Pharmaceutical Industry Investment Highlights:
Boom in the industry is high. January-February 2008, the
pharmaceutical industry sales revenue and net profit increased by 32%,
57%, industry 07 listed companies two indicators year on year growth
of 17.9%, 112.9%, 08 in the first quarter continue to follow the
growth momentum, up 21.9%, 37.2%.
The future will continue to grow rapidly. On the demand expansion, the
global drug patent expiration caused a large number of industrial
transfer, trade and technological progress, industrial concentration,
such as multiple positive factors to improve under the guidance of
China's pharmaceutical industry to maintain at least the next three
years more than 20% growth.
Inflation in the context of pharmaceutical sector is a good choice.
High in the CPI, PPI to the spread of the background, the
pharmaceutical industry as a consumer rigid industry, can effectively
fight against inflation, future earnings growth clear. The current
stock price is a reasonable return to the regional, entered the
Concerned about the five types of investment opportunities: with core
competence and a clear long-term growth companies, have greater
earnings growth potential companies, healthcare benefits class
companies, pharmaceutical business, pharmaceutical raw materials
prices transactions to investment opportunities. Recommend Company:
Double Heron Pharmaceutical, Kang edge medicine.
Medical policy changes, and product prices and so on.
Evaluation and rating adjustments:
Pharmaceutical industry's future earnings growth clearly is a good
choice for the context of inflation, the stock has returned a
reasonable area, the investment rating remains "overweight."
????I. Review of pharmaceutical economy as a whole: substantial growth
in operating income and net profit
????(A) of the boom in the pharmaceutical industry at a high
????Statistics show that from January to February 2008 sales revenue
of pharmaceutical industry 97.776 billion yuan, an increase of 32%.
Among them, chemical, medicine, biochemistry, medical equipment were
completed 549.3,203.2,84.2,91.6 billion yuan, an increase of 32%,
respectively, 26%, 32%, 32%.
2008 January-February completed a total profit of 8.652 billion yuan,
an increase of 57%. Among them, chemical, medicine, biochemistry,
medical equipment were completed 51.2,17.7,9.1,7.6 billion yuan, an
increase of 31.7%, respectively, 13.5%, 6.4%, 5.6%.
Pharmaceutical industry sales revenue and profits growth have been
made, the profit margin has improved steadily, at a high boom in the
industry. The income share (59%) greater increase in the chemicals
sub-industry profits much higher than other sub-sectors, making the
rate of profit growth far exceeded income growth.
????(B) the performance of listed companies in the pharmaceutical
industry increased substantially
????1,07 Annual Report: Growth comes from investment income and
????Respectively, in 2007 the pharmaceutical industry to achieve
operating income, net profit of 192.12 billion yuan, 89.1 billion
yuan, an increase of 18%, respectively, 113%, of which 3.856 billion
yuan profit investment income, net of the impact of non-recurring
gains and losses, net profit up 60% .
Operating results of the main reasons for the substantial growth:
First, consolidation of governance in 2006 the pharmaceutical
industry, making the industry operating in a slump, the overall low
base; the second is to bring equity investment income securities
market, accounting for 29% of total profits; three is derived from the
endogenous growth of listed companies, including revenue growth, the
rate of decline during the period, gross profit margin improvement and
2,08 In the first quarterly: continued growth
????2008 a quarterly show pharmaceutical industry operating income,
net profit was 53.15 billion yuan, 27.4 billion yuan, up 22%, 37%,
excluding non-recurring profit impact, net profit rose 47%. Growth in
gross margin and net interest margin improvement from, respectively
2.17,0.58 percentage points.
3, the performance of their different sub-sectors
????Situation from the various sub-sectors, chemical raw materials
prices rose sharply since 2007, profitability improved significantly;
chemical agents and related benefit from the expansion rate of decline
in demand; medicine sub-sector gross margin stabilized, but the
management of declines in rates Net profit margin much improvement;
biological products subject to the bottleneck of resources and
vaccines plasma moderate growth, relatively slow growth rate;
pharmaceutical business as the business model of innovation,
efficiency, distribution, value-added service provider to a logistics
role changes in gross margins and net interest margin has a
????Second, rapid growth in the future will
????(A) to promote the demand for expansion of health care reform
????1, promoting urban and rural residents in health security system
to bring drugs in consumption.
Mainly in three aspects: the expansion of urban basic medical
insurance coverage; basic medical insurance for urban residents and
extend the trial to over 50% of the city; in the country to fully
implement the new rural cooperative medical system in rural areas,
with two years will raise the standard by the 50 yuan per person per
year to 100 yuan, the central and local government contributions to
farmers subsidies from 40 yuan to 80 yuan.
