Exclusive Interview: Chinese biopharma Sinovac (SVA) Makes a Compelling Case

Last week I met with management of Chinese small-cap Sinovac (ticker: SVA) while they were in New York for the Morgan Stanley Healthcare Conference. We spoke for almost an hour. Here’s the conversation in full (lightly edited):

Q: WERE MOST QUESTIONS AT THE MORGAN STANLEY CONFERENCE THIS WEEK ABOUT YOUR POTENTIAL GAME CHANGER EV-71?

SVA: Most of them.

Some of them are also asking about the pricing pressures for other medicines in China.

But it’s (the pricing pressures) not related to vaccines.

Q: WHY DO YOU REMAIN SO SURE EV-71 WILL BE APPROVED?

SVA: We can have that expectation mainly because in the past the vaccine orders came from the CDC who is managed by MOH (Ministry of Health).

In the prior MOH, the minister who has a scientific background and recognizes the disease and knows there’s outbreak peaks in each regular years and which months it could happen.

So previously his plan was to have the vaccine used on children around early 2014 so we could prevent the disease in the first peak in Spring 2014.

For that, what we have to do is calculate backwards and see how we get approval. By that time we thought the government was aligned in their objective because the disease is so serious in China and the government has pressure.

However in the new generation of the government, the head of MOH has changed and the government’s priority is the inactivated polio vaccine.

EV71 normally ranks below it – but still relatively more urgent than other applications in the pipeline. But I also think that’s the reason that’s causing some delay.

Also, for CFDA this would be one of the very few products that they would approve first globally.

Q: BUT YOU SEEM SO CONVINCED OF EV71 APPROVAL.

SVA: That’s from the technology because firstly the production process for EV71 is very similar to Hepatitis A. It’s a virovaccine inactivated and we use similar technology in the cell factory.

Through the pre-clinical studies as well as the human clinical studies we’ve seen very good results. So we think the chance of not having this vaccine approved is less and less.

Of course we need to manage and see how the trends change when we’re progressing in regulatory approval processes. And right now after the CFDA reviews the technical documentation and the data on clinical and pre-clinical studies we receive their inspection on our facilities and our capabilities – whether you can really manufacture a qualified vaccine with the data or parameters you developed in your research. And that on-site inspection finished in August.

When the inspection happens we need to manufacture 3 consecutive lots of the vaccine. And they come 3 times to see different steps in the manufacturing. Once the vaccine is manufactured they will sample it and they will do the testing. Right now the sample has been selected and we’re waiting for the testing results.

So once the results are available they’ll compile all the conclusions and review comments on their prior reviews and they will come up with the conclusion for the new drug application whether it’s going to approve or not.

But we think the chance of not having the vaccine approved is not very big. At least right now we can’t see any reason.

Q: YOU’VE TALKED ABOUT HOW YOU’RE ALL READY FOR COMMERCIALIZATION. YOU MUST BE CONVINCED OF APPROVAL.

SVA: We can only say that the chance of it happening is bigger than the other side.

We’re not 100% sure but right now we’re more confident than 2 years ago.

And I think when we start to build the plant we’ll have already seen the results for Phase 1. And also we’ll do some preliminary immunogenicity.

Actually the biggest risk is the Phase 3 – efficacy study.

Sometimes the vaccine does produce the antibody but that antibody may not protect you. That’s the most uncertainty in the vaccine development especially for the new vaccines.

But when we do the Phase 3 trial I think we’ll already be in the process of finishing the plant building.

So there’s some level of risk but we think we’re capable of managing that.

At the same time we have to do that in order to meet the government’s objective of using the vaccine.

Q: AND IF YOU DON’T RECEIVE APPROVAL CAN YOU RE-APPLY?

SVA: It depends on the reason.

If the government wants you to do more research it’s then just an issue of timing.

But in recent months the Chinese government has been issuing lots of new policies and right now they’re tracking the integrity of the clinical data. So they ask all their companies applying for new drug application that they need to submit another report on their clinical data -- whether it’s complete or not. And they encourage some of the companies to withdraw if they don’t think they’re clinical data is complete.

