According to Zhito Finance APP, Debang Securities released a research report stating that the national centralized procurement has progressed to the ninth batch and will soon proceed to the tenth batch. In the tenth batch of procurement varieties, the proportion of injections has further increased, reaching 37, accounting for 60%. Historically, from the fourth to the ninth batch, except for the sixth batch specialized in insulin, injections using borosilicate as packaging materials maintained a proportion of over 70%, and the rapid increase in the varieties selected for centralized procurement will also drive up industry demand. On the cost side, since 2024, the prices of raw materials for medicinal glass such as soda ash and borax have decreased compared to those in 2023; prices of natural gas and coal have also remained low. The reduction in costs is expected to improve profitability in the medicinal glass industry.

Debon Securities' main points are as follows:

The proportion of pharmaceutical packaging materials in the overall value of drugs and the penetration rate of borosilicate in our country are far lower than those in developed countries in Europe and America.

The production value of the pharmaceutical packaging industry in our country has accounted for more than 10% of the national packaging industry's production value. However, there is still a certain gap compared to the level of developed countries where the pharmaceutical packaging industry accounts for over 30% of the total production value of the pharmaceutical industry. At the same time, borosilicate performs better than traditional soda-lime glass, and its cost-effectiveness is superior to high boron glass. Therefore, the injection package materials in the European and American markets mostly choose borosilicate, but in 2018, the penetration rate of borosilicate glass in our country was only about 7-8%. According to China Glass Network and the prospectus of Linuo Pharmaceutical Packaging (2021), in the next 5-10 years, 30%-40% of medicinal glass in our country will upgrade from low boron glass and soda-lime glass to borosilicate medicinal glass.

Pharmaceutical spending is relatively rigid, and the demand from the downstream pharmaceutical industry is steadily growing with the aging population, continuously benefiting the medicinal glass industry. According to IQVIA, driven by the increasing number and usage of innovative drugs, China's pharmaceutical spending is expected to grow at a CAGR of 3.8% over the next five years starting in 2021. Based on this, it is estimated that by 2027, the market demand for borosilicate ampoules, tubes, and molded bottles is expected to reach 19.7, 7.4, and 7.4 billion units respectively.

On the demand side, the country is promoting the consistency evaluation of drugs, urging pharmaceutical companies to upgrade their packaging materials.

The consistency evaluation requires that the standards for the packaging materials of generic drugs are not lower than those of the reference formulation, with most reference formulations using borosilicate glass, pushing for generic drugs to switch to borosilicate glass during the evaluation.

National centralized procurement promotes the use of borosilicate packaging materials for medicines, expanding the market size for borosilicate medicinal glass: the centralized procurement has now reached the ninth batch, about to proceed to the tenth batch. In the tenth batch, the proportion of injectables has further increased, reaching 37 varieties, accounting for 60%. Historically, from the fourth to ninth batches of selected varieties, apart from the sixth batch focused on insulin, the proportion of injectables using borosilicate as packaging materials has remained above 70%, and the rapid increase in varieties from centralized procurement will further drive industry demand.

The associated evaluation has raised the costs for downstream customers to switch packaging material suppliers, which is more conducive to increasing industry concentration: under the associated evaluation system, pharmaceutical companies are responsible for the safety and quality of packaging materials, resulting in higher costs for switching suppliers, which indirectly promotes an increase in industry concentration.

Supply side: the competition landscape for borosilicate molded bottles is favorable, and future pipe bottles are expected to achieve self-production of glass pipes.

The market for borosilicate pipe bottles is fragmented and highly competitive, and in the past, raw materials were heavily reliant on imports. However, in recent years, with domestic manufacturers making continuous breakthroughs in technology, some glass pipes have been self-supplied, and gradual import substitution is expected in the future. There are few A-class qualified enterprises for borosilicate molded bottles, with only four domestic companies currently holding 'A certificates', leaving ample market space and a more favorable competitive environment. Additionally, companies like Langzhong and Dingxin, which previously had little exposure in the pharmaceutical packaging field and lacked competitiveness, will see pharmaceutical companies preferring to cooperate with leading packaging material companies under the backdrop of associated evaluation and approval, forming channel barriers that effectively strengthen customer loyalty and stabilize the leading position of companies. It is anticipated that even with full production capacity planning from Shandong Pharmaceutical Glass and Linuo Pharmaceutical, it will still be close to a capacity of 5.4 billion units, with a significant gap from the market demand of 7.4 billion units.

Cost side: current major costs for raw materials, energy, etc. are at low levels.

Since 2024, the prices of raw materials such as soda ash and borax for medicinal glass have decreased compared to 2023; the prices of henry hub natural gas and coal have also remained low, and the decline in cost items is expected to improve the profitability of the medicinal glass industry.

Stocks of interest: continue to recommend Shandong Pharmaceutical Glass (600529.SH), focusing on Linuo Packaging (301188.SZ) and Chongqing Zhengchuan Pharmaceutical Packaging (603976.SH) among others.

Risk warnings: risks of fluctuations in raw material and fuel prices, risks of capacity release not meeting expectations, risks of intensified market competition.