BREWHAHA, FIGHT OVER RICE YEAST PITS CHINESE MEDICINE AGAINST WESTERN WAYS

U.S. Firm Says Remedy Cuts Cholesterol, So the FDA Calls It a Drug in Disguise

Why Vague Labeling Helps

By Ian Johnson, Staff Reporter of The Wall Street Journal

SHANGHAI, China The Materia Medico Pharmacopeia is an unlikely source of
modern commercial conflict. Written 400 years ago, it details 1,900 herbs,
minerals and animals used by the Chinese through the ages to treat ailments.

But there, in volume 17, chapter 25, page 18, in terse classical Chinese,
is a description on which hinges a milliondollar product and a contentious
test case for a multi billiondollar industry: "Hongqu is sweet and
nonpoisonous," reads the description of a rice yeast. "It helps digestion,
moves blood, strengthens the spleen and cures diarrhea."

Hongqu, now on sale at 30,000 stores across the U.S. as the
cholesterolcutting product Cholestin, is the focus of a regulatory dispute
between its California based maker, Pharmanex Inc., and the U.S. Food and
Drug Administration. The FDA charges that Cholestin is a drug in herbal
disguise. Pharmanex, which has invested heavily in China on the premise
that America is ready for traditional Chinese medicine, points to Hongqu's
inclusion in the Materia Medica as proof that the Chinese have used the
product as an herbal medicine for centuries, if not millennia, and that it
is therefore a simple dietary supplement, not a drug to be regulated by the
FDA.

Vital Difference

The distinction is a vital one that goes far beyond a single company's
product. China has 1,080 companies making traditional Chinese medicines,
mostly herbal products, and they would love a slice of the world's
fastgrowing $12 billion foodsupplement industryif not one day a share of
the much larger world pharmaceutical industry. The center of attention is
the U.S., where alternative medicines are growing in popularity and gaining
acceptance by Western patients, doctors and even some insurance companies.

But the U.S.'s haphazard regulatory structure highlighted last week when
a presidential commission called for clearer rules governing the sale of
herbs effectively bars some of China's most famous traditional medicines,
while encouraging companies to put vague and possibly misleading labels on
others.

The problem is that few understand tne scientific reasons why Chinese
medicine works. In China, traditional doctors typically choose from 400
commonly used herbs and select a dozen that can help an individual's
illness. The prescription is filled at a pharmacy and the herbs brewed into
a tea. The challenge for Western science is that, with dozens of chemicals
interacting in the herbal mixture, isolating an active ingredient takes
years of research. And when a compound is isolated, tests usually show that
it isn't as effective as the original brew, where numerous other
ingredients are at work.

The legal and scientific problems have scared most of the world's
pharmaceutical giants away from China's herbal treasure trove. One person
who was willing to buck the trend, though, is Bill McGlashan, the
34yearold entrepreneur who formed Pharmanex after deciding three years
ago to invest in Chinese medicine.

That was the year Congress passed the Dietary Supplement Health and
Education Act, which radically relaxed rules on how herbs could be marketed
by allowing companies to advertise "structure and function" claims even if
medical evidence was sketchy. That meant, for example, that while a company
like Pharmanex that sells extracts from the leaf of the ginkgo tree can't
say that its product fights memoryerasing Alzheimer's disease, it can say
that ginkgo helps the brain's proper functioning, which in fact is what
recent studies indicate may be true. The key to the labeling: staying
vague. Make any medical claims, and the FDA can regulate the product as a
drug.

With that new law in the back of his mind, Mr. McGlashan was intrigued when
his Chinafocused venturecapital fund, Generation Ventures, stumbled
across Cinogen Pharmaceutical Co. It had been founded in 1993 by Michael
Chang, a former researcher at Merck & Co. and RhonePoulenc Rorer who sank
$3 million into a researchanddevelopment laboratory in Shanghai and a
ginkgoextract factory in nearby Huzhou. The two formed a partnership for a
year and then, early last year, Mr. McGlashan bought Mr. Chang out, forming
Pharmanex.

Mr. McGlashan temporarily left his fund to serve as president of Pharmanex,
headquartered in Simi Valley, Calif. He quickly raised money $26 million
from other venturecapital funds sinking it into quality control, testing
and newproduct development. He hired 80 researchers with doctorates and
bought stateoftheart drugtesting equipment for the lab and factory in
China. "The 1994 law made work like this economically viable," Mr.
McGlashan says. "Because we can now make structureand function claims, we
can recover big investments." Those investments, Mr. McGlashan thought,
would make Pharmanex the FDA's darling instead of its antagonist. "We want
to do the good science that will prove efficacy and approach the scientific
levels set by the pharmaceutical companies," he says. "We want to be the
industry's trendsetters because it must move forward."

Pharmanex's strategy of modernizing Chinese medicine faced two problems.
One was that by pledging pharmaceuticalstyle proof of exactly what is
interacting with the body, it would have to forgo the complex herbal
formulas that are the basis of Chinese herbal medicine. To date,
Pharmanex's five products are all extracts or efforts to isolate active
ingredients. Besides Cholestin, it also produces two different extracts of
ginkgo leaves, a greenteabased pill that is supposed to inhibit aging and
an extract of a rare Tibetan caterpillar, Dong Chong Xia Cao, which was
popularized by a Chinese running coach whose charges all consumed the
caterpillar and then proceeded to break a string of world records.

Modernizing traditional Chinese medicine had another cost, which became
apparent with Cholestin: By boasting about its scientific research,
Pharmanex drew the attention of the FDA.

