The pharmaceutical industry is known as a sunrise industry that will never decline. It has the characteristics of weak cyclicality, long industrial chain, large differences in industry and product life cycles, and differentiated competitive structure. Therefore, research on the pharmaceutical industry generally adopts a "top-down" approach to select rapidly growing subdivisions, and then uses a "bottom-up" method to determine investment targets. To do this, you need to have a basic understanding of the pharmaceutical industry.

1. Characteristics of the pharmaceutical industry

Cyclic characteristics: The pharmaceutical industry is a typical weak cyclical industry. Pharmaceuticals are a special commodity. The demand is highly rigid and elastic, and is less affected by the macroeconomics. Therefore, the pharmaceutical industry is highly defensive.

? Industrial chain characteristics: The industrial chain of the pharmaceutical industry starts from upstream raw material companies to R&D and production companies, passes through the intermediate circulation field, reaches hospitals or retail terminals, and finally faces consumers.

? The pharmaceutical industry differs according to its position in the industrial chain. The upstream raw material companies mainly include chemical raw materials, traditional Chinese medicines and traditional Chinese medicine pieces industry, while the midstream production companies mainly include chemical pharmaceutical preparations, traditional Chinese medicines, biopharmaceuticals, etc. , the downstream circulation enterprises mainly include the pharmaceutical commercial industry (including wholesale and retail), medical services, etc.

? In this industry chain, the circulation of upstream raw materials and downstream pharmaceuticals is relatively stable, while traditional Chinese medicine has been tepid. Relatively speaking, chemical pharmaceuticals and biopharmaceuticals are relatively prone to bullish stocks, because generally If new chemicals are effective, they will continue to bring huge revenue to the company.

For example: Hengrui Medicine launched apatinib tablets for cancer in 2011, becoming the first widely recognized anti-cancer drug in my country. As a result, Hengrui Medicine's stock price has increased more than 10 times since 2011.

Another example is Zhifei Biotechnology, a biomedical company. In 2017, it represented Merck's cervical cancer vaccine 9-price HPV. Its performance grew rapidly and its stock price nearly tripled in two years.

? Life cycle of the pharmaceutical industry: The pharmaceutical industry as a whole is in the growth stage, but the subdivided products are very different. Most pharmaceutical products are in the growth stage, but a considerable number of biopharmaceutical products and some innovative drugs are still in the initial stage, such as monoclonal antibody drugs, therapeutic vaccines, etc., and some products, such as penicillin, aspirin and other drugs, have entered the mature stage. , sulfonamides and other drugs have entered a stage of decline.

? Having said this, everyone should understand why some pharmaceutical stocks are alive and well, while others are lifeless. A simple example: From a stock perspective, Hengrui Pharmaceutical (innovative drugs, growing industry) > Lukang Pharmaceutical (penicillin, mature industry) > Xinhua Pharmaceutical (sulfonamides, declining industry)

? Competitive structure of the pharmaceutical industry: The pharmaceutical industry is composed of many different sub-industries, and the operating conditions and industry competition structures of each sub-industry are different.

In general comparison, the competitive environment for biopharmaceuticals and medical services is relatively good, while the competitive environment for chemical raw materials, chemical pharmaceutical preparations, traditional Chinese medicine, pharmaceutical business and medical devices is relatively poor. However, there are great differences in various subdivisions of the industry. For example, in chemical preparations, the competitive environment for patented drugs and exclusive products is very good, but for general drugs, it is very poor; a similar situation exists in traditional Chinese medicine. Branded traditional Chinese medicine The competitive environment of Chinese medicine is very good, but that of ordinary Chinese medicine is very poor. The analysis of the competitive environment requires specific analysis for specific companies.

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

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

? From a macro perspective, the factor that affects the demand for medicine is the population structure, such as the degree of aging, the ratio of men to women, etc., which all have an impact on the demand for medicine.

? From a micro perspective, the needs of specific subdivisions need to be considered from the following points: (1) the incidence of diseases in this subdivision; (2) whether various policies, especially medical insurance policies, are It will stimulate the consumption of this type of drugs; (3) Whether this increase in demand can be implemented in specific companies.

? For example, in China, through the information that the incidence rate of tumors is rapidly increasing, we have tracked that the anti-tumor drug market is growing rapidly, and under the pull of universal medical insurance, anti-tumor drugs are the one that has received the greatest boost. field, thus drawing the conclusion that related products of leading anti-tumor drug companies will grow rapidly.

