The Internet has warmed up, will pharmaceutical stocks be far behind?
“Taking medicine and drinking” used to be the eternal belief of investors. The steady fundamentals and the pursuit of funds make these two sectors enjoy a high valuation level all year round. As the representative of A-share “core assets”, they have also become the talk capital after dinner. However, when the fund’s heavily held stocks collapsed, the two sectors turned down at the same time. Even if there is no significant change in operating performance, the continuous decline in valuation has eroded the principal of many high-level investors and funders.
According to statistics, the average withdrawal of component stocks of CSI pharmaceutical index from last year’s high reached 50.64%, and even several star pharmaceutical stocks fell by more than 70%. But at the same time, the valuation of the sector has also reached a historical low. Fund managers believe that although it will take some time to be emotionally at the bottom, from the perspective of absolute value, many enterprises in this position have been very worthy of the long-term attention of the market.
looking forward to the future, many fund companies believe that the antigen detection brought by the repeated epidemic and the upstream raw materials, intermediates and cdmo links of covid-19 specific drugs in the anti epidemic route will usher in better growth opportunities. In addition, the current competition pattern in HPV field is relatively good, and it is less disturbed by China’s foreign policies. It may be in a good state of supply and demand in the next few years
share price is losing ground. Why
In the rather restless year of 2021, pharmaceutical stocks earned the tears of many investors. The so-called “core assets” reached an all-time high and inevitably disintegrated after facing a high valuation premium. Within the sector, Intco Medical Technology Co.Ltd(300677) , Contec Medical Systems Co.Ltd(300869) , Meinian Onehealth Healthcare Holdings Co.Ltd(002044) and other companies, as well as fund heavy position stock “Yamao” Topchoice Medical Co.Inc(600763) has fallen by more than 70% compared with the high point of last year, and the average pullback of component stocks of CSI pharmaceutical index has also reached 50.64%, just halving. The decline in the net value of individual stock associated funds has gradually collapsed the market’s belief in “drinking and taking medicine”.
An important factor in the decline of stock price is the reduction of fund allocation. According to the statistics of Anxin securities, in the fourth quarter of 2021, the position proportion of the whole market pharmaceutical fund was 10.77%, down 2.36 percentage points month on month; Excluding pharmaceutical theme funds, the position ratio was 7.60%, down 1.76 percentage points month on month. The popularity of the pharmaceutical industry has declined, and the pharmaceutical position of public funds is at a relatively low level in history. After excluding the pharmaceutical theme fund, the allocation degree of the pharmaceutical and biological sector has decreased significantly, and the allocation proportion from Q3 to 2021q3 in the third quarter of 2020 has reached a low level in recent three years.
China Industrial Securities Co.Ltd(601377) managing director and chief analyst of medicine Xu Jiaxi said, “from the perspective of the whole base, we think it is basically irreducible, because medicine is a big game, and there are always some pharmaceutical stocks that will be selected for investment.”
With regard to other reasons for the decline in the pharmaceutical sector, Su Qingyun, fund manager of Hua’an fund medical 50ETF, said that from the macro level, factors such as the escalation of geographical conflicts, the rise of commodity prices, the rise of global inflation and the withdrawal of loose policies of major economies have led to increased volatility in the financial market, and it is difficult for the pharmaceutical industry to be alone in the process of panic decline in the market; Secondly, from the industry level, on the basis of centralized purchase of chemical drugs, medical devices, traditional Chinese medicine decoction pieces, growth hormone, etc. have been included in the scope of centralized purchase one after another, and the centralized purchase tends to expand, which continues to cause certain pressure on the pharmaceutical industry; Thirdly, from the news level, the recent inclusion of China’s leading cro companies in the unverified list in the United States has raised investors’ concerns about the overseas impact on the future business of pharmaceutical companies.
pharmaceutical stocks fell out of the value pit
However, after the continuous decline of share prices, the current valuation advantage of the pharmaceutical sector has gradually become prominent. Data show that as of press time, the P / E ratio of CSI pharmaceutical index was only 29.13 times, while the historical highest value was 61.95 times, with a median of 41.2 times. The current valuation is at the historical quantile of 14.06%, which has been called “floor price”.
Even so, PE or Pb indicators in the pharmaceutical sector are hard to underestimate compared with other industries. Does this mean that there is still a large downward space? In this regard, Su Qingyun explained that due to the different characteristics of the industry itself, there are great differences in valuation levels among industries, so a simple horizontal comparison cannot be made. Due to the characteristics of the pharmaceutical sector itself, the traditional PE valuation method is also difficult to comprehensively reflect the valuation level of the industry. Especially for innovative drug enterprises with relatively high investment in pharmaceutical R & D, more are free cash flow discount model (DCF). When using this valuation model, we should comprehensively consider the product life cycle of different pharmaceutical R & D pipelines to judge the future revenue and expenditure, so as to predict the future cash flow. At the same time, external factors such as the change of market risk-free interest rate and equity premium rate should be considered.
