Core view:
The trend of the pharmaceutical industry resumed in 2021 and judged in 2022. The trend of the pharmaceutical industry in the whole year of 2021 was resumed. The strong characteristics in the first half were obvious. It was mainly driven by the better than expected performance of CXO sector and covid-19 industrial chain. The leading white horse with large market value, high roe and high growth led the market. In the second half, with the high valuation of the leading white horse and the congestion of the trading track, the correction of large market value and high prosperity sectors for many months, combined with the introduction of new policies such as CDE innovative drug R & D guidelines, the expected change of centralized procurement and the lower than expected phased performance of some medical service leaders, the market sentiment led to the continuous decline of innovative drugs and its industrial chain. After November, with the full release of negative factors, the recovery market was driven by undervalued traditional Chinese medicine, pharmacies and other sectors, oversold medical devices and raw materials with rising prices under inflation expectations. From the perspective of style, the performance of small and medium-sized enterprises is obviously dominant. In the long term, the pharmaceutical industry has opened a new bull market since 2019 and lasted for two years. Superimposed on the demand stimulation of covid-19 epidemic, the performance of protection, detection and prevention sectors has entered the late stage of performance outbreak, and the fear of covid-19 “cliff” has increased the expected uncertainty. On the whole, we believe that the pharmaceutical industry is likely to maintain a volatile trend in 2022, with the rise of the valuation center, structural differentiation and obvious market characteristics.
The innovation trend remains unchanged, and the negotiations on centralized procurement and medical insurance are normalized. On November 19, 2021, CDE officially released and implemented the guiding principles for clinical research and development of antitumor drugs guided by clinical value. The document requires that the drug development principles guided by clinical demand and clinical value should be implemented in the future research and development of antitumor drugs, from determining the research and development direction to carrying out clinical trials. This principle will promote the gradual transformation of most Chinese pharmaceutical enterprises from me too to mebetter or completely independent innovative drugs, release more resources for truly valuable innovation, avoid homogeneous competition caused by “high-level repetition”, and will benefit innovative drug head companies and differentiated companies in the long run. The centralized purchase of drugs has gradually stepped into normalization. The National Medical Insurance Bureau organized the centralized procurement of artificial joints and the gradual landing of insulin. In addition to actively promoting drug procurement at the national level, the centralized procurement of inter provincial alliances has developed widely since 2020. Except Hong Kong, Macao and Taiwan, almost all provinces and cities in China have participated in various inter provincial alliance procurement. The inter provincial alliance has a wide range of volume procurement, strong bargaining chips and a high success rate of price for volume. It is an effective supplement to the national centralized procurement, including the implementation of centralized procurement of Chinese patent medicines by the alliance of 19 provinces such as Hubei, which has a strong demonstration effect. On December 3, 2021, the 2021 version of the national medical insurance catalogue was released, and the new version of the catalogue was implemented on January 1, 2022. The total number of drugs in the adjusted national medical insurance drug catalogue is 2860, including 1486 kinds of Western medicine and 1374 kinds of Chinese patent medicine, all of which are the largest in the number of varieties negotiated in the previous medical insurance catalogue. The adjustment of the national medical insurance drug catalogue has added 507 drugs for four consecutive years. In this adjustment, a total of 74 drugs were added to the directory, and 11 drugs were transferred out of the directory. In this adjustment, a total of 117 drugs were negotiated, and 94 were successfully negotiated, of which 85 exclusive drugs outside the catalogue were negotiated into 67. The average price reduction was 61.71%, and the maximum price reduction was 94%, which was at a high level compared with previous negotiations. On the one hand, the high success rate of the negotiation of the medical insurance catalogue shows that the state attaches importance to the universality of the medical insurance negotiation. On the other hand, it also shows that the market and pharmaceutical companies are more and more fully prepared for the negotiation on the premise that the negotiation framework of the medical insurance catalogue has been basically determined. With the gradual advancement of centralized procurement and medical insurance negotiations, the industry will continue to differentiate in the future, the leading effect will be further highlighted, and enterprises with rich production pipelines, outstanding R & D capacity and good competition pattern are expected to benefit from it and stand out in the competition.
Fund heavy holdings data show that the pharmaceutical industry over allocation ratio is still in the forefront of the industry. In the first three quarters of 2021, the proportion of the market value of the pharmaceutical and biological industry held by the fund in the market value of A-Shares was 13.75%, 14.47% and 13.25% respectively, which was generally stable. Among them, the proportion of positions in the third quarter was second only to food and beverage. The pharmaceutical industry is still in the state of over allocation, with an over allocation of 4.39%, ranking third in the industry. Despite the obvious shock characteristics in 2021, the defense attribute of the pharmaceutical industry is still favored by institutional investment. In terms of capital, in the first three quarters of 2021, 438 pharmaceutical funds were issued, with a total issuance scale of 698.189 billion yuan, which remained at a relatively high level. The inflow of incremental funds effectively supported the valuation of the whole industry. The proportion of foreign shares in the total market value of the pharmaceutical and biological industry is relatively low, accounting for about 3.68%; The proportion of foreign shares in the circulating market value was 7.63%, and the proportion of foreign shares in the circulating market value was the highest on February 5, 2021, which was 8.38%. The proportion of foreign shares in the pharmaceutical and biological industry showed an upward trend as a whole. From the perspective of channels, land stock link is the main investment channel for foreign capital inflows and shows an upward trend. At present, it accounts for 93.17% of foreign investment in the pharmaceutical and biological industry. The continuous influx of foreign capital into the A-share market will not only provide more overseas funds for China’s capital market, but also bring changes in market investment style. The style shows that Lu Gutong’s investment direction in the pharmaceutical and biological industry is dominated by large and medium-sized companies such as biological products and CXO, while QFII’s investment direction in the pharmaceutical and biological industry is dominated by medical devices and traditional Chinese medicine companies, and the overall layout tends to small and medium-sized companies.
