Pharmaceutical Industry Research

The pharmaceutical industry is known as the sunrise industry that will never decline, and it is characterized by weak cyclicality, a long industrial chain, large differences in the life cycle of the industry and its products, and a differentiated competitive structure. Therefore, the pharmaceutical industry research is generally used "top-down" to select fast-growing segments, and then through the "bottom-up" to determine the investment objectives of the method, in order to do this, you need to have a basic understanding of the pharmaceutical industry.

1. Characteristics of the pharmaceutical industry

Cyclical characteristics: the pharmaceutical industry is a typical weak cyclical industry, pharmaceuticals is a special commodity, pharmaceuticals demand rigidity, elasticity is small, less affected by the macro-economic impact, and thus the pharmaceutical industry has a strong defensive characteristics.

? Industrial chain characteristics: the pharmaceutical industry chain from the upstream raw material enterprises to the R & D and production enterprises in the middle of the circulation area, to hospitals or retail terminals, and finally to consumers.

? According to its different positions in the industry chain, the pharmaceutical industry mainly consists of upstream raw material enterprises, including chemical raw materials, Chinese herbal medicines and traditional Chinese medicine tablets industry; midstream production enterprises, including chemical pharmaceutical preparations, traditional Chinese medicines and biopharmaceuticals; and downstream distribution enterprises, including the pharmaceutical business industry (including wholesale and retail), medical services, etc.

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? In this industry chain, the upstream API and downstream pharmaceutical distribution is relatively stable, traditional Chinese medicine has been lukewarm, relatively easy to appear bullish stocks are chemical pharmaceuticals and biopharmaceuticals, because generally new chemical drugs out if the effect is good, it will continue to give the company a huge income.

? For example: Hengrui Medicine launched Apatinib tablets for cancer in 2011, which became the first widely recognized anti-cancer drug in China. As a result, Hengrui's share price has more than doubled 10 times since 2011.

? Another example is the biopharmaceutical Zhifei Bio, in 2017, the agent of Merck Sharp & Dohme's cervical cancer vaccine 9-valent HPV, the performance of the rapid growth, the share price has also turned over nearly 3 times in 2 years.

? The life cycle of the pharmaceutical industry: the pharmaceutical industry as a whole is in the growth stage, but the segmented products therein are highly differentiated. Most of the pharmaceutical products are in the growth stage, but a considerable part of the biomedical products and some innovative drugs are still in the nascent stage, such as monoclonal antibody drugs, therapeutic vaccines, etc., and some other products such as penicillin, aspirin and other medicines have entered the maturity stage, sulfonamides and other medicines have entered the decline stage.

? In this way, we should understand why some pharmaceutical stocks live, and some pharmaceutical stocks are dead. Simply take an example: from the point of view of the stock Hengrui medicine (innovative drugs, growth industry) > Lu resistance medicine (penicillin, mature industry) > Xinhua Pharmaceutical (sulfonamides, decline industry)

? Competitive structure of the pharmaceutical industry: the pharmaceutical industry consists of many different sub-industries, the operation of each sub-industry and the competitive structure of the industry varies.

Overall, the competitive environment is relatively good for biopharmaceuticals and medical services, and relatively poor for chemical APIs, chemical preparations, traditional Chinese medicines, pharmaceutical business and medical devices. However, in the various segments of the industry, and there are great differences, such as in the chemical pharmaceutical preparations of patented drugs and exclusive products in the competitive environment is also very good, the general medicine is very poor; Chinese medicine within a similar situation, branded traditional Chinese medicine is a very good competitive environment, the general Chinese medicine is very poor. In the analysis of the competitive environment needs to be analyzed for specific companies.

2. The core of the pharmaceutical industry-supply and demand

The demand for a single drug in terms of volume is low, so once the drug is mass-produced, it is easy to satisfy the market, therefore, the focus of the pharmaceutical industry research is on the demand side.

