On December 13, 2023, the National Health Insurance Administration announced the results of the adjustment of the national basic medical insurance, work-related injury insurance, and maternity insurance drug list in 2023. After this adjustment, the total number of drugs in the catalogue will increase to 3,088, including 1,698 Western medicines and 1,390 Chinese patent medicines, and the total number of Chinese patent medicines will reach a new high. In addition, the requirements for the scope of application of some proprietary Chinese medicines have been relaxed. It has become a trend to expand the variety of traditional Chinese medicines in the medical insurance catalog.
Although Jichuan Pharmaceutical is also one of the leading Chinese medicine stocks, the price-earnings ratio is only 11 times, and its net profit growth rate in the past three years is more than 20%, and the valuation is obviously suppressed.
And the valuation of this 11 times PE is still the valuation after a period of rise. Jichuan Pharmaceutical has risen by about 30% since the end of October. In the context of the rapid growth of corporate earnings, what is the reason for the suppression of corporate valuation, what has Jichuan Pharmaceutical done right, and what are the hidden concerns?
1. Jichuan Pharmaceutical's stable product line
Jichuan Pharmaceutical's operating income in 2022 will be nearly 9 billion yuan, a year-on-year increase of 19.8%, and the net profit will be 2.17 billion yuan, a year-on-year increase of 26%, and the operating income in the first three quarters of 2023 will be 6.54 billion yuan, and the net profit will be 1.944 billion yuan, a year-on-year increase of 22%, and the operating income will increase by about 20% in the past three years. Operating income and net profit have grown steadily, and this steady growth is based on Jichuan Pharmaceutical's complete range of traditional Chinese medicine.
There are many varieties of traditional Chinese medicine in Jichuan Pharmaceutical, involving pediatrics, oral cavity, respiratory, digestion, obstetrics and gynecology and other fields. Specifically, the heat-clearing and detoxification products are mainly Pudilan anti-inflammatory oral liquid, the digestive products are mainly rabeprazole sodium enteric-coated capsules, stomach digestion oral liquid, the pediatric products are mainly pediatric soybean Qiao Qingre granules, the respiratory products are mainly Sanjiao tablets and Huanglong cough granules, the cardiovascular and cerebrovascular products are mainly Chuanxiong Qingnao granules, the gynecological products are mainly gyn Yanshu capsules, and other products are mainly iron protein succinate oral solution.
According to the detailed financial report rules, there are three varieties of these drugs with sales revenue of more than 1 billion yuan in 2022, namely Pudilan Oral Liquid, Pediatric Soy Qiao Qingre Granules, and Rabeprazole Sodium Enteric-coated Capsules, and a total of 4 products with sales revenue of more than 100 million yuan, namely iron protein succinate oral solution, stomach digestion oral liquid, Huanglong cough granules and three tablets.
Among them, Jichuan Pharmaceutical's largest core product is Pudilan Oral Liquid, which is an exclusive dosage form, which is mainly used clinically for mumps, pharyngitis, tonsillitis, boils, etc.
In terms of income classification, Pudilan Oral Liquid belongs to the heat-clearing and detoxification products. From the perspective of the past ten years, the revenue of heat clearing and detoxification has maintained rapid growth from 2013 to 2018, from 1 billion yuan to 3.2 billion yuan. In recent years, due to the withdrawal of Pudilan oral liquid from medical insurance and the impact of the epidemic, the income has fluctuated to a certain extent. In 2022, the revenue of heat clearing and detoxification products will be 2.87 billion yuan, with a gross profit margin of 80%, accounting for 32% of the company's operating income.
Looking forward to the future from the past, although Pudilan oral liquid will still maintain a certain growth, the product growth rate like before 2018 has passed, and Jichuan Pharmaceutical's future large-scale single product support still needs other products to exert force.
The company's second largest source of revenue is digestive products, mainly including rabeprazole sodium enteric-coated capsules and stomach digestion oral liquid. Among them, rabeprazole sodium enteric-coated capsule is a new generation of proton pump inhibitors, mainly for the treatment of duodenal ulcer, gastric ulcer, and reflux esophagitis, and is a large single product of more than 1 billion.
From the perspective of revenue, from 2013 to 2019, digestive revenue increased from 722 million yuan to 1.608 billion yuan, with a compound growth rate of about 15%, and the growth rate declined from 2020 to 2022. The gross profit margin of digestive revenue is as high as 92%, and the proportion of business revenue is about 20%. Looking forward to the future from the past, the operating income of the digestion category remained basically stable.
The company's third largest source of revenue is pediatric products, mainly pediatric soybean Qiao Qingre Granules. Pediatric Soya Qiao Qingre Granules is a special Chinese patent medicine for children, which is composed of 14 Chinese herbal medicines such as forsythia, light tempeh, peppermint, nepeta, etc., which are compatible with each other, which has the effect of dispelling wind and relieving the surface, clearing heat and conducting stagnation, and is used for children's wind, heat and cold.
According to the data, the market share of Pediatric Soybean Qiao Qingre Granules in the pediatric cold Chinese patent medicine market in public hospitals from 2021 to 2022 will be 51.99% and 57.75% respectively, ranking first in the market share for two consecutive years.
