In the first half of the year, the performance of the pharmaceutical sector has continued to diverge, with outstanding performance in chemical medicine and biopharmaceuticals, especially in innovative drugs. Traditional Chinese medicine and circulation have been slightly under pressure in the short term, but their valuations are still at a relatively low level. It is bullish on the value of bottom-up allocation and the prospects of leading companies in specific sectors.
According to the Futu Securities report, the performance of the pharmaceutical sector has continued to diverge in the first half of the year, with outstanding performance in chemical medicine and biopharmaceuticals, especially in innovative drugs. Traditional Chinese medicine and circulation have been slightly under pressure in the short term, but their valuations are still at a relatively low level. Currently, the domestic biotech industry has entered a period of commercialization and is experiencing rapid growth. Per capita output continues to increase. With the strong sales growth of heavyweight innovative drug products and the slowdown in expense growth, the break-even point of leading biotech companies is approaching, and it is expected that profits will be rapidly realized in the next 1-3 years. Recommended stocks in this sector include Beigene, Innovent Bio, and Akeso.
GTJA's main opinions include:
Chemical medicine and biopharmaceuticals have shown excellent performance, driven by the increase in sales volume of innovative products and the simultaneous reduction of costs and increased efficiency.
Chemical pharmaceuticals: Revenue in 24H1 increased slightly (+2%), and profit benefited from the rapid growth of innovative drugs and overseas BD revenue of innovative drugs, resulting in accelerated growth (+13%). The performance of the Pharma sector has shown some differentiation, with innovative drugs and essential drugs performing well. Since Q3 2023, under the further standardization of the medical market, the sales expense ratio has continued to decline, improving profitability under the reduction of costs and increased efficiency, and driving high profit growth. It is expected that the reduction of costs and increased efficiency will continue in the second half of the year, and performance is expected to accelerate.
Biopharmaceuticals: Rapid revenue growth (+22%), with significantly lower expense growth than revenue, and continuous improvement in operational efficiency. Among them, the overall performance of the growth hormone sector is stable; the insulin sector shows some differentiation in short-term performance due to centralized procurement; the Biotech sub-sector has achieved breakthrough performance, leading to a significant reduction in losses. Currently, the domestic biotech industry has entered a period of commercialization and is experiencing rapid growth. Per capita output continues to increase. With the strong sales growth of heavyweight innovative drug products and the slowdown in expense growth, the break-even point of leading biotech companies is approaching, and it is expected that profits will be rapidly realized in the next 1-3 years.
Traditional Chinese medicine and circulation sectors have been slightly under pressure due to the high base in the same period, and the expectation is that the performance will improve sequentially in 24H2.
Traditional Chinese Medicine: Due to the high base effect of H1 23, the recent OTC performance is under short-term pressure; historically inherited brands show stable growth; prescription drugs in traditional Chinese medicine have significantly declined under the impact of industry rectification. It is expected that the OTC performance in the second half of the year will recover and show stable growth, and the performance of prescription drugs is also expected to improve seasonally due to the clearance of the base disturbing factor.
Distribution: Short-term performance is slightly under pressure due to the high base effect; under the influence of the overall industry environment, collections also face certain pressures. It is expected that the performance in the second half of the year will improve somewhat due to the elimination of the base effect.
Valuation still remains at a temporary low level, bullish on bottom allocation value. Since 2023, the stock prices of the medical and biological sector have been fluctuating persistently, with valuation at the bottom for nearly three years. The relative premium rate of the medical and biological sector compared to A-shares/CSI 300 remains relatively low, with bottom allocation value.
Emphasizing both innovation and commercialization, bullish on the steady main business and breakthroughs in overseas business for leading industry players.
Recommended Portfolio: Biotech: Beigene (06160), Innovent Bio (01801), Akeso (09926), Hutchmed (China) (00013), Shockwave Medical-B (06990), Kinnov Therapeutics (02162), Zaijiam Pharmaceutical (688443.SH), Zhejiang Jingxin Pharmaceutical (688266.SH), Innocare (09969), Sunshine Guojian Pharmaceutical (688336.SH), Remegen (09995); Pharmaceutical Companies: Jiangsu Hengrui Pharmaceuticals (600276.SH), Sino Biopharm (01177), Jiangsu NHWA Pharmaceutical (002262.SZ), Huadong Medicine (000963.SZ), Zhejiang Jingxin Pharmaceutical (002020.SZ); Traditional Chinese Medicine Enterprises: Yunnan Baiyao Group (000538.SZ), China Resources Sanjiu Medical & Pharmaceutical (000999.SZ).
Risk Warning: Risks of R&D falling short of expectations, risks of new drugs entering the market failing to meet expectations.