Three years ago, AstraZeneca was embarrassed when its plans for sourcing active pharmaceutical ingredients from China were accidentally disclosed. The drug maker engaged in a fit of furious backpedaling as it tried to downplay remarks by some of its own executives that production in such places as the UK and Germany would eventually be phased out in favor of lower-cost China.

Why was the drug maker so keen to deny that China represented the future of API sourcing? For those who can’t recall, the headlines at the time conveyed alarming stories about unadulterated medicines, poisoned dog food and toxic toys stemming from China. Not exactly a good time to announce plans to source key pharmaceutical ingredients from a country that was likened to the Wild West (even if it is in the Far East).

This gaffe, moreover, occurred a few months before the notorious Heparin scandal in which several deaths were linked to a tainted substance found in the widely used injectable blood-thinning medication sold by Baxter. That episode prompted Congressional inquiries into the FDA and its ability to monitor the flow of products coming from China which, of course, includes facilities inspections.

Why are we dredging up these stories now? We were reminded of these events when AstraZeneca recently acknowledged long-sought efforts to build up its manufacturing presence in China, which includes a big factory in Wuxi where, in addition to making APIs, medicine formulation and packaging also are conducted. But AstraZeneca isn’t the real story here; the drug maker merely symbolizes a trend that isn’t going away – ever.

As drug makers work harder every day to wring costs out of their mammoth structures, China is taking on more importance all the time. And this effect is, of course, multiplied by the potential of the large domestic Chinese market that drug makers want to tap as a much-needed source of additional revenue. The Chinese pharmaceutical market, in fact, grew 24% in the 12 months ended June 2009, according to IMS Health.

Whatever the ultimate product destination, though, more manufacturing will be done in Asia, especially China, according to a 2008 report by PricewaterhouseCoopers report. When considering such parameters as cost, risk and market opportunity, China scored as the best outsourcing destination, in general. And the lower costs and greater market opportunity for both China and India outweighed more established and mature countries such as Australia, Singapore and Japan.

This begs one overarching question: is all this outsourcing to China a good idea whose time has not yet come? Money will, of course, dictate what happens in the marketplace. And lower costs are, well, lower costs. For instance, if one compares the per-kilo price, but ignores standards for Good Manufacturing Practices and Health, Safety and Environment, the difference in APIs from China or the West could be two to five times, according to Guy Villax, chief executive officer of Hovione, an API manufacturer based in Lisbon, Portugal. On the other hand, sourcing from equivalent suppliers, and factoring in GMP and HSE, and having some assurance of continuity of supply, the difference in price is more likely to be expressed in percentage terms. And so, arguing with the economics is difficult.

But this is more than an economics lesson, of course. Repeated scandals can be difficult memories to erase from the public consciousness. Just like Vioxx has become a buzzword in discussions about safety and marketing, Heparin has arguably become synonymous with poor quality and poor oversight.

Indeed, impressions are made worse when the FDA is vilified for failing to work harder at preventing some of these widely publicized episodes. There may be a new, consumer-conscious regime at the top of the agency now, but it’s not clear that much, if anything, will change anytime soon, despite pronouncements by FDA commissioner Margaret Hamburg to improve product safety across the board.

An FDA spokeswoman says that there are just two agency inspectors on the ground in China for scrutinizing medical products, although “many” inspectors based in the U.S. make short-term trips to China to conduct inspections. How much is accomplished on such trips isn’t clear, unfortunately. And there was no further information about the number of trips or how many inspectors travel to China to compensate for the lack of personnel stationed in the country. And the agency spokeswoman added that, for now, there are no plans to add more inspectors there. In other words, the FDA’s ability to detect serious problems doesn’t appear to have changed appreciably.

Meanwhile, along with India, China reportedly supplies about 40% of the APIs used to make pharmaceuticals that are sold in the U.S. Repeated scandals have prompted Chinese authorities to tighten laws, but enforcement remains weak and transparency is minimal, according to a recent report from the American Enterprise Institute. That said, the move three years ago to execute Zheng Xiaoyu, the former director of China’s State Food and Drug Administration, for approving untested medicine in exchange for cash from eight drug and medical equipment companies, left quite an impression.

Publicity over lethal injections aside, the vapid state of Chinese regulation poses a dilemma for drug makers, which already suffer from some of the worst corporate bashing over the past decade, thanks to their own safety scandals and ongoing pricing debates. One needn’t be Machiavelli to understand that poor quality control, unscrupulous suppliers or lax oversight can lead to irreparable trouble – and not just in terms of public image, but in actual sales. Imagine the fallout that would occur if the Heparin scandal were to be repeated at another couple of drug makers in a relatively short period of time.

But trying to stay on the straight and narrow can prove daunting. And that’s no secret, is it? This is especially true in China, a vast country where regulatory norms are obviously still evolving and will, in all likelihood, take still more time to match Western standards. This means, however, that drug makers must work overtime, so to speak, to ensure their suppliers – or their own employees – are well-versed in the sort of regulatory procedures that customers in the West have come to demand.

