Guangdong two-vote system enters the substantive implementation period | Accelerate the integration of medical device mergers and acquisitions

According to the medical network June 22, the circulation of medical devices presents a pattern of small, scattered and chaotic, with many intermediate links. Integrating equipment distribution companies by means of mergers and acquisitions is a path for pharmaceutical distribution companies to expand the national market.

Guangdong Province drug The trading center recently released a concrete "two-vote system" and entered into the substantive implementation period. medicine The economic volume is huge, and the impact of the 'two-vote system' on the implementation of pharmaceutical distribution companies has deepened. Since the State Council's Medical Reform Office and other ministries announced the introduction of the 'two-vote system' for drug procurement by public medical institutions two years ago, the 'two-vote system' Year by year, step by step, province by province.

The 'two-vote system' corresponds to multiple invoices issued by previous multi-drug circulation providers, from drug manufacturers directly to pharmaceutical distributors, and directly to medical institutions and other terminals. There are no other circulation links in the pharmaceutical industry. In a round of policy reform, the industry is faced with reshuffling and re-layout.

In addition, medical reform gradually enters deepwater areas. After the establishment of the Medical Insurance Bureau, it will in-depth participate in pricing, procurement and payment links. Circulation companies will also need to strengthen their relationship with upstream manufacturers. The downstream hospitals will be involved in overall procurement, use, and inventory data. In the course of linkage and medical improvement, the social functions of distribution companies will gradually expand from traditional distribution, advancement of resources to supply chain management, comprehensive hospital services, and academic promotion.

On the other hand, the circulation industry is moving from a low level of concentration, multiple levels, and low efficiency to gradually increasing the degree of concentration and the path of economies of scale. It has become an important strategy for some pharmaceutical distribution companies to build distribution networks throughout the country through mergers and acquisitions.

The market size of the pharmaceutical distribution industry is nearly 2 trillion yuan, and the industry's leading concentration and scale are still increasing. The industry is shifting from a period of rapid growth to a period of stable growth. However, there is still much room for growth in the equipment sector. Zhang Renhua, president of Kang Pharmaceutical, told the 21st Century Business Herald that the profit rate of equipment is much higher than the gross profit rate of medicines, and there are more opportunities in the terminal service value and integration space.

Circulation enterprises undertake the dual functions of advancement and logistics and distribution in the industrial chain, and the advancement of funds is part of the circulation business.

'The reason for the extension of accounts receivable due period is that after the implementation of the two-vote system, the ratio of pure sales of circulation enterprises has increased, while the net sales period of net sales business has been longer than the allocation business. This is basically the situation faced by all circulation companies.' Lin Na, a pharmaceutical industry analyst at the Bank of China Securities Research Institute in China, told the 21st Century Business Herald that 'the second is the extension of the hospital’s billing period; third is the change in the business structure of some companies, and the increase in the proportion of equipment and consumables distribution compared to the pharmaceutical 3- For a 6-month billing period, the chargeback period of the device will be 6-12 months.'

According to the 2017 annual report of Ruikang Pharmaceutical (002589.SZ) previously published and the quarterly report of 2018, the company's operating revenue for 2017 was 23.294 billion yuan, an increase of 49.14% compared with the same period of last year; the net profit attributable to the parent company was 1.008 billion yuan. In the same period of last year, the growth rate was 70.66%. In the first quarter of 2018, the operating income was 7.129 billion yuan, an increase of 43.2% over the same period of the previous year; The net profit attributable to the parent company was 280.3 million yuan, which excludes the one-time influencing factors of the change in accounting estimates for 2017Q1. After) increased by 53.84% year-on-year.

Zhang Renhua said that the increase in revenue and profit was mainly due to the completion of the national marketing network layout and medical instruments The rapid growth of business.

