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Private players are set to be allowed in the distribution of "commercial" vaccines from next year, marking the marketization of the sector which will lead to higher tax revenues and better efficiency.

A security guard monitors travellers' temperatures with a thermal-imaging device at a train station in Beijing last week. SARS has led to a big surge in demand for flu vaccine. [Reuters]

The current widespread shortage of flu-vaccine shots in China and the need for a more efficient vaccine supply system for infectious diseases such as SARS (severe acute respiratory syndrome) are compelling the central government to marketize distribution.

Government public-health organizations will next year start retreating from the sector they have monopolized for decades, according to new polices the State Drug Administration, the Ministry of Public Health and the State Tax Administration are jointly drafting.

The policies, expected to be announced next year, will close a huge income avenue enjoyed by these organizations, according to sources close to the policy-drafting panel who did not want to be identified - they grab tax-free revenue of hundreds of millions of yuan from flu vaccine alone each year.

More than 30 provincial-level disease-control centres owned by the government will be stripped of their privilege as non-compulsory or commercial-vaccine (such as for flu) suppliers, the sources said. Thousands of grassroots disease-control centres will for the first time enjoy the freedom to purchase vaccines themselves.

However, compulsory vaccine shots for children, such as for Hepatitis B, Meningitis B, mumps and smallpox, will continue to be provided by the government organizations.

The State Drug Administration will regulate the production, storage, transportation and sales of vaccine shots.

Industrial insiders hail the proposed reforms as "an important first step" which will lead to the complete opening of the sector and predicted the birth of market-oriented domestic vaccine producers and specialized vaccine distributors with their own sales networks.

Plugging loopholes

The drawbacks of monopoly distribution by government-run disease-control centres have become increasingly conspicuous in recent years, industry experts noted. The most striking are the heavy losses in taxes and the slow reaction of the centres to the changes in market demand.

Under the current vaccine distribution system, which retains strong characteristics of the planned economy, disease-control centres are the only players in the vaccine circulation business.

Producers can sell their vaccine shots only to provincial-level centres, which pass the products to city-level, then district level centres and finally to the hospitals. During the process, vaccine prices go up step by step, creating huge profits for the centres.

The centres, originally funded by the government to handle compulsory vaccine shots, do not have to pay taxes on their earnings. And with the fast- growing demand for commercial vaccine shots, there have appeared huge taxation loopholes.

It is estimated that the disease-control centres can make a profit rate of 30-40 per cent by distributing imported commercial vaccines and even 50 per cent on similar products made in China.

Analysts said marketization is expected to create not only promising business opportunities for non-government investors but also handsome tax revenues for the government.

More importantly, analysts noted, under the current system, vaccine shot manufacturers do not set production according to market demand but according to orders by the disease-control centres.

The current nationwide shortage of flu vaccine is the direct result of the distribution system's slow reaction to market fluctuations and step-by-step distribution mechanism.

Because of strong central government advocacy as one of its efforts to block the reappearance of SARS, national demand for flu vaccine is expected to top 15 million shots this year, far more than the 6 million last year.

However, the disease-control centres ordered only 10 million shots and were caught unprepared for the surge in demand.

As a result, many cities and provinces, including Beijing, Henan, Hebei, Shandong, Liaoning and Guangdong were hit by a shortage, which led to public unhappiness.

China started importing flu vaccine shots in 1995, but sold only half of the 2,000 shots ordered. In the same year, 77 million such shots were sold in the United States.

Mushrooming market

Vaccine production and marketing is a fast-growing industry globally and the growth rate in China is far above the world average.

A man receives a flu-vaccine shot last month in Yangquan, Shanxi Province, as winter usually claims more flu victims. [newsphoto.com.cn/file]

According to estimates by Merrill Lynch, global sales of vaccine shots will hit US$10 billion in 2006 compared with US$5.4 billion in 2001. Sales of flu vaccine are expected to soar and reach US$2 billion in five years.

China, as a new market for vaccine products, boasts enormous sales potential, said Wang Hexing, a senior researcher with the China Disease Prevention Society.

Sales growth of commercial vaccine shots in China is expected to increase by 15 per cent annually, higher than the 10 per cent rise worldwide. According to conservative estimates, the market now is already worth between 2 and 3 billion yuan (US$242-363 million).

