Industry warming integration speed | the pharmaceutical industry has room to improve valuation

Pharmaceutical Network December 21 hearing the current low level of the pharmaceutical sector and the industry fundamentals are heating up, the trend of accelerating the integration of efficiency does not match, mainly due to the market for short-term fluctuations in performance and consolidation and cash over concerns, but we determine the medical reform Policy-oriented unchanged, the industry's long-term trend is not changed, leading pharmaceutical and growth stocks long-term logic remains strong, at the moment many stocks already have a higher valuation advantage.

Combined with the current performance, valuation and policy analysis of the trend of analysis and evaluation, it is recommended to grasp the innovation as the key link, blue-chip optimization, the average return to the three main lines, focusing on: 1. Lead innovation and international Hengrui Medicine (600,276, stock it) , Fosun Pharma (600,196, Shares), Yunnanbaiyao (000538, Shares) and Le Pu Medical (300003, Shares); 2. Pharmaceutical and retail areas of China Medicine (600056, Shares), Liuzhou Pharmaceutical (603368, Shares) , Yifeng pharmacy (603939, stock it), the Senate forest, while the proposed attention Shanghai Pharmaceutical (601607, Shares); 3. Segmentation of the industry's high growth Tonghua Dongbao (600867, stock it), Ireland ophthalmology , Antu Biologicals, Yamaha Takeda (000,915, stock it) and Dean Diagnostics (300,244, stock it) and so on.

Since 2017, the pharmaceutical sector has gradually shown a pattern of differentiation. There are three main reasons for this: First, the profit growth in the pharmaceutical industry and revenue growth continued to diverge. Secondly, due to the change in market style, the fund's position in pharmaceuticals in the third quarter Down to historic lows, the fundamentals of the industry continued to warm up and the market with low levels of significant differentiation; Finally, the performance of first-tier blue chip and the valuation of matching degree compared to small and medium market capitalization growth stocks also continued to differentiate.

According to the latest data from National Bureau of Statistics of China, from January to September 2017, the accumulated revenue from principal operations of the pharmaceutical manufacturing industry reached 2.17 trillion yuan, up 12.1% over the same period of previous year, an increase of 2.10 percentage points from the same period in 2016. January 2017 As of September, the accumulated profits of the pharmaceutical manufacturing industry totaled 242.0 billion yuan, up 18.4% from the same period of last year and up 4.5 percentage points from the same period of 2016. At present, the overall revenue and profit growth of the pharmaceutical industry both showed a significant improvement over the same period of last year, , The growth of leading enterprises in 2017 is still worth the wait. In addition, in the first nine months of this year, the profit growth of the industry exceeded the revenue by 6.3%. The operation of the micro-level continued to differentiate, and the profitability kept rising.

Medical financial support continued to increase the proportion of China's financial expenditure continues to increase, January 2017 to September, fiscal health expenditures totaling 1.18 trillion yuan, an increase of 16.42% over the same period public expenditure growth 4.71 percentage points , And from 2010 to September 2017, the proportion of public finance in China's health care expenditure has risen from 5.3% to 7.79%, an increase of 2.49 percentage points, and the financial support for the medical and health sector has been steadily increasing. It is estimated that with the financial support The intensity of the intensification of hospital pressure due to zero addition, tender price cuts will be gradually eased, the pressure on the circulation enterprises and upstream enterprises is expected to gradually reduce.

According to the Awkwardness Positions of the 2017 FJQ Quarterly Report, as of the end of the third quarter, all fund TCM stocks accounted for approximately 8.04% of the total positions, down 2.59% and 1.48% from the same period of previous year and the end of the previous quarter respectively. The positions held have dropped to historic lows. Pharmaceutical funds in the pharmaceutical stocks positions accounted for about 92.05%, an increase of 4.58 percentage points, with the theme of the third quarter of last year, the funds gradually returned to the value of the pharmaceutical stocks situation is similar to deducting the medical funds, the market The overall shareholding ratio of pharmaceutical stocks was 5.70%, down 1.76% and 1.26% YoY respectively, while the pharmaceutical market accounted for about 6.12% of the market value of the pharmaceutical sector in the same period. The level of fund positions in the pharmaceutical sector had dropped to historic lows.

