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Pharmaceutical stocks rejuvenate in late autumn or is it the trend of the times?

 Last Update: 2022-11-15
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Since mid-October, the hot market of pharmaceutical stocks has drawn an overall upward growth curve
.
At the close of trading on October 31, the pharmaceutical biology (Shenwan) sector rose 4.
82%.

According to statistics from Caijian Dao, the pharmaceutical biology (Shenwan) sector rose from the lowest point of 7748.
74 on October 12 to 8670.
85 on October 31, sweeping away the decline of more than the past year
.

Especially on October 26, it was even more eye-catching
.
Oriental Wealth Choice data shows that the biomedical sector opened at 3232.
58 on the day, touched 3327.
44 at the highest, and finally closed at 3290.
31, up 5.
40%.

Since the sector picked up on October 12, this round of recovery has become the general trend
.

What are the reasons for this, besides the cyclical law of "starting up, continuing downward, and then going up again"?

01 "U-shaped reversal" "Easy renewal" releases a mild signal

"U-shaped reversal" "simple renewal" sends a gentle signal

Reviewing the last wave of the market, since the second half of 2021, the entire pharmaceutical stock has opened a "downward mode"
.
On June 30, 2021, the biomedical closing index was 5584.
57, and by September 30, 2022, it was only 3021.
62
.

Reviewing the last wave of the market, since the second half of 2021, the entire pharmaceutical stock has opened a "downward mode"
.
On June 30, 2021,

One year and one quarter, the overall price of the biomedical sector was almost "cut by half"
.
Market confidence is so weak that it is difficult to boost
even positive news.

Take BeiGene, a leading anti-cancer drug leader in China, as an example
.
Since the second half of 2021, BeiGene has issued a number of voluntary announcements, many of which are positive
.

For example, BeiGene announced on December 3, 2021 and EUSA Pharma announced that China's National Medical Products Administration (NMPA) has approved SYLVANT (situximab for injection).

It is reported that the drug is mainly used to treat adult patients
with multicentric Castleman disease (MCD) who are negative for human immunodeficiency virus (HIV) and negative for human herpesvirus type 8 (HHV-8).
The disease, also known as idiopathic MCD (iMCD), is a rare, life-threatening debilitating lymphoproliferative disorder
.

Although Castleman disease affects only about 2 in 100,000 people worldwide, it is extremely
harmful.
The 5-year survival rate of iMCD patients in China is only 55%~77%, which is lower than the global level
.

The listing of Savinco not only provides more treatment options for patients with patients, but also provides a "reassuring pill" for this group, which can be described as far-reaching
.

Corresponding to the positive news, BeiGene (06160.
HK) Hong Kong shares fell by 0.
56%, and fell by 13.
56%
on the second trading day (December 6, 2021).

This is not an isolated case
.
On December 13, 2021, BeiGene issued two voluntary announcements
.
The results of the interim analysis of the SEQUOIA trial were presented at the 63rd ASH (American Society of Hematology) Annual Meeting
.

This is not an isolated case
.

It is reported that this is a phase 3 trial in patients with treatment-new (TN) chronic lymphoblastic leukemia (CLL), and the data included in the analysis are from randomized columns comparing BRUKINSA and bendamustine in combination with rituximab (B+R regimen)1 and evaluating BRUKINSA plus venetoclax treatment with 17p chromosome deletion (del[17p]) and ╱ or patients with pathogenic TP53 variant gene Queue 3 (Group D).

Commenting on the significance and value of the results, Weijuan Huang, MD, Chief Medical Officer of BeiGene Hematology, said: "In this positive trial of SEQUOIA, BRUKINSA demonstrates the therapeutic promise
of highly selective BTK inhibitors when comparing the efficacy of chemoimmunotherapy for first-line treatment of CLL patients.

Constantine at Peter MacCallum Cancer Centre, Australia Professor Tam (Bachelor of Surgeons and Surgeons, MD), based on these results, confirms that BRUKINSA, a highly selective BTK inhibitor, is expected to help CLL patients bring chemotherapy-free treatment options
.
”

After the same positive news was exposed, in the five trading days from December 13 to December 17, BeiGene's Hong Kong stocks unexpectedly gained "five consecutive negatives"
.

