On May 26th, the Cailian Press (reporter Zhang Liangde) revealed two obvious trends in the traditional Chinese medicine industry: the number of participating enterprises and people in the OTC market conference has increased significantly; attention from funds and enterprises on products for the elderly market has significantly increased.

From the perspective of medical industry conferences, the number of participating enterprises and people in the OTC market-oriented Xidinghui and Wuzhen Health Conference has set a new record this year, with each of the two conferences focusing on "accelerating industry transformation and winning product upgrades" and "resilience and change management" as the main themes of the conference. The direction of the industry has clearly shifted. An employee of Beijing Dairy Information Consulting Co., Ltd., the organizer of the Wuzhen Health Conference, told Cailian Press, "Traditional Chinese medicine products account for a higher proportion of the OTC market, so many of the participating companies you see may be from the traditional chinese medicine industry."

It is believed that the traditional chinese medicine industry is a weak cyclical industry, which mainly refers to the lack of obvious cyclical fluctuations in the traditional chinese medicine industry over a relatively short period of time. However, from a long cycle perspective, the traditional chinese medicine industry is greatly affected by population cycles and medical industry policy cycles.

According to the "China Population Situation Report 2024" released by Yuhua Renkou, Ren Zeping, Liang Jianzhang and others, the aging of the Chinese population is intensifying, and the country is transitioning from a population dividend period to a population burden period. The silver economy is entering a major development stage.

A person from Green Stone Venture Capital Corporation told Cailian Press, "We have been paying attention to the traditional chinese medicine industry for a long time. We are now focusing on opportunities in the OTC market, where traditional chinese medicine companies have more advantages, especially since the demand for traditional chinese medicine health preservation and cardiovascular and cerebrovascular slow disease has been increasing after the aging of the population."

Population cycles and the silver economy.

Some people in the industry believe that the traditional chinese medicine industry is a weak cyclic industry, mainly because the traditional chinese medicine industry does not have obvious cyclic fluctuations over a relatively short period of time. However, from a long-term cycle perspective, the traditional chinese medicine industry is greatly affected by population cycles and medical industry policy cycles.

According to the "China Population Situation Report 2024" released by Yuhua Renkou, Ren Zeping, Liang Jianzhang and others, the aging of the Chinese population is intensifying, and the country is transitioning from a population dividend period to a population burden period. The silver economy is entering a major development stage.

Image source: "China Population Situation Report 2024".

The report shows that since 2021, China has crossed the threshold of deep aging, and by 2023, the proportion of people over 65 years old has risen to 15.4%. Around 2030, China will enter the ranks of super-aging societies, and the proportion of elderly people will exceed 20%. It is predicted that after 2084, the elderly will occupy half of China's total population.

Facing the accelerating trend of aging in the next 20 or 30 years, the medical, retirement and medical industries are seen as key areas that will significantly benefit, and their development potential and market demand expectations will usher in unprecedented opportunities for expansion.

A company executive told Cailian Press, "Even only relying on natural market growth on the silver economy track, the annual market increment is 5%-10%."

Lin Yuan, a well-known private equity investment tycoon, also frequently appeared at shareholder meetings of companies such as Guangyu Yuan (600771.SH), Da Rentang (600329.SH), and Taiji Group (600129.SH) in the past two years. He said in a live broadcast with the media in December last year, "Now our investment direction is on aging. For the next 20 to 30 years, we only look at investment opportunities related to hypertension, heart disease and diabetes."

From the hospital sales data of some representative drugs for slow diseases, the relevant drug market has shown a rapid growth trend.

Sales volume of relevant slow disease TCM prescription drugs in the hospital market in the past five years (source: Zhongkang CMH-Kaishi system-graded hospital database).

"Spring rivers warm and ducks know first", changes in industry trends have been observed by enterprises, and most listed companies in the traditional chinese medicine industry view elderly and slow disease management related fields as important opportunities for the company's future development. A secretary to the board of directors of a listed company told Cailian Press that the company will mainly focus on cardiovascular and cerebrovascular products and enterprises in external development in the future.

