“Science and Technology Innovation Board Daily”, December 6 — After hitting the pharmaceutical sector, including CRO, with a PPT, Yakuming Biotech quickly announced a repurchase plan this morning to buy back 10% of its shares for no more than 600 million US dollars. Meanwhile, in its announcement, Pharmaceutical Biotech stated that the current stock trading price does not reflect its intrinsic value or the actual business prospects of the company. So they hope to boost market confidence by buying back shares.

Stimulated by favorable repurchases, Pharmaceuticals Biotech once rose more than 5% in early trading today.

Yakumei Biotech is a leading company in the CRO industry. The core performance of CRO is driven by customer orders. The execution cycle of each order is about two to three quarters. Therefore, the heating and cooling of CRO companies is inseparable from the upstream innovative pharmaceutical industry.

Today, the A-share innovative drug sector reacted even more intensely. By the close, Kane Technology had risen and stopped, and various individual stocks such as Alice, Yahong Pharmaceutical, and Shenzhou Cell rose strongly.

On December 4, Pharmaceutical Biotech released a business update PPT on its official website, which not only adjusted the company's performance guidelines for the next 2-3 years, but also stated that due to the impact of biotechnology financing, the industry expects single-digit growth in the next two years. This has further raised concerns in the market about the demand for pharmaceutical innovation, and the overall sector has been greatly adjusted.

However, Pharmaceutical Biotech did not simply release pessimistic expectations. On the evening of the 4th, it said that the Group's business operations and financial conditions had maintained a strong momentum.

Entering 2024, we need to think about annual investment ideas. What are the prospects for the pharmaceutical industry? How much is the investment value of the sector? Which segments are worth paying more attention to?

▌The bottom of the pharmaceutical industry?

Currently, the trend of Pharmaceutical Biology (Shenwan) from year to date is still at the low point of September 2022, and the valuation is also at the low point of previous years.

Looking back at market trends from January to November 2023, the overall Shenwan Pharmaceutical Biotechnology Industry Index fell 2.56% during this period, ranking 19th in Shenwan's Tier 1 industry, outperforming the Shanghai and Shenzhen 300 Index by about 7.14 percentage points during the same period. Most segments recorded negative earnings. Among them, the blood products and chemicals sectors registered the highest gains, rising 24.14% and 7.70% respectively; the hospital and offline pharmacy sectors experienced the highest declines, falling 23.67% and 17.47%, respectively.

In terms of valuation, according to statistics from Dongguan Securities, as of November 30, 2023, the overall PE (TTM, overall method) of Shenwan Pharmaceutical's biotechnology industry is about 29.0 times, which is 82% of the historical average; compared to the overall PE premium rate of the Shanghai and Shenzhen 300, it is in 85% of the industry's premium rate center compared to the Shanghai and Shenzhen 300 premium rate centers since 2012. The current valuation is relatively low in the industry in the past ten years.

Judging from the Q3 performance, both industry revenue and net profit declined year-on-year, and the performance of most segments showed negative growth. The main reason was that the industry was greatly affected by anti-corruption medical treatment.

▌Which segments are worth paying attention to?

Since the beginning of December, a number of institutions have released their 2024 outlook reports, believing that the pharmaceutical industry is at the bottom, and that high-quality growth stocks with many segmented tracks have reached the point of long-term placement.

It is worth noting that innovative drugs and overseas travel have become key areas of focus for various institutions.

According to Societe Generale Securities's latest research report, innovation+internationalization will open up space for industry growth. On the industrial side, technological innovation iterations and the continuous release of new demand provide inexhaustible impetus for the long-term growth of the industry; on the market side, domestic demand is recovering steadily, and the international market is leaping by leaps and bounds. Differentiated “Chinese innovation” is about to gradually move from clinical to commercialization, and the cost-effective “intelligent manufacturing in China” is gradually breaking through overseas high-end markets. It is recommended to focus on new investment opportunities under the comprehensive internationalization of China's pharmaceutical and biological industry:

(1) Global multi-center clinical progress and data reading of innovative drugs and innovative medical devices, and subsequent overseas licensing cooperation are worth continuing to track;

(2) The release of major products that have entered the commercialization stage of innovative drugs overseas can be expected. Medical equipment with “hard technology” capabilities will further open up overseas high-end medical markets, and exports of APIs, pharmaceuticals, low consumption, core components, and new order development are expected to accelerate;

(3) The frontiers of overseas innovation also deserve attention. New demands such as weight reduction and AD provide new impetus for industry development, and also bring new business growth to China's innovative industrial chain. Looking ahead to 2024, the “innovation+internationalization” development of China's pharmaceutical industry is expected to rise to a new level, and the main line of industry growth remains the same.

Huaan Securities said that policy-related disadvantages have come to an end, and large pharmaceutical products continue to unfold, showing the investment value of pharmaceutical products. At the end of the year, health insurance negotiations continued and the renewal of bids were superimposed on the basic drug catalogue. The fund's position on pharmaceuticals increased slightly month-on-month but is still at a low level compared to history. Standing at this point in time, the pharmaceutical sector needs to increase its allocation.

In terms of investment ideas, the agency believes that 2024 is still the main line where variety is king, and tradition, modernity, and globalization need to be combined:

(1) Tradition refers to traditional Chinese medicine. Targets related to traditional Chinese medicine need to firmly seize opportunities for innovative traditional Chinese medicine drugs, brand OTC and ordinary OTC, and representative individual stocks brought about by state-owned enterprise reform;

(2) Modern, refers to FastFollow pharmaceutical devices or even FIC pharmaceutical companies. 2024 is the year of category implementation and continuous product commercialization, and changes in corporate logic and valuation brought about by many companies beginning to turn losses into profits in 2025;

(3) Internationalization: The target of internationalization requires the allocation of more positions. This year, the team's forward-looking recommendations for Yifan Pharmaceutical, Junshi Biotech, Luye Pharmaceutical, etc. were approved by the FDA based on products.

Great Wall Guorui Securities said that the current valuation of the industry is still at the bottom, and it is recommended to continue to focus on the innovative drug sector. Recently, Junshi Biotech's “high price” of treprilizumab went overseas to give the innovative drug field a cardiotonic dose. The 2023 health insurance negotiations have come to an end, and the results of the negotiations may be announced at the end of this month. Currently, the industry is in a “performance vacuum period”. This year, there have been marginal improvements on the payment side of the innovative drug sector, and the level of internal volume has improved to a certain extent. Companies are actively exploring differentiation and seeking opportunities to go overseas starting from clinical needs.

Bank of China International recently released a research report saying that looking ahead to 2024, the bottom of the pharmaceutical sector will rebound. After continuing to decline in 2022-2023, the current valuation of the pharmaceutical sector is low, fundamentals and sentiment are expected to recover steadily, and the overall cost performance is relatively high. As favorable payment-side policies continue to be implemented and market liquidity is expected to improve marginally, the agency continues to be optimistic about valuation recovery opportunities in the pharmaceutical industry in 2024 and the medium to long term, and suggests seeking alpha opportunities in the following two main lines:

(1) A double-click opportunity for Davis, who has strong innovative attributes and a double rebound in fundamentals+valuation;

(2) Consumer medical-related targets where demand is expected to rebound.