Stretching the timeline, from June 30, 2021 to September 30, 2022, BeiGene's Hong Kong stock fell from HK$211.
2 to HK$
81.
05.

Coincidentally, Hengrui Pharmaceutical at the same time （600276.
SH) shares fell from 67.
70 yuan to 35.
1 yuan, WuXi AppTec (603259.
SH) A shares fell from 156.
07 yuan to 71.
69 yuan, and Zhifei Biologics (300122.
SZ) fell from 185.
63 yuan to 86.
43 yuan
.

It can be seen that in the context of the huge downward pressure on the entire sector, it is difficult to "save itself" by releasing good news, and it is even difficult to do
it alone.

According to the law of U-shaped reversal, after the entire sector experienced a continuous sharp decline, it has reached the bottom
of this cycle.
According to the "spring effect", once the spring is pressed heavier in the early stage, the greater
the rebound amplitude.
This led to a strong recovery
in mid-to-late October.

Of course, the spring is strongly pressed down, although it increases the explosive potential and space, but the "burst point" also plays a crucial role
.

Focusing on the rebound of pharmaceutical stocks, the "explosive point" is the "National Medical Security Bureau's Reply to Recommendation No.
1599 of the Fifth Session of the 13th National People's Congress"
issued by the National Medical Insurance Bureau on October 12.

Specifically, it was a reply to the suggestion of Sun Piaoyang, chairman of Hengrui Pharmaceutical, on "improving the medical insurance access rules for new indications for innovative drugs with multiple indications", and the reply mentioned that "it should be noted that in the process of negotiating drug renewal for the adjustment of the national medical insurance catalogue in 2022, we fully consider the opinions and suggestions of relevant parties and include the new indications in the scope of simple renewal consideration"
.

Specifically,

In short, in this year's medical insurance negotiations, some innovative drugs with new indications may not need to be renegotiated, but will be directly included in medical insurance
through the "simple renewal" rule.

This also means that for the varieties with new indications, the price reduction will not be too large, according to the simplified renewal procedure, the maximum reduction is only 25%, which undoubtedly greatly alleviates the price reduction pressure
of related pharmaceutical companies.

According to the calculation of Essence Securities, if the new indications of innovative drugs can be directly included in medical insurance through the simple renewal rules, according to the current simple renewal rules, the price reduction rate of innovative drugs after the new indications will be between 0% and 44%, compared with the possible average reduction of 50%-60% after renegotiation, the scope of reduction has narrowed
.

How much impact will health insurance negotiations have on pharmaceutical companies?

Since 2017, a number of exclusive innovative drug products have been negotiated into the national medical insurance directory
.
However, the price of medical insurance negotiations has decreased significantly, and the decline has shown a trend of increasing year by year, and reached a climax of decline in 2021, with an average decrease of 62% and a decrease of up to 94%.

As the price decline in medical insurance negotiations intensified, the net profit margin of pharmaceutical companies also declined
.
For example, BeiGene's net profit margin on sales decreased from -50.
98% in mid-2021 to -158.
28%
in mid-2022.
During the same period, Zhifei Bio dropped from 41.
69% to 20.
32%.

However, due to the "moderate" signal released by the National Medical Insurance Bureau this time, it means that the policy margin is expected to be relaxed, and while maintaining medical insurance, patients and hospitals, it also takes into account the multi-party interests of enterprises, which is also the inflection point of the "U-shaped reversal" of pharmaceutical stocks
.

02 Less affected by collective procurement and medical insurance negotiations Medical devices and traditional Chinese medicines are expected to take the lead

Less affected by collective procurement and medical insurance negotiations Medical devices and traditional Chinese medicine are expected to take the lead

The train runs fast, all thanks to the headband
.
The "front of the car" in the subdivision that took the lead in driving the recovery of pharmaceutical stocks this time is medical devices and traditional Chinese medicine
.

In terms of medical devices, on October 14, the medical device sector has seen a rising tide
.
Dirui Medical (300396.
SH), Nanwei Medical (688029.
SH), Huitai Medical (688617.
SH), Heartpulse Medical ( 688016.
SH) Opening medical treatment (300633.
SZ), Mindray (300760.
SZ), Wego Orthopaedics (688161.
SH), BGI Intelligent Manufacturing (688114.
SH) and other stocks rose by more than 10%.