Some listed companies have also adjusted their development strategies accordingly. After being acquired by China Resources Sanjiu (000999.SZ) in 2023, Kunyao Group (600422.SH) completed its strategic transformation, clearly defined its future focus on the field of slow disease health, and launched the "777" and "1381" brands. The company has publicly declared its strategic goal of "creating the first stock of silver economy health, being a leader in slow disease management, and being a leader in high-quality national medicine."

In addition to the cardiovascular and three high-category drugs mentioned above, with the increase of age, the demand for health products is also increasing.

Jia Haibin, chief analyst of the Traditional Chinese Medicine Big Data Center of Zhongkang Technology, told Caijing News Agency, "With the aging of the population and the growth of personal health care needs, online, traditional Chinese nourishing products such as "invigorating qi, nourishing blood, nourishing qi and blood", are selling well; offline, cardiovascular and cerebrovascular diseases, tumors, cough relief and expectorants, muscles-bones, and clearing heat, are the top 5 categories. Among them, cough relief and expectorants, clearing heat, nourishing and health care, neurology/nourishing and calming sleep, skin, diabetes and other common slow diseases of Chinese patent medicines have grown significantly. It is expected that the overall revenue growth rate of the entire traditional Chinese medicine sector will be above 8.24% by 2030."

The market changes also coincide with the analysis of industry experts. Taking Dong-E-E-Jiao (000423.SZ)'s compound Ejiao syrup as an example, the sales in 2022 and 2023 will exceed CNY 900 million and CNY 1.5 billion respectively. It has maintained rapid growth in the first quarter of this year. The company plans to achieve a revenue target of over CNY 2.5 billion for the whole year, an increase of more than CNY 1 billion.

The sales growth of some major traditional Chinese medicine health care products is also very significant. According to the data of the Zhongkang CMH-Kesi system-retail market database, Huangqi Jing, Jinkui Shenqi Wan, and Sheng Mai Yin and other nourishing products have grown rapidly in the past five years. Among them, Huangqi Jing's OTC market sales have doubled in the past five years.

Sales of some health care traditional Chinese patent medicines in the past five years in the OTC market (data source: Zhongkang CMH-Kesi system-retail market database)

Jia Haibin said: "Based on the aforementioned industry analysis, domestic traditional Chinese medicine production companies are increasing their research and development investment in traditional Chinese medicine health care products, medical instruments or long-term medication for chronic diseases. This is mainly based on building an industrial chain with advantageous brands, distribution of resources or bases, and enterprises' efforts in research and development and production, forming a full ecological cycle of health care and treatment products."

From hospital to retail market

Affected by policies such as medical insurance control, rational use of drugs, and normalized centralized procurement, prescription drugs are frequently under pressure in the hospital market, and the ceiling for hospital market payment is gradually approaching its peak, accelerating the release of attraction outside the hospital market.

Regarding the impact of medical insurance control, the pharmaceutical industry has a keen perception. Some executives of listed companies in traditional Chinese medicine told Caijing News Agency that in the medical insurance catalog adjustment in 2017, Chinese medicine injections became the key monitoring object of medical insurance control. Since then, the sales of Chinese medicine injections in the hospital market have decreased from CNY 88.058 billion in 2016 to CNY 40.614 billion in 2022, and the market scale has been reduced by more than 50%. The performance of listed pharmaceutical companies with Chinese medicine injections as their main product has displayed a significant decline, and the industry has experienced a reshuffle.

Another article in this series (Chinese medicinal cycle variation? Decline in gross margin, pharmaceutical companies face the choice of price increase |Chinese medicinal new cycle) pointed out that the decline in gross margin of some Chinese medicine companies due to changes in costs. However, in addition to changes in costs, changes in selling prices are also an important reason for the changes in enterprise gross margin levels.

Taking Wanbangde (002082.SZ) as an example, the company's sales gross profit margin has been declining for two consecutive years. The gross profit margin for the first quarters of 2022, 2023, and 2024 were 49.75%, 43.32%, and 36.17% respectively. Company officials stated: "This is mainly due to the impact of block orders of the main product Gingko biloba folium droplets."