The SARS epidemic, which claimed 774 lives worldwide earlier this year, further fuelled individual interest for various vaccine shots.

Demand for different vaccine shots in Beijing, for instance, went up by 10 times since the outbreak of SARS, government statistics indicate.

A large number of research centres are studying and testing SARS vaccines, attracted by a large potential market which, experts forecast, could be as high as 10 billion yuan (US$1.21 billion).

Wang said there are three major elements supporting long-term fast growth of vaccine sales in China.

n Huge population. With a population of 1.3 billion, China sees the birth of 15 million new babies a year and an increasing number of the aged. They are the two largest groups of vaccine-shot consumers.

n Government support. The Chinese Government has listed disease prevention as a key sector of the country's pharmaceutical industry development plans and the reforms will further accelerate demand growth.

According to Wang Hexiang, former minister of public health, the central government, even before the SARS outbreak, had decided to inject 1.2 billion yuan (US$145 million) this year to set up a nationwide disease prevention system; in 2002, the input was only 800 million yuan (US$96.4 million).

Government funding for research on a SARS vaccine alone has already reached 200 million yuan (US$24.2 million).

Realizing the potential investment returns in the vaccine industry and the huge losses in life and economic activity due to SARS, the government is making unprecedented efforts to promote public awareness of vaccine.

The Ministry of Public Health issued the first-ever guidelines to promote vaccine shots in early September, giving detailed instructions on the use, distribution and publicity of flu vaccine shots.

Wang said the popularization of vaccine injections has produced remarkable economic and social returns and saved enormous medical resources.

For instance, an input of one US$1 in the prevention of measles can save US$12 in government and individual spending.

n Individual interest. Rising incomes have pushed up the consumption of commercial vaccine shots, which are not covered by medical insurances.

The vaccine market has also attracted top international producers to the country.

Glaxo SmithKline, Aventis, Wyeth and Merck, the four largest vaccine manufacturers which control 85 per cent of the market in the world, have either launched production facilities in China or are considering doing so.

Aventis was the first to enter China with the establishment of a joint venture in Shenzhen providing vaccine shots for HIB, Hepatitis A, pneumonia and flu.

Meanwhile, Glaxo SmithKline invested US$30 million to start constructing the first phase of its joint venture in Shanghai earlier this year.

Bothersome bottlenecks

Compared with global big names, domestic vaccine producers are small in production scale, backward in production technology and high in operation costs, said Wang Jian, a researcher with Peking University.

Demand for different vaccines in Beijing has gone up by 10 times since the outbreak of SARS. [newsphoto.com.cn/file]

These weak points, despite the 50-70 per cent lower prices, put them at a disadvantageous position, especially after the country completely opens vaccine distribution to market forces in the long term.

For instance, flu shots produced by domestic manufacturers have stronger side effects and are suitable for people aged 12 and above, while similar shots provided by international giants can be used on children above six months old.

Although sales of commercial vaccine shots made by local manufacturers are between 500 million and 600 million yuan (US$60.5-72.6 million) a year, higher than the roughly 200 million yuan (US$24.2 million) by foreign suppliers, domestic producers enjoy very thin profits.

For instance, Tiantan Biological, one of the key domestic vaccine producers, has to set aside 70 per cent of its production capacity to make compulsory vaccine shots and compete with foreign producers with 30 per cent of its production capacity.

More importantly, analysts noted, the real bottleneck blocking a faster expansion of national vaccine demand is financing. Relying only on individual spending on commercial vaccine shots is inadequate to tap the huge potential.

For instance, even if the annual national consumption of flu vaccine reaches 30 million shots, it only covers 2.5 per cent of the population, or 22 per cent of people above 60. In contrast, 26 per cent of the US population and 20 per cent of the South Korean people take flu shots annually.

However, unlike in countries like the United States where spending is covered by medical insurance, consumers in China have to dig into their own pockets to take commercial vaccine shots.

Fortunately, the Beijing municipal government has allocated special financing to provide flu shots to residents on minimum living expenses. The example, if followed by other relatively-rich regions in China, can strongly push up vaccine consumption.

Nonetheless, medical experts are calling the government and insurance companies to include the costs in people's medical insurance, which, they said, is the only way to boost vaccine consumption in the long term and minimize the country's heavy spending on medical products and services.

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