Blood Mover

At first, Cholestin's ability to reduce cholesterol with a natural product
seemed ideal for aging, overweight America. Hongqu, or Monoscus Purpureus
Went, is red yeast grown on rice and traditionally used as a food coloring
and medicine. Its description in the Materia Medica, especially the phrase
"moves blood," reads like some form of ancient recognition that it fights
the blocked arteries that result from what modern medicine calls cholesterol.

In fact. research into Honqou seems to bear this out. Dr. David Heber, a
professor of medicine who heads the University of California at Los
Angeles's Center for Human Nutrition, says he is convinced the product
safely reduces cholesterol. Having read 17 studies carried out in China
and conducting his own, which will be presented next year, Dr. Heber says:
"Its effects are clearly beyond changing one's diet. It's a natural food
product without the side effects of taking drugs."

Pharmanex and its Chinese partner, WBL Beijing University Biotech Co.,
immediately struck a deal; Pharmanex helped the company double production
of Hongqu to 200 tons a year at its small factory in Beijing's northern
suburbs. There, among fields of corn and wheat, two whitetiled buildings
house giant stainlesssteel vats that dry the rice imported from southern
China and then heat it so the red yeast grows. The reddish rice is crushed
to a fine powder and then funneled upstairs where it is fed into small
capsules.

But instead of simply marketing Hongqu as a dietary supplement like any
other say, by claiming that it improved blood flow Pharmanex launched a
nationwide publicity blitz, making specific claims that Cholestin "reduces
LDL 'bad' cholesterol" and "increases HDL 'good' cholesterol."

That sounded like a medical claim to the FDA. But what really got the
agency's attention was Pharmanex's reams of research part of its program
to make Chinese drugs seem more scientific and less mysterious. The company
divulged that one of Hongqu's active ingredients was lovastatin, a chemical
compound patented 10 years ago by Merck and sold today as the prescription
drug Mevacor.

Keeping Stock

In May, the FDA slapped an import ban on Pharmanex's supply of Hongqu,
causing the production lines in Beijing to shut down most of the time. But
because the two sides are still negotiating, sales of the product in the
U.S. haven't been banned, and Pharmanex, which has a stockpile of Hongqu in
the U.S., is still able to keep Cholestin in stock. "We're flexible on the
claims," Mr. McGlashan said. "We just wanted to say exactly what the
product does."

In a September letter outlining its objections to Cholestin, the FDA told
Pharmanex that its main problem was that Hongqu hadn't been on sale in the
U.S. before Merck obtained permission in 1987 to sell lovastatin as a drug.
Thus, the agency argued, Hongqu was simply a means to produce lovastatin
and not an herb despite its inclusion in the Materia Medica. An FDA
official who declined to be identified put it this way: If Pharmanex hadn't
analyzed Hongqu so carefully and identified lovastatin as one of its active
ingredients, it could have sold its product without any problem.

Although the FDA won't comment officially, insiders say the agency would
ideally like Cholestin off the market because they believe it is piggy
backing on Merck's research on lovastatin. But the agency may settle for
rewritten labels or a product relaunch with a different name and less
aggressive claims. A spokesman for Merck, meanwhile, says it agrees with
the FDA that Cholestin should be regulated as a drug, not a food supplement.

After six months of negotiations, a final FDA ruling seems likely later
this month. If Pharmanex loses, Mr. McGlashan says the company is certain
to appeal in court.

For many in China's medical establishment, this is an alarming prospect
after all, isolating active ingredients and figuring out chemical compounds
is precisely what China's 170 herbal research institutes are trying to
accomplish. "We believe fundamentally that the outside world will only take
us seriously if we modernize," says Chen Keji, president of the Chinese
Association of the Integration of Traditional Chinese and Western Medicine.
"But we can't go so far that we're treated like drugs in the West. Getting
the FDA's approval for a new drug can require millions and millions of
dollars. No Chinese pharmaceutical company can afford that."

The question for many Chinese herbal companies is whether to concede that
they are essentially selling drugs. Some do and thereby forgo the U.S.
market. Yunnan Baiyao, for example, has become one of China's most famous
herbal medicines thanks to its bloodclotting properties, making it an
essential part of every Chinese soldier's medical kit for the better part
of a century. But the company that makes it has avoided the U.S. market
because to say that its product stops bleeding would require FDA approval
that it can't afford.

But the U.S. law on herbal food supplements doesn't require such
scruplesand with $2 billion in herbal sales a year, the U.S. market is
enticing enough for companies to take advantage of the 1994 law's
loopholes. The law essentially eliminates regulation of herbal medicines
as long as they don't make medical claimsPharmanex's sin in claiming
Hongqu fights cholesterol. (The FDA can step in when it sees a health
threat; for example, it was able to ban some herbal weightloss pills after
they caused heart problems.) One Beijing company, Sinomedical Development
Inc., even specializes in this business, helping small pharmaceuticdl
companies redo their labels so they won't suffer Pharmanex's fate.

One of Sinomedical's clients, for example, makes Tongtian, a mixture of
five herbs, including chrysanthemums and peppermint. In China, it is sold
as a medicine and prescribed by doctors to prevent and treat cerebral
hemorrhages, inflamed vertebrae and paralysis. But its U.S. packaging is
radically different, claiming it is an "herbal dietary supplement" that
"helps increase cerebral blood flow and improve microcirculation of blood."
Not so Pharmanex. In China, Pharmanex's partner, WBL, makes specific
medical claims when it sells its version of Hongqu. WBL vice general
manager Duan Zhenwen says Pharmanex erred in copying the Chinese package's
labeling and making specific claims about reducing cholesterol.

More vagueness on Pharmanex's part, he said, and his factory would be
cranking out Hongqu for export.