From the perspective of revenue, in addition to a sharp decline of 32% in 2020, the compound growth rate of pediatric revenue in other years is also more than 30%. In 2022, the revenue will be 1.76 billion yuan, accounting for 20% of the operating income. It can be said that in the past ten years, Pediatric Soy Qiao Qingre Granules has been one of the main sources of growth for the company.
Respiratory products are mainly Sanjiao tablets and Huanglong cough granules, cardiovascular and cerebrovascular products are mainly Chuanxiong Qingnao granules, gynecological products are mainly gynecological Yanshu capsules, and other products are mainly iron protein succinate oral solution. In 2022, the total revenue of respiratory, cardiovascular and cerebrovascular, gynecological products and other categories will be about 1.7 billion, accounting for 20% of the company's operating income.
In summary, these drug varieties constitute the core business of Jichuan Pharmaceutical. Most of these products are traditional Chinese medicines, and a small part are Western medicines, and at the same time, they have achieved such excellent results in so many varieties of production lines, which is worth learning from pharmaceutical companies. Affected by the complete range of products, Jichuan Pharmaceutical's product revenue and profit continued to grow rapidly before 2019.
However, affected by the epidemic in 2020, the epidemic drugs squeezed the market space of pediatrics and gastroenterology, resulting in a certain decline in the operating income of Jichuan Pharmaceutical, although the operating income will resume growth after 2021, but from the perspective of the growth cycle of the main products, the high growth of product income has become a thing of the past, and in the context of medical insurance reform, what are the pain points of Jichuan Pharmaceutical, and what are the hidden dangers of development?
2. Jichuan Pharmaceutical's hidden worries
The gross profit margin of all major varieties of Jichuan Pharmaceutical is very high, which remains above 80% all year round, but the net profit margin is only about 20%. One of the largest expenses is sales expenses, which account for about 50% of revenue in the long run. In comparison, R&D investment accounts for only 5% of operating revenue.
This kind of "heavy marketing, light R&D" is a problem that has always existed in Jichuan Pharmaceutical and even many traditional Chinese medicine companies. Selling non-exclusive products through marketing is the survival logic of Jichuan Pharmaceutical. But this logic of survival is facing challenges in the future.
In 2022, the number of employees in Jichuan Pharmaceutical is about 1,600 fewer than in 2021, but the number of sales staff is nearly 2,000 less. In 2021, the company's sales staff was 3,047, and nearly two-thirds of it was laid off in 2022. This is a big change for Jichuan Pharmaceutical, which focuses on marketing. The description of the 2022 annual report is that "under the professional academic promotion model, in order to strengthen the information communication and control of terminal market resources, all promotion activities are carried out under the unified guidance and planning of the company." The change from 2021 is the removal of "relevant marketing personnel are hired by the company".
It can be seen from this that Jichuan Pharmaceutical's marketing system is likely to begin major changes in mid-2021, with a large number of marketing personnel being laid off. Specialized academic outreach activities may be more outsourced.
Specifically, in terms of the specific composition of sales expenses, marketing expenses accounted for 88% in 2022, compared with 77%, 72.5% and 60% in the previous three years, compensation accounted for 5.7%, compared with 12.5%, 14% and 13.3% in the previous three years, and travel expenses accounted for 4.2%, compared with 7.6%, 10.4% and 18.3% in the previous three years. The surge in marketing expenses and the sharp drop in pay and travel expenses are evident in this in line with the reduction in sales staff. Jichuan Pharmaceutical's large-scale reform of the marketing system has brought about a certain cost reduction effect. In 2022, the proportion of revenue from selling expenses decreased from more than 50% in 2020 to 45.72%.
To a large extent, this change in the sales model is to respond to the country's pharmaceutical reform, and now the core purpose of the national pharmaceutical reform is to control costs, and the core of cost control is to reduce sales. The purpose of volume procurement is to reduce the price of drugs by saving the huge cost of the sales process.
Although due to the particularity of traditional Chinese medicine, the consistency evaluation is somewhat difficult, so that the implementation of collection is not as uniform as Western medicine. At present, the centralized procurement of traditional Chinese medicine has begun, and the price reduction is relatively modest. In the gradual advancement of the centralized procurement of traditional Chinese medicine, there will be more experience to be applied to the centralized procurement of traditional Chinese medicine. In such an environment, the price reduction and cost control of traditional Chinese medicine is bound to be the general trend. Volume-based procurement has caused in-depth changes in the pharmaceutical industry, and promoted enterprises to "focus on R&D" and "light sales".
In the long run, the marketing channels and sales expenses of pharmaceutical companies remain high, and the marketing method of academic seminars may gradually become a burden, resulting in the weakening of core competitiveness.
The fundamental purpose of medical reform is to meet the basic security needs of the national medical insurance, but in addition to the medical insurance, the improvement demand of individual self-payment is the market mechanism, and the national medical insurance will not control this part.
If Pudilan chooses not to do national medical insurance, Jichuan Pharmaceutical should aim at the improved demand market. There is little policy regulation in this field, great autonomy and high profits, but the market may be relatively small compared with the hospital side, the competition is fierce, and customer stickiness is needed, and the developed marketing channels are the support for this competitive pattern.
Therefore, for Jichuan Pharmaceutical, it is a choice that Jichuan Pharmaceutical must make in the future, whether to choose to meet the requirements of medical insurance or aim to improve the market, or to go hand in hand to make the company's operating income continue to run smoothly and rapidly.