Source: China Economic Information Network Report by the National Information Center — “2019 Pharmaceutical Industry Development Report — Outlook: Strict Cost Control and Drug Price Reduction Will Drive Innovation and High-Quality Generic Drugs to Stand Out”

Since 2018, factors such as the comprehensive advancement of consistency evaluation, the initial implementation of the new chemical drug registration classification reform plan, and the streamlined verification process for clinical trial data have impacted most enterprises, leading to a decline in production momentum. However, the pharmaceutical industry maintained relatively rapid growth in main business revenue, primarily due to increased sales volumes from tendering for certain products and new inclusion in medical insurance coverage, apparent revenue growth driven by shifts in drug marketing models, and price increases for some products. From January to September, the pharmaceutical manufacturing sector recorded an industrial added value growth rate of 10.3%, down 1.5 percentage points year-on-year. Main business revenue reached RMB 1,820.37 billion, representing a 13.6% year-on-year increase—a 1.5 percentage point acceleration compared to the same period last year.

Looking ahead to 2019, on the supply side, factors such as consistency evaluation, the marketing authorization holder system, and strengthened quality supervision will lead the pharmaceutical industry to control the number of existing drug varieties and even existing manufacturers. This will purify the industry by optimizing existing products and manufacturers, improving the competitive environment, reducing low-end and ineffective supply in the pharmaceutical sector, and achieving capacity reduction. Concurrently, guidance on corporate R&D will be strengthened, review and approval processes accelerated, and the policy environment optimized to encourage innovation. On the demand side, industry demand continues to rise amid China's aging population, heightened health awareness, and shifting disease patterns. In 2019, the pharmaceutical manufacturing sector is projected to achieve an industrial added value growth rate of approximately 8%, with main business revenue reaching around RMB 2.783 trillion—a year-on-year increase of about 15%.

As the pharmaceutical industry deepens its transformation and upgrading, some pharmaceutical companies have increased investment in emerging pharmaceutical fields. This has manifested as a continuous narrowing of the year-on-year decline in fixed asset investment since 2018. Looking ahead to 2019: First, driven by pharmaceutical industry reform policies, M&A activity in the sector will remain active. Second, listed pharmaceutical companies will continue to increase R&D investment to capture a larger market share. Third, China will accelerate opening up in the healthcare sector, boosting foreign investment confidence. Consequently, the growth rate of pharmaceutical industry investment will continue its upward trajectory, with an expected year-on-year increase of approximately 10%.

Since 2018, influenced by factors such as cost control/drug expenditure ratio restrictions, increased investment in innovative drug R&D, and higher value-added tax rates, the pharmaceutical industry's profit growth rate has shown a downward trend, lagging behind the growth rate of main business revenue. From January to September, the pharmaceutical industry achieved a total profit of 230.59 billion yuan, an increase of 11.5% year-on-year, which was 6.9 percentage points lower than the same period last year. Looking ahead to 2019, the impact of policies such as medical insurance cost control, volume-based procurement, and consistency evaluation is expected to diminish. However, significant pressure to reduce drug prices and increased R&D investment for new drugs will lead to higher production costs for enterprises, potentially causing the profit growth rate of the pharmaceutical industry to continue its downward trend. Preliminary estimates suggest that the total profit of the pharmaceutical industry in 2019 will reach approximately 23.3 billion yuan, representing a year-on-year increase of about 6%.

Market Supply and Demand Characteristics and Full-Year Forecast for 2018

I. Declining Production Momentum in the Pharmaceutical Industry and Slowing Growth in Industrial Added Value

Since the beginning of 2018, multiple factors have increased R&D costs for pharmaceutical companies, impacting most enterprises and leading to a decline in production momentum. These factors include the comprehensive advancement of consistency evaluation for the quality and efficacy of generic drugs, the initial implementation of the new chemical drug registration classification reform plan, and the proceduralization of clinical trial data verification. From January to September, the growth rate of industrial added value in the pharmaceutical manufacturing sector was 10.3%, down 1.5 percentage points from the same period last year.

From January to October, the growth rate of industrial added value in the pharmaceutical manufacturing sector was 9.9%, down 2.1 percentage points year-on-year and 0.4 percentage points lower than the January-September period. Production momentum in the pharmaceutical sector is expected to face continued downward pressure in the fourth quarter. For the full year of 2018, the growth rate of industrial added value in the pharmaceutical manufacturing sector is projected to be approximately 9.5%.

