20171011-中国银河国际证券-China_Healthcare_Update_620kb

China Healthcare Sector Policy Update (October 11, 2017)

Core Content

On October 8, 2017, the Chinese government released a new policy titled "Opinion on deepening review and approval system reform and encouraging the innovation of drugs and medical instruments", which builds upon the 2015 "Opinion on medicine equipment review approval system". This policy represents a significant shift in the regulation and development of the healthcare industry, emphasizing innovation, affordability, and stricter oversight.

The policy aims to:

1. Encourage the use of innovative drugs (both local and imported) that are essential to China.
2. Make innovative drugs more affordable.
3. Promote the R&D of new drugs and medical instruments.
4. Improve the regulatory framework for drug and medical instrument approvals.

These measures are part of a long-term, top-level strategy to guide the healthcare sector's development and demonstrate the government's commitment to reforming the industry.

Main Points and Key Information

1. Clinical Trial Supervision Reform

• Goal: Increase the number of qualified clinical trial institutions to meet the high demand.
• Current Situation: Over 10,000 Grade II hospitals and 2,000 Grade III hospitals exist, but only about 600 are qualified for clinical trials, and only 100 can conduct Phase I trials.
• Support for Social Capital: The government encourages private investment in clinical trial centers.
• Benefits: Contracted research organizations (CROs) such as Genscript [1548.HK] and Wuxi Bio [2269.HK] are likely to benefit. International pharmaceutical companies with strong R&D capabilities will also gain from the acceptance of foreign clinical trial data in China.

2. Accelerating New Drug Review Progress

• Drug Form Priority: The authorities prioritize drugs based on safety risk, with the order: oral > muscle injection > IV injection.
• Support for TCM: Continued encouragement for Traditional Chinese Medicine (TCM), with CTCM [570.HK] being a related company.

3. Pushing Drug Innovation and Generics Development

• Marketed Drugs Catalogue: A new directory will be established, including innovative drugs and generics that have passed quality and efficiency assessments.
• Innovation Support: Stronger patent protection and reimbursement policies to incentivize innovation, especially when review processes are delayed.
• Generics Development: Generics are supported as a cost-effective solution, and the CFDA will expedite the release of innovative drugs post-patent expiration to encourage generics production.
• Impact: Companies with strong R&D and a broad product range will benefit from this policy.

4. Full Lifecycle Management of Drugs and Medical Instruments

• MAH System: The Marketing Authorization Holder (MAH) system will be implemented, making the MAH responsible for the entire lifecycle of a drug or medical instrument, from pre-clinical studies to post-market surveillance.
• Outcome: This is expected to accelerate industry consolidation and eliminate low-end manufacturers.

5. Improving Technical Review Capability

• Objective: Enhance the technical review capacity to reduce bottlenecks in the approval process.
• Benefit: This will alleviate review pressure and benefit companies with strong R&D capabilities.

6. Strengthening Policy Implementation

• Commitment: The policy reflects the government's strong determination to implement reforms effectively.
• Expected Impact: Streamlined processes and stronger enforcement will lead to faster drug and medical instrument approvals.

Key Beneficiaries

The following companies are identified as potential beneficiaries of the new policy:

• CTCM [0570.HK; BUY]
• CSPC [1093.HK; BUY]
• SinoBiopharm [1177.HK; Not rated]
• 3SBio [1530.HK; HOLD]
• MicroPort [0853.HK; Not rated]
• Hengrui [600276.CH; Not rated]

Stock Valuation Summary (Figure 1)

Simple Average:

• PER: 40.1, 28.4, 22.2
• PBR: 4.9, 4.3, 3.7
• ROE: 14.0, 16.0, 16.9
• EV/EBITDA: 20.2, 16.8, 13.6

Median:

• PER: 38.1, 30.0, 23.9
• PBR: 4.7, 4.0, 3.5
• ROE: 11.9, 12.7, 15.0
• EV/EBITDA: 18.9, 17.6, 14.6

Equity Ratings

• BUY: Indicates the share price is expected to increase by more than 20% within 12 months.
• HOLD: No clear catalyst, and the rating may be downgraded to SELL or reinstated to BUY pending further signals.
• SELL: Indicates the share price is expected to decrease by more than 20% within 12 months.

Disclaimer and Disclosure

This report is issued by China Galaxy International Securities (Hong Kong) Co., Limited and is intended for institutional clients. It does not constitute an offer or solicitation to buy or sell any securities. The report and its contents are subject to change without notice. The firm may have financial interests in the companies mentioned and may serve as a manager or co-manager in public offerings related to these entities. The analyst confirms no trading activity in the securities covered within 30 days prior to the report's release.

Analyst Certification

The analyst certifies that all views expressed in the report accurately reflect their personal views and that their compensation is not directly or indirectly related to the specific views in the report.