The dawn of Chinese vaccines is quietly approaching

Ask AI · Why does Billion-Yuan Loss at Zhifei Biological Indicate a Industry Turning Point?

Introduction

THECAPITAL

With the help of engineer dividends, Chinese vaccines will eventually become the most competitive force globally.

This article is 2,398 words, about 3.4 minutes reading time.

Author | Lin Pharmacist

Source | Yiyao

With the support of engineer dividends, Chinese vaccines will eventually become the most competitive force worldwide.

Five years after the high-level collapse, expectations for Chinese vaccine stocks have bottomed out. It can be said that the industry’s fundamentals are as bad as they can get. But there is an old Chinese saying, “When adversity turns to prosperity,” and when confidence hits rock bottom, a reversal may be quietly beginning.

In June last year, in the article “Chinese Vaccines Enter a New Cycle,” we predicted that Chinese vaccine stocks had reached their bottom. Earlier this year, the absolute leader Zhifei Biological projected a loss of 10 billion yuan in 2025. This news, seen by most investors as a major negative, in our view, is actually an important signal of China’s vaccine industry rebirth.

As the saying goes: When a giant whale falls, all things are born. The popularity of Merck’s HPV vaccine brought Zhifei Biological unprecedented attention beyond its own value, but this does not conform to the development pattern of the vaccine industry. If all companies compete for MNC agency rights, who will focus on R&D? The future of China’s vaccine industry must not rely on imports. To rise globally, Chinese vaccines must first sell their own products.

When Zhifei Biological’s valuation returns to a normal range, investor focus will gradually shift to R&D. In this process, new vaccine leaders will inevitably emerge. Who will become the new leader of Chinese vaccines? R&D capability is undoubtedly the core.

What kind of business is vaccines?

Vaccines are a business with front-loaded core costs; current profits are not the main indicator of a company’s development.

Unlike innovative drugs that rely on continuous breakthroughs, vaccines emphasize stability. The largest cost in vaccine production is R&D. If a vaccine company cuts R&D investment, it can easily boost profits, but this is not beneficial for long-term development. Therefore, evaluating a vaccine company’s industry competitiveness should focus more on pipeline layout and progress, rather than current profits.

As long as a vaccine is successfully launched, it can generate a continuous cash flow. Many vaccines have a lifecycle of decades, so the richness of a company’s pipeline is essentially its performance moat.

Fundamentally, competition among vaccine companies is about management’s strategic planning ability. Since vaccine incubation cycles are very long—8 to 10 years is normal—the expected timeline for a single vaccine is predictable. How to strategically build a competitive pipeline matrix is what management should consider.

Of course, the development path of vaccine companies is not limited to this. Zhifei Biological previously earned huge profits through exclusive agency rights for Merck vaccines. While the agency model avoids the industry’s largest R&D costs, it also comes with procurement contract constraints.

The reason why Zhifei Biological is expected to lose 10 billion yuan in 2025 is mainly due to the procurement agreement signed with Merck in January 2023. The contract stipulated the purchase of 97.957 billion yuan worth of HPV vaccines from mid-2023 to 2026. Essentially, this procurement agreement is a performance gamble: if domestic vaccine companies cannot meet performance targets, they must bear the “bottom line.” Although the parties later adjusted the agreement, Zhifei Biological still suffered huge losses.

Fortune and misfortune are intertwined. The agency model, though capable of generating substantial current profits, also carries risks of underperformance. If agencies could truly “sit back and win,” what reason would vaccine companies have to invest in R&D?

Caution in Innovation

R&D does not equal innovation. The vaccine industry emphasizes engineering capability more and should not blindly pursue First-in-Class products.

Innovative drugs aim to create blockbuster products, while vaccine companies pursue steady progress. Many popular vaccines in China are follow-ups to mature Western products; compared to the four major international vaccine giants, Chinese vaccine companies still have a significant gap in competitiveness. Currently, successfully localizing Western vaccines is already a victory.

This is mainly because vaccine development involves many validation steps, and except for some emergency infectious disease vaccines, there are no fast-track approval channels. For an industry that requires long-term accumulation, strategic errors cannot be remedied by tactical adjustments.

Of course, this does not mean First-in-Class products are meaningless. Instead of risking everything to create new markets, it’s better to follow industry leaders and leverage China’s engineer dividends to compete globally. Essentially, China’s vaccine industry has engineer dividends similar to those in China’s CXO sector, but currently, the competitiveness of Chinese vaccine companies is still weak, and these dividends are temporarily masked by intergenerational gaps.

As vaccine varieties continue to evolve, mainstream vaccines are moving toward multivalent and multi-antigen formulations. The future core competition in the industry will be the ability to develop multivalent and multi-antigen vaccines.

Under this industry trend, to develop higher-level vaccines, companies must first have the R&D capability for basic vaccines. For Chinese vaccine manufacturers, there are still significant gaps in these foundational vaccines. Therefore, many seemingly unprofitable vaccine categories actually hold strategic importance for breaking through, and their layout will determine the future ceiling of vaccine companies.

As long as Chinese vaccine companies can keep pace with global giants and foster a competitive environment, China’s engineering advantages will gradually emerge. Therefore, what China urgently needs to catch up on is not First-in-Class capability but quickly closing the gap in basic vaccine varieties and leveraging engineering advantages to win.

Valuation Logic of Vaccine Stocks

Based on the development characteristics of the vaccine industry, we believe the most suitable valuation method for vaccine companies is PS (Price-to-Sales).

Since vaccine R&D costs are fully front-loaded, current profits are not particularly meaningful. As long as the company’s basic cash flow can cover R&D costs, the business model can be sustained. Many investors worry about price wars in the vaccine industry, but this actually reflects the industry’s engineering capability—how efficiently it can produce reliable, low-cost vaccines. This is the core competitive moat of vaccine companies.

Vaccine companies with weak competitiveness, due to insufficient cash flow to support long-term R&D, naturally cannot survive, which aligns with the natural selection principle. Besides price wars, in 2026, vaccine products will face a tax rate adjustment, no longer enjoying the simplified 3% tax policy, replaced by the standard 13%, which will also accelerate the exit of marginal vaccine companies.

Gradually, the industry’s competitive threshold is rising, and domestic market profits will be affected. This will push vaccine companies to seek more opportunities overseas. We see that domestic leaders like Wantai Biological, Kangtai Biological, and Wansheng Biological are expanding into international markets to seek secondary growth drivers.

Vaccine business is not for everyone, especially in the early stages, where a large enough market is essential—this is one of China’s advantages. While Japanese pharmaceutical companies are highly competitive globally, they have little presence in vaccines, mostly relying on imports from Europe and America.

In summary, the competition Chinese companies face in the vaccine field is much lower than in the broader pharmaceutical industry. Chinese vaccine companies only need to follow the development path of industry giants, and with engineer dividends, they will eventually become the most competitive globally. China’s vaccine companies, accustomed to competition, are fully capable of putting pressure on the four major vaccine giants.

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