? From a macro point of view, the factor that affects the demand for pharmaceuticals is the demographics, such as the degree of aging, the ratio of men to women, etc. all have an impact on the demand for pharmaceuticals.

? From a micro point of view, the demand for specific segments also needs to be considered from the following points: (1) the incidence of diseases in the segment; (2) whether policies, especially health insurance policies, will have a pull on the consumption of such medicines; (3) whether this growth in demand can be realized to specific companies.

? For example, domestic we through the rapid increase in the incidence of tumors this information, tracked to the anti-tumor drug market is growing at a high rate, and in the universal health insurance pull, anti-tumor drugs and by the pull of one of the largest areas, so as to reach the conclusion that anti-tumor drugs leading enterprises related products will grow at a high rate.

3. Pharmaceutical industry investment logic and performance growth sources

The point of investment opportunities in the pharmaceutical industry is more, usually can be from the following aspects of the entry, looking for investment opportunities:

? (1) The improvement of the overall prosperity of the subsectors and fields can be tracked from the growth of the industry's revenue and profit, the level of profit margins, the cash flow situation and the operation of major companies in the industry;

? (2) The most important thing for a pharmaceutical company is the product, and a new heavyweight drug often plays a crucial role for a company. For pharmaceutical companies, it is essential to track the development of their new products, and to understand the sales status of the company's products in the channel. At the same time, because the domestic enterprises are mainly generic drugs, they need to grasp the patent expiration time of similar drugs, product price fluctuations and so on.

? (3) industry environment and policy factors, the need to interpret the policy guidance, to see whether the policy will have a big impact on the industry, such as consistency evaluation policy on the impact of generic drug companies;

? From the point of view of the various sub-sectors of the pharmaceutical industry, different types of companies, their analytical methods and investment logic vary greatly, and the driving force behind the company's growth is also different.

3.1 Chemical APIs

? The chemical API industry is customarily divided into bulk APIs and specialty APIs, and there is a big difference between the profit models of the two types of companies.

3.1.1 Bulk APIs

Bulk APIs have typical cyclical characteristics, and the drive for corporate profits is often determined by price and volume.

This is more typical of the last two years, the stock price soared in the new and Cheng, in recent years its main vitamin has been rising prices, but this price increase is not because of strong demand, but due to the impact of environmental protection policies, vitamin start-up restrictions, as well as vitamins, vitamins, the core technology is only mastered in the hands of BASF, the new and Cheng, Dismantling and other a few companies, which are jointly supported the price. Therefore, the vitamin appeared to trend up.

3.1.2? Specialty APIs

? Specialty APIs and bulk APIs compared to a certain degree of technical content, speaking of speed. Especially when a new drug just came out can quickly realize the supply of raw materials, the premium ability to gradually weaken, prone to ups and downs. For example, the early Huahai Pharmaceuticals, Tianyu shares.

? But in recent years, due to the stage of the industry's growth is weak (the vast majority of the field of APIs are very clear), so that this field gradually faded out of our vision.

3.2 Chemical Pharmaceutical Preparations Industry

? Chemical pharmaceutical preparation enterprises can be divided into generic-type chemical drug (innovative drug) enterprises, OTC preparation enterprises and general pharmaceutical preparation production enterprises. OTC chemical and traditional Chinese medicine enterprises **** strong, of which the characteristics of traditional Chinese medicine OTC enterprises are more obvious, and thus we put in the traditional Chinese medicine part of the discussion.

3.2.1 Generic-inventive chemical enterprises

? Typical of the generic-type enterprises is Hengrui Medicine, which used to develop its market mainly by imitating the products of patented drugmakers that were not protected in China or whose patent protection had expired. Later, as the company's R&D strength increased, it began to develop innovative drugs, forming a product line combining generic drugs + innovative drugs.

