On-Track To Develop The World's First SARS Vaccine, Sinovac Is A Success Story in the Making

By Marc Davis, Managing Editor
December, 2003

Another global outbreak of the deadly and highly infectious SARS virus could prove far more devastating than when it first appeared a year ago, scientists are now predicting. That is why the race is on to launch the world's first breakthrough vaccine as the initial line of defence against SARS (severe acute respiratory syndrome).

"We must be ready to manage a possible resurgence of SARS," warned a grim-faced Lee Jong-Wook, the Director General of the World Health Organization, at a November conference in Geneva aimed at finding ways to combat the next likely outbreak.

With 15 nations represented at this gathering of leading SARS researchers, the greatest concern was that no country is adequately prepared to face the grave health threats posed to their urban populations. Nor are their regional and national economies braced for the seriously negative financial impact that SARS has already caused in many places. For instance, Canada's largest city, Toronto, experienced profound and widespread economic losses totaling over Cdn. $100 million as a result of last summer's SARS outbreak. (The Canadian Tourism Commission estimates that SARS flare-ups nationwide cost Canada's economy approximately Cdn. $519 million in 2003, alone).

However, a major milestone development has been achieved by a newly-listed, publicly-traded U.S. company named Sinovac Biotech Ltd. (NASD OTC-BB: SNVBF) which has just announced that it is well on its way to successfully developing the world's first-ever SARS vaccine.

With the full support of the Chinese federal government, Sinovac's SARS vaccine is about to be fast-tracked into human clinical trials in China following the highly successful use of its proprietary immunology biotechnology in primate studies. Sinovac's scientists have now revealed that monkeys that were injected with inactive versions of the vaccine subsequently developed antibodies against the virus. Clinical trials could begin before the year's end, Sinovac's management announced in late November.

Such an initiative could conceivably lead to the commercialization of a SARS vaccine within a year - one that also meets Western standards of safety and efficacy. Notably, a pharmaceutical product's approval timeline in the United States may sometimes be expedited to as little as six months if it is designed to treat or prevent a life-threatening illness for which there are few or no alternative therapies.

SmallCapMedia believes that the implications of such a breakthrough could be nothing short of sensational in the global battle to fend off a possible pandemic in the making. (The last pandemic to affect North America involved an outbreak of a particularly virulent strain of influenza in 1918 that killed close to one million people). The advent of a vaccine that has what is known in the biomedical business as "blockbuster potential" would also offer early-stage Sinovac shareholders tremendous potential returns in their investments.

By way of background, Sinovac Biotech is a biopharmaceutical company that is based in Beijing, China where it is fast earning a reputation for itself in the field of immunology. Specifically, the company's initial focus is the development and commercialization of human vaccines for infectious illnesses such as Hepatitis A and Hepatitis B, Influenza and SARS. In this regard, the company is already developing a successful business model through the marketing of its vertically integrated, proprietary immunization biotechnology.

Sinovac's inaugural immunology product, named Healive, for the prevention of Hepatitis A was successfully launched in 2002. Healive and Sinovac's other in-development vaccines are manufactured in a state-of-the-art facility that was designed and built by a renowned European company to meet the exacting standards of the U.S. Food and Drug Administration, as well as the European Union. This is strategically very important in that it bolsters the company's future prospects of marketing such cost-efficient vaccines in North America and elsewhere in the Western world.

Sales of Healive for 2003 are already growing exponentially over 2002 (the year the vaccine was launched) with a total of approximately 500,000 units sold at around US $7 each. A strong sales curve is expected to continue during the next few years, largely because of the "inactive" status of Healive. Simply stated, this means that the vaccine contains the DNA of the Hepatitis A virus but it has been chemically treated to render it "inactive" or impotent. By comparison, the several other established, inexpensive Hepatitis A vaccines that are sold by other Chinese pharmaceutical companies use "live" viruses that can produce harmful side effects and have a poor record safety and efficacy. With such a strong competitive advantage in this marketplace, Sinovac therefore projects that its sales figures may reach approximately US $40 million by 2007.

The first "inactive" and highly effective vaccine ever developed by Chinese scientists using their own proprietary technology, Healive is far less expensive than Twinrix -- the world's only other commercialized "inactive" Hepatitis A vaccine. Marketed by the multinational pharmaceutical giant GlaxoSmithKline, Twinrix is prohibitively expensive for most Southeast Asians. Thus, the much lower price point of Healive offers Sinovac a key competitive advantage in marketing to a very price-sensitive Chinese healthcare system, as well as other developing southeast Asian nations. Moreover, Sinovac's management says its vaccine is safe and effective for the inoculation of children, whereas GlaxoSmithKline's vaccine is only intended for use by people over the age of 16. And with a target market in China of approximately 300 million youngsters, including about 20 million newborns each year, Sinovac is strategically poised to capitalize on this as-yet unmet need.

Significantly, China's federal government has selected Sinovac to spearhead a recently initiated national healthcare initiative to inoculate all of China's 100 million-plus school children within the next 5 to 7 years. (Sinovac's combined Hepatitis A&B vaccine, Bilive, is expected to target the same demographics). These vaccines will also benefit those who legally require such vaccines in the event of regional Hepatitis outbreaks. They include healthcare workers, food handlers, and others who are at high risk, including travelers in the affected areas. It is worth noting that approximately 2.5 million Chinese are diagnosed each year with potentially lethal strains of Hepatitis, while an equally large number of cases (particularly in rural China) go undiagnosed or unreported.