Expected urban workers, urban residents, the three insurance funds and
the NCMS can bring drugs trillion yuan 2,000 a year increments.
2 and improve the public health service system to promote the
development of the immune class manufacturing enterprises
????Mainly refers to the good job of major disease control, the
implementation of immunization programs to expand the scope of the
national infectious diseases. In this connection, the Ministry of
Health announced the "expansion of the national immunization
plan" from "five seedlings 7" disease extended to the
"12 seedlings of 15 disease", that is, the 6 in the original
vaccine in national immunization hepatitis B vaccine, BCG, ridge Grey
vaccine, DPT vaccine, measles vaccine, diphtheria vaccine, based on
increased hepatitis A, meningitis, encephalitis, MMR vaccination and
other vaccine programs. Expansion of the scope of immunization, the
vaccine will stimulate the enterprises producing and major infectious
diseases, drugs consumption.
3, to promote rural health care system will drive consumer medical
????Focus on improving the three-tier health service network in rural
and urban community medical service system. Community and rural
medical institutions must build the infrastructure and medical
equipment to the construction of the pilot, which will boost
consumption of medical device products.
4, led the establishment of national essential drug system of
essential drugs consumption.
The central government will allocate 83.2 billion yuan, 16.7 billion
yuan more than last year, support for health reform and development,
focusing on rural and grassroots to tilt. National essential drug
system and the pharmaceutical supply system will drive the consumption
of basic drugs.
(B) the rapid development of generic drug market
????Excessive growth of medical costs, troubled governments, including
developed countries, in order to reduce medical costs, countries have
to encourage and increase the use of generic drugs. With the number of
annual sales of over USD 10 billion so-called "blockbuster"
level drug patents have expired, the field of generic drugs showed a
clear trend of rapid growth. By 2008, the world heavyweight 35 species
concentration due generic, covering ulcer medication, antihypertensive
drugs, lipid-lowering drugs, antibiotics, anticancer drugs and many
other varieties, generic market expansion will reach 800 billion.
Domestic enterprises, some enterprises have been if the sea is
medicine, such as in the generic drug generic Huahai made a wealth of
experience and outstanding results, with the multinational companies
to shift production capacity. Especially after the 2008-2010 years
ago, is a global drug patent expiration of the concentration of the
outbreak, which features on the domestic production of generic drugs
business is undoubtedly a golden opportunity.
(C) industrial policy and technological progress to lead the industry
????China's "Eleventh Five-Year," the overall goal:
establish a strong international competitiveness of the pharmaceutical
industry, part of the area into the world's leading ranks. In the
field of chemical raw materials, through the process, technology and
equipment innovation, potential for market growth of 20 large, high
value-added products industry into the international market. Areas in
the chemical pharmaceutical preparations, preparations for products
made of 5 U.S. or EU listing. In the field of Chinese medicine
products, develop improved quality standards listed 20-30, efficacy
mechanism clear, safe, efficient, stable and controllable modern
Chinese medicine products. Major, serious acute infectious diseases
and chronic disease areas, for a 10-15 with China's own intellectual
property rights of innovative drugs and new vaccines to realize
industrialization. Add 10-20 kinds of digital, non-invasive or
minimally invasive diagnostic equipment and medical materials into the
In the innovation system, the establishment of a market-oriented
research combining pharmaceutical innovation system for medical
devices and pharmaceutical companies focus on R & D investment
share of total sales revenue reached more than 5%, industry R & D
investment to 3% of sales revenue,
????In policy formulation, the state introduced a corresponding
financial, taxation and government procurement policies and increase
investment in medical innovation, and encourage qualified enterprises
to buy shares holding, leasing, overseas listing, R & D centers,
etc. to enter the international market establish and improve
management and supervision of foreign investment, simplify procedures,
focusing on business in foreign investment credit, overseas investment
income, information services, etc. to support.
Meanwhile, the industry introduced a corresponding new "Drug
Registration", re-define the new drugs, new drug application
greatly increased the difficulty. Then issued a "special approval
procedures for drug registration Implementation Measures
(Provisional)" draft, created four sets of new drugs, treatment
of severe diseases can be difficult to enter the "green
channel", the implementation of special approval for
pharmaceutical companies to promote the special pharmaceutical
research and development, to promote industrial optimization and
upgrading of high-tech.