In our opinion, the current low level of the pharmaceutical sector does not match with the warming of the industry fundamentals and the accelerating trend of consolidation and efficiency increase, which is mainly due to the market's excessive concerns about fluctuations in short-term performance and consolidation and redemption. However, Long-term trend of the industry does not change, leading pharmaceutical and growth stocks long-term logic remains firm, at the moment many stocks already have a higher valuation advantage.

In October 2017, relevant departments issued the Circular on Deepening the Reform and Approval of the Examination and Approval System for Reviews drug medical instruments Innovative opinions, "from the six aspects of reforming clinical trial management, speeding up examination and approval of listing review, promoting drug innovation and generic drug development, strengthening the management of pharmaceutical medical device life cycle, upgrading technical support and strengthening organization and implementation, 36 rules To guide the structural adjustment and technological innovation in the pharmaceutical and medical device industry and encourage and support the development of domestic innovative drug devices at a higher level of policy.

Since the issuance of heavyweight documents that encourage the innovation of pharmaceutical equipment, a number of supporting policies have been issued lately, including the revision of the two major documents for initiating the Drug Administration Law and the Drug Registration Administration Measures, and the adjustment of the related matters concerning the registration of imported drugs. The CDE first announced There is no valid domestic patent, no generic application list of drugs and medical device regulatory regulations released amendments.With the policy support of the landing, the progress of the market of China's innovative drug will be significantly accelerated docking products and technologies overseas markets will be more direct .

At present, the domestic CAR-T clinical treatment research ranks second in the world, the future is expected to achieve overtaking. CAR-T industry in China rapid development in recent years, has now entered the field of international CAR-T first echelon: 1. China's CAR -T clinical treatment research behind the United States, second in the world, and the number of new increased significantly over the past two years; 2. China's CAR-T's clinical costs for 30,000 to 50,000 yuan, significantly more than the United States Of the cost advantage; 3. A number of international pharmaceutical companies, academic institutions rich experience in the research and development of scientists returning, substantially increase the domestic CAR-T field of technology accumulation; 4. At present, CAR-T technology at home and abroad belong to the exploration period, foreign Leading edge is not obvious.

China is the second largest market for medical devices, with a compound annual growth rate of over 20% in the medical device industry in the past three years. China is the second largest medical device market in the world after the United States. In 2015, the domestic market exceeded 300 billion yuan, Accounting for 8% of the global market size medicine According to the IMS data, the compound growth rate of the global medical device industry is currently 6%, the market growth rate in Asia Pacific is 10%, and the market size is between 55 billion U.S. dollars and 60 billion U.S. dollars China has become the fastest growing medical device market in the Asia Pacific region with a CAGR of 21.91% in the past three years. It is estimated that the average annual growth rate will be around 15% to 18% in the next five years.

The four elements continue to drive, expansion and substitution to bring sustained demand release.We judge that with the high-end medical device technology innovation and import substitution trends appear, the industry's logic of rapid growth will mainly have the following four elements driven: 1. Aging The per capita income and the increase in the level of medical insurance will continue to release the demand for medical and health care. 2. The proportion of China's medical and health expenditure in GDP will be only 5.6%. If the proportion of medical and health expenditure in the next five years can be increased by 2.5 percentage points , The scale of the pharmaceutical market will directly double; 3. Financial support is constantly increasing, primary market and private hospitals to bring medical equipment market expansion; 4. Domestic medical equipment in technology research and product performance breakthroughs in the high-end domestic manufacturers in Market expansion and upgrading of products continue to increase market share.

