What You Need to Know About the Substandard Vaccine Scandal

Two batches of substandard children's vaccines, totaling more than 650,000 doses, have been found in mainland China. Nine months after the official announcement, the authorities still have not disclosed the production records or recall status of these vaccines, and Chinese parents are deeply worried. Over the past weekend, the incident dominated almost all mainland media and social platforms.

The Background to the Substandard Vaccine Incident

In November 2017, the China Food and Drug Administration (hereinafter the "Drug Administration") issued a notice stating that two batches of DTaP (diphtheria, tetanus and pertussis) vaccines produced by Changchun Changsheng Biotechnology Co., Ltd. (hereinafter "Changchun Changsheng") and Wuhan Institute of Biological Products Co., Ltd. (hereinafter "Wuhan Bio") did not meet the standard for potency. Vaccine potency is an indicator for predicting the protective effect of a vaccine. A vaccine with non-compliant potency may fail to immunize, and thus fail to prevent the corresponding disease.

DTaP is a combined vaccine against three diseases: pertussis (whooping cough), diphtheria and tetanus. Under China's national immunization schedule for children, infants must receive it after birth, between the ages of 3 months and 6 years. Children entering public primary schools in China must submit a Child Immunization Certificate (a record of a child's vaccination) before enrolling, so that authorities can check whether they have received required vaccines, including DTaP, as prescribed.

The two non-compliant batches totaled more than 650,000 doses. Of Changchun Changsheng's vaccines, apart from 186 doses remaining in inventory, all 252,600 doses went to the Shandong Provincial Center for Disease Control and Prevention. Of Wuhan Bio's vaccines, 190,520 doses went to the Chongqing Center for Disease Control and Prevention, and 210,000 doses went to the Hebei Provincial Center for Disease Control and Prevention.

How many of these 650,000 substandard doses were injected into children? Nine months after the notice, the Drug Administration has still not disclosed any information, including production records or recall status.

At the same time, Changchun Changsheng was exposed for another quality problem. On July 15, 2018, the National Medical Products Administration issued a notice stating that Changchun Changsheng had falsified records during the production of freeze-dried human rabies vaccine, and ordered it to stop producing rabies vaccine.

On the evening of July 19, Changsheng Biotechnology issued another announcement saying that its wholly owned subsidiary, Changchun Changsheng, had received an administrative penalty decision from the Jilin Provincial Drug Administration. The DTaP vaccines produced before the incident would be treated as substandard drugs; the 186 doses in inventory would be confiscated, the illegal gains would be confiscated, and a fine of about 3.44 million yuan would be imposed.

Strangely, the Jilin Provincial Drug Administration had opened an investigation into the DTaP vaccine problem as early as the end of October 2017, yet it took nine months to announce the penalty decision.

How Does China's Vaccine Regulatory System Work?

In China, vaccines are mainly divided into two categories: Category I and Category II.

Category I vaccines are provided free of charge by the government to citizens and must be administered to all children of the appropriate age. Provincial governments budget for and tender their procurement, and prices differ little among manufacturers. Once procurement is complete, the vaccines are uniformly distributed to vaccination sites, where eligible children can receive them free of charge. There are 11 Category I vaccines. In addition to the DTaP vaccine involved in this incident, they include the BCG vaccine, polio vaccine, hepatitis B vaccine, measles-rubella vaccine and measles-mumps-rubella vaccine, all of which newborns must receive.

Category II vaccines are paid for by citizens, who receive them voluntarily, and are purchased by vaccination sites on their own, with relatively free pricing. One type contains components of Category I vaccines, such as imported hepatitis B vaccines and inactivated Japanese encephalitis vaccines. The other type includes other Category II vaccines, such as varicella and influenza vaccines. The rabies vaccine that Changsheng illegally produced this time belongs to the latter type.

All vaccines must undergo batch release testing before they go on the market. Batch release is one of the six national vaccine regulatory functions required by the WHO, and it is overseen by the National Medical Products Administration. The actual batch release work is carried out by the National Institutes for Food and Drug Control (hereinafter "NIFDC"). In addition, Beijing, Shanghai, Guangzhou, Sichuan, Hubei, Gansu and Jilin each have one provincial drug inspection institution authorized by the Drug Administration to conduct batch release.

Regarding the two batches of DTaP vaccines with problems, a former spokesperson of the National Food and Drug Administration explained at the time that, under the relevant rules, the NIFDC tests every batch submitted by manufacturers for batch release on safety indicators, and that for potency, in line with international practice, 5% of samples are randomly selected for testing. "A check of the batch release records shows that these two batches met the safety standards," while the potency indicators were "not within the scope of sample testing."

