Key investment points
Look at the essence: Traditional Chinese medicine formula granules lead the standardized development of decoction pieces
Traditional Chinese medicine formula granule is the product of traditional Chinese medicine keeping pace with the times. It is the inheritance, development and innovation of traditional Chinese medicine decoction pieces. Compared with traditional decoction pieces, it has many advantages, such as convenient carrying and storage. Since the outbreak of covid-19 epidemic, the state has advocated “paying equal attention to both traditional Chinese and Western medicine and using both traditional Chinese and Western medicine”. Traditional Chinese medicine formula particles have played an important emergency role in coping with the epidemic test due to their advantages of high industrialization, convenient transportation and convenient formulation, and the recognition of doctors and patients has gradually increased. In order to adapt to its rapid development, the state has constantly explored and updated policies and regulations, and relevant regulatory systems and standards have continuously driven the industry to gradually develop and mature. Referring to the development trend of Japanese Chinese prescription drugs, the development of traditional Chinese medicine formula particles will promote the upgrading of traditional Chinese medicine industrial structure and lay a good foundation for traditional Chinese medicine to enter the international market. It can be seen that the rise of traditional Chinese medicine formula granule industry is the inevitable result of the inheritance, innovation and development of traditional Chinese medicine.
Look at change: the pilot is over and ushers in new opportunities
Market side: the volume and price rise together, and the 10 billion market will usher in several times of capacity expansion.
Broaden the sales scope or accelerate the market expansion: we believe that the use terminal of formula particles has been expanded from traditional Chinese medicine hospitals above level II to all medical institutions at all levels with traditional Chinese medicine practice, and the use scope has been greatly increased. In addition, the third terminal market caters to the consumption preference of traditional Chinese medicine and the replacement cycle is short. We expect the industry to usher in large-scale production. The ex factory price may rise, covering the cost of standard switching and raw material price rise: the formula granular products produced according to the new standard will be put on shelves in early 2022, and the standard switching also provides a good opportunity for enterprises to form a new price system. Therefore, we expect enterprises to raise prices to hedge the pressure of standard upgrading and upstream costs. Market space measurement: due to the initial implementation of the policy, there is no obvious volume trend for reference, but considering the short replacement cycle of the third end market, we expect that the volume will reach a relatively stable state in 3-4 years due to the liberalization of the policy and the expansion of the scope of the sales end. According to the announcement on ending the pilot work of traditional Chinese medicine formula particles, it is pointed out to adhere to the dominant position of traditional Chinese medicine decoction pieces, and with reference to the announcement for public comments issued by Shandong Medical Security Bureau on doing a good job in the medical insurance payment of traditional Chinese medicine formula particles (Trial), it is clearly stipulated that the use of traditional Chinese medicine formula particles in the same medical institution shall not exceed 30% of traditional Chinese medicine decoction pieces, Therefore, we expect that when the market volume is relatively stable, the use of traditional Chinese medicine formula particles will reach at least 20-30% of traditional Chinese medicine decoction pieces (2-3 times more growth space than that in 2021). Referring to Sangge stone’s consulting and sorting, the price of traditional Chinese medicine formula particles after conversion according to specifications is about 50% higher than that of traditional decoction pieces. Assuming that the ex factory price of formula particle enterprises increases by 7.5% – 20% in order to improve the coverage standard and the pressure of upstream costs in early 2022, the price of formula particles will be about 60% – 80% higher than that of traditional decoction pieces. Referring to the market scale of traditional Chinese medicine decoction pieces, the market scale will be 200 billion yuan, During this period, without considering the impact of large-scale price reduction such as centralized mining, we calculate that when the volume of traditional Chinese medicine formula particles reaches a relatively stable level, the corresponding market scale will reach 64-108 billion yuan.
Payment end: formula granules are included in medical insurance, and the conditions for large-scale centralized mining are not yet ripe.