And there are some companies that did withdraw.

Q: WERE ANY OF THE COMPANIES APPLYING FOR EV71 APPROVAL FORCED TO WITHDRAW?

SVA: No.

Q: SO ALL THE EV71 COMPETITORS ARE STILL ALIVE?

SVA: Yes.

Q: AND THERE ARE 2 COMPETITORS YOU’VE TALKED ABOUT.

SVA: Correct.

The 2 competitors are in a similar timeframe.

Both us and Kunming completed on-site inspection. CMBG is a little behind but it’s not a material difference.

Q: AND REMIND ME THE DIFFERENCE BETWEEN YOUR DRUG AND THOSE OF YOUR COMPETITORS?

SVA: I think the key production process is different. We use cell factories. It’s a matter of how you increment the virus.

Also, each company has their own seed. We selected our own. CDC provided over 100 seed. So we go in and select the best one for producing vaccine. And they have their own source.

And cell lines are different.

So there are some technical things that are different but if you want to compare it’s more on the results. I think 3 vaccines all provide efficacy rates over 95%.

We produce about 94.5% -- which was published in the New England Journal of Medicine.

The other 2 are also around 90…I can’t remember exactly but it’s not very different.

Q: SO YOUR DRUG WILL BE SIMILAR TO YOUR COMPETITORS?

SVA: Based on recent research the drugs will be similar.

But this is a new vaccine. The history of using it is so short. And we need to observe once on the market to see what the difference will be in terms of controlling the disease.

Q: YOU’VE SAID EV71 IS A NOVEL DRUG. WHAT MAKES IT NOVEL?

SVA: Because no similar kind was ever commercialized in the past. So this is the first one.

Why is it the first one? I think that it’s due to the disease. The disease is actually in China and some Asian countries. You don’t frequently see it in the US. There is hand, foot and mouth disease but most aren’t caused by EV71.

Q: AND THERE’S MUCH BIGGER DEMAND IN CHINA?

SVA: At least right now. We don’t know about the future.

Now you can see the reported cases in China but not much in the Western world.

Some other Asian countries like Taiwan, Korea, Japan, Cambodia and Vietnam also have reported cases.

Q: WHY IS IT MOSTLY IN ASIA?

SVA: I don’t know.

A lot of people ask that question but for us our expertise is producing and developing vaccines and those other studies need to be done by experts in this area.

Q: BUT YOU ANTICIPATE THERE’LL BE DEMAND FOR THIS FOR A LONG TIME?

SVA: Yes.

Because right now in China at least we’re targeting the empty market. It’s a totally blank area for the child under 5 years old.

But for the long run it’ll be the whole world of newborn babies every year. That would be a very steady market demand.

Q: IS IT FAIR TO ASSUME THAT WITH THE RELAXATION OF THE ONE-CHILD POLICY THERE’LL BE MORE NEWBORN BABIES AND THUS POTENTIALLY MORE DEMAND?

SVA: Yes.

Q: EVEN THOUGH THE RELAXATION HAS NOT LED TO THE ANTICIPATED GROWTH IN NEWBORNS?

SVA: At least not as fast as people expected.

Q: BUT YOU EXPECT THE NUMBERS TO INCREASE?

SVA: Many of my friends – once the new policy was announced – they’re thinking about whether they want to have a second child. They may say “no”. But after awhile many do have a second child. Generally speaking I think the number will go up.

Q: SOME BELIEVE THAT WITH MORE HEALTH INSURANCE AND A SOCIAL SAFETY NET THE CHINESE PEOPLE WILL WORRY LESS ABOUT SAVING WHICH COULD LEAD TO MORE CHILDREN.

SVA: One of the key reasons for some families concern of not having a second one is you need to pay for school and other things. So if you have social security system I think people’s level of uncertainty will be less.

Q: ARE ALL EV71 VACCINES NEW AND NOVEL?