(D) policies on the regulation to enhance industrial concentration, to
promote the healthy and orderly development of
????Government to increase medical services and security at the same
time, while drug production, procurement, use, distribution and other
aspects of increased supervision and strict pharmaceutical companies
and access, enhance quality control, from the source control disorder
of Medicine, prices were inflated, unfair trading, commercial bribery
and other serious problems. The introduction of a series of regulatory
measures and implementation, making some of the core competitiveness
is not forced out of small businesses, to avoid vicious competition
and the healthy development of the industry plays a far-reaching
We judge the rising demand for expansion of medical reform, the global
pharmaceutical patent expiration caused a large number of industrial
transfer, trade and technological progress and the improvement of
concentration, etc., will lead the next three years, China's
pharmaceutical industry to maintain growth of more than 20%.
Third, the pharmaceutical industry in the current valuation is
(A) outperform the pharmaceutical industry trends
????Pharmaceutical sector reform in the health policy background of
good expectations, from December 2007 to March 2008 out of the wave of
a strong rally, far more than the broader market trend in Shenzhen and
Shanghai, and then adjusted to follow the broader market fell more
than a months later, in late April, high inflation, hand, foot and
mouth disease, earthquake and other factors under the influence of a
strong rally once again out of the wave of the recent adjustments with
the broader market fell. The overall trend is much stronger than the
(B) of the pharmaceutical sector is a good choice for the context of
????We believe that the pharmaceutical sector outperform the reason
the trend, mainly in the high CPI, PPI to the spread of the
background, many industries are facing downside risks to future
earnings growth. The pharmaceutical industry in the policy environment
of support, continuous improvement of business efficiency, future
earnings growth is very clear. Rigidity of the industry as a consumer,
can effectively fight against inflation, so in disadvantaged
environments, the recognition by many investors. This is also the
period of inflation from the U.S. market performance of various
industries by supporting the U.S. in the six times of inflation,
economic slowdown, the market overall poor performance, but the new
energy, raw materials, pharmaceutical or outperform.
????(C) return the current valuation is reasonable area, entered the
????As of June 18, medicine section 08, 2009 were 25.24 times forecast
earnings, 19.44 times, PEG 0.79,1,08 were 4.22 times book value in the
first quarter. The current valuation is reasonable?
By the pharmaceutical industry compared with foreign securities
markets, we find that European countries such as Britain, France,
Switzerland, Germany, Italy, low price-earnings ratio medicine plate
were 12,14,18,16,18 times, because the European region is a high
welfare state , a larger proportion of public health; and the United
States, India and South Korea are relatively high, respectively
22,28,22 times, China 25 times.
U.S. pharmaceutical market is a relatively mature market, while
India's pharmaceutical market and industry structure and stage of
development similar to China, so the United States and India,
respectively, as a reference,
????In the United States, the U.S. pharmaceutical sector is 22 times
price-earnings ratio, the relative rate of 27% premium to the broader
market; and pharmaceutical sector in China is 25 times price-earnings
ratio, the relative rate of 41% premium to the broader market,
price-earnings ratio slightly higher than the United States.
Nevertheless, China's pharmaceutical sector more investment value.
Support for the following reasons:
China's pharmaceutical industry has a comparative advantage.
????The general market view is that China's pharmaceutical industry R
& D strength is poor, industry concentration is low, there is no
core technologies. Yes, we do many problems The stress core
competitiveness is not strong, however, we have our own comparative
advantages, that is, China's pharmaceutical market with 1.3 billion
people, backed by strong domestic demand, its capacity worthy of the
pharmaceutical market than the U.S. ; with low labor costs; has a good
industrial policy environment; industrial concentration is gradually
improving and there is much room for improvement; there has emerged a
number of new core competencies of the enterprise, Just imagine, if
less than 20% industrial concentration to 60%, what advantage of
business will get cake! Therefore, China's pharmaceutical industry has
high growth potential, should have higher valuation premium.
Then to India, for example, the pharmaceutical sector 28 times
earnings, the market premium rate of 37%, two data are related to
China's, India and China overall situation is similar to that China's
pharmaceutical sector is not overestimated, and one of the advantages
of enterprise its continued growth and broad market prospects of the
pharmaceutical market in China must share the feast, should receive a
higher valuation premium. Therefore, we believe that pharmaceutical
sector through the early fall, now return to a reasonable area,
entered the configuration stage.
????Four, five companies concerned about the investment opportunities
????(A) with core competence and long-term growth of the company a
????The core competitiveness of pharmaceutical companies in the
following areas: innovation, marketing, product, management team, and
a sustained ability to grow with the company generally has outstanding
research and innovation capacity, excellent marketing capabilities,
huge market potential gradient of products and extensive product,
excellent management team. From the performance perspective, the main
business of these companies annual revenue and net profit growth of
20% or more, have higher levels of gross margin and net profit margin,
operating cash flows are abundant.
