$Hengrui Pharmaceutical(SH600276)$ $Betta Pharmaceuticals(SZ300558)$ $Rongchang Biology(SH688331)$
Recently, A-shares have fallen into the curse of “one big white horse collapses a day”, including pharmaceutical stocks Mindray Medical, Pien Tze Huang, etc. They have not been spared. Their decline made me sigh that in a bear market, we must retain enough margin of safety. to resist the downside risk.
But in fact, in addition to being affected by the macro environment, pharmaceutical companies represented by Hengrui Medicine have already entered a bear market. Tracing the origin is that the development logic of the pharmaceutical industry has changed under the influence of the medical reform policy in recent years, especially pharmaceutical equipment. The price was greatly reduced after the centralized procurement and medical insurance negotiation.
At present, although the overall performance of the pharmaceutical industry is not bad, and there are only a few companies that are adversely affected by the policy, the market’s view on the medical reform seems to be more negative for the long-term, so let’s review the pharmaceutical-related policies today and take a look Is there any imagination in the pharmaceutical market regulated by the medical reform policy?
1. Medical reform stems from supply-side “pressure”
The reform of the medical insurance system is actually a supply-side reform of the pharmaceutical industry. As a “strategic buyer”, medical insurance will put forward quality improvement requirements for the entire medical service market.
It can be understood from three perspectives. First, from the perspective of payment, medicine is too expensive and the pressure on medical insurance funds to pay needs to be reformed. Second, from the perspective of system formulation, the problem of unbalanced and insufficient medical insurance needs to be addressed. Reform, the third is to consider from the perspective of drugs, the homogeneity of market products seriously requires us to reform.
Therefore, nearly 20 years after the establishment of the medical insurance system, we have ushered in reforms, not only at the level of “cost control”, but more importantly, the structure of the medical insurance system, the coverage and even the reimbursement ratio are improving and increasing.
It is reported that the specific reform arrangements involve deepening the reform of the centralized procurement system for drugs and medical consumables; enhancing the accessibility of medical services; promoting the improvement of medical service capabilities; establishing a market-led price formation mechanism, etc.
Although our reform has lofty goals, at the current stage of in-depth reform implementation (2020-2024), the pharmaceutical industry is bound to face pains.
It is expected that by 2025, the medical security system will be more mature and finalized, and the reform tasks of important mechanisms such as treatment guarantee, financing operation, medical insurance payment, and fund supervision, as well as key areas such as medical service supply and medical insurance management services, will be basically completed.
Then the question arises , what will our pharmaceutical industry look like when the reform is basically completed by 2025? Can a market-led price mechanism be truly formed? Can supply and demand balance be achieved?
To understand this problem, we need to understand the supply and demand issues determined by the pharmaceutical industry itself.
2. The homogenization of the pharmaceutical market needs to enhance innovation
We mentioned earlier that the supply-side reform can be understood from three perspectives. The first two perspectives can be realized by the pressure of fund burden and the imperfect system. However, if the homogeneity of the drug market is serious, pharmaceutical companies need to change by themselves. There is only one way. , that is, to improve its own level of innovation.
For a long time, generic drugs have occupied most of the market share in the pharmaceutical market, even in the medical device industry. Even in the upstream of pharmaceuticals, there are many links that are blocked by foreign countries. Therefore, forcing or supporting pharmaceutical innovation is also an important part of the reform of the pharmaceutical industry;
The shrinking of the space for generic drugs by the medical insurance fund will provide space for payment innovation. In the future, more qualified innovative drugs will be included in the scope of medical insurance payment.
(Explanation from the reply from the Medical Insurance Bureau on August 21, 2021)
As of the first half of 2022, China’s basic medical insurance expenditure was 1,103.088 billion yuan, and the income was 1,520.051 billion yuan. Among them, the fund expenditure fell slightly (-0.75%) year-on-year, and the income increased by 7.67% year-on-year. The medical reform is quite effective, and the fund income balances It is expected to maintain the trend of continuous increase.