? Of course, most of the transformation of China's pharmaceutical companies are taking the same route, which is more successful to the transformation of innovative drugs: Colom Pharmaceuticals, Fosun Pharmaceuticals, Beida Pharmaceuticals and so on.

Through innovation to develop new products, this type of company is the pharmaceutical industry is the most likely to appear bullish company, is the focus of our attention.

? As an example, Xingqi Ophthalmic has been an ordinary eye ointment company, but in April 2019 the company disclosed the development of orotidine hydrochloride eye drops for conjunctivitis, corneal ulcers and other diseases, which is still a gap in the country, and the future prospects are promising, and the company's stock price has risen from 20 yuan to near 100 yuan, or nearly 5 times.

3.2.2 General drug preparation manufacturers

? Generic drugs, i.e., conventional drugs, relative to new drugs, these products have usually been on the market and sold for many years, the market is relatively mature, there is no patent and other protection barriers. Most of the domestic chemical pharmaceutical companies are generic pharmaceutical manufacturers, most of these companies have low gross margins, many manufacturers, fierce competition, and its possible attraction lies mainly in the increase in industry concentration, through the scale effect and cost compression to bring profit growth.

? This type of company's stock price trend is generally smooth, such as:China Resources Double Crane, Modern Pharmaceuticals, China Pharmaceuticals, East China Pharmaceuticals, Jingxin Pharmaceuticals, Puli Pharmaceuticals and so on.

3.3 Chinese Pharmaceutical Preparations

Chinese medicine is mainly divided into 4 types, Chinese medicine tablets, branded Chinese medicine, modern Chinese medicine, Chinese medicine OTC

3.3.1 Chinese medicine tablets industry

? Due to its small market size, low value-added products, limited technical content, gross margin is usually lower than 50%, branded Chinese medicine enterprises are less involved in this field, the Chinese medicine beverage field is mainly characterized by low access standards, poor standardization and market fragmentation.

So this industry is not considered a good track.

? We also see that the long-term performance of the shares of listed companies such as Kangmei Pharmaceuticals, Hongri Pharmaceuticals, Xiangxue Pharmaceuticals and Tai Long Pharmaceuticals is very average.

3.3.2 Branded TCM

? Brand Chinese medicine is the most important category of companies in the field of traditional Chinese medicine, whose product brands are often formed for historical reasons, such as Tongrentang, Yunnan Baiyao, Dong'a Gum, Pientzehuang, with exclusivity and non-reproducibility, and have strong cost pass-through ability due to the scarcity of their brands and relative rigidity of demand.

? From the past, the performance growth of such companies often relies on two points: (1) the improvement of product price; (2) the extension of product application field or brand. Typical representative companies such as Yunnan Baiyao, Pientzehuang, Dong'a Gum.

? For example, Yunnan Baiyao found a breakthrough in toothpaste, and its stock price had a good performance during 16-18 years, while Pientzehuang expanded the route of skincare products, and its stock price was also very strong.

? But Tongrentang and Dong'ajiao, in recent years, the product has been relatively single, the share price is average performance.

3.3.3 Modern TCM companies

? Modern Chinese medicine enterprises are distinguished from branded Chinese medicine enterprises by the innovative nature of their products, including dosage form innovation and innovation of the products themselves. These enterprises often do not have a history of inheritance and accumulation, and their development often relies on product innovation, from scratch, from a single product to a series of products. Through continuous investment in research and development, the realization of continuous innovation in products, the formation of a rich product echelon, to promote the company's sustained and rapid growth, such as Tianshili, Kangyuan Pharmaceuticals and so on.

? But pay attention to one point, Chinese medicine injection has been in the clinical effect is not good, and even there are safety problems, it is difficult to large-scale promotion. Such as Tianshili in the United States to carry out large-scale international clinical trials of compound danshen drip pill, delayed delivery of satisfactory results.

