$Hengrui Medicine(SH600276)$ $Minray Medicine(SZ300760)$ $WuXi AppTec(SH603259)$
The pharmaceutical industry is still in the bottom-grinding stage. Although most companies’ performance in the third quarter was in line with expectations, it is still not optimistic. The market is in the transitional stage from the bottom of the valuation to the bottom of the performance, and it seems that the unilateral decline has stopped.
So, when will the results come?
It has to be said that the development of the pharmaceutical industry is closely related to policies. Especially in the past ten years, the “three medical linkages”, that is, the linkage of medical care, medical insurance, and pharmaceutical reforms, and the continuous deepening of medical reforms have brought challenges to the development of the pharmaceutical industry.
So, under the challenge, where is the opportunity?
Today, we will analyze the investment value of the pharmaceutical industry from the perspective of industry market, policy and finance.
1. The industry market scale exceeds one trillion yuan, and the deepening of aging will drive market growth
Although the medical reform poses certain challenges to the development of the pharmaceutical industry, the enhancement of residents’ security cannot be ignored. In this context, my country has built the world’s largest basic medical security network covering the entire population, and the universal medical security is actively moving towards universal health security .
So far, medical insurance spending has become an important “buyer” for the stock of the pharmaceutical industry. Residents have resident medical insurance, and employees have employee medical insurance; residents pay medical insurance on an annual basis, and employees pay medical insurance on a monthly basis, and the company pays a higher proportion at the same time; individual medical insurance accounts can be used to see a doctor and sell drugs, and the medical insurance pooling account can be used to reimburse hospitalization cost of.
We pay insurance every year or every month. The actual situation is that most of us are healthy and do not use medical insurance. So why does the state control the cost of medical insurance?
The reason is actually very simple, that is, the degree of aging in our country will gradually deepen, and more and more people will see a doctor in the future, which will lead to an increase in medical insurance spending. How many elderly people there will be in the future and how much they will spend is actually difficult to estimate, and it is a precautionary measure.
(Data sourced from Zheshang Securities)
As of now, China is about to enter a stage of deep aging (14% of the population aged 65 and over), and the figure announced in the first half of 2021 is 13.5%. At the same time, in 2021, China’s national basic medical insurance (including maternity insurance) ) total fund expenditure reached 2.4 trillion yuan;
If the proportion of aging population reaches nearly 25% by 2035, there will be pressure to double the expenditure of medical insurance funds.
This is where the huge market space of the pharmaceutical industry lies. In addition to the payment (reimbursement) of the medical insurance fund, consumers also have medical expenses at their own expense. If calculated at 20% of the medical insurance fund, the cumulative total in 2021 will be nearly 3 trillion yuan.
Then, the medical reform with the purpose of “saving expenditure” was the first to kick off. The scale of some subdivided medical industries was compressed, and the revenue and profit scale of pharmaceutical companies declined.
And even so, it still cannot change the status quo of the continuous growth of medical insurance funds. In 2021, the total expenditure of national basic medical insurance (including maternity insurance) funds will increase by 14.3% over the previous year; in 2021, the total amount of online purchase orders through the provincial centralized drug procurement platform will be 1.03 trillion yuan, an increase of 11% over the previous year.
Therefore, from the perspective of the future development of the pharmaceutical industry, the market size will continue to expand. Even if the growth rate will decline to a certain extent in the future, there will still be structural opportunities in the pharmaceutical industry, such as opportunities for expansion and mergers and acquisitions, opportunities for upgrading and iteration, and opportunities for innovation (new technology). , new fields, new models), etc.
2. Sorting out industry policies: policy inflection points appear in the short term, and long-term focus on performance growth
The first is the centralized procurement related to drugs and medical devices.
The seventh batch of drugs has been collected, of which the sixth batch is in the field of biological drugs, insulin, and the others are basically chemical drugs.
Medical equipment has been collected in three batches, ranging from cardiac stents to artificial joint stents, and then to this year’s spine stents. At the same time, the collection of dental implants and OK mirrors is in progress.
Looking forward to the future, the centralized procurement of medicines and medical devices will continue to advance, especially biological drugs and medical devices. It is impossible to know when and where the flowers will be spent. Therefore, large-scale and high-priced varieties need special attention. .
At present, the relatively safe ones are chemical drugs and proprietary Chinese medicines.
The centralized procurement of chemical drugs is mostly generic drugs. After many centralized procurements, the scale has reached a certain proportion. Therefore, even if there are more brands in the later stage of centralized procurement, the impact on enterprises will be relatively reduced. For example, Hengrui Medicine, Enhua Pharmaceutical, Huadong Medicine, etc.