A person from a major domestic vaccine manufacturer told the media frankly that vaccine companies and relevant national agencies operate a sampling system, which has two meanings: first, only some batches among those submitted are sampled; second, only some test items are sampled.

How Many Vaccine Incidents Has China Had in Recent Years?

Despite claims of a strict batch release system, Chinese vaccines have repeatedly run into problems in recent years.

Why Do Vaccine Problems Keep Occurring?

First, penalties for illegal companies are too light and are completely out of proportion to their illegal gains. Take this incident as an example: Changchun Changsheng produced about 250,000 doses of the problematic DTaP vaccine. Under the Drug Administration Law, fines are imposed at three times the value of illegally produced or sold drugs; for substandard drugs mainly used by pregnant women, infants and children, penalties within the range should be heavier. The Jilin Provincial Food and Drug Administration did impose a fine of three times the value, but the total fine amounted to only 3.4429 million yuan.

CCTV Finance commentators questioned whether the figure was adequate: Changsheng Biotechnology had revenue of about 200 million yuan in the first half of the year and profit of 140 million yuan, so the fine amounted to only 1.2% of its annual profit. Commentator Yan Xiaofeng asked what effect such a one-off punishment could possibly have. He argued that a penalty of this size can easily be taken by the public as an encouragement, and Changchun Changsheng's repeated offenses are clear proof: it was investigated again and again, and kept falsifying.

Second, there are objective blind spots in food and drug regulation. After the 2016 Shandong vaccine incident, Li Guoqing, then director of the Drug Chemistry Supervision Division of the State Food and Drug Administration, revealed that there were fewer than 500 people in China qualified to conduct drug inspections, while there were more than 5,000 drug manufacturers and 400,000 drug retailers, making comprehensive supervision very difficult.

In addition, collusion between officials and businesses has surfaced from time to time. Ma Liang, a researcher at the National Academy of Development and Strategy of Renmin University of China, pointed out that a closer look at the state-owned enterprise reform and market listing process of Changchun Changsheng reveals clear interest transfers and irregular operations, yet relevant regulators turned a blind eye. In just three years, Changchun Changsheng's market share in rabies vaccines rose from less than 4% to 28%. It may have obtained regulatory approvals through various special means and produced multiple vaccines with a market-monopoly character. Such cases are not without precedent. Yin Zhanghong, former director of the Biologics Division of the Registration Department of the National Medical Products Administration, held great power over vaccine approvals, yet in exchange for bribes of more than 3 million yuan, helped several drug companies, including Yunnan Walvax Biotechnology Co., Ltd. and Liaoning Chengda Biotechnology Co., Ltd., with drug filings and approvals.

What Kind of Company Is Changchun Changsheng, the Company at the Center of This Incident?

Changchun Changsheng was founded in August 1992. It has six varieties of Category I and Category II vaccines, is China's second-largest rabies vaccine company, and ranks among the top three in influenza vaccines. Its batch release volumes were 5.77 million doses for Category I vaccines and 10.11 million doses for Category II vaccines. In 2017, Changchun Changsheng also received government special subsidies for producing rabies and DTaP vaccines.

In July 2015, Changsheng Biotechnology gained a listing on China's capital markets by taking over the shell of Jiangsu-listed "Huanghai Machinery." In 2016, following the Shandong vaccine incident, the authorities revised the Regulations on Vaccine Distribution and Immunization Management to remove intermediaries from vaccine distribution, allowing manufacturers to sell vaccines directly to disease control and prevention institutions. Overnight, vaccine distribution shifted from a model that was "mainly distributor sales, supplemented by direct sales" to a "direct sales model." Changchun Biotech benefited greatly: in 2017, its vaccine sales were about 1.5 billion yuan, with net profit of 566 million yuan, and sales revenue rose 51.67% year on year.

Changchun Changsheng, which grew strong along this path, has a history full of misconduct.

1. Suspected Embezzlement of State Assets in the Privatization Process

Changchun Changsheng was once the core asset of Changchun High-Tech, a listed state-owned enterprise.

In 2003, the board of Changchun High-Tech planned to transfer all of its equity stake in Changchun Changsheng. Gao Junfang, then vice chairman of Changchun High-Tech and chairman and general manager of Changchun Changsheng, acquired 17.34 million shares of Changchun Changsheng at 2.4 yuan per share, accounting for 34.68% of the total share capital. The listed company Yatai Group acquired 12.5 million shares, accounting for 25%. The appreciation rate of the assets in this transfer was only 3%, and the appreciation rate of net assets was only 8%.