3. Investment logic and sources of performance growth in the pharmaceutical industry

There are many investment opportunities in the pharmaceutical industry, which can usually be found from the following aspects Make an entry and look for investment opportunities:

? (1) The improvement of the overall prosperity of subdivided industries and fields can be measured from the growth of industry revenue and profits, the level of profit margins, cash flow conditions, and Track the operating conditions of major companies in the industry;

? (2) The most important thing for pharmaceutical companies is the product, and a new blockbuster drug often plays a vital role in a company. For pharmaceutical companies, it is essential to track the research and development of new products and understand the sales status of the company's products in channels. At the same time, because domestic companies mainly focus on generic drugs, they need to understand the expiration time of similar drug patents, product price fluctuations, etc.

? (3) Industry environment and policy factors, the policy orientation needs to be interpreted to see whether the policy will have a big impact on the industry, such as the impact of the consistency evaluation policy on generic drug companies;

? From the perspective of various sub-sectors in the pharmaceutical industry, different types of companies have very different analysis methods and investment logics, and the driving forces for company growth are also different.

3.1 Chemical APIs

? The chemical API industry is customarily divided into bulk APIs and specialty APIs. There are big differences in the profit models of the two types of companies.

3.1.1 Bulk APIs

Bulk APIs have typical cyclical characteristics, and the promotion of corporate profits is often determined by price and sales volume.

This is more typical of Xinhecheng, whose stock price has surged in the past two years. Its main vitamins have been increasing in price in recent years, but this price increase is not due to strong demand, but due to environmental protection. Due to policy influence, the start-up of vitamin production is limited, and the core technology of vitamins is only in the hands of a few companies such as BASF, NHU, and DSM. These companies have jointly raised prices. Therefore, vitamins have seen a trend upward trend.

3.1.2? Featured APIs

? Compared with bulk APIs, specialty APIs have a certain technical content and require speed. Especially when new drugs are first released, raw material supply can be quickly realized, and the price premium gradually weakens, and it is easy to rise and fall sharply. For example, Huahai Pharmaceuticals and Tianyu Pharmaceuticals in the early days.

However, in recent years, due to the phased weakening of the growth of the industry (APIs in most fields are clear), this field has gradually faded out of our sight.

3.2 Chemical drug preparation industry

? Chemical drug preparation companies can be divided into generic chemical drug (innovative drug) companies, OTC preparation companies and general drug preparation manufacturing companies. OTC chemical drugs and traditional Chinese medicine companies are highly competitive. Among them, traditional Chinese medicine OTC companies have more obvious characteristics, so we will discuss them in the traditional Chinese medicine section.

3.2.1 Generic chemical drug companies

? A typical example of a generic chemical drug company is Hengrui Pharmaceuticals. In the past, the company mainly used imitating patented drug manufacturers to obtain unprotected or unprotected products in China. It is to open up the market for products with expired patent protection. Later, as the company's R&D strength increased, it began to develop innovative drugs and formed a product line that combined generic drugs + innovative drugs.

? Of course, most pharmaceutical companies in my country are following the same path in transformation. Among them, the ones that have been more successful in transforming into innovative drugs include: Kelun Pharmaceutical, Fosun Pharmaceutical, Betta Pharmaceuticals, etc.

Through innovation and development of new products, these companies are the most likely to have bullish stocks in the pharmaceutical industry, and they are the focus we need to pay attention to.

For example, Xingqi Eye Ointment has always been an ordinary eye ointment company, but in April 2019, the company disclosed that it had developed olopatadine hydrochloride for conjunctivitis, corneal ulcers and other diseases. Eye drops are still blank in China, but the future prospects are promising. The company's stock price has risen from 20 yuan to around 100 yuan, an increase of nearly 5 times.

3.2.2 Generic drug preparation manufacturers

? Generic drugs are conventional drugs. Compared with new drugs, such products have usually been on the market for many years, and the market is relatively mature. There is no Patents and other protective barriers. Most of the domestic chemical pharmaceutical preparation companies are manufacturers of general pharmaceutical preparations. Most of these companies have low gross profit margins, many manufacturers, and fierce competition. The possible highlights are mainly the increase in industry concentration, through scale effects and cost compression. profit growth to come.

? The stock prices of companies of this type generally have a stable trend, such as: China Resources Shuanghe, Modern Pharmaceuticals, China Pharmaceuticals, Huadong Pharmaceuticals, Jingxin Pharmaceuticals, Puli Pharmaceuticals, etc.

