A New Round of Centralized Procurement Deepens Anti-Price War Efforts, Bullish for Biotech Sector Breakthroughs

On July 15, the National Medical Security Administration (NMSA) announced the launch of the 11th round of national drug centralized procurement, focusing on the theme of 'anti-internal competition' to avoid low-price competition in the Industry. As centralized procurement continues to deepen, it is reshaping the landscape of China's pharmaceutical industry, narrowing the profit margins for traditional generic drugs. Future innovative drugs may achieve a premium through new payment channels such as Category C medical insurance and commercial insurance, driving pharmaceutical companies to increase R&D in innovative and high-barrier generic drugs to achieve transformation. In the recent biotech stock rally, the gains have been relatively even, with leading companies showing strength, and smaller pharmaceutical companies also showing highlights. The direction of the transformation process will be a significant differentiator in future performance.

The NMSA recently optimized centralized procurement measures in line with the requirements of the State Council's executive meeting, adhering to the principles of 'stabilizing clinical use, ensuring quality, preventing collusion, and anti-internal competition,' improving specific procurement rules, and no longer using the lowest price as the sole reference. This move is expected to prevent small and medium-sized pharmaceutical companies from competing at excessively low prices, thereby affecting overall prices, which is Bullish for the Medical Sector.

Several Institutions, including JP Morgan Chase and Citi, have issued reports on the new round of centralized procurement, indicating that the official support for Industry innovation and rational competition is expected to result in relatively moderate price reductions, gradually reducing the impact on pharmaceutical companies. Coupled with the frequent introduction of Bullish policies in the first half of the year, this further establishes the long-term growth trend of China's biotech Sector, with the profitability of innovative pharmaceutical companies continuously strengthening.

Leading pharmaceutical companies are increasing their R&D efforts to transform.

In the past, original drugs were expensive, while generic drugs were often labeled as 'low-cost' by the market. With the normalization of centralized procurement, traditional pharmaceutical companies are generally increasing R&D in innovative and high-barrier generic drugs to achieve transformation. On one hand, this is driven by the need for pharmaceutical companies to have more 'confidence' in negotiations for inclusion in medical insurance, and on the other hand, innovative drugs imply larger profit margins.

However, the transformation process for pharmaceutical companies has its ups and downs. Traditional leading pharmaceutical companies are making drastic changes to transform rapidly, but their paths are difficult to replicate entirely. For example, SINO BIOPHARM (01177.HK) $SBP GROUP (01177.HK)$has divested non-core assets to raise funds and increased investment in innovative drugs to rebuild its competitiveness. The recent acquisition of Lixen Pharmaceuticals has become a market focus. Considering that Lixen Pharmaceuticals has globally validated innovative capabilities, along with a robust pipeline of first-in-class (FIC) and best-in-class (BIC) drugs, this acquisition is expected to strengthen its innovative drug business.

After the acquisition, SINO BIOPHARM can also incorporate several high-quality assets from Lixen Pharmaceuticals, significantly enriching its existing oncology pipeline. This will not only enhance competitiveness but also contribute substantially to sales revenue. As it continues to launch innovative drugs, improve R&D capabilities, and enter a long-term growth cycle, the upcoming mid-term performance may serve as a catalyst.

Optimization of R&D Portfolio for Small and Medium-Sized Pharmaceutical Companies: Standing Out in the Industry

In contrast to directly increasing investment to accelerate transformation, LEE'S PHARM (00950.HK), which announced on Thursday (31st) that its oncology drug Socazolimab has been approved by the National Medical Products Administration for first-line treatment of small cell lung cancer in mainland China, $LEE'S PHARM (00950.HK)$has taken a different approach. In addition to advancing PD-L1 cancer treatment, the company has recently shifted its strategy towards patented and generic drugs, with a 60:40 ratio of sales from patented and generic drugs to introduced products. LEE'S PHARM has a diversified and competitive product portfolio, including the selected products under the national centralized procurement plan such as the fondaparinux sodium injection 'Lichangjing®', which have seen strong sales growth, demonstrating its deep expertise in key areas. Additionally, the company's products like treprostinil injection 'Ruinier®' have been included in the national medical insurance drug list, laying a solid foundation for future steady growth.

LEE'S PHARM's production capacity and efficiency have also continued to upgrade. It has expanded and upgraded production facilities at its two major bases in Hefei and Nansha. The equipment upgrade at the Hefei base has significantly increased the production capacity of centralized procurement drugs, with a 77% increase in pre-filled syringe production. At the Nansha base, the company has successfully increased the production of azilsartan tablets 'Qitaping' and advanced the validation batch production of fentanyl aerosol inhaler. A refined production system helps the company meet complex and changing market demands.

On the R&D front, LEE'S PHARM maintains a strong pipeline and continuous investment, covering key therapeutic areas such as cardiovascular, women's health, pediatrics, rare diseases, dermatology, and obstetrics, with multiple early to late-stage clinical drugs, including the new drug application for 'Intrarosa®' for the treatment of vulvar and vaginal atrophy, and the abbreviated new drug applications for sugammadex sodium injection and melphalan hydrochloride for injection. This demonstrates its ability and determination to address various medical field needs. Additionally, the group is advancing several rare disease R&D projects, including neridronic acid for the treatment of osteogenesis imperfecta; its focus on innovative drugs for women's health, rare diseases, and other major diseases is expected to bring long-term competitive advantages.

Compared to the leading stocks SINO BIOPHARM and INNOVENT BIO (01801.HK),$INNOVENT BIO (01801.HK)$LEE'S PHARM, which has already broken through to new highs, showing a cup-and-handle pattern breakout, is worth watching. With its diversified high-quality product portfolio, strong R&D pipeline, and enhanced production capabilities, the upcoming mid-year results are highly anticipated, making it a potential candidate for catching up.

Author: Philip

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