Investment Highlights

Zhou Si: Pharmaceutical Investment Analysis under the Acceleration of M&A The

pharmaceutical industry has entered a new stage of high-quality development under the guidance of policies, and mergers and acquisitions have become an important tool and means. The concentration of the circulation industry has been further improved, the integrated expansion of the API industry, the expansion of life science services and the expansion of product and service scenarios in the CXO industry. In order to better guide investment decisions from the perspective of mergers and acquisitions, we analyze recent policies and cases:

Mergers and acquisitions are important market tools to support economic transformation and upgrading and achieve high-quality development. On April 12, 2024, the State Council issued the Several Opinions on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market, which is the third "National Nine Articles" of the capital market. Through clear goals, key promotion directions and specific measures, the new "National Nine Measures" aim to improve the quality and competitiveness of the capital market, promote economic restructuring and industrial upgrading, deepen the construction of Shanghai's "five centers", stimulate market vitality, form policy synergy, and provide strong support for Shanghai's high-quality development. For the pharmaceutical industry, the plan will promote industry integration, promote the development of innovative drugs, enhance international competitiveness, optimize resource allocation, stimulate market vitality, and provide strong support for the high-quality development of the pharmaceutical industry.

On September 24, 2024, the China Securities Regulatory Commission (CSRC) issued the "Opinions on Deepening the Market Reform of M&A and Restructuring of Listed Companies", namely the "Six Articles on M&A", and the "Six Articles on M&A" elaborated on the optimization of the review process, the improvement of audit standards, the strengthening of information disclosure, the strengthening of continuous supervision, the strict delisting system and the optimization of incentive and restraint mechanisms, etc., clearly supporting cross-industry mergers and acquisitions, allowing mergers and acquisitions of unprofitable assets, and encouraging private equity funds to participate in the mergers and acquisitions of listed companies. It aims to promote the healthy development of the M&A and restructuring market of listed companies and improve the efficiency of resource allocation in the capital market.

On December 10, 2024, the General Office of the Shanghai Municipal People's Government officially issued the "Shanghai Action Plan for Supporting the M&A and Restructuring of Listed Companies (2025-2027)" (hereinafter referred to as the "Plan"), proposing to strive to implement a number of representative M&A cases in key industries by 2027, cultivate about 10 internationally competitive listed companies in key industries such as integrated circuits, biomedicine, and new materials, form a scale of 300 billion yuan of M&A transactions, and activate total assets of more than 2 trillion yuan. The "plan" also proposes to set up a 10 billion yuan biomedical industry M&A fund, which is the first time that a local government has set up an M&A fund for the biomedical industry.

Since the promulgation of the new "National Nine Articles", the M&A and restructuring activities in the pharmaceutical industry have increased significantly with the support of policies. Frequent mergers and acquisitions in January 2025: On January 16, 688293.SH the company announced that the company is planning to purchase the control of PharmaLegacy Biomedical Technology (Shanghai) Co., Ltd. by issuing shares and paying cash, and at the same time raise matching funds; On January 15, Humanwell Pharma (600079. SH) announced that Modern Technology, China Merchants Innovation Technology (Group) Co., Ltd. (hereinafter referred to as "China Merchants Innovation and Technology") and Modern Technology Manager signed the "Reorganization Investment Agreement" on the same day. As a reorganization investor, China Merchants Innovation and Technology plans to invest RMB11.8 billion, and will control the voting rights corresponding to the 23.70% equity of Fu Pharmaceutical held by Modern Technology in the future, and then become the new controlling shareholder of Humanwell Pharmaceutical. On January 13, Bide Pharma (688073. SH) announced that its shareholding company, Weibo Investment, intends to acquire 100% of the equity of Combi-Blocks for a transaction consideration of approximately US$215 million; On January 11, Shengxiang Biotechnology (SH: 688289) announced that it intends to acquire 100% of the equity of Zhongshan Haiji Biotechnology for 807.5 million yuan. The

"Six Mergers and Acquisitions" issued by the China Securities Regulatory Commission (CSRC) and the Shanghai Municipal Action Plan have provided clear policy guidance and support for mergers and acquisitions in the pharmaceutical industry, and promoted the integration and optimization of the industry. These policies not only support leading enterprises to enhance their competitiveness through mergers and acquisitions, but also encourage technology-based enterprises to achieve industrial upgrading through mergers and acquisitions, while improving the tolerance of unprofitable asset acquisitions, and improving audit efficiency and payment flexibility. Through mergers and acquisitions, the pharmaceutical industry can achieve resource integration, enhance industrial concentration, and help enhance the overall competitiveness and innovation ability of the pharmaceutical industry.



On January 16, the National Health Insurance Administration issued the "Notice on Promoting the Reform of Instant Settlement of the Basic Medical Insurance Fund" (hereinafter referred to as the "Notice"), in order to promote the coordinated development and governance of medical treatment, medical insurance and medicine, the National Health Insurance Administration will further optimize the payment method and settlement policy of the medical insurance fund, and continuously improve the efficiency of settlement and clearing. It is clear that in 2025, about 80% of the country's overall planning areas will basically achieve instant settlement, and in 2026, all the overall planning areas in the country will achieve instant settlement.

