According to the Securities Times app, Zheshang Securities released a research report stating that with the continuous expansion of centralized procurement categories, the major varieties of listed companies, especially large non-exclusive varieties, may be included in the new batch procurement catalogue. Unlike the previously Hubei-led Chinese patent medicine centralized procurement, this time the price competition in the procurement introduces the weight of daily cost, but the impact is limited; it is expected that in future procurement, the weight of daily cost will continue to increase to avoid the presence of inferior products pushing out superior ones. As for the target, bullish on strong brand power, strong price control, and continuous improvement in quality and efficiency of traditional Chinese medicine enterprises.

Zheshang Securities' main points of view are as follows:

Event: On October 25, 2024, the National Chinese Patent Medicine Joint Procurement Office publicly solicited opinions on the "National Chinese Patent Medicine Procurement Alliance Centralized Procurement Document" (Draft for Solicitation of Opinions) and the "National Chinese Patent Medicine Procurement Alliance Centralized Procurement Document (First Batch Expansion Continuation)" (Draft for Solicitation of Comments), with a deadline of November 1, 2024.

In terms of procurement categories, for the first time, the procurement groups are divided according to indications, distinguishing from the past division based on generic names. For example, Xuezhikang and Zhibitai are both exclusive varieties for the treatment of hyperlipidemia, and are categorized into the same purchasing group as Zhibituo with the same indications. Zhejiang Securities predicts that in the future, all centralized procurement will adopt this grouping method, and it is not ruled out that the varieties previously purchased according to generic names may be competitively re-grouped based on indications in future centralized procurement auctions, but "same indications" are a prerequisite. Exclusive varieties may enhance competitiveness and take the initiative in the procurement by means of secondary development.

This involves the procurement varieties previously included in the Guangdong 6 Province Alliance, including Maixuekang, Xiyenping, Yadanzi oil, Naoxinqing, Qingkailing, and Baofukang. The results of the last national Chinese patent medicine centralized procurement show that varieties that have been successfully bid in other alliance procurements will continue to decrease in price, with a decrease of over 20%.

There are relatively few major varieties of listed companies involved, apart from Shineway Pharm's Qingkailing and New Journey Health Technology Group's Xuyiwei, other varieties involving listed companies are relatively small, with limited impact on the performance of listed companies, and may even achieve volume increase through price reduction. Zhejiang Securities predicts that with the continuous expansion of the centralized procurement categories, the major varieties of listed companies, especially large non-exclusive varieties, may be included in the new batch procurement catalogue.

In terms of procurement rules, unlike the Chinese patent medicine group procurement led by Hubei in the past, the scoring of price competition has introduced the weight of daily average cost, but the impact is limited, because when the daily average cost is not greater than 1.5 times the mean of the daily average cost of the same procurement group, the weight is 1, and the premise of being shortlisted is also not greater than 1.5 times. What really matters is that the premise of being shortlisted has been reduced from a previous 1.8 times price difference to 1.5 times, highlighting the weight of daily average cost.

Zheshang Securities believes that the significance of the daily average cost is that it can prevent drugs with inherently higher prices from winning bids by drastically reducing prices, and the winning bid price may still be higher than the declared price of competing products. Considering both the absolute price reduction and the relative price difference helps achieve the goal of high quality and reasonably priced group procurement, and also helps low-priced drugs with clear efficacy achieve volume through price. It is expected that the weight of daily average cost will continue to increase in subsequent group procurements to avoid driving out good products with bad ones. The technical evaluation score weakens the impact of the credit level of reporting enterprises in non-"particularly serious" situations.

It is worth noting that this is the first truly national Chinese patent medicine group procurement, and also the third Chinese patent medicine alliance procurement initiated by Hubei. Fujian and Hunan provinces, which did not participate in the previous national Chinese patent medicine group procurement, have now become alliance members. The first batch of expanded varieties are all previously included in the alliance group procurement of 19 provinces including Hubei, while the participation of provinces nationwide in this round means that varieties that were not previously dynamically linked by other provinces will achieve national unified online pricing.

Investment recommendation: With the gradual expansion of the scope of coordinated payment by medical insurance, medical companies with high gross profit margin/high sales revenue that have comparative price conditions face the risk of price reduction. Traditional Chinese medicine companies can achieve sustained growth in performance and stock prices through refinement, intelligence, and systematization to improve quality and efficiency. Bullish on traditional Chinese medicine companies with strong brand power, strong price control capabilities, and sustained quality and efficiency improvement. Recommended symbols: Dong-e-e-jiao (000423.SZ), Henan Lingrui Pharmaceutical (600285.SH), Yunnan Baiyao (000538.SZ), China Resources Sanjiu Medical & Pharmaceutical (000999.SZ); Scarce resource products with sustainable price increases: Beijing Tongrentang (600085.SH), Zhangzhou Pientzehuang Pharmaceutical (600436.SH).

Risk warning: Policy implementation falling short of expectations, risks exceeding expectations in group procurement, intensified market competition, rising raw material prices.