"The war will start" for APIs?

Author: Good Lentils

"Prophet of industry development stocks", and the same is true of medicine

Recently, the National Development and Reform Commission and the Ministry of Industry and Information Technology issued the "Notice on the Implementation Plan for Promoting the High-quality Development of the API Industry

On the second day, the API stock market rose by about 3.

With the introduction of this policy, the "war will start" for APIs?

"The Beginning of the Great War" under the New Deal

The sharp rise of the API stock market has triggered a new round of discussions on the development of APIs, and a smoke-free "war" is about to begin

What is the core logic of the New Deal announcement?

From the interpretation of the New Deal, it can be clearly seen that at least the era of high pollution, high energy consumption, and low added value of China's APIs has passed.

On the other hand, in the stock market, after more than a year of adjustment, the high level has fallen by about 50%, corresponding to an average PE valuation of about 20-30 times in 2022, whether it is a horizontal comparison of other medical branches or a vertical comparison of history.

In addition to the PE value of CDMO shares involved in the supply of raw materials, it is also worthy of recognition.

Such a low-lying land, in conjunction with the heavy policy, is very obvious

Table 1 Representative API concept stocks

Data source: Oriental Fortune Network

Secondly, no matter how good the concept is, it needs to be supported by demand

From the perspective of industry needs, large-volume procurement requires stable supply of bulk raw materials.

The short-term, medium-term and long-term demand elements are complete, and the demand system has a clear toughness, providing strong support for the development of the API industry

In addition, from historical data, the price trend of most APIs is highly correlated with oil prices

Considering the historical experience of the raw material drug industry lagging oil prices for 6-12 months, it is expected that from the fourth quarter of this year to the first half of next year, a considerable part of the raw material drugs will gradually increase their prices, and corporate profits will improve significantly

From the changes in the stock market, we can see that we need to focus on the value of characteristic APIs that have a heavier voice in the industrial chain and the company's target with the integration of the industrial chain

Featured APIs with growth potential and horizontal CDMO expansion will be the two main lines with the most investment value in the API sector

The "raw material medicine tug-of-war" surrounded by gunpowder smoke

In fact, long before the two ministries and commissions took action, the raw material drug market had already been turbulent, and a see-saw battle began

For example, before mass procurement, both the gross profit margin and the net profit margin of preparation companies were significantly higher than those of API companies
.

For preparation companies, there is no willingness to spend energy to do things whose profitability is lower than that of the main business.
APIs are more purchased from outside
.

Therefore, before 2017, the API development index has generally stabilized
.

However, centralized bidding and procurement have greatly reduced the price of medicines, and reduced the costs of circulation, marketing, and hospital admission, forcing preparation manufacturers to focus on the supply of raw materials and costs, and APIs have become the focus of the industry chain
.

On the other hand, with the stricter policy supervision of the API industry and the small wave of "anti-globalization", the API industry is advancing in a multi-party force
.

In addition, the outbreak of the domestic new crown epidemic has delayed the resumption of work and production of enterprises, and the prices of some APIs have risen due to tight supply.
After the epidemic is controlled, the API market will bring new opportunities, and a new round of reshuffle will be on the line
.

Therefore, after 2018, the development of APIs has shown large fluctuations, and the trend of quarterly changes has become prominent
.

At present, China can produce more than 1,500 kinds of APIs, accounting for 3/4 of the global API production, but the market share only accounts for about 10% of the world, and it is dominated by bulk APIs with low added value
.

China's API companies are mainly distributed in the central and eastern regions, especially in Jiangsu and Zhejiang along the east coast, with more than 300 companies
.

Figure 2 Analysis of changes in operating income and profit of China's chemical raw materials

Data source: PDB

Figure 3 Distribution of my country's API companies

Data source: Ping An of China

In general, China's API production technology and quality level are gradually improving, and it is transitioning from the stage of producing only low-end bulk APIs to the stage of producing higher-end specialty APIs and patented APIs
.

Who will "go forward heroically"?

With the integration of regulatory policies internationally, disorderly competition is coming to an end, capacity expansion has made the past high-profitable scenery no longer, and the problem of overcapacity has plagued traditional API companies
.

Mergers and acquisitions have gradually become the norm, and the leading production capacity has emerged.
This is a key support direction.
Who will "go forward bravely"?

As the raw material industry enters a period of change, raw material pharmaceutical companies can start to make breakthroughs in the following five aspects:

Figure 4 Breakthrough path of raw material companies

1) Access qualification: On the one hand, obtaining access qualification is a symbol of strength, and on the other hand, it is a ticket to participate in global competition, which can expand the market audience
.

2) Speed ​​competition: For generic drugs, speed and cost are the key competitive advantages, especially bulk APIs and specialty APIs.
For innovative drugs, speed is the most critical core, which can quickly break through process problems and improve It is the only way to get orders
.

3) Technological competition: Compared with SOPs with strong guiding significance such as preparation and quality analysis, raw material production procedures are difficult to normalize, and the technical thresholds of products in different production lines and different fields are different, so technological breakthroughs are indispensable
.

4) Quality competition: Whether it is the consistency evaluation of domestic generic drugs or the internationally accepted ICH, quality requirements are rising, and downstream companies have "clear eyes"
.

5) Price competition: Under the three-medicine linkage reform, the price advantage of raw materials will be placed in a particularly prominent position, breaking the original situation of circulation and preparations occupying the bulk of the cost
.
High-quality and low-cost APIs can seize the opportunity whenever and wherever possible, which is also a quick way to occupy the gap in the supply of APIs in other countries due to the epidemic
.

With the triple resonance of policy, industry and capital, a "war" of a smoke-free war is about to begin
.