On January 17, the National Health Insurance Administration said that this year's adjustment time for the medical insurance drug list will be advanced. Since the Category C catalogue needs to be docked with commercial insurance products, it is necessary to leave a certain amount of time, and the adjustment time of the national basic medical insurance drug catalogue will be appropriately advanced from this year, and it is expected that the declaration will begin in early April and be completed in September; In order to minimize the impact on the industry, it is planned to adopt transitional measures of pre-declaration this year, and it is expected that new drugs approved before the end of May this year can be declared in advance, and they can participate in the review before the official approval of the expert review. In 2025, the medical insurance department will continue to further promote the centralized procurement of drugs and medical consumables. At the national level, the 11th batch of drugs will be procured in the first half of the year, the 6th batch of high-value medical consumables will be carried out in the second half of the year, and new batches of drugs will be launched in a timely manner. The

Category C Catalogue will be adjusted simultaneously with the National Basic Medical Insurance Drug Catalogue, and the first version is scheduled to be released in 2025.

The working procedures are intended to refer to the adjustment procedures of the basic medical insurance catalog, but will insist on giving full play to the decisive role of the market in the allocation of resources, and fully mobilize the enthusiasm of insurance companies and insurance industry experts in the formulation process.

Market review: outperforming the market, the proportion of turnover decreased

Change and decline: This week (25.1.13-25.1.17), the pharmaceutical (CITIC) index (CI005018) rose 2.58%, outperforming the CSI 300 index by 0.44 percentage points, ranking 24th among all industries. Since 2025, the Pharmaceutical (CITIC) Index (CI005018) has fallen by 4.0%, underperforming the CSI 300 Index by 0.9 percentage points, ranking 21st among all industry gainers.

Month-on-month decline in turnover ratio: As of January 17, 2025, the pharmaceutical industry had a turnover of RMB253.9 billion this week, accounting for 4.2% of the total turnover of all A-shares, down 1.7 pct from the previous week and lower than the pivotal level (7.9%) since 2018.

Sector valuation improvement: As of January 17, 2025, the overall valuation of the pharmaceutical sector (historical TTM, overall method, excluding negative values) was 25.31 times PE, up 0.59 from the previous month. The valuation premium of the pharmaceutical sector relative to the CSI 300 was 114%, up 2.0pct from the previous quarter, lower than the four-year pivotal level of 140.6%.

Analysis of the rise and fall of sub-sectors: According to the industry classification of CITIC Securities in the Wind system, this week (2025.1.13-2025.1.17) pharmaceutical sub-sectors have been raised, of which biomedicine (3.94%), medical devices (2.92%) and chemical raw materials (2.45%) have been raised more.

According to the classification of key companies of Zheshang Pharmaceutical, all sectors have been raised this week (2025.1.13-2025.1.17), among which scientific research services (6.1%) and innovative drugs (5.7%) have increased the most. In terms of individual stocks, among the innovative drugs, BeiGene (13.4%), InnoCare (11.3%), CARsgen (10.9%) and Zhixiang Jintai (10.1%) were among the top gainers; Among biological drugs, Oulin Biotech (10.6%) rose first; Medical services: China's health (4.5%) rose first; API and preparation exports to China and the United States, Novartis (6.3%), rose first; Among traditional Chinese medicines, China Resources Sanjiu (5.2%) was the top gainer; Among generic drugs, Humanwell Pharmaceutical (8.8%) rose first; CXO Zhonghaoyuan Pharmaceutical (8.2%) was the top gainer; Minimally invasive robots (11.5%) in medical devices rose highly; Pharmaceutical business: China Pharmaceutical (4.9%) was the top gainer; Among the scientific research services, Concentrating Technology (21.3%) rose highly.

Overall, pharmaceutical valuations and holdings are still at historical lows, and investors are waiting for the pharmaceutical sector to be catalyzed by the bottom shock. The domestic pharmaceutical industry is in the deep water area of supply-side reform, innovation and upgrading, channel structure changes, has become the main direction, in this process, hospital out-of-hospital products benefit from the accelerated trend of aging, innovative drugs and devices under the influence of encouraging policies into the cash period, more importantly, with the deepening of the reform of the medical link, we judge that the pharmaceutical value chain will also undergo a relatively large reconstruction, in this process, prescription outflow, pharmaceutical CSO, the concentration of each link has become an inevitable trend, and will also present more investment opportunities.

2025 Pharmaceutical Strategy Perspective: Breaking the Cocoon In

2024, under the influence of the comprehensive pharmaceutical policy, the pharmaceutical industry will continue to experience the process of switching between new and old kinetic energy driven by centralized procurement and innovation, and at the same time, the impact of macro factors will be superimposed, the operating efficiency will generally decline, the pharmaceutical sector will experience more than 3 years of adjustment, and the innovation drive will be more optimistic in 2025. Life science research services, etc., the main line opportunities are not obvious.

Opportunity mining: At the macro level, medical reform will continue to deepen in 2025, especially the medical sector, the level of medical insurance supervision will continue to improve to cope with the trend of revenue and expenditure, and the pharmaceutical industry will enter a new stage of supply-side reform (increased demand and structural adjustment); At the fundamental level of the industry, in 2025, various segments will enter a new cycle of improving operating efficiency, and innovative drugs and devices will usher in a better development window, but at the same time, we are also paying special attention to the performance elasticity in the switching between new and old kinetic energy in the fields of preparations and consumables.

Investment perspective: There is a large heterogeneity in the subdivision of the pharmaceutical sector, and we analyze each sub-field in combination with the marginal change of the prosperity and the expected difference, and find that chemical preparations, medical consumables, medical equipment, etc. are all in the large expectation difference and good prosperity marginal change.

Recommended Portfolios for 2025: Kelun Pharmaceutical, Nhwa Pharmaceutical, Jiudian Pharmaceutical, Jianyou Co., Ltd., Mindray Medical, United Imaging Healthcare, Kaikai Medical, Dong'e Ejiao, Shanghai Pharmaceutical, Titan Technology, Akeso, WuXi AppTec, Pharmaron.

Risk Warning:

Changes in industry policies; The commercialization of new products is not as expected; The results were lower than expected.