Recent highlight: Negotiations on the Catalog of Medicines covered by National Medical Insurance
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10 Nov 2021
Recent highlight: Negotiations on the Catalog of Medicines covered by National Medical Insurance System
Negotiations with several domestically produced PD-1 have ended, and there is a rumour that the price is better than the market expectations. According to Tianfeng Securities, the institutional investors are expecting for a price of around CNY 35,000 per year, while the market speculation is that the final price will eventually be higher than that. The rumour is expected to trigger the rebound in the price of the related stocks today.
Currently, we are unable to confirm the reimbursement from the national medical insurance system, but regardless of the outcome of the negotiations, the pharmaceutical stocks have been fully adjusted and have entered a bottom stage, which deserves active attention.
[ChinaAMC(HK) Market Outlook]
Our views on the CXO Industry
The market paid attention to the significant reduction of CXO stocks by Hillhouse Capital Group in recent. Rumours about the CXO industry are spreading, such as the industry is approaching its turning point, the industry is heading into another crisis, and concerns on whether the Chinese government will introduce new regulatory policies on the CXO industry, etc. However, we believe that the changes in portfolio holdings of the investment institutions at this time are mainly because of the decline in stock prices of the CXO companies.
CXO is the earliest internationalized industry in China, and the industry global market share has been increased continuously in recent years. We believe that the fundamentals of the CXO industry are still good, and that we have not seen a downward trend in the prosperity of the industry. Stocks in the CXO industry, such as WuXi AppTec (2359 HK) and WuXi Biologics (2269 HK), both have outstanding financial performance this year. The interim results of WuXi AppTec largely exceeded the expectations, in which its revenue and net profit continued to set new record highs. For the first time, its mid-term revenue exceeded the RMB 10 billion mark, while its mid-term net profit also firstly exceeded the RMB 2 billion mark. In the meantime, WuXi Biologics has improved its future performance guidance as well as clarified its future performance direction. In terms of industry policies, policies related to research and development (R&D) in the pharmaceutical industry have been implemented for many years and have become more and more detailed. The main direction of supervision is to continuously improve the existing industry standards, as well as upgrade the level of enterprises. Therefore, future policy implementation will not suppress the development of the industry.
The recent adjustment of CXO’s stock price is based upon two major factors: First, stocks in the CXO industry have high valuations and market expectations. In terms of valuation, in the past three years, the core assets of the industry (a total market value greater than RMB 50 billion) had an increase in the hub of their P/E ratios, from 37 times to 73 times, and that their contribution rate of valuation expansion greatly exceeds their performance growth. In the case of unstable market conditions and sluggish investor sentiment, their stock prices will be prone to decline. Second, public offerings and foreign investors begin to diverge their holdings of core assets. Foreign investors have largely reduced their China allocation this year, resulting in huge selling pressure for stocks with a more concentrated position previously. Therefore, we believe that the recent decline is more similar to a temporary downward adjustment after a boom cycle, rather than a change in industry trends.
A Good Time to Invest After the Industry Cools Down?
At present, the bottom of the pharmaceutical industry is gradually consolidating, and we believe that investors can enter the stage of active stock selection and investment.
First of all, the pharmaceutical industry has fallen sharply, to an extent that is close to the sharpest downward adjustment in history. The Hang Seng Healthcare Index had its largest downward adjustment of 48% in 2018, while there has already been a downward adjustment of 39% in the index level since the beginning of 2021. Secondly, among all the pharmaceutical stocks with positive profits in Hong Kong, their average P/E (TTM) is currently below 50% of the historical quantile, while more than 60% of the pharmaceutical companies are valued below 30% of the historical quantile. Besides, the valuation of the A-share pharmaceutical industry has entered a historically low quantile, and the proportion of stocks with reasonably low valuations has increased significantly. The SYWG Medical and Biotech Index (SYWGMB) currently has a P/E (TTM) of 35.15 times, which is equivalent to a quantile point of 40.6%.
In addition, compared to the valuation of the China 10-Year Government Bond Yield (China’s risk-free rate of return), the current valuation of the pharmaceutical industry is already at the bottom of the pharmaceutical industry’s stock prices in early 2012, early 2016, and early 2019.
The areas that we are optimistic about in pharmaceutical industry
With the uncertainty of the future trend of US market, the global liquidity and the COVID pandemic, it is difficult for us to say whether a V-shape market reversal will occur. Thus, in the current stage our investment strategy is to select those companies which have good competitive advantages, clear business development directions and reliable and executive management teams.
In pharmaceutical production field, we are optimistic about the large pharmaceutical companies that can enrich their product lines through the expanding R&D and BD, and that have digested the pressure on their main business and fully reflected in their valuation.
In biotech field, we are optimistic about the companies that can achieve breakthroughs in overseas business.
In medical devices field, we are optimistic about the companies that have led the industry in large segments such as heart valves and surgical robots, and have continued to increase their business volume.
In medical services filed, which includes medical services and R&D services, we will pay close attention to CXO companies. When the valuation is adjusted to a more reasonable level, such companies will still be good to invest.
2. Changes in investment focus under the pandemic
The key issue to invest in vaccine-related stocks is that we need to estimate the scope and frequency of vaccination in the future, also the time remained to reach the overcapacity (a large number of companies around the world have production capacity, so the shortage of supply will be eliminated gradually in the future). After the successful clinical trials of Covid-19 antiviral pills, especially MERCK and PFE drugs, the scope and frequency of vaccination will be affected, and vaccine-related stock prices are under pressure.
In terms of COVID small molecule drugs, the only Chinese pharmaceutical company that has entered the phase three of clinical trials is Kintor. According to the company’s guidelines, the interim analysis data of the first phase three clinical trial will be generated in December. Others are mainly CDMO/CMO in the production of compound fragments, intermediates and APIs. The percentage of the business volume is difficult to predict, but from a certain angle it also proves the global competitiveness of China’s medical chain. The future development of COVID small molecule drugs also depends on the results of clinical data.
3. Innovative drugs and Internationalization
The European and US markets are the world’s largest biomedical markets. Internationalization is a key factor for Chinese pharmaceutical companies to grow. Hong Kong-listed biotechnology companies have made positive progress in research and product lines development last year. The clinical trials led by those companies have accounted for more than 56% of the domestic market, and there are many license-out deals, reflecting that China biotechnology companies are constantly improving their value and driving the future growth potential of the industry.
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