3.3 Traditional Chinese Medicine Preparations

Traditional Chinese medicine is mainly divided into 4 types, traditional Chinese medicine pieces, branded traditional Chinese medicine, modern traditional Chinese medicine, and traditional Chinese medicine OTC

3.3.1 Traditional Chinese medicine preparation industry

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? Due to the small market scale of Chinese herbal medicine pieces, low product added value and limited technical content, the gross profit margin is usually less than 50%. Branded Chinese medicine companies rarely get involved in this field, and the field of Chinese herbal medicine pieces has low entry standards. , poor standardization and market fragmentation are the main characteristics.

So this industry is not a good track.

We have also seen that the long-term stock price performance of listed companies such as Zhongkangmei Pharmaceutical, Hongri Pharmaceutical, Xiangxue Pharmaceutical, and Tailong Pharmaceutical is very average.

3.3.2 Branded Chinese medicine

? Branded Chinese medicine is the most important type of company in the field of Chinese medicine. Its product brands are often formed due to historical reasons, such as Tongrentang, Yunnan Baiyao, Dong'e Ejiao and Pien Tze Huang are exclusive and non-replicable. Due to the scarcity of their brands and the relative rigidity of demand, they have strong cost-passing capabilities.

From the past, the performance growth of such companies often relied on two points: (1) increase in product prices; (2) product application areas or brand extensions. Typical representative companies include Yunnan Baiyao, Pien Tze Huang, and Dong'e Ejiao.

For example: Yunnan Baiyao found a breakthrough in toothpaste, and its stock price performed well between 2016 and 2018. Pien Tze Huang expanded its skin care product line, and its stock price was also very strong.

However, the products of Tongrentang and Dong'e Ejiao have been relatively single in recent years, and their stock prices have performed generally.

3.3.3 Modern Chinese medicine companies

? What distinguishes modern Chinese medicine companies from branded Chinese medicine companies is the innovation of their products, including innovation in dosage forms and innovation in the product itself. Enterprises often do not have historical 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, we can achieve continuous innovation in products, form a rich product echelon, and promote the company's sustained and rapid growth, such as Tasly, Kangyuan Pharmaceutical, etc.

? But please note that traditional Chinese medicine injections have always been clinically ineffective and even have safety issues, making it difficult to promote on a large scale. For example, Tasly's large-scale international clinical trial of Compound Danshen Dropping Pills in the United States has been unable to produce satisfactory results.

3.3.4? OTC drugs

? ORC drugs are over-the-counter drugs. The characteristics of this type of products are: (1) Mainly sold through retail channels; (2) Patients make the decision on product consumption Otherwise, the company's bargaining power is not strong; (3) Brand is the most important factor for OTC companies. Typical OTC traditional Chinese medicine companies include Jiangzhong Pharmaceutical and China Resources Sanjiu.

? In China, some OTC products have been in the market for a long time, such as Sanjing calcium gluconate and Sanjiu cold medicine series, but more products have been leading the market for three to five years. , marketing cannot continue to innovate, new products cannot appear, and growth will be difficult to sustain.

4. Biopharmaceuticals

? There are many types of biopharmaceutical companies. In the domestic market, the companies that can continue to grow in performance are mainly in diagnostic reagents, blood products, vaccines, etc. The climate for biopharmaceutical companies in the true sense has not yet formed. There are very few A-share companies that purely develop and produce innovative biopharmaceuticals, and most of them are chemical/traditional medicine companies. In addition, most companies of this type are in the research and development stage and suffer large losses, and most of them are listed on Hong Kong and US stocks.

4.1 Vaccines

Vaccines are divided into mandatory vaccines (Class I vaccines) and optional vaccines (Class II vaccines). Class I vaccines have a large market size, but are strictly controlled by the state. , In addition, the demand is also planned. For example, listed companies Zhongkangtai Biological (hepatitis B vaccine), Hualan Biological (immunization vaccine), etc., the first-class vaccines of these companies are often a stable source of profits for the company.

? However, the growth of Class II seedlings is relatively rapid at this stage as personal health awareness increases. Our vaccine companies have joined in the development of second-category vaccines, such as Zhifei Biotech’s HPV cervical cancer vaccine, Wosheng Biotech’s pneumonia and influenza vaccines, etc.

In recent years, Class II vaccines have been a blue ocean in the field of biomedicine, and due to safety issues, the country has highly regulated the vaccine industry, with very high barriers to entry and only a few companies. Therefore, the vaccine industry is a rare good track in medicine.

? In recent years, hand, foot and mouth disease has become serious among children. Hualan Biotech has achieved rapid growth by virtue of its leading position in influenza vaccines, and its stock price has more than doubled since last year.

