Sinovac Biotech Is The One Chinese Company That Should Be In Your Portfolio

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 |  About: Sinovac Biotech, Ltd. (SVA)
by: Chris Katje

Summary

Sinovac's hand, foot, and mouth vaccine demonstrated 100% effectiveness against hospitalization.

Undervalued pipeline that takes on Pfizer and has huge targeted population numbers.

Fourth quarter heavy in recognized revenue from existing deals.

On February 26th, Sinovac (NASDAQ:SVA) shares were up over 5% after the New England Journal of Medicine published the Phase III results of the company's EV71 vaccine. This vaccine could be the biggest catalyst for shares of Sinovac going forward. The results included a 94.8% rate against EV71-related hand, foot, and mouth disease. The vaccine was also 100% effective against EV71 associated hospitalization and against hand, foot, and mouth disease with neurologic complications.

The important factor here was the 100% efficacy rate against the hospitalization, as this is the main cause for fatalities from the disease. The trial consisted of 10,077 healthy infants aged six months to 35 months of age. Hand, foot, and mouth disease is a huge devastating disease that has killed over 2700 infants in China. From 2008 to 2013, there were nine million reported cases of hand, foot, and mouth disease in China. There have been reported breakouts in China from 1998 to 2008. In 2008, 23 children died during one particular outbreak. Other nearby countries like Malaysia (1997), Taiwan (1998, 2000, 2001), Australia (1999), and Singapore (2000) have also seen hand, foot, and mouth disease outbreaks.

The follow-up to the Phase III results is on-going and the vaccine could be approved soon. There is currently no commercialized vaccine available in China. The company maintains that it is well prepared for commercialization of the vaccine and had this to say, "We are pleased to see that our vaccine is able to provide protection to infants and children against the EV71-associated HFMD."

The risk for Sinovac and its investors here is there are several competing drugs in trials throughout China. The 94.8% and 100% rates will be the ones to watch as competitors present their numbers. If another company can report rates in the 90%, they will likely also see approval and compete directly against Sinovac. If the trial results from competitors are not strong, shares of Sinovac could once again rally.

China National Biotec Group and Kunming Institute of Biological Products both have government sponsored trials on hand, foot, and mouth disease vaccines. Results from those trials are expected later in 2014. A Reuters article suggests the key number to watch is the efficacy rate. If either competitor can post a number above 90%, it would seriously compete with Sinovac. If both companies show efficacy of under 70%, Sinovac would likely dominate the market in China.

Sinovac's 94.8% efficacy will likely put it at the top of the class and its impressive 100% against hospitalization will likely top rivals. There is an estimated need of 10 million vaccines a year to treat hand, foot, and mouth disease. This leaves a huge opportunity for all three competing Chinese companies, but a sure win by Sinovac would make this vaccine a blockbuster.

Sinovac has several approved vaccines and a rich pipeline of vaccines that could power revenue and share higher. The company sells vaccines in China and also exports vaccines to Mongolia, Nepal, and the Philippines. Recently, Sinovac was approved to sell seasonal flu vaccines in Mexico. Here is a look at the approved vaccines from Sinovac:

· Healive: first Hepatitis A vaccine developed in China

· Bilive: first and only Hepatitis A&B vaccine developed in China

· Anflu: influenza

· Panflu: first and only Chinese developed H5N1 influenza vaccine

· Panflu.1: first influenza A vaccine approved in the world and China

Sinovac's pipeline remains undervalued, aside from the EV71 drug. Here is a look at the company's pipeline:

· EV71: hand, foot, and mouth disease, target population of 80 million children

· Pneumococcal Polysaccharides vaccine: target population 350 million aged 50+

· Pneumococcal Conjugate vaccine: target 32 million children

· Chickenpox: target 10 million annual doses

· Rubella vaccine: target population 30 million

The catalyst for Sinovac is the results from EV71 treating hand, foot, and mouth. However, take a look at some of those target populations. The two pneumococcal vaccines would treat huge populations of children and elderly. These two drugs will also compete against Prevnar, a vaccine from Pfizer (NYSE:PFE). Pfizer has a good hold in several international markets, including China. Sinovac could cut into that share and end up as a possible joint venture for the large American drug company.

