Investors lose faith in Big Pharma as China’s vaccine scandal recalls memories of product safety woes

PUBLISHED : Monday, 23 July, 2018, 1:29pm
UPDATED : Monday, 23 July, 2018, 11:38pm

Chinese pharmaceutical stocks plunged, as an unfolding safety scandal over the nation’s vaccines reminded investors of the series of food and product recalls from a decade ago that decimated China’s reputation as the world’s factory - an industry damage that and took years to repair.

The Health Care Index, which tracks the performance of 22 pharmaceutical stocks on the CSI 300 Index, plummeted as much as 5.7 per cent before clawing its way back to close 4.1 per cent lower in an advancing market, marking the biggest single-day decline since May 29.

Chinese Premier Li Keqiang over the weekend ordered a thorough investigation into the country’s vaccine producers after a publicly traded drug maker was found to have falsified data on its production and quality inspection.

Li ordered the State Council, or China’s cabinet, to immediately send investigators to scrutinise the production and sales of all vaccines throughout the country, according to a statement. The government would severely punish anybody who was found to have broken laws, or to have been derelict in their duties, according to the statement.

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“It will have quite a significant impact on the industry, and will probably cause distrust in the industry and the sector’s regulation,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. “Investors will turn cautious toward the pharmaceutical sector, particularly the biological companies. The industry will be in for a major shake-up.”

The harsh crackdown follows the revelation that Shenzhen-listed Changsheng Bio-technology had fabricated the production and inspection data of its rabies vaccines. Drugs made by the company, which is based in northeastern China’s provincial capital of Changchun, for treating infant coughs and colds also failed tests by the state drug administration. The company was ordered to halt production, and had to recall all of its unused vaccines.

Changsheng’s shares fell by the 10 per cent daily limit to 13.05 yuan on Monday after trading was halted in the morning. It was the sixth straight day that the stock had fallen by that magnitude, erasing 11.2 billion yuan (US$1.65 billion) in value from its market capitalisation.

China’s manufacturing industry was rocked by a series of safety recalls a decade ago. Infant milk powder was laced with melamine, toothpaste contained formaldehyde, while children’s toys were painted with excessive levels of lead. Even exported pet food had contaminated gluten that sickened thousands of cats and dogs that ingested it.

The spate of scandals that began in 2007 hurt the confidence in the “Made in China” brand, with damage particularly to the dairy industry that took years to rebuild. To this day, a cottage industry thrives where thousands of buyers snap up milk powder, seafood and health supplements from Hong Kong, Australia and New Zealand to supply mainland Chinese customers.

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Investors with long memories would remember the stocks that burned with China’s food safety scandals a decade earlier.

The low-water mark for the scandals was set by Sanlu Group, a state-owned dairy product company, that was found to have added melamine to its infant milk powder to inflate the protein content. The powder led to the deaths of six babies and sickened an estimated 300,000 infants. Former Sanlu chairwoman Tian Wenhua was jailed for life and three other people were given death sentences for their roles in the sale of tainted milk. Shares of China Mengniu Dairy Co. and Inner Mongolia Yili Industrial Group Co., China’s biggest dairy companies, slumped at least 65 per cent in 2008 as the scandal caused a sell-off in the sector.

In 2011, Henan Shuanghui Investment & Development – which subsequently acquired Smithfield Foods of Virginia to become the world’s largest meat processor – bought pigs that were fed an illegal additive to induce the growth of lean meat, according to China Central Television. Shuanghui’s shares fell 20 per cent that year.

“It’s a black-swan event in the pharmaceutical industry,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “We’ve seen sell-offs across the board regardless of whether the company is good or bad, and that’s more due to the sentiment change.”

It is very much a case of deja vu. China’s pharmaceutical industry has been exposed to a slew of scandals recently. Zhejiang Huahai Pharmaceutical, a Shanghai-listed drug maker, found a toxic impurity called N-nitrosodimethylamine (NDMA) in ingredients it exports to medicines for treating hypertension in laboratory tests. The substance, a by-product of industrial processes, is toxic to the liver and classified as a carcinogen for its ability to cause cancer in humans.

The industry-wide drug safety worries have been a setback for stock investors who have loaded up on pharmaceutical companies this year on the bet that earnings growth will accelerate after the government encourages the development of proprietary medicines and cleans up sales channels.

Some were even encouraged by the box office success of the locally made film Dying to Survive - a black comedy billed as the Chinese take on the 2013 Oscar-winning Dallas Buyers Club - about a leukaemia patient smuggling cheap but unverified cancer medicine to China from India.

China’s mutual funds had also bought major pharmaceutical firms’ shares, with stocks in the sector 8.2 percentage points higher than equities in the CSI 300 benchmark at the end of the second quarter, according to Haitong Securities.

Chongqing Zhifei Biological Products, which makes vaccines for pneumonia and rabies, led declines among pharmaceutical stocks on Monday, dropping by its 10 per cent daily limit to 44.10 yuan. Hualan Biological Engineering, which makes serum albumin and other biological products, plunged by 9.9 per cent to 31.32 yuan.

“When this settles down, good companies will stand out,” said Shanshan’s Wu. “In the long run, it’s an opportunity to remove these poor-quality players from the industry.”