Xu Jiaxi believes that the recent weak performance of the pharmaceutical sector is due to the previous relatively concentrated chip structure and some potential concerns about the fluctuation of product price. Although it will take some time to be emotionally at the bottom, from the perspective of absolute value, many enterprises in this position are very worthy of long-term consideration.
Su Qingyun also said that after substantial adjustment, the pharmaceutical industry is now in the range of high investment cost performance. He is firmly optimistic about investment opportunities in the pharmaceutical industry, mainly due to the following reasons:
At the policy level, on March 5, the government work report proposed to improve the capacity of medical and health services, and made work content planning in terms of financial subsidies, volume procurement, epidemic prevention and control and the development of traditional Chinese medicine. On the whole, in 2022, the increased amount of medical insurance and public health subsidy standard is the same as that in 2021, and the industry is expected to grow steadily. Promoting volume procurement, Revitalizing Traditional Chinese medicine and strengthening anti epidemic protection will still be the key development direction of the pharmaceutical industry in 2022.
From the industry level, according to the data released by the National Bureau of statistics, the industrial added value of pharmaceutical manufacturing industry increased by 24.8% year-on-year from January to December 2021, and the production side accelerated the recovery. Among the 41 major industries in 2021, the manufacturing of chemical raw materials and chemical products grew rapidly, reaching 87.8%. The revenue growth of pharmaceutical manufacturing industry is in the middle range, reaching 20.1%; The year-on-year profit growth rate was large, reaching 77.9%.
From a business perspective, the continuous catalysis of epidemic related fields. The repeated outbreaks in Hong Kong and other places, as well as the gradual opening of the country in the future, are expected to continue to catalyze relevant sectors, including oral drug R & D and industrial chain, covid-19 detection, etc.
which sectors will rise first
When the recent epidemic set off a new round of growth, the investment of medical resources plays a vital role in economic recovery.
Pharmaceutical stocks hit the bottom to rebound. Which sectors will rise first? Harvest Fund said that under the current repeated epidemic situation, the state has introduced the application scheme of antigen detection, which takes antigen detection as the primary screening to prepare for the control of the epidemic as soon as possible.
Antigen detection reagents have been launched in the leading chain pharmacies one after another, which is expected to increase the revenue and gross profit of the leading pharmacies. However, the final contribution of short-term performance mainly depends on the quota, selling price and epidemic prevention policy; In the medium and long term, thickening passenger flow and increasing the service scope of pharmacies are the key, which depends on the detailed rules for the implementation of antigen testing and epidemic prevention policies. The performance flexibility of pharmacies in 2022 depends on whether the current and sales restriction measures of pharmacies can be relaxed.
while in the large pharmaceutical sector, Harvest Fund is optimistic about the investment value of innovative drugs in the medium and long term. “Although there is a certain gap between China and overseas countries in basic scientific research and transformation, under the background of increasing policy, capital, talent and R & D capabilities, China’s innovative drug industry is expected to develop rapidly. We are optimistic about the long-term investment value of innovative drugs, especially localization.”
However, the technology in the field of innovative drugs has been upgraded rapidly, and there are many tracks, including antibody technology for extracellular and cell membrane proteins, car-t technology mediated by cell membrane proteins, etc. Among these different technology driven segments, Harvest Fund is more optimistic about nucleic acid drugs, gene therapy and protac from a long-term perspective. If focusing on the long-term layout, it is also recommended to focus on enterprises with R & D reserves and clinical applications in the above fields.
Gao Bing, manager of the hybrid fund for flexible allocation of emerging vitality of Chinese businessmen, believes that the pharmaceutical sector mainly focuses on the upstream raw materials, intermediates and cdmo links of covid-19 specific drugs of the anti epidemic route, especially the links of carbonic anhydride and azabicyclic ring. Some companies are also trying to break through the processes of SM1 and SM2, which deserves special attention. The second is the detection field related to the epidemic. If the follow-up normalized detection is carried out, the detection industry may benefit in the future or in the long term. The third is to pay more attention to the HPV field with few defects. The competition pattern in this field is relatively good and less disturbed by China’s foreign policies. In the next few years, it may be in a good state of supply and demand, and the leading companies are expected to fully enjoy the industry dividend. Finally, we should pay more attention to the opportunity of reversing the plight of individual stocks in the field of traditional Chinese medicine. Especially under the state’s vigorous development support, some companies in the industry are expected to enjoy policy development dividends, which need to be explored from bottom to top.
