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The Growth Rate of Medical Industry Greatly Slows Down
Author:   Source   Date:Aug,14,2014   Browse:9696   
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With the in-depth implementation of such high-handed policies as restricting prices through bidding and regulating fees by medical insurance, the growth rate for the whole medical industry slows down by a big margin. Insiders believe that, the pharmacy sector will still be suppressed by related policies in the short run, whereas in the long run the medical industry displays an overall upward trend.


Growth Rate Slows Down

According to the calculation conducted by medical team in Guotai Jun’an Securities, the growth rate for the medical industry, in the first quarter of 2014, slows down greatly, and the average revenue growth rate is 13.7%, which is estimated to be the lowest point of the whole year. Due to the policy of control over medical fees, the growth rate for medicare expenditure slows down, bringing down that of the whole industry.


From the situation of every sub-industry, the speeding-down of Chinese patent drugs growth is the most notably significant, for the price cut prevails, affecting the stockpile of downstream customers. The average growth rate for every Chinese patent drug producer is 13.83%. Among them, giants such as Tongrentang (600085) and Yunnan Baiyao (000538) bear little impact for their mighty capability in price protection.


Chemical producers are recovering from low ebb, and the growth of enterprises for high-end special drugs also keeps stable momentum. In the first quarter, the revenue growth rate for chemical manufacturers is 12.72%, profit up by 18.82%. In 2013, greatly affected by the bribery of GSK, the revenue growth rate of the chemical industry has started to slow down since September, plummeting from 20% during January and August to 3% in the first two months of 2014. At present, the whole industry has gradually stepped out of the shade, and the growth of high-end special drugs is pulling up the profit of the whole.


As for medical apparatus and instruments, its profit growth rate has also declined, and enterprises in the circle integrated with each other, competition becoming bitter. In the first quarter, the profit growth rate for the medical instruments industry falls to 5.31%, down by 3.7% on year-on-year basis. It is still not clear for the export end. Caused by short trade banners, competition in the circle is getting increasingly fierce, and companies’ profitability slightly drops. Since 2012, the pace of the integration in the industry has sped up, and the concentration of detailed fields has elevated. In March this year, CFDA issued a new amendment draft to Regulations on Medical Apparatus and Instruments. The new regulation will be implemented from June 1st, and it generally encourages innovation, helping motivate the vitality in enterprises’ R&D, improve the output rate of new products and accelerate the growth of the whole industry.


The export of chemical crude drugs is still at the low ebb, and the pressure from environmental protection groups mounts on these enterprises. In the first quarter, the revenue growth rate for the industry is 11.32%, down by 8.65% comparing with last year. Affected by inventory cycle and products’ prices, its growth rate is still greatly fluctuating. Enterprises who produce bulk crude drugs now have to face unprecedented pressure for environmental protection’s sake. Plus the price cut, the ratio of margin displays a declining trend.


According to the financial data revealed by enterprises, in the first quarter, the operating cash flow of listed medical enterprises stays at the lowest level during the past five years.


The polarization for the development of listed medical enterprises is also worsening. Among 179 listed medical enterprises, the percentage of those whose growth rate for net profit without fees is above 20% falls from 72% in 2009 to 40% in the first quarter this year, whereas the percentage over 50% falls from 42% in 2009 to 16% this year.


Three Promising Fields in the Second Half

Ding Dan, medical analyst from Guotai Jun’an, concerns that, against the background when the growth rate for the entire industry slows down, there are three investment ideas that are worth following in the second half of this year: pay attention to those detailed fields with good prospects, such as prescription granules, hospital construction and urinary medicine; to those who benefit from reforms in policies, like low-price drugs policy and bidding advancing; to those enterprises who experience thorough changes, namely marketing reforms, changes in stock shares, approval of new drugs and new drugs coming into the market.


Part of Guotai Jun’an’s view is echoed by the medical team in Haitong Securities (600837). Haitong believes that most of medical enterprises are in a state of slow progress. For this reason, if these enterprises want to walk out of the trouble, they need to set foot in new fields, among which developing new products and extended mergers are two key paths. It is the top draw for enterprises to enter into new fields like medical service after innovating new products. However, though mergers can solve the problem of slow growth of short-term profit, it is hard to predict whether the growth will continue later on.


In light of breakthrough drugs, Haitong Securities thinks that, apart from such areas as patent drugs and pharmaceuticals that attract much attention, new fields like gene sequencing, mobile health and online drugstores continuously pop up, and these fields are now staying on speculation stage, while the trend of the industry has undeniably taken shape, and their industrial model is gradually ripening. The huge growing space brought about by technological advancement is promising.


Source: China Securities Journal

Time: June 4th, 2014

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