SVA: EV71 is a type of new thing. The 3 of us are in the first round.

But if there are some later joining the game that would be a second wave.

Q: IF YOU RECEIVE APPROVAL THIS YEAR HOW LONG UNTIL COMPANIES START PRODUCING GENERICS?

SVA: Even before we start, some other companies can learn the process. So they have less risky profile of developing similar products.

So there are several other companies applying for clinical studies already but haven’t been approved yet.

Q: DOES THAT WORRY YOU?

SVA: We do for the long term but not for short term.

Because you can calculate the timing. If they’re not even getting the license it will take them 3-5 years to commercialize their vaccine. So there’ll be time.

Q: SOMETIMES YOU TALK ABOUT COMMERCIALIZATION IN 2016. AT ONE POINT YOU SAID Q1 2016. BUT ON THE LAST EARNINGS CALL YOU JUST SAID 2016. SO YOU DON’T REALLY KNOW THE TIMING?

SVA: I don’t.

Q: BUT YOU DON’T ANTICIPATE Q1 2016?

SVA: Yes. Because in the past when we receive the notification of on-site inspection we thought they could come early.

Finally I think it takes us several months to fix the schedule for all the expert inspections to come to the site.

So, the only way of saying the timing is that once we receive all the certificates it will take another 4-5 months to put a single dose on the market.

So if we can have approval by the end of this year it could be on the market 2nd quarter of next year. But if approval is Q1 next year then it’ll be 2nd half 2016.

Q: SO YOU ASSUME IT WILL BE APPROVED YOU JUST DON’T KNOW TIMING?

SVA: Yes.

Q: WOULD YOU KINDLY REVIEW WHAT YOU’VE SAID PREVIOUSLY ABOUT PRICING AND VOLUMES?

SVA: Firstly, for the pricing, given the current competitive landscape and big demand we plan to price it higher than our existing vaccines.

So the highest level of our current vaccine is around 80 RMB per dose, roughly $15, less than $15, $12-$13 per dose. So every kid gets 2 doses.

So, whether it’s going to be 80 RMB or 100 or 150 Mr. Xia and his team are finalizing their assumptions, making different scenarios and analyses. Now I think they’re in the final stage of conclusion once he gets back to China.

As for the volume, the volume is limited to the core process. Once the CFDA comes to see the facility they require us to produce that on a commercial scale.

I can’t remember how many doses they can produce per batch but it should be less than 500,000 per batch. Of course we’re producing that in parallel to a certain extent. We’re not just producing 4 months and then 4 months. So we may have the first step started for the first batch and once we move to the second stage we’ll start the second batch.

So that’s how we calculated full year capacity of 20 million doses.

Q: AND YOU ANTICIPATE THAT NUMBER GROWING BASED ON DEMAND?

SVA: The capability for us to produce the vaccine could go up because once the team masters the process better they should be more efficient than the beginning period.

But as you said it’ll depend on the demand.

Q: IS THERE ANYTHING NEW WITH YOUR COMPETITON FOR EV71?

SVA: Competitors are still the same. None have been approved. We’re all in the same stage of the approval process.

Q: YOU’VE SAID THAT WHEN YOU’RE READY TO FUND COMMERCIALIZATION IT’S NOT GOING TO BE BY SELLING STOCK BUT THROUGH BANK LOANS?

SVA: That’s our priority. We don’t want dilution.

We don’t think our shares are traded well and also it’s limited liquidity.

We don’t want to harm existing shareholders.

And as a high tech company in Beijing we have some favorable policies from the government. They do interest subsidy so it’s relatively cheap. 

Q: ARE MOST OF YOUR SHAREHOLDERS LONG TERM HOLDERS WAITING PATIENTLY FOR YOU TO BE SUCCESSFUL?

SVA: That’s my impression. Yes.

It’s public information that SAIF Partners are the biggest shareholders and they have about 19%+ and they’re just buy-and-hold.

They bought from 2010. I think they were buying in the $3-$4 range. I think their investment philosophy is more like private equity and they have a longer period for the fund.

