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China's tougher rules for tainted vaccines market to boost larger drugmakers

Chinese regulators approved fewer vaccines in the first half of 2019 after a series of scandals over poor-quality inoculations rocked the industry, and led to the passing of a tougher vaccine law earlier this year.

Stricter quality controls are likely to benefit some of the biggest private sector vaccine manufacturers in the country in the medium term, who will be able to hike prices for certain vaccines, experts said.

The country approved 229 million vials of vaccines in the first six months of 2019, down 17% from the same period last year, according to a note by Guosheng Securities, citing data compiled by the National Institutes for Food and Drug Control.

Despite the lower approval rate, demand for high quality vaccines remains high in China, said Zhang Jialin, a Hong Kong-based analyst at ICBC International, in an email interview. In particular, he highlighted continuing demand for optional immunizations not subsidized by the government.

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China surpassed Japan to become the second-largest global market for vaccines in 2017. The market is expected to reach 50 billion yuan by 2020, Zhao Bing, a Shanghai-based healthcare analyst with Huajing Securities, said.

The market's potential has also attracted international drugmakers including Pfizer Inc., Sanofi and GlaxoSmithKline PLC, although they account for only about 10% of China's vaccine market.

Sliding supply

China's vaccine industry, dominated by local companies, suffered a drop in supply in 2018, after Changsheng Bio-Technology Co. Ltd., was found guilty of making substandard vaccines and slapped with a fine.

The vaccine law, announced late June and scheduled to come into effect Dec. 1, also penalizes producers and distributors of fake vaccines by fining them as much as 50x the product value.

Chen Hao, a China healthcare policy researcher at Huazhong University of Science and Technology, said the penalties on Changsheng and under the new law have made vaccine manufacturers cautious about policy risk.

"Some manufacturers may temporarily reduce or halt production to watch how supervision over the sector will evolve," he said.

It could also stretch the manufacturing cycle, said Zhao, as higher quality standards come into play.

Large players to gain

Zhao also said while tougher regulations will make it harder for companies to enter and survive in the vaccines market, such a development could mean good news for industry leaders, who are in a better position to hike product prices.

In the note, Guosheng Securities analyst Zhang Jinyang also said Chongqing Zhifei Biological Products Co.Ltd., Walvax Biotechnology Co. Ltd. and Shenzhen Kangtai Biological Products Co. Ltd., among the top private sector vaccine makers in China, are likely to be the biggest beneficiaries of the new operating environment.

Walvax Biotechnology, for instance, saw an increase in the number of approved vials in the first half of 2019, according to the Guosheng Securities report.

Zhang Jialin agrees: he believes market share will accrue to drugmakers with strong research and development and quality manufacturing capabilities.

China had 45 vaccine manufacturers as of July 2018 producing more than 60 types of immunizations, according to the Chinese government body State Council's website.

Vaccines come under two main categories in China. Immunization for diseases such as rabies and hepatitis A are classified as optional vaccines, which patients pay for themselves. Another class of immunization, covering 11 diseases, including hepatitis B and leprosy, are compulsory and provided free by the government.

Compulsory vaccines, mostly manufactured by state-backed companies, account for about 64% of vaccines approved by regulators, while voluntary vaccines represent the rest, Zhao added.

As of Aug. 6, US$1 was equivalent to 7.03 Chinese yuan.