While it's well known that international corporate giants are funneling big bucks into research institutes in China, lesser known is the Chinese government's efforts to make the nation a world leader in medicine, science and technology. Examples of its push to beef up innovation can be seen at state-run research labs such as the China Academy of Sciences, a broad collection of R&D facilities currently undergoing significant reforms and expansion that officials hope will become a major high-tech incubator. The Academy already has a leadership role in the field of biotech.

One of the Academy's partners in China's race to innovate in the biotechnology industry is Sinovac Biotech Ltd. (AMEX:SVA). Sinovac researchers have worked closely with government scientists to tackle illnesses (such as the outbreak of bird flu in Hong Kong). The company does business under its majority-owned subsidiary, Sinovac Beijing, and its wholly owned subsidiary, Tangshan Yian. A leading domestic vaccine producer, the biopharmaceutical company is engaged in the research, development and commercialization of agents that protect against human infectious diseases including hepatitis, influenza and SARS.

Sinovac's portfolio of State Food and Drug Administration-approved products consists of Healive, a vaccine against hepatitis A virus; Bilive, which is used to prevent infection from hepatitis A and B; and Anflu, a seasonal influenza virus vaccine. Four pipeline drugs are also in development. They include two vaccine candidates for the H5N1 strain of bird flu (pandemic influenza) as well as a vaccine for the Japanese encephalitis virus, and another for SARS (Severe Acute Respiratory Syndrome), a potentially deadly virus with flu-like symptoms that attacks the lungs.

Compared with Big Pharma drugs designed to battle cancer, high blood pressure, depression and high levels of bad cholesterol, pharmaceuticals such as those produced by Sinvac maintain a decidedly lower profile. But the vaccine maker doesn't seem to mind, especially given growing concerns about the threats posed by hepatitis, Avian flu, SARS and drug-resistant new viruses.

After all, in the aftermath of the 7.9 magnitude earthquake that rocked China on May 12, business was a good for Sinovac, as provincial CDCs stocked up on vaccines to inoculate children against possible outbreaks of hepatitis A and B. Immediately after the disaster, China's Ministry of Health purchased $2.86 million worth of the Healive to distribute in Sichuan, Shanxi and Gansu provinces. In the month following, the company received an order for 257,100 doses of Healive from the Shanxi Center for Disease Control and Prevention, sold 47,000 units of Bilive to the Gansu CDC, and also delivered 80,000 doses of Bilive to the Municipal Health Bureau and the Municipal Center for Disease Control in China.

After successful Phase II clinical trials of Panflu, its pandemic influenza whole viron inactivated vaccine, Sinovac received a SFDA production license in April (Panflu is the only approved vaccine available in China that is indicated to protect individuals against the H5N1 flu virus). Sinovac recently began Phase II clinical trials of its split viron pandemic flu vaccine, which has the potential for less side effects than Panflu. Preliminary results from testing are expected in early 2009.

Analyst Lewis Fan with Brean Murray initiated coverage last month with a bullish outlook. He kicked off Sinovac with a "buy" and a 12-month target of $5. In a research note, the analyst mentioned that the company's area expertise, production capacity, market-leading vaccines and strong relationships with the government give it an advantage over the competition. The analyst also said that Sinovac's future domestic and international expansion efforts will likely benefit from its partnerships with several major Western drug companies. He added that Sinovac is "well positioned to benefit from the rapidly expanding Chinese vaccine market, which is supported by the country's growing population and personal wealth, greater access to health care, and a commitment by the government to combat popular infectious diseases."

Second-quarter earnings, reported on Aug. 13, showed the company's sales beat Wall Street expectations, rising 73% to $16.5 million, from $9.5 million in the same quarter last year. Gross profits increased 70% to $13.9 million, up from $8.2 million, and net income came in at $3.3 million, or $0.08 per diluted share. In the quarter, the company sold 2.72 million doses of Healive, a 55% increase, and 180,000 doses of its Bilive vaccine.

Given Sinovac's already strong grip on the Chinese vaccine market, it does not have to negotiate hurdles faced by most smaller outfits that lack the large sales teams and marketing departments that larger companies take for granted and use to their advantage. And, its established alliance with GlaxoSmithKline (NYSE:GSK), as well as the cooperative olive branch it has extended to other multinationals, could mean eventual access to the huge U.S. and European markets.

That, coupled with experts' expectations that growth of the vaccine market will easily outpace that of prescription drugs for the foreseeable future spells a healthy outlook for Sinovac.

The stock closed at $3.52 on Wednesday. Shares have traded between $2.57 and $8.33 in the past 52 weeks.