In terms of medical devices,

The industry generally believes that this is related to the "Letter of the National Medical Security Bureau on the Reply to the Proposal No.
02866 (Social Management No.
263) of the Fifth Meeting of the 13th National Committee of the Chinese People's Political Consultative Conference" issued on October 12, once again responding to
the issue of procurement of innovative medical device products.

The National Medical Insurance Administration pointed out that in the recent collection of spinal consumables, 3D printing spine products are independently selected by enterprises to participate
or not.
In the next step, the National Medical Insurance Administration will take into account the characteristics of technical characteristics, production costs, usage, clinical efficacy and other characteristics of innovative products such as 3D printed orthopedic consumables, and adopt a "one product, one policy" approach to determine appropriate procurement rules
.

In the recent collection of spinal consumables, 3D printed spine products are independently selected by the company to participate
or not.
Adopt a "one product, one policy" approach to determine appropriate procurement rules
.

Previously, the National Health Insurance Administration released the "Reply to Recommendation No.
4955 of the Fifth Session of the 13th National People's Congress", which clearly pointed out that it is difficult to implement the dosage method
because the clinical use of innovative medical devices is not yet mature and the amount of use is temporarily difficult to estimate.

Since the clinical use of innovative medical devices is not yet mature, and the amount of use is temporarily difficult to estimate, it is still difficult to implement the quantitative method
.

For a long time, medical devices have been relatively less
affected by centralized procurement and medical insurance negotiations than medicine.

First of all, the main purpose of centralized procurement is to reduce medical insurance expenses
.
Unlike most drugs that are covered by medical insurance, the centralized procurement of medical devices is more concentrated in
high-value consumable devices.
Secondly, because it is difficult to have a reference standard for medical devices in consistency evaluation, it is difficult to compare, and the manufacturer's voice is relatively greater
.

This is why the net profit margin of medical device companies fluctuates less
.

Taking Mindray as an example, the net profit margin of sales was 34.
01% in mid-2021, 34.
45% in mid-2022, and 34.
82% in the third quarter of 2022.
Wego Orthopedics (688161.
SH) had a net profit margin of 33.
79% in mid-2021 and 35.
98%
in mid-2022.

Kaiyuan Securities believes that a major signal of the current stabilization and recovery comes from the favorable policies and the moderate landing of dental implant and spine centralized procurement policies, and another signal comes from the stabilization
of the performance of the sector targets.

Let's look at Chinese medicine
.
From October 12 to 31, Chinese Medicine II (Shenwan) rose from the lowest point of 5974.
80 to the closing point of 6889.
29
on the 31st.

Taking October 28 as an example, Chinese medicine stocks performed well, with Miraculous Pharmaceutical (600613.
SH) up and down, Wohua Pharmaceutical (002107.
SZ) approaching the upper limit, Tuspark Pharmaceutical (000590.
SZ), Wohua Pharmaceutical (002107.
SZ), Huason Pharmaceutical (002907.
SZ) rising more than 5%, Panlong Pharmaceutical (002864.
SZ), Foci Pharmaceutical (002644.
SZ), Longshen Rongfa (300534.
SZ) and so on
。

Similar to medical devices, the rise in the share price of Chinese medicine stocks is inseparable
from the support and encouragement of policies.
The report of the 20th National Congress specifically proposed to "promote the inheritance and innovation and development of traditional Chinese medicine"
.
The National Health Commission launched a special activity to promote the health of traditional Chinese medicine last month, and its "Implementation Plan" requires that by 2025, the proportion of tertiary and secondary maternal and child health hospitals providing specialized services of traditional Chinese medicine will reach 90% and 70% respectively; In public health services, the health management rate of Chinese medicine for children should reach 85%, and the health management rate of Chinese medicine for the elderly aged 65 and above should reach 75%.

Similar to medical devices, the rise in the share price of Chinese medicine stocks is inseparable
from the support and encouragement of policies.

Xiangcai Securities pointed out that the policy's support for the Chinese medicine industry covers the entire industry chain of traditional Chinese medicine, involving upstream Chinese herbal medicine planting, traditional Chinese medicine service system, talent construction, inheritance and innovation, open development, medical insurance payment, review and approval, etc.
, and the traditional Chinese medicine industry ushered in a period
of policy dividends.