Policy support continued to increase.China's imports of high-end medical equipment import substitution road in the new round of medical reform has started on the road, we determine the premise of import substitution is a technological breakthrough in domestic medical equipment, the core catalyst is the policy side of the strong ice, through Encourage innovation, speed up the review and support the use of domestic medical equipment, such as the procurement of combination boxing, on the one hand to improve the level of innovation and manufacturing of domestic brands, on the other hand through the pattern of remodeling for the domestic equipment provided tickets.

In order to improve the innovation capability and industrialization level of medical devices, in August 2016, the Ministry of Industry and Information Technology promulgated the "Notice on Implementing 5 Major Projects for Manufacturing Innovation Center" and listed 11 high-performance medical devices as 11 priority areas for high-end equipment innovation project One of which includes digital imaging, clinical testing, advanced treatment, implantable devices and materials, and health monitoring equipment category 5. In addition, the "Made in China 2025 Technology Roadmap for Focus Areas" lists biomedical and high-performance medical devices as medical areas Advanced manufacturing two directions, of which the road map proposed that by 2030, China's medical device industry to reach 3 trillion yuan scale, and the completion of 1 trillion yuan export target.

In order to encourage the innovation of medical devices, our country has set up a special rapid review and evaluation channel for medical devices, namely the 'green channel' system, which can speed up the process of device listing for 3 to 6 months. The setting of 'green channel' will speed up the technology in the field of medical devices Innovation and product substitution will help improve the overall R & D level of the industry.

In order to encourage the development of domestic medical equipment, optimize the allocation of resources and reduce inspection costs, the National and major provincial and municipal Health and Family Planning Commission repeatedly advocated the use of domestic medical equipment and encourage prioritization of procurement of domestic equipment in the new configuration. Looking from the current trend of bidding and purchasing, China is expected to gradually weaken the difference between domestic and imported products and pay more attention to product quality and performance. With domestic equipment manufacturers gradually breaking through technical barriers, middle and high-end domestic products are expected to steadily embrace import substitution with higher cost performance and better bidding and purchasing policies Road, the growth rate of domestic medical equipment will be higher than the industry as a whole, the market share will continue to improve.

On March 5, 2016, the General Office of the State Council issued the Opinions on the Evaluation of Consistency in the Quality and Efficacy of Generic Drugs. Relevant supporting policies and guidelines have been issued intensively. The ambiguous reference formulation and the lack of clinical trial base have two major impacts The issue of consistency assessment process is also being gradually solved, and it is expected that with the further introduction of the relevant rules, the progress of the generic drug consistency assessment will continue to accelerate.

Currently, the number of varieties entering the BE stage is rapidly increasing, among which, the BE record data is more for the companies such as the Yangtze River, Fosun Pharma, and China Biopharmaceuticals, and more than 30 varieties have completed the BE experiment.We believe that the consensus evaluation will promote China's generic drugs In general, the market concentration in both the pharmaceutical and auxiliary materials industries will significantly increase after the generic drug coherence assessment, and high-quality enterprises will achieve strong and strong positions.

On January 9, 2017, the State Medical Reform Office issued the Circular on Issuing the Implementation Opinions (Trial Implementation) on Implementing the 'Two-vote System in the Purchase of Medicines by Public Medical Institutions', marking the formal introduction of the 'two-vote system.' Designed to regulate the order of drug circulation, compression circulation, reduce the high drug prices.

At present, with the combination of "two votes plus battalion plus sales plus verification of circulation", China opened the reform curtain of circulation industry and considered the impact of policies. We think the tide of transformation and integration will be welcomed at all stages of the industry chain: 1. Manufacturer: The traditional reserve price proxy The model will be forced to transition, tax burden increased; 2. Agents: agents with specialized promotion capabilities and expert resources will remain after the transformation; 3. Circulation: compliance of large wholesale enterprises affected by limited, small and medium-sized wholesale The pressure on enterprises is obvious.Under the guidance of policies of two-vote system, business reform, circulation verification and industry consolidation and upgrading, the major pharmaceutical distribution enterprises in all provinces will be reduced to 20 to 30 in the future, and the commercial distribution business will provide nationwide and Regional circulation leading, industry reshuffle acceleration, to further enhance the concentration.