3.3.4? OTC drugs

? ORC drugs, i.e., over-the-counter drugs, the characteristics of this type of products are: (1) mainly sold through retail channels; (2) patients are the determinants of product consumption, and the bargaining power of the enterprise is not strong; and (3) the brand is the most important element of the OTC type of enterprises. Typical OTC Chinese medicine companies are Jiang Zhong Pharmaceutical and China Resources Sanjiu.

? In China, some OTC products in the market for a long time, such as Sanjing calcium gluconate, Sanjiu cold medicine series, but more products in the market is each leading three or five years, marketing can not continue to innovate, new products can not appear, the growth is difficult to sustain.

4. Biopharmaceutical

? Biopharmaceutical companies of many types, in the domestic market, the current performance can continue to grow the company is still mainly in the diagnostic reagents, blood products, vaccines, etc., the real meaning of the biopharmaceutical companies have not formed a climate. a share of pure research and development production of innovative biopharmaceuticals is very little, most of the transformation of the chemical medicine / traditional Chinese medicine enterprises. In addition, this type of company is mostly in the research and development stage of the larger losses, to the Hong Kong and U.S. stocks listed more.

4.1 Vaccines

Vaccines are divided into mandatory vaccines (a class of vaccines) and optional vaccines (second class of vaccines), a class of vaccines market size, but by the state's strict cost control, in addition to the demand for the planned type. For example, listed companies in the Kangtai biological (hepatitis B vaccine), Hualan biological (immunization planning seedling), etc., these companies of a class of seedling is often a stable source of profit for the company.

? But the second type of seedling at this stage with the enhancement of personal health awareness, growth is more rapid. Our vaccine companies have joined the development of Type II vaccines, such as the HPV cervical cancer vaccine of Zhifei Biologicals, Watson Biologicals' pneumococcal vaccine, influenza vaccine, etc.

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? In the past few years, the second type of vaccine is the blue ocean in the field of biopharmaceuticals, and due to safety issues, the state is highly regulated vaccine industry, the barriers to entry are very high, the players are just a few companies. Therefore, the vaccine industry is a rare good track in medicine.

? In recent years, pediatric hand, foot and mouth disease is serious, Hualan Bio, with its leading position in the influenza vaccine, the performance of high-speed growth, the share price has more than doubled from last year to date.

4.2 Blood products

? Typical enterprises of blood products are Hualan Bio, Shanghai Leshi, Tiantan Bio and Boya Bio. Because of the special nature of blood products, except for human albumin, all other blood products are not allowed to be imported from abroad. Since 2001, the state no longer grants new blood product enterprises. The current policy barriers make the domestic blood products industry a closed industry with no new entrants, which is conducive to the survival and development of companies in the industry, especially the leading companies.

? However, the blood products industry as a whole has been relatively mature, the industry's growth rate is not high, the study of this industry focuses on: (1) changes in the price policy of the terminal blood products; (2) the extent to which technological advances in the separation of enterprises to improve the output value of tons of plasma.

For example, in the early days of Shanghai Leslie's plasma separation technology is the strongest in the industry, the overall gross margin is higher than Hualan Bio, the company's market capitalization once broke through the 100 billion mark. But since then, due to the company's operational problems and the catching up of other companies' technologies, the company's advantage has been disappearing, and the stock price has only begun to weaken.

4.3 Diagnostic reagents

Diagnostic reagent industry itself is a high-growth industry, domestic companies in the diagnostic instrument is relatively backward, the early development of more than OEM OEM production of diagnostic reagents, and then gradually to the simultaneous development of instruments and reagents, so there is also this type of company is categorized as a medical device industry. On behalf of the company Anto Bio, Kewa Bio.

? The analysis of this type of company focuses on: (1) the progress of research and development of subsequent products; (2) new application areas.

For example, AnTuBio was not inferior to foreign companies in the diagnostic field at the early stage, but the company has been improving the competitiveness of its products, and in September 17, the company successfully released the first domestic TLA assembly line. The pipeline makes the company become the only domestic enterprises with the ability to compete with foreign companies in the main battlefield of large hospitals, and in one fell swoop laid the foundation for the company's stock price since 17 years of sustained strength.