This wave of gains in pharmaceutical stocks has benefited many
.

For example, Wohua Pharmaceutical is an intermediate enterprise in the industrial chain, not only undertaking the products of upstream Chinese medicine planting, piece processing, excipients and packaging materials production and management enterprises, but also providing medical and health products
to downstream pharmaceutical commercial companies, hospitals and pharmacies.

On October 12, the closing price of Wohua Pharmaceutical was 5.
55 yuan, and the closing price on the 31st had reached 6.
89 yuan, an increase of more than 24%
during the period.

03 Leading enterprises drive the recovery of the sector "rebound" or "reverse"? Let the bullets fly for a while

Leading enterprises drive the recovery of the sector "rebound" or "reverse"? Let the bullets fly for a while

The leading role of leading enterprises also plays the role of
"front of the car".

Take CXO leader WuXi AppTec (603259.
SH) as an example
.
From October 12 to 31, the stock rose 10.
09%.

Data show that in the first three quarters of WuXi AppTec, WuXi AppTec achieved operating income of 28.
395 billion yuan, a year-on-year increase of 71.
9%; The net profit attributable to shareholders of listed companies was 7.
378 billion yuan, a year-on-year increase of 107.
1%.

Among them, its revenue reached 10.
638 billion yuan in the third quarter, which is the first time that its quarterly revenue exceeded 10 billion yuan
.

On the one hand, WuXi AppTec is located in the CXO track to provide pharmaceutical companies with various outsourcing services from new drug R&D to production, which is less restricted by domestic centralized procurement and other policies, and can also undertake the business of
foreign companies.

According to WuXi AppTec's 2022 third quarterly report, during the reporting period, in the first three quarters of 2022, the company added more than 1,000 new customers, the number of active customers exceeded 5,900, and the revenue from customers in the United States was RMB 18.
991 billion, a year-on-year increase of 110%; Revenue from Chinese customers was RMB5.
318 billion, a year-on-year increase of 30%; Revenue from European customers was RMB2.
897 billion, a year-on-year increase of 21%; Revenue from customers in other regions was RMB1.
188 billion, a year-on-year increase of 22%.

Most of WuXi AppTec's customers are top pharmaceutical companies, among which the revenue from the world's top 20 pharmaceutical companies is RMB 12.
918 billion, a year-on-year increase of 175%; Revenue from other customers worldwide was RMB15.
477 billion, a year-on-year increase of 31%.

On the other hand, it is a global layout
.
In the third quarter of 2022, WuXi AppTec announced plans to build a site in Singapore and officially started construction
of a new production site in Middletown, Delaware, USA.

This also partially offsets the impact of
the Biden administration's previous executive order on the National Biotechnology and Biomanufacturing Program.

Let's look at "Medicine Mao" Hengrui Medicine
.
The closing price on October 12 was 33.
25 yuan, and on October 31, Hengrui Pharmaceutical's A-share share price reached 40.
20 yuan, an increase of 17.
89%
during the period.

Compared with WuXi AppTec, Hengrui Pharmaceutical has not had a good time by a series of blows such as centralized procurement, medical insurance price reduction, shrinking medical demand, rising raw material costs, and export backlog
.

Hengrui Pharmaceutical's performance report for the third quarter of 2022 shows that in the first three quarters, Hengrui Pharmaceutical achieved operating income of 15.
945 billion yuan, down 21.
06% year-on-year, and net profit attributable to shareholders of listed companies was 3.
173 billion yuan, down 24.
57%
year-on-year.

Despite the poor performance, there were some positive signals
.
Its operating income of 5.
717 billion yuan in the third quarter is still in the decline range compared with last year, but it increased by 20.
38%
compared with the second quarter of this year.
This shows that the scale advantage brought by centralized procurement is emerging
.

At the same time, in the first three quarters of 2022, Hengrui Pharmaceutical's sales expenses decreased by 26.
21% year-on-year to 5.
16 billion yuan
.