At the same time, the capital market also raised doubts about its operating cash flow deficit. Ruikang said that in the first quarterly quarter, accounts receivable increased by 1.6 billion, prepayments increased by 350 million, and other receivables increased by 550 million; In terms of business, the growth of equipment business is faster (the payment period of equipment is shorter than medicine, and the repayment period is longer than medicines); the consolidated company brings accounts receivable, advances and other receivables, and is affected by the Spring Festival vacation in the first quarter. , Usually the payment is poor, etc. The company will strictly control the account period difference, increase the payment, optimize the payment methods, and promote the improvement of operating cash flow in combination with ABS, supply chain finance and other methods.

Wei Qingyi, chief operating officer and strategic officer of Wellcome Pharmaceuticals, stated that 'in the case of the two-vote system, the cash flow is relatively tight due to the time difference between payment and repayment. This kind of business environment usually generates a trade deficit. This year Shandong region In the second quarter, there was a surplus, which prompted the hospital to make early payments or coordinate with suppliers. Some payments were made through acceptance bills, so the industry can be intensively and finely managed. With the expansion of the company's purchase and sales scale, we The ability to negotiate downstream business is also increasing. Combining innovative tools such as supply chain finance, the company's cash flow can be continuously optimized.

'Circulation enterprise The accounts receivable mainly hospital In particular, the receivables of the top-three hospitals, the risk of bad debts is low, and the provision for bad debts of the circulation companies is sufficient to cover the actual bad debts; and the accounts receivable can be realized through the use of ABS, etc., after realizing a certain capital cost, for the pharmaceutical circulation enterprises. Cash flow and receivables need not be overly worried. ' Linna said.

In the past two years, Ruikang Pharmaceuticals has started to walk out of Shandong Province through the 'M&A+Partner' mechanism and it has been deployed nationwide.

Zhang Renhua said that the average valuation of the M&A companies in 2017 was low, and they promised a 25%-30% growth in revenue in the next 3 years. Most M&As can recover their investment in 3-4 years. There is no industry eye-catching, Ruikang Pharmaceutical has chosen Business lines that are highly complementary to the company's existing businesses are acquired through mergers and acquisitions and paid in installments. Most of the acquired companies have the characteristics of small scale, strong professionalism, and outstanding marketing capabilities. They have advantages in the subdivided fields and can integrate into the Ruikang system more quickly. , Form a synergy with the company's existing business lines.

In addition, cutting into medical devices is one of the opportunities for distribution companies in the future. The primary reason is relative drugs. Medical device supplies require deeper professional services to medical institutions. Therefore, the operating margin is much higher than that of drugs.

In the case of a slowdown in the growth of total sales volume in the drug distribution market, medical devices and consumables still maintain a high growth rate. Medical device distribution and promotion services are characterized by strong demand, variety, high professional requirements, and rapid innovation. The annual growth rate of circulation exceeds 20%, and the annual growth rate of drug circulation is about 10%.

According to the Ruikang annual report, the proportion of medical device sales revenue to operating revenue has increased year by year. In 2013, the company entered the device circulation business. In 2017, it achieved a sales scale of 7.333 billion yuan. In the past three years, the revenue from this sector was 1.051 billion yuan and 2.899 billion yuan respectively. 7.333 billion yuan, accounting for 10.76%, 18.56% and 31.48% of operating revenue, respectively.

In fact, the circulation of equipment is also the entry point for local distribution companies to reach the national layout. In the case of head enterprises such as Sinopharm, Shanghai Pharmaceutical and China Resources, etc., holding a large market share of drug distribution, IVD, high-value consumables (orthopedics, intervention) Equipment such as large-scale market, high gross margin, more subdivided areas.

'Available for mergers and acquisitions, there are fewer circulation companies with a revenue of more than 1 billion yuan, and the era of expansion through large mergers and acquisitions is over. ' Lin Na believes that the circulation of equipment still presents a pattern of small, scattered, chaotic, intermediate links. There are also many, and the integration of equipment distribution companies by way of mergers and acquisitions is also a way to expand the national market.