As the exclusive product of the company, Gingko biloba folium droplets received a 54% price reduction in the 2021 Provincial Collaborative Procurement of Chinese Patent Medicines led by Hubei Province. The product price was reduced from CNY 24.46 per box to CNY 11.2 per box, halving the price. Affected by this, the company's performance has declined significantly. Investors asked about this on the interactive platform, and the company replied that the main product Gingko biloba folium droplets and other products participated in regional alliance procurement, and the product price was greatly reduced after the selection of collective procurement. Due to the uneven progress of the implementation in each region, the incremental volume of procurement did not completely eliminate the impact of price reduction.

In addition, some industry insiders believe that exclusive patented traditional Chinese medicine products that have expired their patent protection period may also gradually implement medical insurance price reduction. Shandong Bucang Pharmaceuticals (603858.SH) announced this month that based on the relevant documents of the National Medical Insurance Bureau, the hanging-net prices of its brain-heart capsules in various specifications have been lowered, and the price reductions of its three specifications of brain-heart capsules are 9.09%, 9.3%, and 19.4% respectively.

According to the public account of the National Medical Insurance Bureau, Shi Zihai, a member of the bureau's party group and deputy director, said that we need to conduct in-depth research and improve the drug price formation mechanism and take targeted price policy measures for different stages of the entire life cycle of drugs.

Against the backdrop of these policies, the uncertainty of the performance of some listed pharmaceutical companies has increased. Under this influence, in the securities market, funds are increasingly inclined to favor enterprises with significant advantages in the OTC field. China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Dong-E-E-Jiao, KPC Pharmaceuticals, Inc., Hubei Jumpcan Pharmaceutical (600566.SH), Henan Lingrui Pharmaceutical (600285.SH), and Sunflower Pharmaceutical Group (002737.SZ) have a relatively high proportion of sales in the OTC market, and their stock prices have a significantly stronger trend than the industry as a whole.

There is a significant difference in the number of participants in the shareholders' meetings of different listed pharmaceutical companies. Investors who have recently attended the annual shareholders meeting of Yunnan Baiyao Group (000538.SZ), TJ Darentang USD (600329.SH), and Shijiazhuang Yiling Pharmaceutical (002603.SZ) told Cailian Press reporters that there were significantly more participating institutions and investors in TJ Darentang and Yunnan Baiyao's shareholders meetings.

Under the aforementioned policy impact, the in-hospital market for some prescription drugs has been under pressure in the past two years, and the number of prescription drugs that have been converted to non-prescription drugs has gradually increased. For pharmaceutical companies, the expansion of "two jumps" products has increased sales channels, increased product sales, and the retail prices outside of the hospital are usually higher, which can bring more abundant profits to companies.

Image source: National Medical Products Administration

So far this year, the National Medical Products Administration has issued 7 announcements totaling 15 prescription drugs that have been converted to non-prescription drugs, which is significantly faster than the past two years (9 in 2022 and 18 in 2023). And Chinese patent medicine has significantly increased its share this year, including Zhongsheng Pills under Guangdong Zhongsheng Pharmaceutical (002317.SZ), Qiangshen Pills under a subsidiary of Shanghai Pharmaceuticals Holding Co., Ltd. (601607.SH), Lilinghua Granules under Zhejiang Jolly Pharmaceutical Co., Ltd. (300181.SZ), Stomach-Soothing Tablets under China Resources Sanjiu Medical & Pharmaceutical and Weikang Pharmaceutical Co., Ltd. (603139.SH), etc. According to the analysis of sales volume changes of prescription drugs converted to non-prescription drugs in 2021 by mineweb, the overall sales growth rate of products after the conversion of prescription drugs to non-prescription drugs has accelerated significantly.

It is worth noting that investors should distinguish between non-prescription drugs and the retail market outside of the hospital. While improving the sales capabilities of the retail market outside of the hospital, Cailian Press reporters found that pharmaceutical companies also attach great importance to academic promotion of evidence-based medicine and prescription drug sales outside of the hospital.

According to the financial reports of the listed companies, Taiji Pharmaceutical Co., Ltd., TJ Darentang, and other companies significantly increased their research and development investment last year. These enterprises have all taken evidence-based medicine as the key investment focus in their research and development.

Some pharmaceutical company executives told Cailian Press reporters that although the company had a relatively large layout of OTC products in the past, due to the high proportion of prescription drugs in the retail market outside of the hospital, the company plans to tilt its development strategy towards prescription drugs to a certain extent in the later stage.