The financing channels are smooth, and the financing scale and securitization rate of the pharmaceutical industry are increasing. In 2021, the overall financing of the pharmaceutical and biological industry was 136.624 billion yuan, a year-on-year decrease of – 3.57%. Among them, the total financing of pharmaceutical, biotechnology and life science industries was 112.223 billion yuan, a year-on-year decrease of 3.38%; The total financing of medical and health care equipment and service industry was 24.4 billion yuan, a year-on-year decrease of 4.46%. Overall, the financing scale of initial public offering accounts for the largest proportion. Overall, 2020 and 2021 are the years when pharmaceutical and biological companies are listed intensively. Compared with the total operating revenue and profit of Listed Companies in the pharmaceutical and biological industry and the pharmaceutical manufacturing industry, as of November 2021, the operating revenue of the pharmaceutical and biological industry accounted for 77.60% of the operating revenue of the pharmaceutical and biological manufacturing industry, and the total profit accounted for 49.00%. From the perspective of trend, since 2013, the proportion of operating revenue and total profit of the pharmaceutical and biological industry in the pharmaceutical manufacturing industry has increased year by year, and the securitization rate of the pharmaceutical and biological industry as a whole shows an upward trend. Driven by the demand explosion of covid-19 and other factors, the three sectors of medical devices, biological products and medical services show strong growth ability and profitability.
The aging process drives the demand for conventional medical treatment. Covid-19 industrial chain is an important part of the current total medical demand. According to the data of the seventh national census, in 2020, the proportion of people aged 65 and over in 149 prefecture level cities and above has exceeded 14%, entering a deep aging stage. Overall, the proportion of the population aged 65 to the total population in 2020 was 13.5%, significantly higher than the 10.5% in 2015. It is estimated that by 2040, China’s elderly population aged 65 and over will account for more than 20% of the total population. With age, the chance of suffering from chronic diseases increases greatly. Therefore, the increase of the aging population means an increase in the demand for chronic disease prevention and treatment. The aging process is an important driving force for the demand for routine medical care.
According to Pango data, as of January 14, 2022, there were 1727 variants of covid-19 virus. The emergence of new mutant strains highlights the difficulties and challenges faced by covid-19 epidemic prevention and control. The high infectivity and low severe rate of the currently prevalent Omicron strain increase the uncertainty of the expected epidemic of covid-19, and the epidemic situation is short-term or difficult to end. The “cliff” of covid-19 determines the inflection point of the industrial chain. At the current time point, the covid-19 industrial chain is an important part of the total medical demand. According to the differences of consumption characteristics, the investment opportunities of covid-19 detection and treatment are better than those of protection and vaccine, and determine the export structure of the pharmaceutical industry.
A number of payment side data show that there is still huge room for medical consumption to be released. China’s per capita health expenditure increased from 1490.1 yuan in 2010 to 5112.3 yuan in 2020. Although the growth rate of per capita health expenditure in 2020 decreased compared with previous years, it still remained at a high level of 9.49%. Structurally, the proportion of personal health expenditure continued to decline, from 35.29% in 2010 to 27.65% in 2020, providing sufficient space for the further release of medical consumption. According to the data of medical insurance fund, in 2020, the income of China’s basic medical insurance fund was 24846 billion yuan, with a growth rate of 1.74%; The expenditure of China’s basic medical insurance fund was 2103.2 billion yuan, with a growth rate of 0.85%. The growth rate of income was greater than that of expenditure, and both showed a slowing trend. The changes of the two were respectively affected by the phased halving of the payment of employee medical insurance units since the epidemic, as well as the savings of medical insurance fund expenditure brought about by the centralized purchase of drugs and medical insurance negotiations. In vertical comparison, the growth rate of medical insurance fund expenditure in 2018-2019 was higher than that of income for two consecutive years, but it reversed in 2020. In terms of surplus of medical insurance fund, in 2020, China’s surplus of medical insurance fund was 381.4 billion yuan, with a growth rate of 6.92%. Compared with the previous two years, the growth rate increased significantly. In terms of health insurance, from January to October 2021, the premium income of China’s health insurance was 743.564 billion yuan, with a growth rate of 3.82%, which decreased compared with 2020. On the whole, China’s health insurance has developed rapidly in recent years, and the premium income has maintained a growth trend, becoming another support other than personal payment and medical insurance fund payment. In terms of structure, the per capita medical and health care expenditure of urban residents accounts for 4.91% of the per capita disposable income, and the per capita medical and health care expenditure of rural residents accounts for 7.86% of the per capita disposable income. There is still a huge space for medical consumption.
