According to the Zhitong Finance APP, Xinda Securities released a research report stating that in 2024, the pharmaceutical and biotechnology industry will face overall growth pressure due to high base numbers, medical anti-corruption, DRGS reform, and price reductions from centralized procurement. With the recent push for medical reform, the one-stop settlement of medical insurance and commercial insurance is helping the development of commercial health insurance and enhancing the payment capacity for high-end medical demand, leading to a marginal improvement in the industry policy environment. Looking ahead to 2025, commercial insurance and AI healthcare may help the industry warm up, signaling an impending turning point.

Key Points from Xinda Securities:

Industry operation and valuation dynamics: Overall growth in the industry is under pressure due to high base numbers, medical anti-corruption, DRGS reform, and price reductions from centralized procurement.

In the first three quarters of 2024, the total industry revenue remained flat year-on-year, while net profit attributable to shareholders decreased by 7.3% year-on-year. The industry has faced intensified competition due to expansion during the pandemic, with the overall gross profit margin continuously declining since Q1 2022, dropping to 32.8% in the first three quarters of 2024. The net profit margin has remained relatively stable since the end of 2022, standing at 8.1% in Q3 2024. From the performance in the secondary market, the pharmaceutical and biotechnology industry has seen a decline of 10.17% from the beginning of 2024 to the present, ranking last among the 31 first-level sub-industries in SW, and has been continuously adjusting since July 2022.

One-stop settlement of medical insurance and commercial insurance helps the development of commercial health insurance and enhances the payment capacity for high-end medical demand.

Limited by the convenience and timeliness of claims, the claim rate for commercial health insurance in China is relatively low, accounting for less than 5% of total domestic healthcare expenditure in 2023. In November 2024, the National Healthcare Security Administration, in conjunction with the Financial Regulatory Bureau, will promote a one-stop synchronous settlement payment model for medical insurance and commercial insurance, which is expected to resolve the resistance to the development of commercial insurance. Relying on the nationally unified, widely covered, standardized national medical insurance system platform and big data, new types of health insurance will be launched to enhance payment capacity at the medical end.

2025 Investment Outlook:

1) Domestic leaders in life science research services are expected to benefit from import substitution and mergers and acquisitions.

With policies increasing investment in scientific research, the R&D investment efforts of enterprises are expected to bottom out and rebound. Policies such as the "Law on the Progress of Science and Technology" are favorable for domestic manufacturers in terms of import substitution. Additionally, in 2024, the China Securities Regulatory Commission will release the "New National Nine Articles," promoting mergers and acquisitions, which will benefit already listed companies with capital accumulation, enhancing their market share through mergers and acquisitions. It is recommended to pay attention to Haier Biomedical and Aladdin.

2) Policies supporting "full-chain support for innovative drugs" will accelerate the commercialization of innovative drugs.

The national deepening of healthcare system reform policies mentions the need to establish systems that support the development of innovative drugs. Many regions in China have already formulated supportive policies for the R&D and commercialization of innovative drugs. In the future, the number of INDs, clinical trials, NDAs, and listings for domestic innovative drugs, as well as their overseas expansion, is expected to reach a new peak. Furthermore, significant achievements have been made in the approval of innovative drugs in overseas markets and the landing of BD projects. It is recommended to pay attention to Xinda Biopharmaceutical and Zai Lab.

3) The demand for home health devices is increasing against the backdrop of an aging population, and equipment updates are helping to revive procurement of remote devices.

① The aging process is accelerating, leading to a rapid increase in demand for home health devices. According to data from Huajing Industry Research Institute, the market for home medical devices is expected to reach 350 billion yuan by 2025. It is recommended to pay attention to companies such as KeFu Medical, Yuyue Medical, and Meihao Medical ② Government bonds support the update and iteration of medical equipment. As policies gradually take effect, equipment procurement at hospitals is expected to recover in 2025. It is recommended to pay attention to Mindray Medical, Kaili Medical, and United Imaging Healthcare.

4) The end of inventory destocking in overseas markets + the increase in centralized procurement of certain products may signal a turning point for the medical consumables industry.

① The destocking of low-value consumables overseas has ended, and a performance turning point is expected in 2024, with a return to normalized growth in 2025. It is recommended to pay attention to Zhengde Medical and Wanjian Medical; ② The centralized procurement of artificial bones has been implemented, and after price reductions, market penetration is expected to continuously improve, with significant growth anticipated in 2025. It is recommended to pay attention to Aojing Medical.

5) The high base of the traditional Chinese medicine sector has been digested, and there is optimism for inventory replenishment and state-owned enterprise reform catalysts.

The China National Pharmaceutical Group is facing the "14th Five-Year Plan" concluding battle in 2025, with reforms likely to deepen further. Additionally, traditional Chinese medicine companies experienced an industry-wide decline in 2024, and a replenishment cycle is expected in 2025. It is recommended to pay attention to Taiji Group and Kewang Pharmaceutical.

6) The pharmaceutical commercial sector is accelerating the integration of medical device commerce, and the medical insurance bureau's prepayment policy may improve cash flow.

The pharmaceutical commercial industry is experiencing a slowdown in growth due to a high base, but recovery is expected in 2025. Furthermore, the implementation of the prepayment system may improve corporate cash flow. Leading companies in circulation platforms, with their medical device business combined with new CSO agency businesses, may accelerate growth. It is recommended to pay attention to China National Pharmaceutical Group, China National Pharmaceutical Co., Ltd., Jiuzhoutong, Shanghai Pharmaceuticals, and Baiyang Pharmaceutical.

Risk factors: Risks of policy implementation falling short of expectations; risks of demand recovery not meeting expectations; risks of centralized procurement price reductions exceeding expectations