On May 26th, Cailian Press (Reporter Zhang Liangde) quoted an industry insider stating, "Chinese herbal medicine prices generally follow a ten-year cycle of three years of growth, three years of decline, and three years of stability. Based on this, it is expected that by the end of 2023, Chinese herbal medicine prices will have risen for three years and should begin to fall." However, during the first half of this year, Chinese herbal medicine prices temporarily adjusted at a high, then continued to rise.

After a whole year of depleting stocks of traditional Chinese medicinal materials, the gross margin of some traditional Chinese medicine companies has undergone significant changes in the first quarter of this year, with the pressure of raw material costs beginning to surface.

Mr. Li, a purchasing manager for a listed pharmaceutical company, told Cailian Press, "In the previous years, some companies predicted that the price of traditional Chinese medicinal materials would rise and thus stored some goods. But generally, the amount of raw materials a company reserves usually only lasts for a year or at most two years."

Since the beginning of this year, the Kangmei Chinese Medicine Index has risen from 1810.99 points to 2248.52 points, an increase of 24.16%. The prices of some products, such as Atractylodes macrocephala, Paeonia lactiflora, and Radix Paeoniae alba, have increased several times over. Traditional Chinese medicinal material prices have continued to rise overall from last year's high prices. After depleting their own stocks of raw materials, pharmaceutical companies have started purchasing more expensive raw materials from the market, which may continue to push up the cost of production for companies. The impact of rising traditional Chinese medicinal material prices this year may deepen their effect upon listed traditional Chinese medicine companies.

The Bozhou traditional Chinese medicinal material market continues to be hot in 2024. (Cailian Press reporter photo)

The gross margin of some traditional Chinese medicine companies has significantly declined.

First-quarter financial reports of Chinese medicine listed companies this year show that the gross margins of some companies have a clear downward trend.

List of some companies with a year-on-year drop in gross margin (data source: financial reports of listed companies)

The gross margin of the abovementioned companies in Q1 2024 has decreased by an average of 7.65pct compared to the same period last year. Many listed companies have seen a decrease of more than 10% in gross margin.

In response to this, Cailian Press called some listed companies as investors. One listed company stated that the rise in traditional Chinese medicinal material prices has put pressure on the company's products. A staff member of Xinguang Pharmaceutical Co., Ltd. (300519.SZ) said, "The price of traditional Chinese medicinal materials doubled from last year to this year."

Chinese herbal medicine price index has hit a new high this year (picture from: Kangmei Chinese Medicine website)

At an earnings conference, Yiling Pharmaceutical (002603.SZ) stated that Chinese medicinal materials have agricultural properties and are cyclical. Some of the medicinal materials used exclusively by the company have significantly risen in price compared to last year, which has to some extent affected the gross margin of some products. The company will take measures to reduce costs and increase efficiency to maintain a relatively stable gross margin. Additionally, the company will further increase its efforts in building traditional Chinese medicinal material cultivation bases, which can guarantee the quality of traditional Chinese medicinal materials from the source and can alleviate some of the pressure on traditional Chinese medicinal material prices.

Cailian Press found that some listed companies had lowered their gross margins, with the main raw material prices of some of these companies' leading products having risen significantly. For example, the purification process of Ziwu goods for Teyi Pharmaceutical (002728.SZ) has risen from 45 yuan/kg at the end of 2022 to 90 yuan/kg now. Similarly, Polygonatum items have risen from 37 yuan/kg to 43 yuan/kg, Chuanbei has risen from 45 yuan/kg to 85 yuan, and licorice from 22 yuan/kg to 31 yuan/kg, with only orange peel showing a slight decrease from 23 yuan/kg to 19 yuan/kg.

However, it should be noted that not all companies' falling gross margins are due to changes in the cost of medicinal materials, as changes in product structure and medical insurance negotiations can also significantly affect gross margins. (See the following reports in this series: The next 20 years of traditional Chinese medicine: pharmaceutical companies lay out the silver-haired economy and OTC market | A new cyclicality for traditional Chinese medicine)

However, for most traditional Chinese medicine enterprises, since traditional Chinese medicinal material prices are trending upwards this year, the impact of rising raw material costs is even more significant than last year. Some common traditional Chinese medicinal materials, such as Atractylodes macrocephala, Paeonia lactiflora, and Illicium verum, have seen significant price hikes, leading to further market sentiment and enthusiasm for investment. Meanwhile, other traditional Chinese medicinal materials, such as Angelica sinensis, codonopsis root, and licorice, have shown signs of stabilization after falling due to excessive price hikes in the latter half of last year.

After conducting research and interviews on the distribution market of traditional Chinese medicine and some listed companies, Caijing reporters found that for companies with traditional Chinese medicine planting bases, the stability of product supply under the circumstance of rising market prices can be basically ensured. However, due to the fact that most of the enterprises adopt cooperation-based planting for most of their traditional Chinese medicines, the raw material purchase price is protected at the market-driven protective acquisition price. Therefore, these enterprises will not benefit significantly from the increase in market prices of these traditional Chinese medicine varieties.

Manager Li told Caijing reporters: 'When purchasing traditional Chinese medicine, most large traditional Chinese medicine companies usually analyze prices. If the price of a certain traditional Chinese medicine is significantly higher than usual, the company will not make a large purchase, but will purchase in accordance with demand as needed.'