The valuation of the pharmaceutical and biological industry is at a medium low level. According to the statistics since 2000, as of December 31, 2021, using Shenwan pharmaceutical index, the overall valuation of the pharmaceutical and biological industry is in the lower quartile of historical valuation, and the PE of the industry is in the 31.58% quartile. In terms of sub sectors, the PE of chemical raw materials, chemical agents, traditional Chinese medicine, biological products, medical commerce, medical devices and medical services are 32.00%, 35.92%, 62.74% and 10.28% respectively 18.30%, 12.20% and 20.94% quantiles; The Pb of pharmaceutical and biological industry is 54.97%, and the Pb of chemical raw materials, chemical preparations, traditional Chinese medicine, biological products, pharmaceutical commerce, medical devices and medical services are 43.02%, 27.82%, 44.36%, 41.19%, 23.89%, 75.19% and 59.81% respectively. On the whole, the valuation of the pharmaceutical industry is in a relatively low position. According to the closing data on December 31, 2021 and using the overall method, the P / E ratio and P / B ratio (MRQ in the latest reporting period) of the pharmaceutical industry (TTM) are 33.46 and 4.72 respectively. In 2020, the premium ratios of the pharmaceutical industry to the overall P / E ratio and P / B ratio of A-Shares were 2.35 and 2.87 respectively. In 2021, the premium ratios of the pharmaceutical industry to the overall P / E ratio and P / B ratio of A-Shares were 1.99 and 2.47 respectively, down from 2020. On the whole, the pharmaceutical business is in a lower position. Driven by the valuation and repair market at the end of the year, the premium ratio of the traditional Chinese medicine sector has increased significantly.
Investment strategy. In 2021, the overseas covid-19 epidemic continued to spread, sporadically distributed in China. Covid-19 vaccination improved the overall defense ability of mankind. The unbalanced characteristics of global structural epidemic prevention and the emergence of super variants such as Omicron determined that covid-19 influenza was not overnight. The recovery of routine medical needs in varying degrees and the continuation of covid-19 medical needs constitute the current situation of global medical needs, and the pharmaceutical industry accelerates iteration. Policies to encourage innovation, internationalization of the medical market, centralized procurement and normalization of medical insurance negotiations are the conventional deduction of the medical industry. The pharmaceutical industry may show six characteristics in 2022: 1) the relative undervaluation and high demand determine that the overall performance of the pharmaceutical industry is better than that in 2021; 2) The market continues the rapid rotation style, and the performance of undervalued value is better than that of overvalued value; 3) Small and medium-sized market value companies lead the performance, and large market value looks at the second half; 4) Innovative drugs and innovative drug industry chain run through the long-term investment of the pharmaceutical industry, which will only be late and will not be absent; 5) The most dangerous time for “vaccine + Omicron” to improve the immune barrier has passed. The unbalanced characteristics of global epidemic prevention determine the long tail demand of covid-19 epidemic and investment opportunities in detection and treatment
Superior to vaccine and protection; 6) Industry differentiation will accelerate, and differentiated products and models will be given higher valuation and pricing. Combined with the changes of industrial policies, demand and market style, it is suggested to focus on the white horse stocks determined by growth and the second-line blue chips with higher than expected product differentiation layout, focusing on the following aspects: first, the innovative drugs and innovative drug industry chain under the continuous guidance of policies, Including innovative drug manufacturers and CXO enterprises providing services for innovative drugs; Second, leading manufacturers of high-end medical devices and epidemic consumables such as detection with import substitution capacity; Third, chain pharmacies benefiting from the improvement of market concentration and steady expansion; Fourth, third-party testing and medical service institutions with strong market demand; Fifth, biological products enterprises with both consumption and epidemic prevention attributes; Sixth, traditional Chinese medicine enterprises with the attributes of “true innovation” and “strong consumption”.
Key companies. It is recommended to focus on the core portfolio in 2022, including Wuxi Apptec Co.Ltd(603259) , Jiangsu Hengrui Medicine Co.Ltd(600276) , Jiangsu Nhwa Pharmaceutical Co.Ltd(002262) , Shanghai Junshi Biosciences Co.Ltd(688180) – u, Lepu Medical Technology (Beijing) Co.Ltd(300003) , Shenzhen Mindray Bio-Medical Electronics Co.Ltd(300760) , Yixintang Pharmaceutical Group Co.Ltd(002727) , Dian Diagnostics Group Co.Ltd(300244) , Hualan Biological Engineering Inc(002007) , Cansino Biologics Inc(688185) – u, Changchun High And New Technology Industries (Group) Inc(000661) and Tasly Pharmaceutical Group Co.Ltd(600535) .
Risk warning. Covid-19 epidemic risk; Industry policy risk; R & D risk; Price reduction risk of drugs and equipment; Risk of performance falling short of expectations; Overseas expansion is less risky than expected.
