’s obligation to comply
with CGMP. Your firm’s executive management remains responsible for fully resolving all
deficiencies and ensuring ongoing CGMP compliance.
Quality Systems Guidance
Your firm’s quality systems are inadequate. For guidance on establishing and following
CGMP compliant quality systems, see FDA’s guidances: Q8(R2) Pharmaceu- tical
Development, at https://www.fda.gov/downloads/drugs/guidances/ucm073507.pdf; Q9 Quality
Risk Management, at https://www.fda.gov/downloads/Drugs/Guidances/ ucm073511.pdf; and
Q10 Pharmaceutical Quality System, at https://www.fda.gov/
downloads/drugs/guidances/ucm073517.pdf.
Additional API CGMP guidance
FDA considers the expectations outlined in ICH Q7 in determining whether API are
manufactured in conformance with CGMP. See FDA’s guidance document Q7 Good
Manufacturing Practice Guidance for Active Pharmaceutical Ingredients for guidance
regarding CGMP for the manufacture of API, at https://www.fda.gov/downloads/
Drugs/.../Guidances/ucm073497.pdf.
Conclusion
Deviations cited in this letter are not intended as an all-inclusive list. You are responsible for
investigating these deviations, for determining the causes, for preventing their recurrence, and
for preventing other deviations.
If you are considering an action that is likely to lead to a disruption in the supply of drugs
produced at your facility, FDA requests that you contact CDER’s Drug Short- ages Staff
immediately, at drugshortages@fda.hhs.gov, so that FDA can work with you on the most
effective way to bring your operations into compliance with the law. Contacting the Drug
Shortages Staff also allows you to meet any obligations you may have to report discontinuances
or interruptions in your drug manufacture under 21
U.S.C. 356C(b) and allows FDA to consider, as soon as possible, what actions, if any, may be
needed to avoid shortages and protect the health of patients who depend on your products.
FDA placed your firm on Import Alert 66-40 on September 28, 2018.
Until you correct all deviations completely and we confirm your compliance with CGMP,
FDA may withhold approval of any new applications or supplements listing your firm as a
drug manufacturer.
Failure to correct these deviations may also result in FDA continuing to refuse admission of
articles manufactured at Zhejiang Huahai Pharmaceutical Co., Ltd., located at Coastal Industrial
Zone, Chuannan No. 1 Branch No. 9, Donghai Fifth Avenue, Linhai, Taizhou Zhejiang, into the
United States under section 801(a)(3) of the FD&C Act, 21 U.S.C. 381(a)(3). Under the same
authority, articles may be subject to refusal of admission, in that the methods and controls
used in their manufacture do not appear to conform to CGMP within the meaning of section
501(a)(2)(B) of the FD&C Act, 21 U.S.C. 351(a)(2)(B).
After you receive this letter, respond to this office in writing within 15 working days. Specify
what you have done since our inspection to correct your deviations and to prevent their
recurrence. If you cannot complete corrective actions within 15 working days, state your reasons
for delay and your schedule for completion.
Send your electronic reply to CDER-OC-OMQ-Communications@fda.hhs.gov or mail your
reply to:
Rory K. Geyer
Compliance Officer
U.S. Food and Drug Administration
White Oak Building 51, Room 4235
10903 New Hampshire Avenue Silver
Spring, MD 20993
USA
Please identify your response with FEI 3003885745. Sincerely,
/S/
Francis Godwin Acting
Director
Office of Manufacturing Quality Office
of Compliance
Center for Drug Evaluation and Research
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The Impact of China’s Policies on Global

Biopharmaceutical Industry Innovation

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER

Competition can drive innovation, but it needs to be market-based competition.

INNOVATION IN THE BIOPHARMA INDUSTRY

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 2

Advanced Economies Lead

China’s Competitive Position

United States China Rest of World

Chinese firms are also expanding internationally, especially in world-class biopharma

CHINESE BIOPHARMA INDUSTRY GOALS

Establish a demand-side incentive mechanism for new biotechnology products. Break

CHINESE BIOPHARMA POLICIES

The central government is also investing in a nationwide network of manufacturing innovation

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 10

Chinese Innovation Mercantilist Biopharma Policies

Type of Policy Impact on Global Innovation

Pressured Joint Ventures

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 11

Draconian Drug Price Controls

China is working aggressively to develop domestically produced generic alternatives to foreign

One goal of this is to centralize procurement of generics so as to generate a consolidation in the

Protected Domestic Market

Limits on Exports of Data

Weak Intellectual Property Protection

Government-Backed Venture Capital Investing

State-Owned and Backed Enterprises

How to Think About China’s Biopharmaceutical Innovation

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 20

Fair Policies Unfair Policies

Foreign consumers Beneficial Indeterminate

Global drug innovation Beneficial Harmful

COMPARATIVE INNOVATION PERFORMANCE

Global Policy Coordination

About the Author

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 30

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER PAGE 31

ONE HUNDRE D S IXTEE NTH CO NGRESS

P r i n t e d for use of the

The Honorable Chuck Grassley

Dear Senator Grassley and Speaker Pelosi:

Carolyn Bartholomew Robin Cleveland

cc: Members of Congress and Congressional Staff

The Commission’s full charter is available at www.uscc.gov.

WEDNESDAY, JULY 31, 2019

EXPLORING THE GROWING U.S. RELIANCE ON CHINA'S BIOTECH AND

Opening Statement of Senator Talent

Panel I: Administration Views on Chinese Pharmaceutical, Medical Product, and

Panel I Introduction by Commissioner Wessel

Panel II Introduction by Senator Talent

Panel III Introduction by Commissioner Wessel

TESTIMONY SUBMITTED FOR THE RECORD

Statement of Mark Abdoo

WEDNESDAY, JULY 31, 2019

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

OPENING STATEMENT OF SENATOR TALENT

MR. PRIEST: Senator Talent, Mr. Wessel, fellow commissioners, I am honored to

Mr. Christopher Priest

Principal Deputy, Deputy Assistant Director, Healthcare Operations

Defense Health Agency

THE MILITARY HEALTH SYSTEM

U.S.-China Economic and Security Review Commission

July 31, 2019