Such companies include dual-Heron Pharmaceutical, Kehua, Henry
Medicine, Kang edge medicine, Hualan Biological, Medicines, East
(B) the potential for earnings growth of companies with large
????Have greater potential for earnings growth, including Double-Crane
Pharmaceutical Company, Jiang Chinese medicine, Hong Mei medicine,
Meiluoyaoye, medicine, and other daughter. These companies unique
competitive advantages in some areas. Double-Crane Pharmaceutical
infusion project rapid growth, epitaxial growth has been initially
completed the layout; the river in the OTC medicine market with its
superior marketing capability, is being nurtured a blockbuster-style
varieties, a new round of growth worth the wait; Hong Mei Chinese
Herbal Medicine Pharmaceutical benefit from the rapid increase of
industrial concentration, the future is expected to enter the fast
growing; Meiluoyaoye placement after the acquisition of assets of the
Group, the leading product "injured Jiegu film" its good
efficacy and a wide market potential, may lead the company to a new
track of development.
(C) of the healthcare related companies benefit
????Health care reform is to establish a "low level, wide
coverage" of the health care system, health insurance coverage
has increased for generic drugs and medical equipment products.
Generic drugs in the performance of the company's competitive edge: a
large scale, variety, wide coverage of commercial channels, supported
by the state and so on. These companies are: Baiyun Mountain,
Double-Crane Pharmaceutical, North China Pharmaceutical, Taiji Group,
and some medical equipment such companies such as Xinhua, Wandong
Medical, diving medical care will also benefit.
(D) a pharmaceutical investment business is another main line
????The overall profitability of China's pharmaceutical business in
poor condition, mainly because many enterprises, industry
concentration is low and competitive; the right to speak in the
industrial chain is not strong, profits are squeezed at both ends of
upstream and downstream, resulting in lower levels of industry
profitability. But the good news is that pharmaceutical business in
recent years, driven by industrial policies, the degree of
concentration there have been more substantial increase, with the
profit model of continuous innovation, operational efficiency, has
entered a virtuous growth path.
We believe that the core competitiveness of pharmaceutical business
in: channel size, location advantage, profit model, operational
efficiency. Currently, listed companies in the pharmaceutical
industry, with a strong channel size, and occupied the regional
advantages, while profit model and the operational efficiency and is
very good, and undoubtedly the Medicines shares, the value of their
investments have been highly recognized.
However, the channel value from the pharmaceutical business, the
Shanghai Pharmaceutical, Nanjing medicine, medicine consistent with
the market value of only 3.6 billion, respectively, 1.6 billion, 43
billion acquisition of more valuable. Shanghai in east China is the
largest pharmaceutical business leader, with more than 3,000 hospitals
terminal, tertiary hospitals in Shanghai to 100% coverage, with fine
linen drugs wholesale national qualifications. Is there a foreign
giants which can hold 3.6 billion to buy commercial channels in East
China Pharmaceutical half of it, the price revaluation of China's
resources, land in the revaluation, the network channels should also
be revalued, in this sense, the value of commercial channels of
Chinese medicine is far underestimated.
We believe that these occupied the geographical advantages of the
regional business leader, they have a strong channel of scale,
operational efficiency has improved, mode of operation is also being
innovative, such as Shanghai Pharmaceutical's OEM International OEM
model, Nanjing Medical pharmacy managed mode These will bring the
release of corporate earnings continue to just take time to nurture.
We believe that the domestic pharmaceutical business leader with broad
space for development, Highlights, Medicines, Shanghai Pharmaceutical,
giving "buy" rating.
(E) concern about drug prices of raw materials trading investment
????Since 2007, traditional export strengths in bulk drug substance
into the business cycle in general, price increases, sales increase.
The causes include: Yimin currency appreciation in dollar terms,
exports led to higher prices; second is the global bulk drug raw
materials, dependent on China, such as VC, penicillin industrial salt,
80% - of the production capacity in China, and China can directly
affect the capacity market supply balance; third is eliminated after
several years of industry and the adjustment of the conversion or stop
some of the enterprises became the gap; fourth is to increase
environmental protection measures, increased industrial costs push
We believe that the API will continue to maintain the business cycle
in 2008, due to: State Environmental Protection Administration on the
control of major pollutants, will make the API limit is about 25% (to
2010); pharmaceutical raw sewage standards improve, encourage
enterprises to increased by at least 30% of treatment costs, some
enterprises to survive the pressure will be eliminated. Focus on the
raw material drug types are: VA, VC, VE and so on.
