Investment Opportunities Exists in Four Areas of China’s Pharmaceutical Industry in 2015

发布日期:2015-03-18访问次数: 字号:[ ]

The year 2014 appears to be rather chilly to the majority of the pharmaceutical companies in China as they’ve suffered from a slump in the growth rate, reduction in the profitability and sluggish marketing. Despite the hardships, however, efforts to break the solid ice can be sensed while the resource allocation in such two sectors as drug pricing and medical service have recovered market-orientation at a quicker step.

At present, the valuation premium rate of the pharmaceutical sector against the big board has dramatically lowered down compared with the beginning of the year, while the absolute valuation has remained to be in the highest point in the past two years. Under such circumstances, in 2015, the pharmaceutical sector will split up severely and the investment opportunities are fermented in such four new changes as new pattern, new technology, new model and new service.

The Recurrence of Market-Orientation Accelerated in the Industry

2014 has appeared to be a year of reduced administrative intervention and recurrence of market-orientation in the pharmaceutical industry. The drug pricing policy, bidding policy, use policy and medical insurance payment policy have constituted four external forces of the industry.

Over the years, the Government has been involved progressively deeper in China’s pharmaceutical industry as evidenced by the extensive controls over price, bidding and market access. Since 2014, the tangible administrative controls have begun to loosen up, as the various ministries and commissions have issued nearly 20 policies to boost transformation of the industrial development, which involve such sub-sectors as children’s medicine, medical equipment and medical service. The adjustment to the pricing policy and the reform of the market access of the social resources desired to be engaged in running medical institutions have a significant impact on the industrial development.

In terms of the reform of the pricing policies, the National Development and Reform Commission issued the Plan of Promoting Drug Price Reform (Draft for Comment) to the various pharmaceutical industry associations at the end of November, indicating it is planned to cancel the governmental upper limit control over the retail prices or the ex-factory prices of drugs and, by way of medical insurance expenditure control and procurement through bidding, the actual transaction prices of drugs will be formed through market competition. The policy is said to be implemented starting from January 1, 2015.

The policy of centralized bidding also appears to be loosened up as in the new bidding policies, the policy of the “lowest-price-orientation”as adopted by a number of provinces is getting changed, with the quality weight to rise up, and even it is said that classified procurement will be adopted. However, in comparison with the vigorous and relentless reform of the pricing policy, the bidding reform still has no clear direction.

Satisfactorily, the reform of drug prices is still going on. In November, the pilot program of benchmark prices for medical insurance payment was launched in Chongqing and Sanming. That is deemed to be a fatal hit on the centralized bidding system if the Diagnostic Related Groupings (DRGs) can be implemented. By then, the hospitals can hold price negotiations directly with the pharmaceutical companies, while the administrative interventions will be diminishing.

Apart from the reform of drug policies, the medical service sector makes another aspect for the top administration to promote the industrial market orientation. In April, the National Development and Reform Commission, the National Health and Family Planning Commission and the Ministry of Human Resources and Social Security jointly promulgated a policy to thoroughly loosen up the control over the prices in the non-public medical institutions. In June, the National Health and Family Planning Commission issued a document for the first time to impose control over the over-fast scale expansion of public hospitals. Some local governments demonstrate even greater enthusiasm in promoting the engagement of private capitals in the medical service sector. In July, the Beijing Administrative Rules on Multi-Site Practice of Doctors was promulgated in Beijing; in November, the Medical Administrative Rules in Shenzhen Special Economic Zone (Draft for Comment) was promulgated in Shenzhen, under which the restriction on doctors’ first site of practice would be eliminated as expected.

The governmental enthusiasm has motivated the private capitals. Since last year, the funds from various channels, ranging from the financial capital to the industrial capital, have begun to compete in the battlefield of public hospital acquisitions. The investments by a number of pharmaceutical companies, including Wuhan Jianmin Pharmaceutical and Kunming Pharmaceutical, have been definitely targeted at the medical service sector. The real estate giants such as Evergrande and Vanke have begun to make preparations to build hospitals by themselves. Beijing United Family has opened a number of branch hospitals. At the end of the year, after years of preparations, two top-grade private hospitals, namely Peking University International Hospital and Beijing Tsinghua Changgung Hospital, opened for business, delivering a perfect end to the first year of the era of private hospitals.

The Trend of Growth Slowdown Can Hardly be Changed

In 2014, the pharmaceutical industry has remained a descending trend in revenue and profit growth, which started in 2012, and it’s pretty hard to expect any change in such descending trend in a couple of years to come.

The data released by the Southern Medicine Economic Research Institute of China Food and Drug Administration indicate that the sales revenues of the pharmaceutical industry amounted up to RMB 786.4 billion in 2008 and rose to RMB 2.1543 trillion in 2013, indicating a cumulative growth of 174% over a period of five years. Although the sales revenues of the pharmaceutical industry will maintain a trend of rather rapid growth over a considerably long period of time in the future, the turning point of the growth rate has appeared in 2012. The growth rate of the sales revenues of the pharmaceutical industry hit 26% in 2011 and then began to drop down year by year. The growth rate was 17.9% in 2013 and 13.3% during the first three quarters of 2014. The annual growth rate in 2014 is expected to be about 13%. The growth rate of sales revenues has dropped down by half compared with 2011.

Along with a declining growth rate of the revenues, the profit growth rate is even less promising. The pharmaceutical industry earned a profit of RMB 84.1 billion in 2008 and RMB 218.1 billion in 2013, exceeding RMB 200 billion for the first time, which indicated a cumulative growth of 159% over a period of five years, a bit lower than the growth rate of the revenues. However, the profit turning point of the industry appeared one year earlier than that of the revenues. The growth has begun to decline since 2010, when a profit growth rate of 32.7% was achieved. In 2013, the profit growth rate was only 17.6%  and the annual growth rate in 2014 is forecasted to be around 12%.

