Healthcare Reform, Pharmaceutical Industry and Businesses: JD Capital’s In-depth Analysis of Investm


Source: Voice of Medicine

According to the latest data, the total income of pharmaceutical industry grew by 10% in the first half of 2016, the profit 13%. The Blue Paper issued by Chinese Academy of Social Science estimates that the industry will enter a “new normal” state of 10-15% annual income growth, with the size of pharmaceutical market reaching RMB 2.3 trillion.

Regarding this growth trend, pharmaceutical investment teams of JD Capital believes that, “the driving forces of the industry include not only the ever-growing medical demand brought by the improvements in people’s livelihood, aging of the population and two-child policy, etc.; but also the strategic positioning and policy adjustment of policy makers in the pharmaceutical industry. In general, this industry is very promising with huge development potential and will inject new vitality into the market.”

2016 is the first year of the healthcare system reform in the “13th Five-Year Plan” as well as the year to comprehensively carry out in-depth reforms on pharmaceutical and healthcare industries. With such market opportunities, pharmaceutical and healthcare industry in China is attracting more and more investors. “Understanding of related policies, prudently judging the industry trends, seizing the opportunities and taking full use of them are the keys to receiving a good return on investment in Chinese pharmaceutical and healthcare industry,” said the leader of the JD Capital pharmaceutical investment team.

It is known that JD Capital has completed nearly 50 investment cases in healthcare industry as of now, covering all sub-industries such as the manufacturing of chemical medicines and Chinese patent medicines, biopharmaceuticals, medicine distribution, medical equipment and health services, etc.

“Among companies we have invested in, over 80% of them have maintained a sustained and stable growth. Some of them have become bellwethers in the industry, such as Fujian Cosunter Pharmaceutical (300436), Fangsheng Pharmaceutical (603998), Er-Kang (300267), Guangxi Liuzhou Pharmaceutical (603368) and Wellead (603309), etc. They all have generated good returns on investment,” said the director of the pharmaceutical investment team.

Healthcare Reform: Regulatory Policies Rebuild the Investment Value of the Industry

Pharmaceutical industry is always under close supervision of the government and relies greatly on the government policies. Every adjustment on the policies, laws and regulations can determine the fate of a number of pharmaceutical enterprises and practitioners.

In the view of JD Capital’s pharmaceutical investment team, being fully aware of the impact of healthcare reform policies on the industry and being able to seize valuable investment opportunities are at the heart of successful pharmaceutical investments.

“Besides, other related policies are also very important, such as the ‘evaluation of the consistency of generic drugs’, ‘two-vote system’ and ‘hierarchical medical system’, etc., which are great impetus to restructure the value chain of the industry,” the director of pharmaceutical investment team added, “take policies for generic drugs as an example, while improving the quality of drugs already in the market, the consistency evaluation can also weed out drugs that didn’t pass the evaluation. Studies show that this policy will lead to the elimination of 70% generic drug production. Companies who have passed the evaluation will gain a significant market share, boosting market concentration.”

Faced with such situation, JD Capital has focused on investment cooperation with pharmaceutical companies who have outstanding technical strength and used its capital advantages to help companies pass the consistency evaluation quickly and efficiently, thus boosting market concentration. JD Capital-invested companies, especially those who have completed their IPOs, thanks to their advantages in technologies and talents, will be the major targets of cooperation.

In addition, in terms of medicine distribution, JD Capital has its own understanding. With the gradual implementation of “two-vote system” and “replacing business tax with a value-added tax”, pharmaceutical distribution companies or agents will face a heavier tax burden and increasing difficulties in tax treatment. This will provide a second chance to augment market concentration of medicine distribution industry. Meanwhile, the implementation of the policy “division of medical treatment and drug sales” will enable patients to buy medicines in hospital outpatient pharmacies and retail drugstores following prescriptions. The market of prescription medicines in retail outlets will be expanded, bringing opportunities to chain drugstores to increase their revenue. 

Pharmaceutical Industry: Rigid Demand and Innovation are the Investment Hotspots

In terms of business model, the pharmaceutical sector in China can be divided into two major areas, namely pharmaceutical industry targeted at medicine production and pharmaceutical business focusing on pharmaceutical distribution. When it comes to pharmaceutical industry, drugs with rigid demand and new drugs are regarded as the investment hotspots in this field in China.

“Drugs with rigid demand refer to those with specific curative effects. In recent years, this kind of drugs experienced rapid growth with domestically produced ones constantly replacing imported ones,” said the director of the investment team.

Take anti hepatitis B virus drugs as an example. According to data released by World Health Organization, the number of population infected by HBV are as high as 240 million globally and 120 million in China. It has become the most widespread chronic infectious disease that threats the lives of Chinese people. The drugs used to treat HBV fall into the category of drugs with rigid demand and the related manufacturing enterprises are popular investment targets. JD-invested company Fujian Cosunter Pharmaceutical Co., Ltd. is the only domestic pharmaceutical company that has three major types of anti HBV active pharmaceutical ingredients in the market and their approval numbers.