In addition, according to the medical insurance negotiation situation and corporate performance in the past few years, the rate of return on research and development of innovative drugs is still guaranteed.
For example, in Betta Pharmaceuticals , the company’s two major products, icotinib and ensatinib, will cut prices by 38% and 70% respectively in 2021, but the estimated annual treatment costs of the two are still 43,000 yuan and 138,000 yuan respectively. In the first half of the year, the new medical insurance price was implemented, and the operating income of Betta Pharmaceuticals remained stable, with operating income of 1.253 billion yuan, an increase of 8.5% year-on-year.
Another example is Rongchang Bio ‘s Vidicitumumab and Taitacept, the price cuts have reached 72% and 68% respectively, and the estimated annual treatment costs are 137,000 yuan and 79,000 yuan respectively. Generally speaking, the higher the value of the product Prices remain higher.
In addition, Rongchang Bio also obtains technical income through authorization, which is equivalent to letting other companies develop and sell in some foreign countries, and Rongchang Bio gets a share. In 2021 and the first half of 2022, Rongchang Biotech will achieve good revenue performance. But at present, the short-term medical insurance cost control has slowed down the rate of return of products, and internationalization can speed up the rate of return.
Finally, we must admit that pharmaceutical innovation is difficult. If we want to fundamentally change the problem of homogeneity in the pharmaceutical industry and reach the international leading level, the pharmaceutical industry still has a long way to go. my country’s pharmaceuticals and medical technology belong to industries that are highly dependent on US technology, and are classified as the second largest industry by the OECD according to R&D intensity. The first category of products with high R&D intensity is aerospace vehicles and related machinery.
The lack of innovation in the pharmaceutical industry may require us to be more patient.
3. The demand of the pharmaceutical industry shows a long-term growth trend
The reason why the pharmaceutical industry has long-term investment value, I think in addition to innovation can bring high barriers, there is another point worth paying attention to, that is demand. The demand of the pharmaceutical industry does not change with the will of anything. In the future, with the speed of China’s aging The demand for medicine and medical care will continue to increase.
In 2021, my country’s total population will increase from 1.276 billion in 2001 to 1.413 billion, of which the population aged 65 and above will increase from 90.62 million to 201 million. In 2021, the population aged 65 and above will account for 14.2% of the total population. The compound growth rate from 2001 to 2021 is 4.05%, far exceeding the growth rate of the total population;
At the same time, with the aging of the population, the incidence of major chronic diseases in my country will continue to increase.
However, my country is still in the trend of consumption upgrading, which makes the per capita medical consumption expenditure increase and provides support for the increase in the demand of the pharmaceutical industry.
As of 2021, the per capita consumption expenditure of Chinese residents has increased from 13,200 yuan in 2013 to 24,100 yuan, with a compound growth rate of 7.79% from 2013 to 2021; my country’s per capita health care expenditure has increased from 912 yuan in 2013 to 2115 yuan in 2021 , the compound growth rate was 11.09%, which exceeded the growth rate of overall consumption expenditure, and the proportion of medical care in overall consumption expenditure increased from 6.9% to 8.8%.
Fourth, to summarize
In general, I think that by analyzing the supply and demand relationship of the pharmaceutical industry, the key to the development of the industry can be found. At present, the development of the pharmaceutical industry is constrained by the medical reform policy and the supply is reduced due to lack of innovation. However, in the long run, the demand will not decrease or even increase. The pharmaceutical industry has achieved structural upgrades, the quality of the pharmaceutical service market has been improved, and the pharmaceutical market will regain excess premium space with the improvement of the supply side.
In the future, supply-side improvement needs to look at three aspects, namely the easing of policy pressure, the improvement of innovation and the improvement of market concentration. Among them, the policy problem is expected to be implemented in the next two years, and the innovation and market concentration will be more important. Look at the competitiveness of the company itself.
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