Due to historical reasons, at present, most of the pharmaceutical commercial companies in China have more or less different distribution businesses. From a policy perspective, the implementation of the two-vote system is imperative. The traditional distribution business of the Company will be forced to face transformation. Which coexistence of opportunities and pressures.With the promotion of two-vote system in depth, changes in the county hospital market structure will also bring to the regional and national leading pure-selling business to enhance the incremental, or the original distribution business to rely on mergers and acquisitions Or self-built downstream channels into a pure profitability improvement.In addition, due to the variety advantages and the further expansion of the terminal channel resources, the new round of bidding and purchasing will also significantly enhance its market share, focusing on Liuzhou Pharmaceutical, Ruikang Pharmaceutical (002589, stock it), Jia Tong (002462, stock it), Sinopharm shares (600,511, stock it).

Large integrated commercial leaders: increasing direct selling coverage, transferring funds to change pure sales and adjusting performance during the period may be under pressure, but in the medium and long term, large-scale comprehensive enterprises or national circulation enterprises have strong capital and centralized purchasing costs Advantage, more small and medium-sized commercial companies with the advantages of terminal coverage is still expected to move closer, the trend of future consolidation and concentration will also be more obvious, it is recommended to pay attention to the national leader Shanghai Pharmaceutical, Sinopharm Holdings, China Resources Pharmaceutical and private leader Kyushu Tong (600,998, Share it).

Under the combination of policy orientation and market style, first-line blue chip represented by Fosun Pharma and Hengrui Pharmaceutical performed strongly in 2017, Fosun Pharma ranked first among A-share pharmaceutical companies with 87% annual increase. At the current node, A shares of the pharmaceutical sector has five target market hundreds of billions of market capitalization, 10 standard market capitalization of 50 billion yuan.Expect 2018, the first question we face is whether the first-line blue-chip market will continue, these thousands Billion (or quasi-billions) market value of the pharmaceutical stocks in the future there is still much room for growth?

Before answering this question, we first want to emphasize an international trend that is easily overlooked by the market but far-reaching and irreversible - the trend of A-share internationalization, which started from the opening of the Shanghai-Hong Kong Stock Connect in 2014. Since 2016, After the opening of the Shenzhen-Hong Kong Stock Connect in the second half of the year, the acceleration will take place. With the inclusion of A shares in the MSCI, the internationalization will be substantially accelerated.

At present, the shareholding amounts of QFII and RQFII in A shares overlap with the total net inflow of northbound funds in Shanghai / Shenzhen-Hong Kong Stock Connect, accounting for about 1% to 2% of the total market value of A shares. However, foreign ownership is often concentrated in tier-1 and tier-2 blue chip stocks. For some stocks, foreign ownership even more than 10% of the share, the most typical example is Hengrui medicine since the opening of the Shanghai-Hong Kong Stock Connect in November 2014, the ratio of its funds from North to December 2014 2.05% on the 31st rose to 12.18% on October 31, 2017. Other pharmaceutical blue-chips, such as Yunnanbaiyao and Dong E Jiao, also exceeded 4% in shareholding, while Fosun Shenzhen Pharmaceutical, Shanghai Pharmaceutical, Livzon Group (L) is a listed company A + H, foreign capital can directly hold its Hong Kong stocks, the ratio of shares held by Shanghai / Shenzhen-Hong Kong relatively low addition, for QFII, in the Shares of pharmaceutical blue-chip shares in about 1%.

From a global perspective, the current A-share internationalization is still in its infancy, the share of foreign investment and share will be in long-term rise, a trend that has quietly affected the A-share blue-chip valuation system.Therefore, the blue-chip pharmaceutical Market value, we think we should think from an international perspective.

First of all, from the perspective of the market value of plates, we compare the market value of each sector of A shares and the US stock market. Among them, in the fields of industry and materials, the market value of A shares is relatively large; however, in the fields of healthcare, information technology and telecom services, Of course, this is mainly due to the low share of related industries in the national economy, but it also reflects that the output and market value of the pharmaceutical sector in our country still have huge room for growth in the future.