The role of Sinovac in this new program cannot be overstated. Presently, foreign vaccines and other drugs are prohibitively expensive and do not fit within the budget restraints of the Chinese federal government's medical insurance initiatives. Thus, the emergence of cost-efficient Chinese vaccine technologies will meet the government's need to contain the rapidly escalating costs of private and socialized medicine.

Indeed, the launch of Sinovac's first commercialized vaccine is the first step in the company's mission to become a force to be reckoned with in China's burgeoning and very lucrative biopharmaceutical industry. A recent GlaxoSmithKline study suggests that China's market for the Hepatitis A vaccine, alone, could be worth up to $1.5 billion by the end of 2005 and that the Chinese biomedical industry, itself, will be the largest in the world by 2020.

Sinovac's prospects are further enhanced by the fact that the company is also entering clinical trials for its proprietary Influenza vaccine. And the company is planning a near-term launch of its combined Hepatitis A&B vaccine for the domestic market, and later for the international marketplace. Clinical trials for this uniquely-engineered vaccine have been completed successfully, paving the way for the near-term launch of Bilive in China. The company is awaiting the imminent licensing approval for the product's sale in China, according to senior management.

However, the advent of Sinovac entering clinical trials for its SARS vaccine at least two years ahead of its competition is what most excites investors and the medical community, alike. Indeed, this scenario may soon propel this emerging company to the forefront of the global immunology industry.

And the prospect of marketing this breakthrough vaccine in China, North America and the 30-plus other nations that were recently impacted by SARS promises to provide the company with immensely lucrative marketing opportunities. This is especially the case if Sinovac opts to leverage its product production pipeline by licensing its biotechnology to one or more leading North American and European pharmaceutical giants. The likelihood of such a timely opportunity was recently underscored by the World Health Organization's announcement at the Geneva convention that it could take up to five years for Sinovac's Western competitors to develop a vaccine that is proven safe and effective in humans.

A prominent reason for Sinovac's early-stage success and its bright future is the caliber of the company's renowned management team. Sinovac's Chairman of the Board, Professor Aihua Pan, is an award-winning luminary in the field of biochemistry at Beijing University. The American Biographical Institute also listed him as one of the world's top 500 most influential leaders in 1997. Dr. Pan is a leading figure in many of China's medical and scientific organizations, including holding such positions as Executive Director of China's National Bio-Engineering Organization and Vice Director-General of China's Medicine Biological Technology Association.

Meanwhile, Sinovac's President, Mr. Wei Dong Yin, has been involved in Hepatitis research for over 20 years and is accredited with developing the intellectual property that led to the development of Sinovac's Hepatitis A vaccine. In addition, Mr. Yin has been instrumental in shaping the Ministry of Public Health's policy for prioritizing Hepatitis as one of the major diseases that the Chinese healthcare system is trying to negate during the next five years. Indeed, this is an initiative that the Chinese government intends to aggressively pursue due to the serious social and economic toll that Hepatitis outbreaks wreak on China's fast-evolving modernized economy.

On this note, the emergence of a new health-conscious Chinese middle class totaling tens of millions of people is also creating a new marketplace for Sinovac's in-development Influenza vaccine. These people tend to have relatively significant disposable incomes and have demonstrated great enthusiasm in recent years for preventative medicines. Accordingly, the demand for Influenza vaccines is expected to grow ten-fold within the next few years, according to Sinovac's management. This represents an unprecedented marketing opportunity for the company. This Influenza vaccine, which is expected to be far less expensive than its Western counterparts, is currently undergoing clinical trials.

As China's economic fortunes continue to improve, the world's largest and inadequately served pharmaceutical market is expected to increase ten-fold to approximately US $60 billion by 2010. Hence, Sinovac is ideally positioned to service the accelerating demand for cost-efficient vaccines that are so well-engineered that they conform to U.S. reporting standards and are also endorsed by the World Health Organization.

This key competitive advantage also offers Sinovac the prospect of penetrating lucrative North American and European markets within the next couple of years by way of licensing and distribution agreements with multinational pharmaceutical companies. All told, such favourable dynamics suggest that Sinovac is well on its way to becoming a rising star in North America's vibrant biotechnology sector. In such an eventuality, SmallCapMedia believes that the company is destined for a listing on a more senior North American stock exchange. This development would offer Sinovac much greater market exposure and liquidity, while also presenting the opportunity to secure major financings among leading institutional investors.

On a technical note, the company is a relatively tightly-held stock with only about 27 million shares outstanding (30 million fully diluted), much of which are held by insiders and are restricted from sale. Such a situation, matched with positive news flow, typically acts as a catalyst to higher share price valuations. The stock is therefore poised for a significant news-driven breakout. Such a scenario is already developing. Accordingly, SmallCapMedia believes that Sinovac is currently undervalued considering that the company has strong fundamentals, a US $3 million financing in the works and an ever-improving balance sheet. And of course, the prospect of being the world's first biopharmaceutical company to commercialize a SARS vaccine also offers investors clear "home run" potential.