Where is the end of the three transformations of Chinese medicine?

Recently, some colleagues in the investment and industry circles have asked me whether medicine is "cool" and whether "everything can be collected".
I am at a staged "low" in the popularity of the medicine sector.
I want to talk about my views
.

In the past two years, the allocation of medicines and medical devices by investors in the pharmaceutical industry has continued to be low.

Whether medicine is a "good industry" depends on your investment cycle
.

Looking at the dimension of a few months, the pharmaceutical index may have fallen by 20%, but with a longer dimension, the pharmaceutical index has risen about 20 times in the past 10 years

[Why can centralized procurement bring so much pressure? 】

[Why can centralized procurement bring so much pressure? 】

In the near term, the centralized procurement policy of either generic drugs or high-value consumables has indeed brought considerable pressure to the pharmaceutical sector.
There are three main reasons for this:

First, from the perspective of the payment side of clinical drugs and consumables, the National Medical Insurance Administration of China has strong bargaining power as a single payer.
China’s medical insurance system is different from that of the United States, similar to Japan and the United Kingdom, but in terms of bargaining power, it is better than that of Japan and Britain.

.

The strong bargaining power of the payer has led to the relatively weak side of the medical and biological enterprises in the centralized procurement, and the enterprises often face greater competitive pressure

Second, the national income level and per capita ability to pay are still limited, and the national income is still lower than that in Europe and America
.

The situation of the National Medical Insurance Administration of China as the main single payer will continue for a long time .

Third, as medicine is a special commodity, the government needs to take into account multiple goals
.

It is necessary not only to ensure inclusive product supply and product quality, but also to be a "housekeeper" to ensure the balance of income and expenditure of the medical insurance fund.

All of the above are realistic pressures, but they are not reasons for the industry to stand still.
In history, this is not the first time the pharmaceutical industry has encountered challenges.

[This is not the first time I have encountered it: but without pressure, there is no motivation]

[This is not the first time I have encountered it: but without pressure, there is no motivation]

While policy changes have allowed pharmaceutical companies to "out of their comfort zone," they have also made investors feel fearful and at a loss for the unknown
.

But what I want to say is that changes to create new opportunities and crises breed new opportunities are the topic of the times.

[The first transformation: from OTC antibiotics to specialty generic drugs]

[The first transformation: from OTC antibiotics to specialty generic drugs]

Looking back on the history of industrial development, from the era of antibiotics and OTC (a group of leading companies represented by North China Pharmaceuticals, Northeast Pharmaceuticals, and Harbin Pharmaceutical Group) to specialist generic pharmaceutical companies (Hengrui Pharmaceuticals, China Biopharmaceuticals, East China Pharmaceuticals, Xinli) (Thailand), traditional enterprises are facing the first labor pains, and the growth of a group of specialized pharmaceutical companies in the fields of oncology, digestion, and endocrine therapy has also laid the foundation for the pattern of Chinese medicine in the following years
.

Looking at it now, on the one hand, the pressure from the policy side is conducive to pushing the supply side closer to the real clinical demand, and on the other hand, it also helps the industry to screen out outstanding companies that conform to the development of the times

[The second transformation: from generic drugs to innovative drugs]

[The second transformation: from generic drugs to innovative drugs]

Marked by the “722” incident in 2015, the “gene recombination” from generic drugs to innovative drugs occurred in China's pharmaceutical ecological chain
.

The successive implementation of policies such as clinical verification, MAH system, consistency evaluation, and priority review of innovative drugs has made China's drug review system basically in line with the international standard market, providing domestic enterprises with a good opportunity and environment for innovation; and With the establishment of the Super Medical Insurance Bureau in 2018, policies such as mass centralized procurement, innovative drug medical insurance negotiations, and DRGS/DIP have been introduced successively, further accelerating the advent of the era of innovative drugs on the payment side

Under the joint promotion of CED, the Medical Insurance Bureau and the capital market, China’s pharmaceutical industry has opened up an innovative landscape.
Leading traditional generic pharmaceutical companies represented by Hengrui, Zhongsheng, Hausen, and Fosun have adopted independent research and development in-house, mergers and acquisitions.
M&A, license in, cooperative development, establishment of subsidiaries/spin-offs and other ways to transform into R&D innovative drug companies
.