5. Medical equipment

Medical equipment is a very lucrative industry, but the domestic enterprise product level is generally not high, weak R & D capability, is still a primary manufacturing level. At present, the domestic market for large medical devices are occupied by overseas giants (represented by GPS), domestic enterprises and these international giants are far away, but the gap also means that the future of import substitution space.

? Domestic enterprises in the high-end medical equipment to do the best is Myriad Medical, mainly engaged in analytical instruments and monitoring instruments, has completed the privatization of the U.S. stock after the A-share listing. In addition, in some areas of high-end devices, such as cardiovascular stents, domestic substitution is also more successful, on behalf of the enterprise Lepu Medical.

? Medical device company research is mainly concerned about: (1) production costs: low-end products are more sensitive to the cost of steel and other raw materials; (2) product grade: high-end means high profits; (3) R & D capabilities: the ability to sustain development.

6. Pharmaceutical business

Pharmaceutical business is a low gross margin, relying on the scale and service to win the industry, pharmaceutical business has two levels of wholesale and retail, pharmaceutical wholesale major companies are Shanghai Pharmaceuticals, China Pharmaceuticals, Sinopharm, Jiuzhutong, etc., the main retail companies: Yixintang, Dashenlin, Yifeng Pharmacy, the old people and so on.

? Pharmaceutical wholesalers are affected by the diversity of pharmaceutical terminals, in the pharmaceutical industry wholesale link will always exist, retail link is subject to the domestic hospitals to medicines for doctors, the overall scale is small, but the development of rapid and fast.

This is also the reason why the stock price of the pharmaceutical wholesale industry stocks to go far worse than the pharmaceutical retail.

? In the U.S., the 3 largest pharmaceutical wholesalers account for 97% of the entire market, while China's largest Sinopharm Holdings has a market share of less than 10%, so the main point of view in the future is in the increase of market concentration.

7. Medical services

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Medical services are divided into many kinds, such as CRO, CMO, private hospitals and so on all belong to the category of medical services.

7.1 CRO/CMO

? CRO that is, clinical medical services, such as a pharmaceutical company to become a strong R & D strong registration of the company is very difficult, so in the R & D homemade a lot of work needs to be outsourced, so the formation of CRO enterprises. With innovative drugs has become a major trend in the development of pharmaceutical companies, the CRO industry is very prosperous, and this prosperous trend may continue with the wave of innovative drugs for 5-10 years, or even longer.

? For example, Tiger Pharmaceuticals has maintained a high rate of growth of more than 50% in continuous net profit since 2017, and the stock price has risen nearly five times in just two years.

? Related companies are also: pharmacy, kanglong hua cheng, kelaiying, zhaoyan new drug, boten shares and so on.

? In addition to CRO, due to the diversification of varieties of pharmaceuticals and less demand for niche areas, some companies are not willing to invest a lot of money to build their own production lines, so it needs to outsource the production of medicines, this kind of outsourcing production business is called CMO, which can be interpreted as a pharmaceutical production OEM enterprises.

? Generally CRO enterprises will also have CMO business, relatively in the foundry business to do more prominent Kelaiying, Boateng Pharmaceuticals, WuXi KangDe and so on.

? Another type of CRO is closely related to the small molecule library, because the research and development of medicine needs to be used to a large number of small molecules, but small molecule research and development also requires a lot of manpower and material resources, so simply buy to let other people to help design or buy other people's finished products, the small molecule design leader here that is, pharma stone science and technology, Pharmacopeia, etc.

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? As the research and development of innovative drugs has a great risk, such as the history of Chongqing Beer R & D hepatitis B vaccine failure, brought about a plunge in the share price. CRO / CMO industry because only charge service fees, so the performance will be more robust, is a good direction to invest in innovative drugs.