Q: SO SAIF OWNS ~20%. WELLINGTON OWNS A COUPLE OF MILLION SHARES. ARE THERE OTHER LARGE INSTITUTIONAL OWNERS?

SVA: Not a lot. There’s Orbimed have about 5%.

Q: AND THOSE FOLKS REALLY UNDERSTAND THE SCIENCE?

SVA: Right. Wellington has known us for awhile over 5 years. And Orbimed, the person in charge of investment used to work at Piper Jaffray on the sell-side covering us. She has a PhD in biology or related major. So she knows the technology.

Q: ARE YOU DISAPPOINTED THE WAY THE STOCK TRADES?

SVA: Yes.

In the 2nd quarter we were profitable and then the share price goes up a little and then down again.

Q: WHAT’S THE REACTION OF THE LARGE INSTITUTIONAL HOLDERS?

SVA: I can’t say whether they’re happy or not. They’re just patient.

Q: BECAUSE THEY BELIEVE IN THIS COMPANY?

SVA: Yes.

And again I think our market cap is not that big. So the contribution to their entire portfolio will not be that significant. That’s what I think.

Q: UNLESS YOUR STOCK MOVES UP A LOT.

SVA: Yes. So they don’t have reason to buy and trade frequently.

Q: ANY PLANS FOR ACQUISITIONS?

SVA: No. We’re not planning to do any acquisitions – at least for now.

Q: WHY ARE INTERNATIONAL ORDERS TAKING SO LONG?

SVA: In the past, we were spending time on getting the license in the individual countries because all the development has been done based on the Chinese regulation.

Requirements are different in different countries. So it takes time.

Q: CFDA APPROVAL DOESN’T APPLY TO OTHER COUNTRIES.

SVA: No.

That’s why it takes so long. And, again in some countries we do have a license. The vaccine we’re supplying is mainly produced and supplied by big pharma. So we have to compete with them. And that will take a lot of resources to challenge their long history with the market. And also this is a vaccine product – a low price might not be enough to win the market.

Vaccine is used on a human being. It’s not like a TV where if it’s cheaper you can win the market. With vaccines there are a lot of different technical things associated with that so you need to take some time to market your products and people need to believe in the products. So it will take time.

Q: ARE YOU SEEING PROGRESS ON THE INTERNATIONAL FRONT?

SVA: I think we’re having progress in getting the licenses but in terms of sales still similar to the last 3 years around US $1 million.

Q: BUT YOU STILL SEE CHINA AS YOUR BIGGEST MARKET GOING FORWARD FOR YOUR VACCINE PRODUCTS?

SVA: I think so. At least for the current product pipeline. So our key focus is still in China.

Q: YOU’VE TALKED REPEATEDLY ABOUT YOUR ROBUST PIPELINE BEYOND EV-71. WILL THE CHINA MARKET BE THE FOCUS FOR THAT TOO?

SVA: Yes.

Varicella may have some overseas market opportunity but it’ll be in a similar situation as our existing vaccines. Big demand in China -- and international, a supplement.

But for Sabin IPV I think that one could have both China and international because once we receive the technology transfer from WHO they require us to make a commitment.

We’re going to do a WHO PQ pre-qualification for this one. If they need we should be able to supply at least 20 million doses.

Q: SO YOU’VE BEEN IN NEW YORK FOR 4 DAYS. WHAT ARE INVESTORS ASKING?

SVA: What is the progress on EV71?

What are your pricing strategies?

How are the other competitors doing?

Are you feeling any pricing pressure?

We’re not feeling any pricing pressure.

Q: DO YOU THINK THERE WAS MORE INTEREST ON THIS TRIP THAN IN THE PAST? THAT’S WHAT I WOULD ANTICIPATE GIVEN THE NEAR TERM CATALYSTS.

SVA: Not very obvious.

On this trip, a majority of the people we meet are those who know the story and they just want an update.

Q: MAYBE INVESTORS ARE CONCERNED ABOUT THE CHINESE ECONOMY?

