Benefiting from continuous policy dividends and the optimization of the industry's competition pattern, the innovative drug sector has ushered in a wave of market since February 2024. As early as the fourth quarter of 2022, Jin Xiaofei, deputy general manager of the second equity investment department of Penghua Fund, was firmly optimistic about the direction of innovative drugs, and practiced his investment views with practical investment actions, creating good historical returns for investors.
Today, we invite fund manager Jin Xiaofei to look forward to the investment opportunities in the pharmaceutical industry in 2024.
Pharmaceuticals are expected to start a new cycle
First of all, if the pharmaceutical sector is regarded as a commodity, and the price of commodities is determined by supply and demand, we need to clarify from the two perspectives of stock and increment, how much capital is willing to allocate to the pharmaceutical sector.
From an incremental point of view, although the total scale of the pharmaceutical fund once fell to a low point in Q3 of 2022, the total plate of the follow-up pharmaceutical fund continued to grow, and there were some structural changes. Because when the pharmaceutical sector enters an upward trend, active funds significantly outperform passive index funds, and people tend to buy active products, while when the pharmaceutical sector enters a downward trend, people tend to buy passive products. In the past three years, the pharmaceutical sector has continued to decline, so the scale of pharmaceutical index products has expanded from 60 billion in Q2 2021 to more than 160 billion. (Data source: Industrial Securities) Subsequently, as the pharmaceutical sector ushers in the upward trend, active pharmaceutical funds will usher in a large incremental subscription.
From the perspective of stock, there has been a year of great volatility in the pharmaceutical sector, which is related to the view of the whole market on the pharmaceutical sector. In 2023, the two rounds of pharmaceutical markets at the beginning of the year and the end of the year will be brought by the institutional full-base pharmaceutical sector. As of Q4 2023, the pharmaceutical holdings of all market institutions (excluding the pharmaceutical base) are 6.6%, which is still underweight. According to historical experience, we believe that in the next three years, with the opening of a new pharmaceutical cycle, institutional holdings will return to a historical high of about 15%.
If the median of the pharmaceutical fund and the whole base is fitted, it can be found that medicine is an amplifier of the market rise, a purely offensive sector, and a long-term bull industry, and every round of market bull market is not absent. For example, in 2020 and 2023, Penghua Pharmaceutical Technology Equity Fund has achieved the first good results in its category (data source: Galaxy Securities, the same category refers to the pharmaceutical and medical health industry equity fund, ranking 1/22 in 2020 and 1/42 in 2023).
Multiple positive resonance, continue to be optimistic about innovative drugs
China has been in a period of accelerated aging for a long time, entering a deep aging society with an elderly population of more than 14% in 2021 and a super aging society with an elderly population accounting for more than 20% in 2032, and the demand for diagnosis and treatment will continue to grow at a high rate in 2023. (Source: Yearbook of Health Statistics)
At the same time, the policy dynamics are cyclically interpreted, and the current innovative drugs have become the direction of clear and focused policy support. Since the beginning of the vigorous control of fees in 2018, the medical insurance negotiations in 2023 are the mildest price cuts, and it is expected to return to the pre-cost control state in the next 2-3 years, and the pressure of price reductions will gradually ease.
We also have some of our own understandings and views on the issue of "full chain" support for the development of innovative drugs that the industry paid attention to some time ago.
First of all, if it is clear that the positioning of innovative drugs is "new quality productivity", the innovative drug industry will become an "economic growth engine". Second, if innovative drugs want to become a global advanced productive force, they need to set a goal to make breakthroughs in key technologies and key products by 2025. Third, assuming that the state supports innovative drugs in an all-round way from the aspects of R&D, approval, application, payment, investment and financing, and data resources, the most important of which is the strong policy tilt on the varieties of "encouraged application catalog". The last time the medical insurance was established to encourage the application of the catalogue was in 2010, when the new rural cooperative cooperative system brought rapid increments, traditional Chinese medicine injections, auxiliary drugs ushered in a large market, and now the auxiliary of innovative drugs can also be cited in this way. Fourth, if investment and financing are liberalized, financing channels can be reserved for unprofitable innovative drug companies. Fifth, if real money enters the primary and secondary markets, it can cultivate medium and long-term investors in innovative drugs, promote pension funds and enterprise annuities including social security funds to carry out investment in innovative drugs, and give more assessment incentives and policy preferences.
If the full-chain policy support continues to be implemented, it will become a major positive for the innovative drug sector, and it is expected that innovative drugs will enter a sustainable and valuation stage. From the perspective of DCF, the post-launch cycle of innovative drugs will be longer, and the peak sales are expected to be higher. From the perspective of PS, the price of innovative drug products refers to overseas pricing, and the investment is expected to refer to the overseas valuation system. We can call for increasing the number of science and technology innovation indexes, including various broad-based ETF indexes, and increasing the speed of innovative drugs entering the pool.
In general, the whole chain of support for innovative drugs will inevitably revolve around the comprehensive support of more than 20 ministries and commissions, and the central leadership level will coordinate and support. As long as the policy is introduced, even if there will be short-term market fluctuations, it will also bring double incentives for the collective valuation and performance of the innovative drug sector. If there is an application catalogue for performance, there will be a process of matching and application, and the valuation is determined by the height of policy setting.
In fact, China has only a short time to make innovative drugs, and large-scale research and development has only begun in the past five years. Before 2022, there were very few products approved by the FDA in China, but at the end of 2022, we judged that innovative drug companies would go overseas, which finally confirmed the non-linear explosive growth of innovative drug authorization in 2023, both the number of authorizations and the amount of down payment for the total package are getting larger and larger.
This is inseparable from the improvement of the technical capabilities of China's innovative drug companies. At present, Chinese innovative pharmaceutical companies have been able to participate in the world's most cutting-edge new technologies, and are expected to lead the progress of the world's most advanced technologies in individual sub-projects.
At present, there are still differences in the market on innovative drugs, and there are mainly the following two types of views:
Divergence 1: The profitability of innovative drug companies cannot be proven so far, but everyone understands that industries with high investment, high R&D expenditure, and very high technical barriers must have a long process of accumulation.
Divergence 2: There is no unified valuation system for innovative drug companies. Now that China is in a new stage of high-quality development, innovative drugs are part of the new quality of productivity, and they should usher in high growth, explosive growth, and non-linear growth, and enjoy a high growth premium. The immaturity of the valuation system is a good thing for innovative drugs at this stage, which may be a source of large income and bring upward flexibility in valuation.
Although there are differences in the market, we only need to grasp the core logic of innovative drug investment: first, the industry is supported by policy settings, second, the industry is thriving and prosperous, and third, the historical review shows that A-shares that meet the above two points reflect a high liquidity premium. After these three facts are established, everyone will have their own standards and participation rhythm in their hearts.
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