The growth rate of the industrial revenues has slowed down mainly due to the sluggish growth of such two sales channels as hospitals and retail terminals. According to the data released by the Southern Medicine Economic Research Institute of China Food and Drug Administration, China’s drug terminal market scale was RMB 458.5 billion in 2008 and amounted up to RMB 1.0985 trillion in 2013, indicating a cumulative growth rate of 140% over a period of five years. During the first three quarters of 2014, the terminal market scale was RMB 933.1 billion and that of the whole year is expected to reach RMB 1.25 trillion. The turning point of the sales growth of the drug terminal market appeared even earlier as the growth rate has been going down since 2008, when it hit a record high of 26.2%. The growth rate dropped down to 15.0% in 2013 and further down to 13.7% during the first three quarters of 2014, and that of the whole year of 2014 is expected to be around 14%.

The slump in the industrial profit growth rate is mainly due to the medical insurance expenditure control, the principle of lowest-price-orientation as adopted in various areas and the cost of the GMP renovations. The industrial profit margin has slumped as a result of these three major factors. The profit margin of the pharmaceutical industry was 11.7% in 2010, 10.1% in 2013 and 9.6% in the first three quarters of 2014, and that of the whole year of 2014 is expected to be around 9.5%.

Investment Opportunities in Four Areas

So far, the pharmaceutical sector has maintained a high-valuation state for nearly 2 years. Given the sluggish growth in the industry, such high-valuation state can hardly be maintained merely by the organic growth of pharmaceutical companies.

Liu Lin with Northeast Securities considers that in 2015 the pharmaceutical sector will get severely split and he suggests to seize the investment opportunities in such four new changes as new pattern, new technology, new model and new service.

The four key opportunities include: Seizing the opportunity to reshape the drug competition pattern in the expansions of the county-level hospitals and primary-level drug market; pursuing continuously the trend of Smart Healthcare; seizing the opportunity for the drug e-commerce dealers to overturn the traditional drug distribution model and being optimistic about the running of medical institutions with social resources, especially the privatization trend of hemodialysis centers.

Firstly, the drug competition pattern will be reshaped by the expansions of the county-level hospitals and primary-level drug market. The 3A hospitals in big cities suffer from increasingly heavy workloads due to oversized scales. Despite remarkable growth in recent years, the medical institutions at primary-level are smaller in scale and limited in the diagnosis and treatment techniques, due to which they can hardly handle the complicated cases. The county-level hospitals have appeared to enjoy an increasingly prominent market position as they are developed to be the regional medical centers. With the gradual implementation of the national policy of “handling serious diseases within county region”, the county-level hospitals are expected to retain a part of the patients who would have gone to big cities for medical treatment and the drug market scale in the county-level hospitals will expand rapidly as expected.

The chemical drugs play a dominant role and the Chinese patent drugs a supporting role in the county-level hospital market. In the past three years, the market shares held by the chemical drugs and Chinese patent drugs have appeared to be relatively stable, subject to a ratio of 3:1. In the county-level hospitals nationwide, a total of 13 drug types, including 7 antibiotics, 2 infusion solutions, 2 digestive system drugs and 2 cardiovascular drugs, have reportedly had the sales volumes of over RMB 1 billion in 2013. The drug market pattern in the primary-level medical institutions has certain similarities with that of the county-level hospital market, as the top 10 drug types in terms of sales volume are comprised mainly of infusion solutions, antibiotics and cardiovascular drugs.

Secondly, Smart Healthcare assumes a heavy responsibility for improving the operational efficiency of China’s medical system. Although it’s hard to fundamentally change the status of the difficulty and high cost of getting medical treatment, Smart Healthcare can help dramatically improve the operational efficiency of medical resources, reduce operational cost and improve doctor-patient relationship. Smart Healthcare may be applied to a number of areas, ranging from clinical decision-making, medical insurance payment, drug R&D, diagnosis and treatment process, doctor-patient relationship and public health, which involve the health administrative authorities, medical insurance agencies, the medical institutions at various levels, pharmaceutical companies, pharmaceutical R&D enterprises, sales agents and third-party agencies etc.

Thirdly, the drug e-commerce dealers will overturn the drug distribution model, which is a dramatic transformation in the area of pharmaceutical commerce. In the drug e-commerce area, there are two important policies, namely the Measures for the Supervision and Management of the Food and Drug Dealers on the Internet (Draft for Comment) promulgated by China Food and Drug Administration on May 28 and the Notice on Implementing the Key Tasks of Medical Reform in 2014 to Improve Drug Distribution Service Level and Efficiency promulgated by the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Human Resources and Social Security, the National Health and Family Planning Commission and CFDA on September 9.

Finally, the opportunity brought about by the trend of privatization of blood purification services. In 2012, the registered hemodialysis patients amounted up to 280,000 and the peritoneal dialysis patients amounted up to about 37,000 in China. By calculation starting from 2001, the compound growth rates of the patient numbers receiving these two treatments have reached 23% and 20% respectively. The number of peritoneal dialysis patients has been growing with an escalating trend in recent years. As high blood pressure and diabetes will probably develop into end-stage renal diseases, it is forecasted that by 2023, the number of the patients to receive blood purification treatment will probably exceed 2 million and the market scale will exceed RMB 100 billion, over 6 times the present blood purification market scale.


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