“We completed our investment in Cosunter in April, 2011. Its revenue increased from RMB 105 million in 2011 to RMB 309 million in 2015; net profit from RMB 33.82 million in 2011 to RMB 103 million in 2015,” said the head of the investment case. Cosunter (300436) completed its IPO on Chinext in April, 2015. 

On the other hand, pharmaceutical companies with new drugs are also good investment targets because of the “innovation premium” of new drugs which can hedge the pressure on lower price brought by medicine bidding.

“Most of new drugs in China are Me-Too drugs with a combination of imitation and innovation. They may share some similarities with the original drugs in molecular mechanism and therapeutic target but they are new molecular entities. After continuous technical accumulation, we believe that in the next few years, domestic Me-Too pharmaceutical companies can also develop me-better drugs and achieve real innovation,” said the pharmaceutical investment team of JD Capital.

Since 2016, many Chinese provinces carried out a new round of public bids for drug purchase, which indicated a new round of price cut for old types of medicine. “However, for those enterprises with many approved new drugs but restrained by public bid, this will be a precious opportunity,” said pharmaceutical investment team of JD Capital. JD Capital-invested company YOKO is a good example for the above investment logics. JD Capital completed its investment in YOKO in 2010 and the reason for its investment was that YOKO was developing new drugs and had a huge growth potential.

“In 2013, ‘moxifloxacin’, developed by YOKO, came into market and made YOKO the first Chinese company to be approved to produce this kind of medicine (the market was monopolized by Bayer before). Up to now, bidding provinces for ‘moxifloxacin’ were less than 10, but in the future, with the gradual implementation of the new round public bids for drug purchase, the sales scope of ‘moxifloxacin’ will extend rapidly,” said the director of the team.

Besides, under the backdrop of the practice of Pharmacy Benefit Manager (PBM), the high-end medical consumption based on out-of-pocket payments is constantly expanding. “This will bring a golden development period for the industry. The combination of the above two factors will improve the purchasing power of patients, providing sufficient driving forces for the growth of high-end healthcare, health services and prescription drugs,” said the investment team. Therefore, the demand brought by high-end healthcare is also the focus of investment.

Pharmaceutical Business: M&As Unleashes the Integration Dividend of the Industry

In the area of pharmaceutical distribution, 2016 is also a year of reform.

The implementation of policies such as “two-vote system” and “replacing business tax with value-added tax” has weeded out some affiliated agents and scalping agents in pharmaceutical distribution channel, with the market share of small distribution companies being constantly diverted to large distribution enterprises.

After the incident of vaccine in the first half of 2016, “two-vote system” was strongly promoted, boosting the industrial concentration. “This trend will promote the formation of a market based on national and regionalbellwethers, thus bringing up the market share of these bellwethers in pharmaceutical distribution area,” said the investment team.

In fact, JD Capital has already invested in this sub-industry. Guangxi Liuzhou Pharmaceutical Co., Ltd. is an investment case in pharmaceutical distribution area. It is the largest pharmaceutical company in Guangxi province and is a typical regional bellwether. 

“To evaluate the value of a pharmaceutical enterprise, one should focus on the research on its market coverage and drug types,” said the investment team. Liuzhou Pharmaceutical covers almost all levels of hospitals in Nanning, Liuzhou and Guilin, which are the most economically developed areas in Guangxi; its business scope covers main sales channels such as hospitals, drugstores, private clinics and township health centers; its drug types include basically all the basic drugs, new drugs and specific drugs used by hospitals. In June, 2010, JD Capital completed its investment in Liuzhou Pharmaceutical and helped it to complete its IPO on A-share market in 2014. Its revenue increased from RMB 2.73 billion in 2011 to RMB 6.51 billion in 2015 with a net profit reaching RMB 208 million in 2015.

Nowadays, under the background of deepening reform on public hospitals, the diversion of drug distribution brought by the “division of medical treatment and drug sales” has become a major trend. “Retail drugstores and community pharmacies have gradually taken on the role of hospital outpatient pharmacies. The entire drug retail industry is expected to embrace a market with hundreds of billions revenue brought by diversion of distribution channels,” the investment team estimated.

Currently, the proportion of chain drugstores and their size are still very small in China. Compared with the proportion of 75% in the U.S., this number was only 40% in China at the end of 2015. “The development goal of domestic retail pharmacies will gradually change from increasing the number of stores to augmenting market concentration. Through boosting market concentration, they will have stronger bargaining power over upstream and downstream companies and ultimately achieve scale advantage,” the investment team believed. 

In terms of the huge development opportunity in chain pharmacies, the pharmaceutical investment team of JD Capital indicated that “In order to better seize this opportunity, on the one hand, we have actively cooperated with bellwethers with the abilities and ambitions to carry out industrial integration and helped them to consolidate their leading positions; on the other hand, we have taken the initiative to make M&A as our strategic direction in order to grasp the new opportunities in the course of reform on medical industry.”