7.2 Private hospitals

? Domestic public hospitals currently occupy an absolutely dominant position, and are non-profit hospitals. In recent years, with the abolition of the pharmaceutical markup public hospitals revenue-generating capacity has declined significantly, the expansion of public hospitals is mainly dependent on the support of government funding.

? Private hospitals are constrained by public hospitals have been the development of deformities, on the one hand, public hospitals on the siphoning phenomenon of excellent medical talent, career establishment limits the flow of talent. Although doctors are practicing on a trial basis, but private hospitals in general still lack of medical talent. On the other hand, hospitals have higher equipment requirements, and private hospitals have invested less in expensive testing equipment than public hospitals. At present, there are two main directions for better development of medical services: (1) Specialty chain. This type of business model is generally higher requirements for equipment and lower requirements for human resources, strong reproducibility. Typical examples are medical checkup companies such as Meinian Health, Aier Ophthalmology, and Tongze Medical, etc. (2) High-end hospitals. Positioned mainly for high-end customers, expensive but good service. Representatives such as United Family Hospitals (UFH), in which Fosun Pharmaceuticals has a stake.

For this industry, our main concerns are: (1) the replicability of the model, (2) the control of costs and expenses after the scale of expansion;

? As an example: Tongze Medical has occupied several large dental hospitals in Zhejiang through mergers, with very good cost and management and excellent performance. And its model can be completely replicated across the country, so Tongze Medical 10 years rose nearly 20 times, the same with the eye hospital Aier Eye

In contrast, the model of the United States can also be replicated, but its company's ability to control costs is not good, and the stock price performance is mediocre.

8. The impact of regulation and policy on the pharmaceutical industry

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Because of the specificity of the pharmaceutical industry, strong regulation has been the industry norm, and the impact of policies on the industry is also very significant. Specific impact policy statistics are as follows:

8.1 Health insurance policy

? Whether a drug can enter the medical insurance catalog and the level of entry has a great impact on its sales, and the medical insurance catalog is formulated by the Medical Insurance Bureau (previously by the Ministry of Labor and Social Security) once every two years, and policy trends in this regard are also the focus of attention.

8.2 New drug approval policy

? In the past, the approval of domestic drugs was very easy, and the phenomenon of buying and selling drug approvals was serious. Nowadays, the approval of the pharmaceutical industry is very strict, which is advantageous to the advantageous enterprises, in favor of enterprises with strong R & D strength, the market competition is not as fierce as before, whether the new drug into the market can get a greater advantage.

The changes in the policy is mainly on the generic invented chemical pharmaceutical preparation enterprises, modern Chinese medicine enterprises and innovative biopharmaceutical companies have a greater impact.

8.3 Production Approval Policy

? The production of drugs is mainly controlled by the State Drug Administration. In the production process, the standardization system has been well established, and a more stringent management system is also implemented in the field of narcotics, blood products, vaccines, etc. This means that the threshold of the industry has been raised, which is conducive to the increase in the concentration of the industry.

The change in the policy mainly affects blood products, vaccines, biological products and other industries with strict regulation.

? For example: in 2001, the state stopped the approval of the entry of the blood products industry, then a few companies with a blood products license became the oligopoly of the industry, since then, Shanghai Leslie, Hualan Biologicals, Boya Biologicals, Tiantan Biologicals stepped into the mode of the long bull.

8.5 Environmental policy

? The State Environmental Protection Administration of the pharmaceutical enterprise sewage standards are constantly improving, this aspect of the increasingly strict regulation will lead to the gradual withdrawal of small enterprises, the threshold of the industry and concentration will continue to increase.

Changes in environmental policy mainly affect API companies.

For example:The vitamin industry is more seriously polluted, and environmental factors shut down many small vitamin manufacturers in 2017, resulting in higher vitamin prices, and the stock prices of Xinhecheng and Yifan Pharmaceutical soared.