SVA: Yes.

I think our large current investors don’t want to sell because they’ve waited so long and it’s closer to getting the results.

Q: I’VE BEEN FOLLOWING YOUR COMPANY FOR MANY YEARS AND LISTENING TO ALL OF YOUR EARNINGS CALLS. BUT ONLY WHEN I WENT TO BEIJING IN AUGUST FOR THE AGM DID I REALIZE HOW CONFIDENT YOU ALL ARE THAT YOU CAN BUILD A SUBSTANTIAL COMPANY. AM I WRONG?

SVA: No.

For our impression, earnings calls are to explain the quarterly results, business development in the past quarter. That’s it.

So we didn’t put much word on the future and strategy.

We think that at the beginning people were buying stocks in China for the future. And after 10 years of communication with investors here in the US I think people here would like to see results.

Our impression is they want to see EV71 on the market and us deliver some results for a few quarters before they start to buy in.

Maybe it’s a different investment philosophy.

Q: CHINA HAS GONE THROUGH MANY INVESTMENT CYCLES. INTERNET PORTALS TO E-COMMERCE TO GROUP BUY TO O2O. I BELIEVE HEALTHCARE AND BIOTECH ARE NEXT. BUT THERE ARE FEW WAYS TO GET EXPOSURE THROUGH THE PUBLIC MARKET. I BELIEVE YOU COULD BENEFIT.

SVA: I think that over the last couple of years the Chinese government has been introducing reform in healthcare that attracts attention from foreign investors.

Of course, healthcare is a defensive. You need it for long term. Even with the economy going up and down there might be some changes in the government budget.

But for people they need some protection on health. And for vaccines it’s preventive. And in China still the majority of the people who use vaccines is pediatric. And parents want to provide good living conditions for their children. That’s still the right assumption.

So I think if you have good product in your pipeline that really give you a chance to grow bigger – whether we could be a giant company I don’t know for now. So we need to take things step by step.

Q: SO THE FIRST STEP IS EV71.

SVA: Exactly.

And the next one Varicella we’ll be supplying to the existing market.

And the next big one will be the Sabin IPV because that will have global exposure – not like EV71 which is a China issue Asia issue. Inactivated polio is a global issue.

And China wants to be in line with the development in the world. They think this is like to demonstrate the country’s capability in this area. That’s why competitor Kunming has Sabin IPV in approval processes – that program is the highest priority in CFDA. I think they already got approval for Sabin IPV. But I think only one supplier will not solve the problem for the whole country.

Q: AND YOU DON’T SEEM TO BE CONCERNED ABOUT BEING SQUASHED BY THE MULTI NATIONALS?

SVA: Their presence has been less in China compared to 10 years ago. Once we enter into China market Glaxo, Sanofi and Merck were supplying Hep A. But Merck and Sanofi came back. GSK didn’t.

But I think we still have a home country advantage and we’re a domestic supplier.

It’s not like the government wants to give more favorable policies.

We’re competing fairly once we submit for the tender.

But I think in terms of how you run the business, how you understand the market need, I think local companies are in a better position to react quickly for the need in the country especially with the outbreak of newly emerged diseases.

So I think the government needs to encourage the development of local industry to be self-dependent.

Many other developing countries are really in a very difficult position during those big outbreaks like H5 or H1N1 because they don’t have their own industry and they’re purely reliant on MNCs. It’s very risky in terms of safety of country.

Q: SO EVEN IF MNCs HAVE MONEY TO BURN YOU’RE STILL COMFORTABLE WITH YOUR POSITION?

SVA: I don’t think we have any protections compared to the big pharma even though they can throw money. China is only one of their markets – and it’s not the biggest market. Decision making process will not be as flexible as local company even though they have local subsidiaries.

Many decisions about supplying the products are based on their one strategy for the whole company.

Big companies have their global market to plan for their best investment. For China, many of them are still export their vaccines commercializing in the developed market into China.

Q: THANK YOU.

NOTE: Learn more about Sinovac here.