The negative factors for the centralized procurement of Chinese patent medicines are small, mainly because the scale of single-product drugs of Chinese patent medicines in hospitals is not large, and there are many exclusive varieties of Chinese patent medicines. The overall centralized procurement of Chinese patent medicines is relatively small. Expectations are also higher.
In this context, with the decline in performance of the companies that have been centralized procurement, the bad news is expected to be gradually released. With the emergence of policy inflection points, our focus needs to pay attention to the performance inflection points of enterprises.
In this regard, we need to look at the growth of long-term enterprises, which involves the incremental market of the pharmaceutical industry.
Innovative drugs (chemical drugs, biological drugs, proprietary Chinese medicines) and innovative medical devices (including medical equipment, medical consumables, and in vitro diagnostics) are one of the most important incremental markets in the pharmaceutical industry.
However, innovative drugs are currently facing the suppression of medical insurance, and only medical devices are still immune. Although they are worried that the prices of innovative medical devices will be greatly reduced in the future, they are still encouraging innovation as a whole, and there is no precedent for negotiation.
Therefore, we need to pay attention to the negotiation of medical insurance related to innovative drugs.
The medical insurance negotiation has gone through two rounds of negotiation in 2020 and 2021. The varieties and companies that have been negotiated have basically achieved a negative release. Even if there are more potential varieties listed, it is estimated that the price will be reduced before there is time to increase the volume. Therefore, for innovative drug companies , to promote the continuous increase in the volume of products that have been covered by medical insurance, and the development of more innovative drugs is the focus of future development.
Among them, innovative Chinese patent medicines (exclusive) after being included in medical insurance, with better competition pattern and smaller price cuts than expected, are expected to be more optimistic.
In addition, this year’s medical insurance negotiations also released a certain relaxation signal. For example, new indications for products that have been included in medical insurance can be easily renewed, making the price reduction relatively controllable; Chinese patent medicines are accelerated to enter medical insurance, and the price reduction is also lower than that of chemical drugs and biological drugs. This makes innovative drug companies a little relieved.
In September of this year, the Medical Insurance Bureau announced the formal review of drugs that applied for medical insurance negotiation this year. A total of 343 drugs met the application conditions for this year’s medical insurance catalog adjustment. You can pay attention to the listed pharmaceutical companies that have passed more drug reviews. Including Hengrui Medicine, BeiGene, which has more than 5 drugs, and Innovent Bio, which has 3 drugs.
Finally, there are actually many positive policies in the industry. The state attaches more importance to the development of the pharmaceutical industry, which reflects the service value of the pharmaceutical industry itself.
3. High profitability and high patent barriers are commercial values that cannot be ignored in the pharmaceutical industry
Finally, in addition to looking forward to medicine from the perspective of industry development and policy, I would also like to talk about the commercial value of the pharmaceutical industry itself, which can be clearly seen from a financial perspective.
The first manifestation of the commercial value of the pharmaceutical industry is the high level of profitability.
As of 2021, the gross profit margin of the pharmaceutical industry (the whole industry chain) is 33.34%, and the return on equity is 11.95%; the gross profit margin of the benchmark bank is 39.81%, and the return on equity is 10.17%; the gross profit margin of the power equipment industry is 20.52% , the return on equity is 8.92%; the gross profit margin of the defense industry is 19%, and the return on equity is 4.63%; the gross profit margin of the computer industry is 25.82%, and the return on equity is 6%. (The above is a random selection of several larger industries.)
Generally speaking, the higher the gross profit rate, the higher the ability of an industry to obtain profits; the higher the return on equity, the higher the return the industry earns for shareholders. The profitability of the pharmaceutical industry is in a relatively leading position in all walks of life.
The second manifestation of the high commercial value of the pharmaceutical industry is the high barriers to competition, which is also the source of the high profitability of the pharmaceutical industry and the core of the pharmaceutical industry. The high barriers to competition are brought about by R&D patents , which are the moat of the pharmaceutical industry. And companies with leading technology level and more patent reserves have a deeper moat.
There is a “Double Ten Rule” for drug research and development, which takes ten years and one billion US dollars. In addition, the validity period of invention patents is 20 years, and the validity period of utility patents is 10 years. It stands to reason that in a strong situation It will not be a loss-making business to engage in research and development.
Fourth, to summarize
In general, I have analyzed the growth logic, policy and commercial value of the pharmaceutical industry from three perspectives. I think the investment value of the pharmaceutical industry is worth mentioning. It is still too early to say that the pharmaceutical industry is mature and the sunset industry is still in In the stage of rapid development, although it has experienced certain twists and turns in recent years, it does not change the long-term investment logic of the pharmaceutical industry!
In the context of a good industry, we can look forward to the “rose of time” when we find good companies and good prices~
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