At that time, a biopharmaceutical company said it was willing to acquire all of Changsheng Biotechnology's shares at 3 yuan per share, but was not given a chance to take part in the acquisition, which caused a considerable uproar. Under pressure, Changchun High-Tech amended the transfer contract in April 2004, raising the transfer price to 2.7 yuan per share. The shares acquired by Jilin Yatai Group were increased to 17.34 million, accounting for 34.68% of Changsheng Biotechnology's total share capital, while Gao Junfang's acquisition was reduced to 12.5 million shares, with a transfer amount of 33.75 million yuan.

However, according to the company's annual reports for 2001 and 2002, Gao Junfang's annual income was only 50,000 to 80,000 yuan. How could she pay the acquisition price of nearly 40 million yuan? Gao explained that she borrowed the money from relatives and friends.

In addition, a review of Changsheng Biotechnology's annual reports shows that from 2000 to 2002, the company's revenue and net profit grew rapidly, but in 2003 both operating revenue and net profit suddenly fell sharply. Some media questioned whether this was a deliberate suppression of performance to facilitate the acquisition.

After all, Changchun Changsheng's annual report stated that it had achieved encouraging results in standardized management in 2002, that its hepatitis B DNA vaccine under development had been listed as a provincial and municipal science and technology innovation project by the Ministry of Science and Technology, and that its purified human rabies vaccine had been named a 2002 national key new product plan project by the Ministry of Science and Technology, the Ministry of Foreign Trade, the State Environmental Protection Administration and other departments.

In 2006, Yatai Group sold its shares to Gao Junfang at 2.8 yuan per share and exited Changsheng Biotechnology. That year, Changsheng Biotechnology's net profit had already grown from 11.47 million yuan when Yatai first came in to 37.65 million yuan.

2. Bribery in Vaccine Sales

Performance data show that Changsheng Biotechnology's R&D investment in 2017 was 122 million yuan, accounting for 7.87% of operating revenue, a pitiful share compared with its peers. Take vaccine maker Walvax Biotechnology as an example: its R&D investment in 2016 and 2017 was 311 million yuan and 333 million yuan, accounting for 52.61% and 49.87% of revenue respectively.

Where did Changsheng Biotechnology's money go? Its financial statements show that sales expenses accounted for 60.27% of its total costs. In 2017, Changsheng Biotechnology had only 25 salespeople, yet its sales expenses reached 583 million yuan, or 23.3185 million yuan per salesperson on average. Of this, 442 million yuan was "promotion service fees," which subsidiary Changchun Changsheng paid to promotion service companies. In addition, meeting expenses reached 72.84 million yuan, a surge of 2,284% compared with 2016. The Shenzhen Stock Exchange once sent a letter of inquiry about this, and Changsheng Biotechnology responded that its sales targets had changed from "provincial, municipal and county-level distributors" to "disease control centers at the county and district level directly," and that various meetings were needed to "enhance brand influence."

According to a third-party software tally, among the legal documents involving Changsheng Biotechnology, corruption and bribery cases rank first, with 20 cases. For example, a judgment published in December 2017 showed that Fan, a deputy director of a county-level disease prevention center in Fujian, received cash totaling 39,910 yuan from Chen, a salesperson of Changchun Changsheng Pharmaceutical Co., Ltd., on seven occasions between December 2014 and March 2016, and split the money equally with the former head of the disease control division of another prevention and control center.

3. Suspected Falsified Listing Data

Changchun Changsheng had a sales contract dispute involving more than 40 million yuan with Shandong Zhaoxin Biotechnology Co., Ltd. In June 2018, the Jilin Higher People's Court ordered Shandong Zhaoxin to immediately pay Changchun Changsheng the outstanding payment and interest. Starting in 2013, vaccines produced by Changchun Bio were sold through Shandong Zhaoxin to the Shandong Provincial Center for Disease Control and Prevention, epidemic prevention stations, hospitals and other institutions. Shandong Zhaoxin was involved in the 2016 Shandong illegal vaccine case, and its Good Distribution Practice certificate for drugs was revoked.

A former employee of Shandong Zhaoxin told the media that Shandong Zhaoxin did not accept the amount involved in the dispute. He said that when Changsheng Biotechnology was going public, Shandong Zhaoxin had cooperated by providing falsified data, which created two sets of contracts. "When the reports were being prepared, several companies cooperated with Changsheng Biotechnology to help it go public."