[The third ongoing transformation: from Me-too to Best in calss, from License in to License out]

[The third ongoing transformation: from Me-too to Best in calss, from License in to License out]

Looking to the future, the development of China's innovative drugs will be upgraded from "does it" to "good or not".
I think we are going through the third transformation, and commercialization, differentiation, and internationalization will become keywords
.
From a major pharmaceutical country to a powerful pharmaceutical country, Chinese pharmaceutical companies need to undergo multiple transformations from "generic drugs", "difficult to imitate drugs", "Best-in-class" to "First-in-class".
Under the double urging of the People’s Republic of China, the transformation is accelerating
.

Innovation-driven development has become a major trend.
How to achieve true innovation is the most important topic for entrepreneurs, and we see that the threshold for enterprise innovation and R&D is getting higher and higher
.
In 2016, for the first time in China, a pharmaceutical company (China Biopharmaceuticals) with annual R&D expenditures of more than 1 billion yuan appeared.
By 2020, the R&D expenditures of China's leading pharmaceutical companies have reached or approached the level of 1 billion U.
S.
dollars (BeiGene , Hengrui Medicine)
.

On the other hand, the regulatory authorities’ guidance to the industry is becoming more and more standardized.
For example, the CDE issued the "Clinical Value-Oriented Clinical Research and Development Guidelines for Anti-tumor Drugs" in the early stage, which basically clarified the attitude of not supporting "me-worse" and some scattered , Inefficient, repetitive low-level innovation will gradually withdraw from the stage of history, and truly innovative leading companies will begin to see gold after the big waves
.

With the accumulation of innovative drug research and development experience, we have also seen that some innovative drug companies in China have gradually emerged a number of innovative drug projects with differentiation and "Best-in-class" potential
.
Large targets with good market performance and great potential for combination use, and new technology platform drugs such as double antibodies and ADCs have all been favored
.

From license-in to license-out, domestically-made innovative drugs are gradually being recognized in the international market
.
For example, 4 domestic PD-1 companies going overseas, Fosun Pharma’s BCL-2, Nuocheng Jianhua’s BTK, Tianjing’s CD47, and Rongchang’s ADC products, which have recently set a new record for overseas authorized amounts, etc.

.
We have recently calculated that from 2020 to now, a total of 27 cooperative development and equity transfer agreements signed by Chinese pharmaceutical companies and overseas pharmaceutical companies have been completed, and we believe that this number will continue to accelerate in the future
.

Figure | License-out status of Chinese pharmaceutical companies from 2020 to now (Source: company official website, Industrial Securities Research Institute of Economics and Finance)

[The direction of the future pharmaceutical field]

[The direction of the future pharmaceutical field]

Looking to the future, the recent pullback of the pharmaceutical sector in the capital market also indicates that investors need to enter the era of "track + individual stocks" of pharmaceutical investment-a high-quality track with a reasonable valuation is still the best choice, new tracks and subdivisions Specialized and new bottom-up stock selection will be an important source of excess returns
.

The subdivision track with more investment value in the future mainly includes the following aspects:

First, Biopharm, which has industrialization capabilities, has gradually opened a watershed with other companies in the field of innovative drugs through full cooperation with Biotech;

Second, some specialties are gradually emerging, such as ophthalmology, central nervous system (CNS), osteoporosis, degenerative diseases, etc.
, a number of subdivision leaders will emerge;

Third, new technologies will continue to emerge.
A new generation of screening and design platforms (DEL, PROTAC, SBDD, FBDD), drug development platforms (gene therapy, cell therapy, bispecific antibodies, ADC), and data platforms (CADD, AI Drug screening, target discovery based on data analysis) are worthy of investors to spend more energy to research and pay attention;

The fourth is professional empowerment platforms, such as upstream CXO, life science support system, big data empowerment platform; downstream CSO, companion diagnostics, commercial insurance support system, etc.
, the industry is faster, professional recognition barriers are not high, and The winning rate is relatively high, which is the "greatest common divisor" for investors
.

[Finally summarize, give everyone some confidence]

[Finally summarize, give everyone some confidence]

Finally, I want to say three things: Confidence is more precious than gold.
When you see problems, you must also see opportunities and hopes; the professionalism of pharmaceutical track investment will become more and more important, and pure track investment will gradually transform into a "track +Investment in "individual stocks", leading the high-prosperity track + field-specific expertise and new innovations will receive more and more attention; as an observer and witness to the development of China's pharmaceutical industry, we also look forward to working with you to witness the pharmaceutical industry A new journey in the industry!