Dispute Over Covid Vaccines Casts Doubt On Clover Bio Recovery

The Chinese biopharma firm faces a potentially damaging fight over a $224 million upfront payment it received in an ill-fated deal to supply Covid vaccines

Key Takeaways:

• The Gavi international vaccines alliance has demanded a refund from Clover Bio after scoring a victory in a similar contract disagreement with Novavax
• Vaccine delays and strained finances have sent Clover Bio's stock tumbling from an IPO price of HK$13.38 to just HK$0.24

China's Clover Biopharmaceuticals Ltd. (2197.HK) was finally looking to the future after a big bet on Covid vaccines failed to pay off.  However, decisions made early on in the pandemic are still casting a long shadow.

The company went all-in to produce a Covid vaccine, stalling work on other projects in the race to come up with a domestically produced immunization option. But the Covid crisis had peaked by the time the product was ready for delivery.  The investment turned sour and Clover Bio had to lay off nearly half its workforce.

Fast forward to the present day, and the company is now focusing its efforts on vaccines for other respiratory viruses. But the Covid era has presented another belated challenge to its corporate health. An international vaccines alliance served notice last month that it wanted to cancel a supply deal struck with Clover Bio back in 2021 and was seeking a $224 million refund for money already made.

In a note to shareholders on March 24, Clover Bio said it would vigorously fight the claim from the Gavi vaccines alliance, which it described as being "without merit".

The dispute centers around an advance purchase and option agreement in June 2021 for up to 414 million doses of a Clover Bio Covid vaccine that was then under development. The doses were to be distributed via the World Health Organization's COVAX vaccine-sharing scheme once the product had been cleared for use.

That same year, Clover Bio was hailed as a Chinese vaccine star when it completed a $134 million pre-IPO financing round and went on to list on the Hong Kong Stock Exchange with a market value exceeding HK$15.49 billion ($1.99 billion) on its trading debut. Since then, the stock has tanked to less than 2 percent of its IPO price and company cash reserves have dwindled, leaving Clover Bio financially vulnerable if Gavi succeeds in pressing its claim.

Gavi informed Clover Bio on March 21 of its unilateral intention to terminate the advance purchase agreement. The two sides had initially agreed that Clover Bio would provide a first batch of 64 million doses of its recombinant protein vaccine once the product had been included in the WHO's emergency-use list. Gavi retained the option of buying another 350 million doses to be delivered in 2022.

However, vaccine development dragged out beyond the end of 2021. The two parties revised the agreement in September 2022, extending the cooperation period for four years and deleting the option for the additional 350 million doses.  However, by that point Gavi had already made an advance payment of $224 million to cover the materials needed to produce the first batch of 64 million doses.

Gavi insists it is due a refund after only receiving around 12 million doses by the beginning of 2025, far less than the agreed amount. Clover Bio vowed to mount a strong defense, saying the terms of the agreement did not support the Gavi claim.

For accounting purposes, the advance payment in the pre-order agreement differs from the typical upfront payouts in biomedical licensing deals. The money paid to Clover Bio is classed as a contractual liability, while standard licensing agreements count as revenue. The fine print of this deal has not been released, leaving it unclear whether any "force majeure" or other get-out clauses would allow Gavi to recoup its money if the pandemic waned before the vaccines were delivered.

Despite its resolute response, Clover Bio could end up with a big bill to pay, judging from the outcome of a similar case involving the Gavi alliance, which aims to source affordable vaccines for low-income countries.

Vaccine supplier Novavax entered into an advance supply deal for Covid vaccines with Gavi in 2021 for a $700 million advance payment. But in 2022 the company accused the vaccines alliance of violating the deal by failing to buy the agreed number of doses. A settlement was finally reached in April 2024 after multiple rounds of arbitration, with Novavax agreeing repay Gavi up to $475 million in an installment plan.

Potential cash crunch

A similar ruling could have dire consequences for Clover Bio. The vaccine developer's cash reserves and bank balance stood at just 556 million yuan in June 2024, compared with current liabilities of 1.91 billion yuan. The company is still under severe financial strain, despite having brought a Covid vaccine and two quadrivalent flu vaccines to the market.

It reported revenues of 38.41 million yuan in the first half of 2024 and a net loss of 903 million yuan, hit by falling demand for Covid vaccines and a lower-than-expected uptake for flu vaccines, after seasonal outbreaks were less severe than predicted.

As the Covid pandemic took hold, the company had suspended research into cancer and other diseases to concentrate on coming up with a vaccine. However, the Covid vaccine was not approved for sale until China was about to lift pandemic controls. In the end, the huge investment did not deliver the hoped-for payoff. The company announced in 2023 that it would shift its attention to the equally competitive market for quadrivalent flu vaccines, known as AdimFlu-S (QIS).

Market confidence in the brand has collapsed, sending the Clover Bio stock plummeting from a listing price of HK$13.38 in 2021 to just HK$0.24 per share. The company is headed by a family duo, with Peng Liang as chairman and his son Joshua Liang as CEO and executive chairman, each with pay deals well above the industry average. In 2022 the father and son earned 10.45 million yuan and 30.29 million yuan respectively, before the company stopped disclosing executive pay in its financial statements.

The company has recently been working on a business reset, focusing on vaccines for the respiratory virus RSV. It has released positive data from a Phase One clinical trial for its candidate RSV vaccine, but that market is already dominated by giants such as GSK and Pfizer.

It remains to be seen whether Clover Bio can get its RSV vaccine to the marketing stage when its finances are stretched so tight. The one-time vaccine star has slumped to a sector-lagging market value of just HK$300 million, while its RSV-focused rival AIM Vaccine (6660.HK) is worth around HK$5.1 billion.

To keep its dreams alive, the company may need to explore the prospects for a technology licensing deal or an injection of fresh capital.