20180913-中国银河国际证券-Healthcare_sector–_1H2018_results_review_and_2H2018_outlook_4页_613kb

Healthcare Sector 1H2018 Results Review and 2H2018 Outlook Summary

Core Content Overview

The healthcare sector in 1H2018 demonstrated strong earnings growth, with major sub-sectors reporting profit increases ranging from 20% to 30%. The report outlines the policy direction and market dynamics influencing the sector in the second half of 2018, along with investment recommendations and risks.

Key Highlights from 1H2018

• Sector Performance:

  • Innovative and biological drugs led the growth with profit increases of over 30%.
  • CTCM (Chemical Traditional Chinese Medicine) and generics reported approximately 20% growth.
  • Distributors remained stable, with growth in the high single digits.

• Profit Drivers:

  • Increased volume of therapeutic drugs due to NRDL (National Reimbursement Drug List) expansion.
  • Sales team expansion and associated selling expenses.
  • Launch of new products and market ramp-up.
  • Mergers and acquisitions (M&A).

• Trends and Concerns:

  • Rising selling expenses to revenue ratio may provide short-term growth but could become a burden in the medium to long term.
  • R&D to revenue ratio is increasing, which may temporarily reduce profits but is a long-term growth enabler.
  • The distribution sub-sector saw a recovery after being impacted by zero price mark-up and two invoice system policies.

Policy Directions in 2H2018

• PWQ Policy (Procurement with Quantity):

  • Aimed at promoting the use of qualified generics in public hospitals.
  • The policy will replace original drugs with generics that have passed consistency evaluation.
  • Tax reduction for generics manufacturers to 15% is part of the policy support.
  • Expected ASP (Average Selling Price) cuts vary based on the number of bidders: 10–40% for different drugs.

• SAMR Initiatives:

  • Accelerating R&D for innovative drugs with definite clinical efficacy.
  • Import registration for drugs from foreign developed markets.
  • Accepting foreign clinical trial data and requiring only human race differentiation trials.
  • Priority review channels for urgently needed drugs and streamlined trial processes.

• Medical Reimbursement Reforms:

  • Three approaches to reduce the burden on the medical reimbursement fund:
    1. Payment reform (lump-sum payments, disease/bed-based payments).
    2. Large hospital procurement to drive down prices.
    3. Substituting generics for original drugs.

Investment Recommendations

• Conviction Calls:

  • CTCM [0570.HK]: Not affected by PWQ policy, strong earnings visibility, and growth outlook in CCMG (Chemical Traditional Chinese Medicine Group) and CTM (Traditional Chinese Medicine). Attractive valuation (15.3x/13.2x/11.1x 2018/19/20E PER) with expected 17.5% EPS CAGR from 2017 to 2020E.
  • 3SBio [1530.HK]: Not impacted by PWQ policy, and has a near-term catalyst with Trastuzumab approval.

• Cautious Recommendations:

  • CSPC [1093.HK]: Still recommended for close monitoring, as its share price is likely to remain weak before PWQ policy details are released. The drop in share price is attributed to the potential ASP cut for generics.

Risks in 2H2018

• More stringent GMP (Good Manufacturing Practice) regulations.
• Stronger anti-bribery measures may negatively affect marketing activities.
• Downstream ASP pressure from procurement policies.

Valuation Table Summary

Key Takeaways

• The sector is expected to benefit from policy support for innovation and generics.
• The PWQ policy is a major driver in 2H2018, likely to reduce ASPs but improve market share for generics.
• CTCM and 3SBio are highlighted as less vulnerable to PWQ policy and have strong growth prospects.
• CSPC is recommended for monitoring due to its exposure to generics pricing risks.
• The report emphasizes the importance of tracking policy developments for investment decisions.