About medical insurance: the price of traditional Chinese medicine formula granules is generally higher than that of traditional Chinese medicine decoction pieces. The implementation of medical insurance policy gives a green light to the development of traditional Chinese medicine formula granules. In addition, the National Medical Insurance Bureau issued a document to encourage the inclusion of traditional Chinese medicine formula particles purchased by public medical institutions into the online transaction of the provincial centralized medical procurement platform, so as to promote the openness and transparency of the transaction. With the gradual standardization of medical insurance payment standards in the national market, it is expected to break the exclusive advantage of medical insurance reimbursement of provincial pilot enterprises under local protection, The enhancement of terminal payment capacity will further drive the growth of demand for traditional Chinese medicine formula granules.
About centralized purchase: considering the prospect of the current drug pricing policy trend, traditional Chinese medicine formula particles may also be purchased intensively across the country. However, given that the current standard formulation is not perfect, the overall market scale of the industry is small, and the formula particles of the new standard have not yet entered the mass production period, we expect that the formula particles may enter the golden period of development with reference to the progress of centralized purchase of traditional Chinese patent medicines and the mass production trend after the landmark is upgraded to the national standard. Referring to the provincial centralized purchase of Chinese patent medicine, the decline of most products is about 30-50%. We believe that compared with chemical medicine, traditional Chinese medicine formula particles have the attribute of upstream resources, and the decline of centralized purchase will be similar to that of Chinese patent medicine.
Production side: build a solid moat with scale + quality control, and keep leading in the industry.
Although the license will be liberalized in the future, we believe that there are still high entry barriers in the formula particle industry, which puts forward higher requirements for the company’s market access, supply chain management, capacity supply, quality control, variety coverage and sales network. The threshold will be reduced and increased. The competition pattern of the industry will not change in the short term, and the industry leader will still maintain a leading position.
Investment advice
We suggest paying attention to leading enterprises with integration and scale advantages.
Chinese traditional medicine: the leader of traditional Chinese medicine formula granules and the linkage development of the whole industrial chain. The market share of the company is as high as about 50%, and there are deep barriers in channels, varieties, quality, production capacity and upstream resources. Strategically, the company actively arranges upstream traditional Chinese medicine planting bases and terminal value-added services, creates the advantages of the whole industrial chain, complements, cooperates and shares resources, and has strong certainty in the growth of industry leaders.
Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) : the innovation achievements of multiple sectors are remarkable, and the internal and external drive the rapid development of the company. The company’s business spans six fields: finished drugs, traditional Chinese medicine formula particles, raw and auxiliary materials, medical devices, medical and health services and intelligent supply chain of medicine and equipment, and attaches great importance to scientific research innovation and scientific research transformation. We believe that on the one hand, the company creates an independent internal drive through advantageous industries such as finished drugs, traditional Chinese medicine formula particles and medical devices; On the other hand, based on the raw and auxiliary materials, medical services and intelligent supply chain of medicine and machinery in the upstream and downstream related industries, an external drive that can carry out cross linkage of businesses at multiple levels is formed. It breaks the pattern of mutual isolation of technology R & D and transformation in various sectors, and multi business sectors jointly drive the rapid development of the company.
China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) : significant channel advantages and intelligent manufacturing of formula particles. The core business of the company is CHC health consumer goods and Rx prescription drugs, with wide product coverage, rich product lines and significant channel advantages. It has strong control ability on the consumer end and the hospital end, and dual terminal collaborative empowerment. In addition, the company has carried out digital transformation in recent years, further strengthened the construction of safety system for traceability of traditional Chinese medicine formula particles through blockchain technology, and improved the intelligent level of production. In terms of marketing promotion, we continuously improve the differentiated competitiveness of products, expand a series of traditional Chinese medicine related products such as decoction pieces and professional health, and cooperate to drive the steady development of the company.
Risk statement
Risk of policy implementation falling short of expectations; Risk of intensified industry competition; Industry development is less than expected risk.
