Not All Pharmaceutical Markets Are the Same

Earlier in the week, China executed the former head of its food and drug administration and sentenced another one to death after they accepted bribes in return for allowing unsafe drugs to be approved in the country.

China's food and drug administration is still in its infancy. Health problems that the agency either refused to recognize or ignored from food- and consumer goods-producing companies has been well documented lately. What has received little attention in the U.S. since it doesn't affect Americans (except for medical tourists to China or those who get hurt while visiting the country) is that China's pharmaceutical industry is experiencing some of the same problems with lax and corrupt government oversight as many of the country's other industries.

What would often be labeled a supplement at best in the U.S. can get called pharmaceutical product in China, as Chinese supplement provider American Oriental Bioengineering (NYSE: AOB) calls some its products. Other drug developers selling compounds in China include SciClone Pharmaceuticals (Nasdaq: SCLN) and nearly all the major pharmaceutical giants. That includes Novartis (NYSE: NVS) and AstraZeneca (NYSE: AZN), who have both made significant manufacturing investments in China.

The focus of this article isn't the unfortunate outcome for the former Chinese health administration official, but rather that the pharmaceutical industry and drug development process in emerging countries doesn't resemble anything close to that of more developed markets like the U.S., Japan, or the European Union. Investors need to take this fact into account if firms try to tout the approval of their compounds in these emerging markets as proof of a drug's effectiveness. Oftentimes, the scientific and clinical trial evidence to support the claims by these firms is simply not there at all.

This doesn't mean that there aren't serious deficiencies and problems with the U.S. and other developed countries' drug regulatory procedures, but trying to get a handle on and gauge the investment opportunities in the Chinese drug industry is next to impossible, since the sector's regulatory and drug approval process is so opaque and open to potential abuse.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article.