Prevnar 13, a vaccine to treat pneumoccocal conjugate from Pfizer, is the most widely used vaccine in its field. The vaccine saw sales of $3.72 billion in 2012. Analysts see the vaccine posting sales of $6.75 billion by 2018 as Pfizer works to expand the drug's labels and approved country list. The vaccine is available in over 110 countries and has labels to treat adults and children as a preventative measure. With a huge population in China, Sinovac could have a blockbuster vaccine similar to Prevnar in its pneumococcal vaccine.

What I like about the company is its portfolio of vaccines continuing to provide balance and sales growth along the way. Here is a look at sales for the company's vaccines in the last quarter and over the first nine months of the fiscal year:

Q3 2013

% of Sales

9MO 2013

% of Sales

Healive

$5.3 million

23.8%

$18.5 million

37.2%

Bilive

$5.4 million

24.3%

$17.9 million

36.2%

Anflu

$8.4 million

38.1%

$8.7 million

17.6%

Rabend

$54,000

0.2%

$0.1 million

0.3%

Mumps vaccine

($0.6 million)

-2.6%

$0.7 million

1.5%

Panflu

$3.6 million

16.2%

$3.6 million

16.2%

Click to enlarge

Over the last nine months, two vaccines (Healive and Bilive) made up over 73% of Sinovac's total sales. However, as you can see from the chart, two upcoming vaccines (Anflu and Panflu) posted strong numbers in the third quarter and ended up each being more than 15% of total sales after the strong quarter.

In the third quarter, total revenue increased 54.5% to $22.1 million. The growth was led by sales of Anflu, which were up 121% over the prior year. Gross margin increased to an impressive 72.1%, from last year's 52.6%. This amount was increased by a lower rate of vaccines returned to Sinovac. Vaccines expire after a certain time period and if they are not used, they are returned for refund to Sinovac.

For the full year, Sinovac expects revenue of $70 million. More importantly, the company expects net income to hit a record and be a positive number. This comes as a pleasure to shareholders, after three straight years of net losses.

The question and answer segment of the third quarter earnings call provided several highlights including:

· Tender with city of Beijing for flu vaccines is for a total of 400,000 doses of Anflu. In quarter three, 300,000 were shipped and were reported in the earnings numbers. The remaining 100,000 will hit the fourth quarter.

· A tender with the Jiangsu region is for 900,000 doses

· In the fourth quarter, Sinovac will recognize two million doses of H5N1 vaccine, and will represent $7 million in revenue

· Fourth quarter gross margin expected to be in the 50% to 65% range

· Hope to launch vaccines in Mexico soon

· Other areas targeted for future growth include India and some parts of South America

There are several risks to investing in Sinovac Biotech. The key risk is the company is a Chinese vaccine company, where the rules are different for approvals. This could limit the potential and expansion into other countries with new vaccines. Sinovac faces competition from both Chinese drug companies and several international pharmaceutical giants like Pfizer, Sanofi, and GlaxoSmithKline.

Another huge risk is the price surge in Sinovac's shares. In 2013, shares of Sinovac increased 99%, almost doubling in a 12-month time. Currently, shares are up 8% in 2014, but trade slightly below their 52-week high of $7.23. The company also sports a market capitalization of $362 million, despite projected revenue of $70.2 million in fiscal 2013. Investors may eventually send shares down to provide a more reasonable valuation.

Despite the risks, I believe Sinovac offers a great investment for those looking for exposure to vaccines, China, and high growth. The company is expected to grow revenue at double-digit rates the next two years. The pipeline remains strong and the company's vaccines continue to see growth in China and newer regions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SVA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.