Determine the value of the business core of the API is: cost
advantage, technical level of technology, production scale. Northeast
Pharmaceutical companies have focused, pharmaceutical, new synthesis,
In addition, the sea is medicine, Huahai two characteristics of bulk
drugs production enterprises, multinational companies face patent
medicine industry is about to expire and the transfer agent of the
industrial upgrading opportunities, will usher in the huge development
V. Recommend company
????(A) two-Heron Pharmaceutical - a prelude to rapid growth has
????1, the gross margin level is high.
????Main Biological and Shenghua Yao, the main products include
Biocoen, Xinji Er, Li and other antibiotics, which contributed
revenues were 38%, 10%, 10%, profits 36%, 14%, 14% . Profitability of
our products is very prominent, Xinji Er, Li antibiotics were 90%
gross profit margin of more than Biocoen other consolidated gross
profit margin products in 2008 are estimated at about 80%.
2, performance increased dramatically.
????The company has experienced 02 to 05 years of business
accumulating and nurturing, the 2006 inflection point into the
business, entered a rapid growth path in 2007, operating income and
net profit of 2.38 billion yuan, 135 million, an increase of 65%,
respectively, , 167.88%, excluding the impact of non-recurring gains
and losses, net profit grew more than 80% also. The first quarter of
2008 continued to maintain strong growth momentum, two indicators were
up by 92%, 58%, net of income tax refunded, and the impact of
non-recurring gains and losses, net profit rose as high as 153%.
3, the earnings growth from the manifold.
????Performance of the company achieved rapid growth partly due to the
growth comes from product sales, on the other hand, with the
improvement of production processes, raw materials, increase
self-sufficiency rate, capacity expansion and so the scale effect
brought about, making the products significantly increase gross margin
4, fine texture.
????From the overall business perspective, the company was only 5.92%
of assets and liabilities, accounts receivable turnover and inventory
turnover rates were as high 12.0,6.7; carrying cash and operating cash
flows are very abundant, high-performance gold; cost control and
reasonable rates continued to decline during the period, the
pharmaceutical industry in a rare high quality company.
5, has entered the corporate life cycle of the growth period.
????The company's future earnings growth from both the inner and
denotative aspects of endogenous growth, including first-line products
Biocoen such explosive growth, as well as second-line products, Ou
Ning, Lei Ning and be listed in the rapid growth of new products;
epitaxial growth, the pace began to accelerate in 2008, Beijing
billion acquisition of 40% stake in something, Beijing Ruikang 25%
stake in medicine, the acquisition of projects are at the forefront of
domestic sunrise industries and disciplines, the market has great
potential. In the next 1-2 years will be health care services as well
as overseas markets.
6, the future high-speed growth.
????Expects the next three years the main business income, net profit
CAGR of 71.25%, respectively, 71.52%, respectively, and net profit of
260 million yuan, 451 million yuan, 6.68 billion, earnings per share
of 1.05 yuan, 1.82 yuan, 2.69 yuan.
7, the investment rating of "buy."
????Absolute valuation method using discounted free cash flow (DCF), a
reasonable valuation of 29.47 yuan; using relative valuation of 42
million. Comprehensive valuation of 35.73 yuan of two ways. Company
good quality, long-term growth clear.
(B) of the Hong edge medicine - has begun a new round of growth
????1, steady growth in sales revenue and net profit. Pharmaceutical
industry and pharmaceutical company's main business, the
pharmaceutical industry is the main source of profit; the
pharmaceutical industry's leading products, including gynecology,
orthopedics, anti-infective, anti-cancer, cardiovascular and
cerebrovascular five series, which is the fist product Guizhifuling
capsule, The Reduning is the fastest growing products. In five series
of products driven by the growth, from 2003 to 2007 the main business
revenue and net profit CAGR of 24.6%, 27.3%.
2, the wealth of products and a unique marketing model gradient is the
company's core competitiveness. The company's core competence lies in
the following areas: rich product lines and gradients; has a strong R
& D capabilities; implementation of the product sub-line sales of
unique marketing model.
3, the next three main drivers of profit. The first round of existing
products into new growth cycle; Second, with the cooperation of the
domestic pharmaceutical business giant, will expand the marketing
channels, drive sales growth; Third, additional project has great
potential, good market prospects.
4, the investment rating of "overweight." We expect the
company 08,09,10 earnings per share were 0.57 yuan, 0.79 yuan and 1.06
yuan. As a leading enterprise modernization of Chinese medicine,
long-term investment value significantly.