Toward that end, drug makers are increasingly grappling with checking supplier management systems and conducting supplier audits as a means of ensuring supply-chain security. And several drug makers are reportedly working with the Pharmaceutical Research and Manufacturers Association to bring nearly two dozen inspectors from China’s SFDA to the U.S. for several weeks to provide them with a better understanding of GMPs. Such efforts are bound to yield some positive results, although this is unlikely to happen overnight.

“The Chinese infrastructure and organization can be good, but the downside is knowledge of regulations is not particularly wide,” said Martin Slade of UK-based outsourcing specialist at GMP Associates and who is also a consultant to Pharmaceutical Development Services. “Anybody from the West would have to have somebody fluent in Chinese and technical language. But it’s regulatory issues, too, not just chemistry.

“One needs to build relationships with suppliers. It’s almost paramount in China. The problem, however, is that a lot of API companies in China have some way to go to meet modern requirements. They’re not daft, though. Most have certainly caught on fast and, increasingly, it seems to me there are more quality manufacturers offering products for marketing in the West.”

Maybe so. But not surprisingly, the sweeping shift toward China is prompting an outcry. A recent editorial in PharmaBiz, a web site that tracks India’s pharmaceutical industry, bemoaned the poor quality of APIs emanating recently from China, which displaced much of India’s homegrown API industry during the past decade. “There is a steady rise in the import of substandard and spurious APIs” since 2003, according to the December commentary, which noted how several recent shipments were seized by inspectors.

Recently, a heated row recently broke out in Europe, where an industry trade group, the Active Pharmaceuticals Ingredients Committee, wants the European Commission to require repeated, mandatory inspections of overseas API facilities, particularly those in . . . drum roll, please . . . China. Of course, a key motivation for the demand is competition – European API suppliers need to preserve business. But given the concerns about Chinese APIs, the APIC can win kudos by coming down on the side of safer products.

The APIC was prompted to act after the European Commission excluded overseas mandatory inspections from a recent draft directive, saying these reviews would be too expensive, an explanation the APIC called absurd. European suppliers, of course, believe mandatory inspections are needed to keep falsified products out of the EU. And meanwhile, the Committee on Industry, Research and Energy, ITRE, believes that 40 inspectors at the EU level would be needed for the inspection programs.

These groups have a good point. Consider that European inspectors visited non-Western drug factories just 19 times in 2008, a number that doesn’t offer much confidence. And while it’s not clear how many inspections were made by FDA staff or the number of facilities they visited in a recent year, the combined effort by presumably experienced U.S. and European inspectors is a pittance compared to the potential for trouble.

But if regulators lack the mandate, the funds or the will to do more, where are we left? The situation may not be quite as bleak as the numbers and criticisms suggest, at least not across the board, according to one wag. That’s because it’s worth making distinctions between what companies when it comes to manufacturing the newest and biggest-selling medications compared with other drugs, such as generics or older medicines that will soon face lower-cost generic competition.

After all, there is considerably less investment – both financial and emotional – that will be made by a company to maintain a product name that is no longer of marquee value. The same goes for a company that is merely introducing a cheap generic. In other words, a new or hot-selling drug with a valuable brand name is likely to cause a company to be more cautious about where it obtains its APIs, or so the theory goes.

“There are many APIs that come from China today – about 37,000 tons of paracetamol active ingredient, for instance, leave the PRC for the U.S. every year, but probably not a single API for a recently approved drug,” said Mr. Villax, the chief executive officer at Hovione, which is a member of the APIC.

“The newer the drug, the more profitable it is, and so the less risk that the innovator will want to take and the more likely that the later phases of the drug- packing, formulation, API, registered steps – are done in the West, maybe not even outsourced. At the other extreme of the life cycle, chances are a growing amount of generics are formulated in Asia, especially India, and the APIs are coming from China,” he continued.

“Today, large pharma is sourcing APIs from China for large volume, low-margin, off-patented compounds, but they invest heavily in sourcing and auditing, and they usually will use a handful of producers, and chances are that most large firms use the same small number of producers.”

Going forward, it would appear unlikely, for now anyway, that big pharma companies will build their own API facilities for small molecules in places such as China, he added. Rather big drug makers will find ways to work together, if need be, to ensure the quality of their supply chains. But it’s clear that the rate at which sourcing APIs from China is taking place is not going to slow down.

Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation’s largest daily newspapers, for more than 12 years. During that time, he has closely followed a variety of topics of concern to those who work for, and with, pharmaceutical manufacturers – drug development, mergers and acquisitions, regulatory oversight, safety and pricing controversies, and marketing issues. Prior to joining The Star-Ledger, Ed spent six years at New York Newsday and previously worked at Investor’s Business Daily. Ed blogs about the drug industry at Pharmalot.