China’s new Vaccine Distribution System, and its Impact on Sinovac Biotech Ltd.

As China’s market economyhas evolved over the last few years, Chinese government agencies in charge of vaccine distribution realized that their regulations retained the inherent flaws of a centralized bureaucratic system. In order to the improve the process, and increase the degree of public immunization against infectious diseases, China’s public health agencies resolved to improve the vaccine distribution system by decentralizing it.

On March 24th 2005, China’s State Council for Regulation of Vaccine Distribution and Prophylactic Immunization issued Order No. 434, which created a new vaccine distribution system and organizational structure for administering it. The Center for Disease Control (CDC) offices in each of China’s provinces would continue to administer and oversee vaccine distribution programs, but under a new system where vaccine manufacturers could sell their vaccines to the 143 distribution sites and also directly to all of the regional distribution centers and hospitals. When order No. 434 went into effect on June 1, 2005, the number of effective outlets for the sale of vaccines was increased from 143 regional distribution sites, to over 700 sites. These new regulations will facilitate China’s “Health for all, with Universal Access to Health Care” program, which was designed to hasten progress towards eliminating infectious diseases in China through vaccination. The mission of Sinovac Biotech, Ltd supports both the purpose and plan of the Chinese State Council’s new regulation.

Vaccine Distribution Regulation prior to June 1, 2005

As mentioned above, vaccine manufacturers in China previously supplied their vaccines to China’s provincial Centers for Disease Control. The responsibilities of each CDC office included product distribution organization, vaccine storage, and distribution operations for all vaccines to the city CDCs. Afterwards, these city CDCs distributed the vaccines to district/county CDCs throughout China. This centralized distribution system resulted in higher prices for vaccines, due to the necessity of having two sites; one provincial and the other local, for temporary storage of every type of vaccine after it had been shipped from the manufacturer.

Regulatory Changes to Distribution System in China

The new regulation Order No. 434 effectively streamlines the distribution system, and enables vaccine manufacturers to market and distribute their products directly to over 700 outlets; including provincial CDCs, district CDCs, and hospitals. Since Sinovac targets the private market; particularly China’s emerging middle class, corporate executives believe that the new regulation will benefit the Company.

Effect of Regulatory Changes on Sinovac

As the vaccine providers of private sales are now responsible for significantly increased transportation requirements and costs, several factors must be considered. How well are companies positioned to handle increased vaccine distribution complexity and costs? How will changes interrupt a company’s marketing and sales networks? How will consumer buying habits change?

Sinovac senior executives believe that Sinovac has an edge over the competition in several areas. First, the Company has always been a shareholder-owned entity. Sinovac senior management team is better prepared and more experienced at adapting to regulatory change than state-run companies. Second, the marketing and sales team that Sinovac has in place is better prepared than the competition to adapt to technological, market, and regulatory changes, including the implementation of the new vaccine distribution system.

At Sinovac, sales teams have two major responsibilities; product sales and product training. Sinovac’s sales teams are trained in four essential areas: product sales, product training,technical support,and service. They provide vaccine training to government officials, doctors and professionals of CDCs, and hospitals, and they also conduct sales with these same clients.

Sinovac has quickly geared up to meet the larger distribution operations requirements by increasing its existing successful marketing and sales structure. In March of 2005, Sinovac sponsored its largest Medical Training and Marketing Conference, which brought top medical professionals and hepatitis specialists from across China, and about 130 doctors from China's Provincial and District CDCs to the Huang Mountain Resort in Anhui Province, China.

After the conference, these professionals, who recommend vaccines to their clients, agreed that the Chinese vaccine industry would begin promoting the use of inactivated and combined Hepatitis A vaccines such as Sinovac's Healive(TM) and Bilive(TM). Sinovac is currently the only domestic manufacturer and license holder of an inactivated Hepatitis A vaccine and combined Hepatitis A & B vaccine in China.

Training and marketing conferences, such this year’s Huang Mountain Conference, provide an excellent platform for Sinovac’s sales personnel to build good relationships with the different levels of CDC professionals and doctors. Sinovac believes, under the new regulation, its sales personnel will be even more effective, due to their previous efforts of building close relationships with the staff of regional and local CDCs and hospitals.

Superiority of Inactivated Hepatitis A Vaccines over Live-Attenuated Hepatitis A Vaccines

The success of immunization programs is dependent on the maintenance of vaccine potency. To achieve this, the recommended temperature must be maintained during storage and distribution to avoid cumulative irreversible
loss of potency from thermal abuse (heat or freezing). The ‘cold chain’ is the system of transporting and storing vaccine at 2–8ºC / 35.6–46.4ºF from the place of manufacture to the point of vaccine administration (the patient).

Sinovac’s inactivated hepatitis A vaccines can be stored and transported at temperatures ranging from 2–8ºC / 35.6–46.4ºF , and must be protected from direct sunlight and kept from freezing. The shelf life is rated at 30 months. Although these environmental controls are the same as live attenuated hepatitis A vaccines, studies show that inactivated hepatitis A vaccines are more stable and do a much better job of retaining their efficacy when environmental conditions go beyond what is prescribed.

Due to Sinovac’s advantages in transporting and storing inactivated hepatitis A vaccines, order No. 434 gives the Company additional advantages over domestic competitors in distribution, sales and marketing. In addition to this, the shelf life for Sinovac’s inactivated vaccines is rated at 30 months, while live attenuated vaccines shelf life is rated at 6 months.

Safe Harbor Statement

THIS INFORMATION PAPER MAY INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE UNITED STATES SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO ACHIEVING CORPORATE OBJECTIVES, DEVELOPING ADDITIONAL PROJECT INTERESTS, SINOVAC'S ANALYSIS OF OPPORTUNITIES IN THE ACQUISITION AND DEVELOPMENT OF VARIOUS PROJECT INTERESTS AND CERTAIN OTHER MATTERS. THESE STATEMENTS ARE MADE UNDER THE "SAFE HARBOR" PROVISIONS OF THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.

SOURCE: Sinovac Biotech Ltd.
Craig H. Bird
Investor Relations
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