4.2 Blood products

? Typical companies of blood products include Hualan Biotech, Shanghai RAAS, Tiantan Biotech, and Boya Biotech. Due to the particularity of blood products, except for human albumin, other blood products are not allowed to be imported from abroad. Starting from 2001, the state will no longer approve new blood product companies. 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 leading companies.

? However, the blood products industry as a whole is relatively mature and the industry growth rate is not high. The focus of research on this industry is: (1) changes in terminal blood product price policies; (2) corporate separation The extent to which technological progress has improved the output value of tons of plasma.

For example, in the early days, Shanghai RAAS's plasma separation technology was the strongest in the industry, and its overall gross profit margin was higher than that of Hualan Biotech. The company's market value once exceeded 100 billion. But since then, due to the company's operating problems and the technological catch-up of other companies, the company's advantages have gradually disappeared, and the stock price has begun to weaken.

4.3 Diagnostic reagents

The diagnostic reagent industry itself is a fast-growing industry. Domestic enterprises are relatively backward in diagnostic instruments. In their early development, they mostly focused on OEM production of diagnostic reagents. Mainly, and then gradually developed simultaneously with instruments and reagents, so this type of company is also classified as a medical device industry. Representative companies include Antu Biotech and Kehua Biotech.

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

For example: Antu Biotech was not inferior to foreign-invested enterprises in the diagnostic field in the early days, but the company has gradually improved its product competitiveness. In September 2017, the company successfully released the first domestic TLA assembly line. This assembly line makes the company the only company in China that has the ability to compete with foreign-funded companies in the main battlefield of large hospitals, and in one fell swoop laid the foundation for the company's stock price to continue to strengthen since 2017.

5. Medical equipment

Medical equipment is a very profitable industry, but the product level of domestic enterprises is generally not high, their research and development capabilities are weak, and they are still at the level of primary manufacturing. At present, the domestic large-scale medical device market is occupied by overseas giants (represented by GPS). Domestic enterprises are far from these international giants, but the large gap also means that there is huge room for import substitution in the future.

? The best domestic company in high-end medical devices is Mindray Medical, which is mainly engaged in analytical instruments and monitoring instruments. It has now completed the A-share listing after the privatization of the US stock market. In addition, in some high-end device fields such as cardiovascular stents, domestic substitution has been relatively successful, represented by the company Lepu Medical.

? Research on medical device companies mainly focuses on: (1) Production costs: mid- and low-end products are more sensitive to the cost of raw materials such as steel; (2) Product grade: high-end means high profits; (3) R&D capabilities ：Sustainable development capability.

6. Pharmaceutical business

Pharmaceutical business is an industry with low gross profit margin and relies on scale and service to win. Pharmaceutical business has two levels: wholesale and retail. , the main pharmaceutical wholesale companies include Shanghai Pharmaceuticals, China Pharmaceuticals, Sinopharm Accord, Jiuzhou Tong, etc., and the main retail companies include: Yixintang, Dashenlin, Yifeng Pharmacy, Laobaixing, etc.

? Pharmaceutical wholesalers are affected by the diversity of pharmaceutical terminals and will always exist in the wholesale link of the pharmaceutical industry. The retail link is subject to the influence of domestic hospitals that rely on medicines to support medicine. The overall scale is small, but it is developing rapidly. quick.

This is also the reason why the stock prices of the pharmaceutical wholesale industry are far worse than those of the pharmaceutical retail industry.

In the United States, the three major pharmaceutical wholesalers account for 97% of the market share, while my country’s largest Sinopharm Holdings has a market share of less than 10%. Therefore, the main focus in the future is market concentration. improvement.

7. Medical services

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There are many types of medical services, such as CROs, CMOs, private hospitals, etc., all fall into the category of medical services.

7.1 CRO/CMO

? CRO refers to clinical medical services. For example, it is difficult for a pharmaceutical company to become a company with strong R&D and strong registration, so a lot of work is required in domestic R&D. Outsourced, and a CRO company was formed. As innovative drugs have become a major development trend for pharmaceutical companies, the CRO industry is very prosperous, and this boom may continue for 5-10 years, or even longer, with the wave of innovative drugs.

For example: Tigermed’s net profit has maintained a rapid growth of more than 50% since 2017. In just two years, its stock price has increased nearly five times.

? Relevant companies include: WuXi AppTec, Pharmaron, Asymchem, Zhaoyan New Drugs, Porton Holdings, etc.

In addition to CRO, due to the diversification of pharmaceutical varieties and low demand in subdivisions, some companies are unwilling to invest a large amount of money to build their own production lines, so they need to outsource pharmaceutical production. This type of company that undertakes outsourced production business is called a CMO, which can be understood as a pharmaceutical production OEM company.

