Cheap commodities can kill you

The pharamaceutical heparin has been killing a small number of its users, as USA Today and others reported Thursday

In a finding eerily similar to the contamination of pet food last year, the Food and Drug Administration said Wednesday that a counterfeit chemical has been detected in recalled supplies of the blood thinner heparin.

From 5% to 20% of the active pharmaceutical ingredients in some heparin supplied by Chinese companies to Baxter (BAX) Healthcare is a similar, but different, chemical that mimics the blood thinner in commonly used tests.

Nineteen people have died since Jan. 1, 2007, from allergic reactions that appear to be associated with contaminated heparin, says Janet Woodcock, acting director of the FDA's Center for Drug Evaluation and Research. The death toll had been four.

So, let’s summarize what this says:

• Baxter bought ingredients cheap in China
• Chinese suppliers cut corners in a way that they knew would not be detected in normal testing
• The difference killed 19 people.

Yes, Baxter’s 2007 COGS is a whopping 51% (leaving a gross margin of only 49%). If Baxter is like industry norms, some of that is the fully amortized cost of the manufacturing facility. However, much (most?) is an expensive distribution channel with lots of incentives for an inefficient sales force and buyer incentives, as Gwen Olsen talks about in her book.

Very little of that is for raw materials: which raises the question of (when human safety is involved) why cut corners with unproven and under-regulated suppliers.

Regular readers know I’m a flaming capitalist, but this is just begging for further regulation — if not by grandstanding politicians, then by greedy trial lawyers (the latter being an extremely inefficient form of regulation).

If the Chinese government doesn’t like the US blocking the buyout of a failing US IT company on national security grounds, it’s going to hate blocking use of dubious pharmaceutical inputs on safety grounds. I will be curious to see if other developed countries follow suit, or if they decide they’d rather risk lives on lax Chinese health regulations rather than risk trade tension with China.