In terms of R&D expenses, Hengrui Pharmaceutical's cumulative R&D investment in the first three quarters of 2022 was 3.
5 billion yuan, although it decreased by 15.
54% year-on-year, but accounted for 21.
93% of total revenue, basically the same as 23.
9% in the same
period last year.

According to public information, Hengrui Pharmaceutical has listed 11 innovative drugs, ranking among the best in the same industry in China, and more than 60 innovative drugs are under clinical development, and more than 260 clinical trials have been carried out
at home and abroad.

Essence Securities released a research report on October 30, giving Hengrui Pharmaceutical an overweight rating
.
The reasons for the rating mainly include: the impact of the fifth batch of centralized procurement is basically cleared, and the impact of the generic drug business on the company's performance is blunted; Innovative drug products have formed a cluster, and the long-term volume in the future is worth looking forward to
.

Look at another giant, Fosun Pharma (600196.
SH), from 28.
72 yuan on October 12, to 33.
03 yuan on October 31, an increase of 18.
09%.

Its third quarterly report shows that the company achieved total operating income of 31.
61 billion yuan in the first three quarters of 2022, a year-on-year increase of 16.
9%; The net profit attributable to the parent was 2.
454 billion yuan, a year-on-year decrease of 31.
2%.

The recovery of Fosun Pharma's stock price is inseparable from
its industrial layout.
In July 2022, Shanghai Fosun Pharmaceutical Industry Development Co.
, Ltd.
, a holding subsidiary, reached a strategic cooperation with Real Biologics, under which the two parties jointly developed and exclusively commercialized the new crown effect drug Azvudine by Fosun Pharma Industry, including the treatment and prevention of
new coronavirus and HIV/AIDS.

Fosun Kite is based on Kite Pharma's CAR-T cell therapy product Yescarta was transferred and the first product to be locally produced in China, iKaida (Aquilenca injection), was accepted in October 2022 and included in the list of
priority evaluation varieties.

This means that adult patients with large B-cell lymphoma who do not respond to first-line immunochemotherapy or who relapse within 12 months of first-line immunochemotherapy can expect to benefit
earlier.

It is worth mentioning that Fosun Pharma has also made some adjustments
to capital actions.

On the evening of October 24, Fosun Pharma also announced that after comprehensive consideration, the company's controlling shareholder, Fosun High-tech, decided to terminate the shareholding reduction plan early on October 24, 2022, and promised not to reduce its shareholding
in the company for one year from that day.

According to the notice of the shareholding reduction plan dated September 2, 2022, Fosun High-tech, the controlling shareholder of the company, plans to reduce its holdings of A shares not exceeding 3% of the company's total share capital, of which A shares will be reduced by centralized bidding not exceeding 1% of the company's total share capital, and A shares
will be reduced by block trading not exceeding 2% of the company's total share capital.

This directly led to Fosun Pharma's A-share volume falling on the next trading day (September 5), and the stock price hit a new low in nearly a year and a half, and continued to fall by 2.
13%
on September 6.

The early termination of the reduction announcement on October 24 also restored capital confidence
to a certain extent.

Thanks to the multi-party resonance of the industry as a whole, subdivisions and leading enterprises, which also affected the attitude of fund managers, many star fund managers increased the allocation of the pharmaceutical industry in the third quarter, such as E Funda Blue Chip Select managed by Zhang Kun increased its holdings of WuXi Biologics in the third quarter, Invesco Great Wall Dingyi managed by Liu Yanchun increased its holdings of Aier Ophthalmology and China Europe Healthcare Mix managed by Gülen, and added Hengrui Pharmaceutical to the top ten holdings
.

The allocation of the pharmaceutical industry, for example, E Funda Blue Chip Select managed by Zhang Kun increased its holdings in WuXi Biologics, Invesco Great Wall Dingyi managed by Liu Yanchun increased its holdings in the third quarter of the third quarter, increased its holdings of China Europe Healthcare Mix managed by Aier Ophthalmology and Gülen, and added Hengrui Pharmaceutical to the top ten holdings
.

In response to the recent strong performance of pharmaceutical stocks, some industry insiders believe that the "rebound" or "reversal" mainly depends on the situation after 4 months, and they are still cautious and wait-and-see
.
In other words, after the change of government of the "two sessions" next year, the new policy of medicine will come out
.

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