If a company begins to use a low inventory raw material procurement strategy, in general, the price of high-priced raw materials will slowly decline due to lack of demand. However, if the price of this raw material continues to rise, the traditional Chinese medicine company can only purchase passively.

Company pricing, breaking a contract, or internal competition?

Faced with the rise in prices of traditional Chinese medicine, different companies have made different responses based on their products and target markets.

Some listed companies have chosen to raise prices. At first, Zhangzhou Pientzehuang Pharmaceutical (600436.SH) published the 'Announcement on the Price Adjustment of Pientzehuang Dominant Product' in May 2023, stating that starting from May 6, 2023, the domestic retail price of Pientzehuang's dominant product Pientzehuang tablets will be increased from ¥590 per pill to ¥760 per pill, an increase of 28.8%.

Regarding this price increase, the company stated that it was mainly due to the rise in raw material costs. Caijing reporters learned from staff at Bozhou Medicine Merchants Network that the price of the main raw material, ox gall, which Pientzehuang requires has risen significantly in the past two years, from ¥500,000 per kilogram to a peak of ¥1.8 million per kilogram, and has now fallen slightly to around ¥1.5 million per kilogram.

However, Pientzehuang did not raise prices for another product, Angongniuhuang Pills, for which ox gall is the primary raw material. Previously, a staff member of another company that produces Angongniuhuang pills told Caijing reporters that although the price of ox gall has increased significantly, the company's pricing also needs to take into account the situation of competitors of the same brand, and a hasty price increase may affect sales.

In addition to Pientzehuang, Lanzhou Foci Pharmaceutical (002644.SZ) also announced in March of this year that, due to the increase in raw material and production costs, the ex-factory price of its main Chinese patent medicine products will be adjusted, with an average price increase of 9%. Judging from the company's first-quarter report, the gross profit margin of Lanzhou Foci Pharmaceutical has indeed grown from 26.66% in the same period last year to 31.1%. However, because the company raised prices in March, the boost effect of the price increase on the gross profit margin has not yet been fully reflected in the first-quarter report.

List of some companies that experienced a year-on-year growth in gross profit margin in the first quarter (Data source: Listed Companies' Financial Reports)

From the company's product structure, Lanzhou Foci Pharmaceutical's main products include Compound Astragalus Oral Liquid, Concentrated Paraconchinfo, Xiaoyao Pill, Angongniuhuang Pills, and Six Ingredient Rehmannia Pill. Most of these are OTC medicines. JD.com, Taobao, and other e-commerce platforms show that the company's product prices are relatively low compared to other similar products of other brands, and the gross profit margin is also relatively low.

In addition to raising prices and breaking contracts, there is a third, slightly helpless option for companies. An industry insider told Caijing reporters that raising prices may face the disadvantage of competing with the same brand, and now companies can only hold out and try to compress various costs as much as possible.

Darentang's Speedy Heart-Saving Pills and other 'Seven-Piece Gourd' products (Photo source: Caijing reporter)

Under the pressure of rising prices of traditional Chinese medicine, some companies have chosen to breach contracts. Last month, Shandong Province released two batches of 'Announcement on the Results of Credit Rating and Procurement Credit Evaluation of Pharmaceutical Prices and Tendering and Purchasing in the Provincial Inter-Provincial Traditional Chinese Medicine (Materials) Procurement Alliance in Sanming', in which many companies refused to perform their contractual obligations or refused to perform purchase/sale or distribution contracts without proper justification. Beijing Tongrentang (600085.SH), Kangmei Pharmaceutical (600518.SH), and Zhendong Pharmaceutical (300158.SZ) subsidiaries were all on the list of breaches of contract.

Shandong Traditional Chinese Medicine and Medicinal Slice Collectively Procured Breach of Trust List (Photo source: Shandong Provincial Public Resources Trading Center)

The list mainly involves varieties including white peony, earth dragon, white atractylodes, peony bark, Chinese angelica, codonopsis pilosula, and other major varieties that experienced large price increases in the second half of last year or this year. Taking white atractylodes as an example, the wholesale price of this traditional Chinese medicine in Bozhou and Anguo markets has risen from a minimum of ¥28 per kilogram last year to a maximum of ¥170 per kilogram this year.

An industry insider told Caijing reporters that since this traditional Chinese medicine and medicinal slice collection in Shandong is not mandatory by the government but rather by Weiyi, the risk of breach of contract is relatively low. Therefore, some traditional Chinese medicine companies have chosen to breach the contract because the cost of some products has risen too high, and continued supply would cause serious losses.

In addition to raising prices and breaching contracts, companies also have a third, somewhat helpless option. Some listed company insiders said that raising prices may face unfavorable competition from similar brands, so at present, they can only persevere and try to minimize various costs.

In the face of continuously rising medicinal material prices, some medicinal material industry experts in Bozhou, Amara and other places have also revised their judgment of the current traditional Chinese medicine material price increase cycle - "there is constantly money flowing in, and prices may continue to rise." However, there are also old medicine traders who believe that the actual demand for medicinal materials is not growing so fast, and many medicinal materials' price increases are not driven by demand but by capital promotion. Medicinal materials have been hoarded in cold storage and have formed inventory, and the risks of future price declines are constantly increasing.