China: Already the World’s Largest Vaccine Maker

The power editors over at Fierce direct me to an article about the vaccine market in China. It was originally published in China Daily and I read it on the English version of People’s Daily Online.

China's vaccine sector will grow 25 percent annually, according to a report from Zero2IPO, a Chinese venture-capital firm. In 2012, the size of the market will reach "8 billion yuan", the report said.

Attracted by the growing vaccine market, "investors from home and abroad will be piling into China", said Zheng Yufen, senior manager for healthcare at the investment banking division of Zero2IPO. China is the world's largest vaccine manufacturer, and most of the companies in the sector are privately owned.

With China already being the world's largest vaccine manufacturer, how do investors get in the game? China’s government “gets it” and is making strong, fast strides towards cleaner, greener manufacturing, processing and its general treatment of the environment. For the past 20 years this has not been the case with pollution running rampant in some areas. With a growing middle class and so many other factors, healthcare is becoming a major issue. It is believed that providing some western style social benefits is a key to maintaining the political status quo. Healthcare tops the list of benefits with each demographic segment of the population being so large and having varied needs. It also can be excellent business domestically and exports. Although strong management and technological innovation are not the norm today , with such a large population and growing educational system, innovation has tremendous potential.

The local vaccine market has enjoyed strong growth worldwide, but vaccine sales accounted for only less than 1 percent in the nation's healthcare industry, according to figures from CITIC Securities. "That number is comparatively low considering China's large population base," said Zheng. Ongoing healthcare reform is giving the vaccine sector a boost because the Chinese government is expected to spend 26 billion yuan on improving public healthcare services before the end of 2011.

Right now most of the firms are private, making venture capital the only way into the market.

 "The time is ripe for venture capital to take some action in the sector," said a venture capital industry insider surnamed Wang. During the past three years, Wang's firm has been in contact with five vaccine companies, but no deals have been signed yet. Several other venture capital companies also have the same idea. Last year, IDG established a healthcare team to study the industry for potential investment targets.

Nationwide, China has over 40 vaccine manufacturers. Other than State-owned companies like Shanghai-listed Tiantan Biological Products and US-listed Sinovac Biotech (NasdaqGM: SVA), many of China's vaccine makers are private and still small in size. "Money is their biggest concern when they plan to expand," said Zheng.

With a scarcity of public companies in which to invest, we can seek large existing public companies that have the vision to invest in these private companies to increase their own pipelines, manufacturing capabilities and perhaps even more important, to have a foot in the door of this massive market.

In 2009, a batch of international pharmaceutical firms entered the vaccine sector through mergers and acquisitions. In late 2009, Novartis International AG, the world's sixth largest pharmaceutical company said it agreed to acquire an 85-percent stake in a Zhejiang-based private vaccine producer.

And last year, GlaxoSmithKline (GSK), the world's leading vaccine producer wrapped up two deals in China to establish vaccine manufacturing joint ventures with two local firms committed to researching and developing vaccines in various categories.

Two names I would like to see enter this market are Pfizer Inc. (NYSE: PFE) and Merck & Co. (NYSE: MRK). MRK has seen its percent of profits grow from vaccines. Back in October of 2007 I first posted about vaccine’s contribution to both the top and bottom lines at Merck.

Time is not on the side of the established public companies. The public companies need to move swiftly or fair valuation may become cost prohibitive.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (PFE and (MRK).

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[Boyd H.]

If you like this segment, you might like to check out China Biologic (CBPO).