? Generally, CRO companies also have CMO business. Relatively speaking, companies that are more prominent in the foundry business include Asymchem, Porton Pharmaceuticals, WuXi AppTec, etc.

? Another type of library closely related to CRO is the small molecule library, because the research and development of medicine requires the use of a large number of small molecules, but the research and development of small molecules also requires a lot of manpower and material resources, so we simply buy them and let others help design them. Or buy other people’s finished products. The leaders in small molecule design here are Yaoshi Technology, WuXi AppTec, etc.

? Due to the great risks involved in the research and development of innovative drugs, for example, Chongqing Beer’s historical failure to develop a hepatitis B vaccine led to a sharp decline in stock prices. Since the CRO/CMO industry only charges service fees, its performance will be more stable, and it is a good direction for investing in innovative drugs.

7.2 Private hospitals

? Public hospitals currently occupy an absolutely dominant position in China, and they are all non-profit hospitals. In recent years, with the elimination of medical bonuses, the revenue-generating capacity of public hospitals has dropped significantly, and the expansion of public hospitals mainly relies on the support of government funds.

? Private hospitals have been developing abnormally due to the constraints of public hospitals. On the one hand, public hospitals have siphoned off excellent medical talents, and the establishment of public institutions has restricted the outflow of talents. Although doctors are trying to practice in multiple locations, private hospitals generally still lack medical talents. On the other hand, hospitals have higher requirements for equipment, and private hospitals do not invest as much in expensive testing equipment as public hospitals. At present, there are two main directions in which medical services are developing well: (1) Specialty chains. This type of business model generally has higher requirements for equipment and lower requirements for human resources, and is highly replicable. Typical examples include physical examination companies Meinian Health, Aier Eye Clinic, Tongce Medical, etc. (2) High-end hospitals. Mainly targeting high-end customers, the charges are expensive but the service is good. Representatives include United Family Hospital, in which Fosun Pharma has a stake.

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

? For example Example: Tongce Medical has occupied several large dental hospitals in Zhejiang through mergers and acquisitions. Its costs and management are very good, and its performance is very good. And its model can be replicated across the country, so Tongce Medical has grown nearly 20 times in 10 years, as has the eye hospital Aier Eye Hospital

In contrast, Meinian Health’s model can also be replicated. Copy, but the company's cost control ability is poor and the stock price performance is mediocre.

8. The impact of supervision and policies on the pharmaceutical industry

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Due to the particularity of the pharmaceutical industry, strong supervision has always been the norm in the industry, and the impact of policies on the industry The impact is also very significant. The specific influencing policy statistics are as follows:

8.1 Medical insurance policy

? Whether drugs can be included in the medical insurance catalog and the level at which they enter have a great impact on their sales, and the medical insurance catalog It is formulated every two years by the Medical Insurance Bureau (previously the Ministry of Labor and Social Security), and policy trends in this area are also a focus of attention.

8.2 New Drug Approval Policy

? In the past, domestic drug approval was very easy, and the phenomenon of buying and selling drug approval documents was serious. Nowadays, the approval process in the pharmaceutical industry is very strict, which is good for advantaged companies. It is good for companies with strong R&D capabilities. The market competition is not as fierce as before, and whether new drugs can gain greater advantages when entering the market.

This policy change mainly has a greater impact on generic chemical pharmaceutical preparation companies, modern traditional Chinese medicine companies and innovative biopharmaceutical companies.

8.3 Production Approval Policy

? The production of drugs is mainly controlled by the State Food and Drug Administration. In the production process, the standardization system has been established and improved, and stricter management systems have been implemented in the fields of narcotics, blood products, vaccines, etc. This means that the industry threshold has been raised and is conducive to the increase in industry concentration.

This policy change mainly affects the strictly regulated industries such as blood products, vaccines, and biological products.

For example: In 2001, the state stopped the entry approval of the blood products industry, so several companies with blood product brand licenses became oligarchs in the industry. Since then, Shanghai RAAS, Hualan Biotech, and Boyaa Creatures and creatures in the Temple of Heaven enter the bull mode.

8.5 Environmental Protection Policy

? The State Environmental Protection Administration continues to improve the emission standards for pharmaceutical companies. More and more strict supervision in this area will lead to the gradual withdrawal of small businesses, the threshold and concentration of the industry The degree will continue to increase.

Changes in environmental protection policies mainly affect API companies.

For example: The vitamin industry is relatively polluted. In 2017, environmental protection factors shut down many small vitamin manufacturers, causing vitamin prices to rise. The stock prices of Xinhecheng, Yifan Pharmaceuticals, etc. rose sharply.