Guojin Securities: Pharmaceutical sector shows strong performance, remains optimistic about pharmaceuticals reversing and rebounding in 2H24

According to the latest information from Zhitong Finance and Economics APP, Guojin Securities released a research report stating that the overall performance of the pharmaceutical industry has been strong recently, and they continue to be optimistic about the industry's continuous reversal and recovery in the second half of the year, especially focusing on two major directions: heavyweight innovation and the recovery of in-hospital performance. As the risks in the pharmaceutical sector have been fully cleared, the improvement and upward potential are considerable, and it is recommended to increase industry allocation.

In recent times, the overall performance of the pharmaceutical industry has been strong. Guojin Securities' previous weekly report's view on the mid-year reversal of the pharmaceutical sector has been perfectly validated. Guojin Securities believes that the main reasons for the recent strength in the pharmaceutical sector are: 1) the gradual realization of the 24Q2 performance expectations under pressure from a high base, with the year-on-year growth rate of the pharmaceutical sector expected to warm up and accelerate in the second half of the year; 2) favorable policies are frequent, with positive policies being implemented in various areas such as encouraging innovation drugs, pharmaceutical consumption, and equipment upgrades across the entire industry; at the same time, the normalization of in-hospital order is gradually stabilizing; 3) some domestic pharmaceutical companies have overcome operational difficulties, made breakthroughs in product research and development, listing, and performance growth; 4) expectations of overseas interest rate cuts are rising, and the pricing of risk assets in emerging markets is expected to rise. Based on the above reasons, Guojin Securities continues to be optimistic about the pharmaceutical industry's continuous reversal and recovery in the second half of the year, especially emphasizing heavyweight innovation and the recovery of in-hospital performance.

Innovative Drugs: This week, innovative drug companies have made significant progress both domestically and internationally. Kangfang Biology's globally original dual antibodies, Hutchison Medicine's globally original small molecule innovative drug Fruquintinib, and BeiGene's large molecule biopharmaceutical Bevacizumab have all made new commercial progress. Guojin Securities judges that with national policy support and technological progress in China's innovative drug industry, the industry will experience faster overall development. Guojin Securities maintains a positive view on three sub-directions: first, consumer-oriented innovative drugs such as Sino Biopharmaceutical and Hengrui Medicine, which have leading research and development advantages, with new products approved and clinically progressing, as well as mature capacity pharmaceutical companies such as Notable Biopharmaceutical and Shengnuo Biopharmaceutical with high elasticity space for future revenue; second, the leading growth potential of ADC (antibody-drug conjugates) and dual antibody tracks such as Kelun Pharmaceutical, Bielitienheng, and Kangfang Biology; third, the bottom-leading Shanghai Pharmaceuticals, China Biopharmaceuticals, and other companies showing an upward trend in performance.

Medical Equipment: With strong support from domestic funding policies, the purchase of domestic medical equipment and in-hospital diagnosis and treatment demand are expected to accelerate recovery in the second half of the year; at the same time, innovative medical device products will drive domestic clinical demand growth and enhance the competitiveness of leading domestic companies in specific areas with strong product and innovation capabilities.

Biological Products: GSK's herpes zoster vaccine growth in Europe and the United States is declining, with the international market becoming the main growth driver under the influence of factors such as Shingrix being included in Australia's national immunization program, regional vaccination subsidies in Japan, and shipments to cooperating distributors in China. Heavyweight innovative vaccine varieties such as HPV vaccines and recombinant herpes zoster vaccines maintained global sales growth in the second quarter, with international regions including China becoming important sources of growth. It is recommended to focus on vaccine companies that have layouts related to vaccine varieties in the domestic market.

Traditional Chinese Medicine & Pharmacies: From a quarterly trend perspective, the overall performance of the traditional Chinese medicine sector hit a low point in the third quarter, and companies within the sector are expected to reach a turning point, suggesting to focus on companies expected to see quarterly performance improvements. In the pharmacy sector, the combination of policies, intense competition, low performance, and a decrease in individual accounts of employee medical insurance balances may accelerate the industry's concentration towards leading companies. It is still recommended to focus on operational quality, cash flow, and Focus on the development of industry leaders from the perspective of overall benefits.

CXOs and pharmaceutical upstream: On August 2nd local time, the US Department of Labor released the employment report, showing that the growth of employment in the US slowed more than expected in July, with the unemployment rate rising to the highest level in nearly three years, reaching 4.3% (estimated 4.1%). Citigroup economists Veronica Clark and Andrew Hollenhorst expect rate cuts of 50 basis points in September and November, and a 25 basis points cut in December, compared to their previous forecast of three consecutive 25 basis points cuts. Guojin Securities expects that with the heating up of rate cut expectations, the subsequent investment and financing environment and the medical innovation industry chain are expected to gradually improve.

Medical services and medical aesthetics: The overall performance of the medical services sector in Q1 24 was relatively sluggish. Guojin Securities believes that on the one hand, the concentrated release of pent-up demand in Q1 23 led to the impact of a relatively high base number; on the other hand, due to the rectification of internal hospital order and changes in the overall consumption environment, the overall recovery of internal hospital and consumption demand was delayed. Starting from Q3, the high base number impact of the medical services sector has basically been cleared; coupled with the arrival of summer vacation, terminal demand is expected to be concentrated. It is recommended to focus on leading companies with high cost-effectiveness valuation and strong performance resilience in segmented sectors.

Investment advice:

The risks in the pharmaceutical sector have been fully cleared, and the improvement and upside potential are extremely promising. It is recommended to increase industry allocation. Especially focus on: 1) the innovative drug track and innovative equipment track with strong new productivity attributes; 2) the recovery of internal hospitals is expected to drive the release of existing drugs and equipment.

Key targets: Kelun Pharmaceutical, Tasly Pharmaceutical, Shindoo Biological, New Industry, and Huaguan Biological.

Risk warning: Hospital tender procurement progress slower than expected; hospital demand lower than expected; risks of medical insurance cost control and centralized procurement price reduction; risks of merger and integration falling short of expectations