Secondly, from the perspective of the stock market value of individual stocks, we compared the relevant targets of the pharmaceutical industry in the United States, Japan, India and the United Kingdom to develop the more developed countries.Because the direction of our pharmaceutical industry policies is to promote industry consolidation and concentration, Therefore, in the context of the internationalization of A shares, it is of great reference value to compare the companies with the largest market cap in the pharmaceutical sector in the above five countries.

From the company's absolute market value, Hengrui pharmaceutical market capitalization has now reached 32.1 billion US dollars, significantly less than Johnson & Johnson and other companies, including Johnson & Johnson's market capitalization reached 375.5 billion US dollars, is more than 10 times the market value of Hengrui medicine.If we exclude the valuation of the country Level and the size of the capital market factors, from the company's market capitalization accounted for the total market capitalization of the country's exchange rate point of view, Hengrui market value accounted for only 0.41%, ranked in the last five countries.In contrast, other consumer industries, some industries Of the leading market value has been able to shoulder or even beyond the overseas leader, such as the market capitalization of Guizhou Maotai (600519, Shares) was significantly higher than the overseas wine leader Diageo Jiage.

Returning to our original question, we think that in terms of absolute volume or relative proportions, Hengrui Pharmaceutical has the lowest market capitalization of pharmaceutical stocks with the largest market capitalization in the United States, Japan, Britain and India. Regardless of whether the current valuation is reasonable or not , Only from the international market point of view, Hengrui Pharmaceutical's market value still has a larger upside in the future, not to mention the current market capitalization of only about half of other top-line pharmaceutical blue chip.

In the past year, there was a hot market for medical white-goods. The average market share of over 50 billion-yuan pharmaceutical stocks rose 50% in October, far exceeding the industry average. In the same period, the small and medium-cap pharmaceutical stocks fell 11%. The polarization of the pharmaceutical sector was quite obvious. We think there are two reasons for the emergence of polarization: From a fundamental perspective, first-line blue-chips are all leading enterprises in various sub-sectors. As the reform advances, resources and opportunities for the industry as a whole are moving closer to the leading companies. From the valuation point of view, the valuation of first-line blue chip relative to the industry as a whole at a low level, higher safety factor.

Combined with the performance of performance, small and medium market value of blue chip stocks did not significantly increase the performance and performance.According to the three quarterly situation, first-line medical blue-chip growth in the first three quarters relatively stable, more than 500 billion yuan in pharmaceutical stocks in the first three quarters average return net profit growth of 16.3% , But higher than the industry median.But through the horizontal comparison of the performance and gains of different market capitalization companies, we can see that some small and medium capitalization companies whose performance is significantly better than the first-line blue chip companies, or much lower than the first-line blue chip stocks, showing that the performance is not this year's medicine Leading the market leading plate, while the performance of good small-cap companies due to higher valuations in previous years, a larger adjustment this year.At the same time, small and medium-sized market capitalization companies after more than two years of adjustment, the overall valuation premium has dropped significantly Small plates and Entrepreneurship Plate valuation premium has reached a 5-year low, the valuation of small and medium-sized pharmaceuticals and blue-chip pharmaceutical stocks are getting closer.

Judging from the current situation, the performance differentiation of pharmaceutical stocks in 2017 may be related to the "two-vote system" and other factors. However, taking into account the long-term consolidation trend of the industry, the logic of the leading share increase is expected to accelerate as well. , The medical sector forecast PE in 2018 is 29.37 times, forecast net profit growth of 21.76% in the long term, the pharmaceutical sector will benefit from the long-term demographic dividend and medical reform policies continue to deepen the dividend, the industry boom trend was significantly upward. We are optimistic about the long-term growth prospects of the pharmaceutical industry. The current valuation level is reasonable and the investment rating of the industry's "Outperform" is maintained.