The Gardasil® / China Inventory Build Up... Seems Due To Xi's Renewed Efforts To "Crack Down" On In-Country Distributors' Profits -- In Pharma...

As many regular readers well-know, Merck's "In-China" distributor for vaccines is the company imaged at top right of the graphic, called Chongqing Zhifei Biological Products Co. [I won't bore you with the Kanji version of the name -- but we've covered the franchise since 2008 (just search "Gardasil^®" above left).]

Well, it seems that company has been in discussions with state actors in China (Xi's people), about what is regarded as too high a middleman's markup, on the Rahway HPV vaccine. That in turn has led to hospital (and other provider) customers slowing stock-up orders, for Chinese consumers.

And it is not at all clear whether Xi intends to try to nationalize the entire pharma distribution chain/effort, or whether he just wants price breaks -- for government-affiliated purchasers (which would be essentially. . . all wholesale purchasers in China). But it is slowing down the restocking Merck usually sees by mid-year in the country. To be clear, this isn't likely to materially affect Merck's full year profitability, though (if it persists) it may trim about ~$1 billion -- from the ~$63 billion in full year expected sales revenue, for the whole company (net of currency translations). Here's what's known so far (courtesy BioSpace) -- which is to say. . . not much is really known:

. . .On the earnings call, Merck CFO Caroline Litchfield said there was a “significant step down” in shipments from its distributor in China, causing “above-normal inventory levels” of Gardasil. The vaccine’s Chinese distributor, Chongqing Zhifei Biological Products Co., had apparently sold less of the HPV vaccine than in past quarters. . . .

Zhifei, specializes in producing and distributing medicines, particularly vaccines. Zhifei and Merck struck a deal back in 2012 to distribute Gardasil in China, with Zhifei contracting to buy specific amounts of the vaccine, Fierce Pharma reported. Zhifei inked another contract last year to distribute five of Merck’s vaccines, including Gardasil, until 2026, in a deal worth over $14 billion, according to Yicai Global.

Merck CEO Robert Davis said on the earnings call that based on the intelligence that the company gathered, Gardasil’s sales have been affected by China’s anti-bribery and anti-corruption drive. Last year, China started a wide-scale anti-corruption campaign targeting hospitals, the pharmaceutical industry and insurance companies. . . .

But as ever, China is an. . . enigma. The mountains are high, and the Emperor is very far away. That is, just as China officially banned Bitcoin mining over three years ago, as a waste of electricity (a state resource). . . many studies place China as the No. 1 Bitcoin mining producer, to this day -- and accelerating. [The electricity is being tapped "before it reaches any reported metering" that the government in Beijing could monitor.] One can never tell if it is all just state-affiliated actors driving out all non-party competitors.

And that could be the case here -- Gardasil has long been a very robust seller in China, as people there are more likely to see long term effects, from any untreated HPV. [No one can be sure why, that is so -- but it does look like there maybe some genetic components -- of particular suseptibility.] So longer term, Xi will be a buyer of the vaccine -- even if the channel of distribution is being "reformed". Onward. More -- if and when we get more granular clarity. But it should not deeply impact the NYSE trading prices. Cheers.

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