II. Decline in Output Growth Rates of Key Products

Despite accelerating transformation and upgrading in China's pharmaceutical industry in recent years, along with ongoing optimization of the foreign trade structure, this process remains relatively slow. Since the beginning of 2018, influenced by multiple factors such as rising prices of raw materials, increasing environmental pressures, and the off-season for consumption, the growth rate of chemical drug substance production has shown a continuous downward trend. From January to October, the output of chemical drug substances reached 2.313 million tons, a year-on-year decrease of 1.3%, compared to a 2.5% increase in the same period last year. It is estimated that the annual output of chemical drug substances in 2018 will reach 2.75 million tons, a year-on-year decrease of approximately 2%.

Since 2018, China's traditional Chinese medicinal materials market has been relatively weak. Coupled with the continuous standardization of China's drug supervision and management, the enthusiasm of Chinese patent medicine manufacturers has been affected, leading to a slowdown in the growth rate of Chinese patent medicine production. From January to October, the output of Chinese patent medicines was 2.192 million tons, a year-on-year decrease of 5.1%, compared to a year-on-year increase of 7.9% in the same period last year. This is also the first negative growth since February 2016. It is projected that total production of Chinese patent medicines for the full year of 2018 will reach approximately 2.55 million tons, representing a year-on-year decrease of about 3%.

III. Further Acceleration in Main Business Revenue Growth of the Pharmaceutical Industry

Since the beginning of 2018, the main business revenue of the pharmaceutical industry has maintained rapid growth, driven primarily by the following factors: First, increased sales volume from tendering for certain products by pharmaceutical companies and new entries into the medical insurance coverage; second, the apparent increase in revenue resulting from the transformation of drug marketing models during the implementation of the “two-invoice system”; Third, price increases for certain products, including raw material price hikes due to environmental factors, as well as price adjustments for traditional Chinese medicinal materials and branded OTC products. From January to September, the pharmaceutical manufacturing sector achieved main business revenue of 1,820.37 billion yuan, a year-on-year increase of 13.6%, with the growth rate rising by 1.5 percentage points compared to the same period last year.

IV. Continued Expansion in Pharmaceutical Industry PPI Growth

Since 2018, driven by rising international commodity prices, industrial restructuring and optimization, coupled with a low base effect from the previous year, pharmaceutical prices have sustained upward momentum with accelerating growth. From January to October, the producer price index (PPI) for pharmaceutical manufacturing rose 3.0% year-on-year. It is projected that pharmaceutical prices will continue to rise to some extent in November and December, with the annual producer price index for the pharmaceutical manufacturing sector expected to increase by approximately 3.1% in 2018.

V. Volume-Based Procurement Policy Implementation: Short-Term Negative Impact, Long-Term Industry Upgrade

On November 21, the Shanghai Municipal Pharmaceutical Centralized Bidding and Procurement Affairs Management Office released the “Supplementary Document for Shanghai Region of the 4+7 City Centralized Drug Procurement.” Previously, the “National Organized Drug Centralized Procurement Pilot Program” was reviewed and approved at the Fifth Meeting of the Central Committee for Comprehensively Deepening Reform on November 14. The following morning, with the consent of the National Healthcare Security Administration, the “4+7 City Drug Centralized Procurement Document” was published on the Shanghai Pharmaceutical Affairs Institute website. This document is hailed by the industry as the “first medical insurance procurement order.” The document specifies that the national centralized drug procurement pilot program will be launched in 11 cities: Beijing, Shanghai, Tianjin, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi'an (hereinafter referred to as the “4+7 cities”). The pilot covers 31 designated drug specifications.

Volume-based drug procurement, known internationally as GPOs (Group Purchasing Organizations), is the centralized purchasing model we are familiar with. GPOs negotiate with upstream suppliers (pharmaceutical companies or distributors) to secure lower procurement prices through large-scale, centralized purchasing. This helps downstream entities (such as medical institutions) reduce costs, improve efficiency, and achieve cost control.

Under the framework of volume-based procurement—where volume is traded for price—and with drug quality assured, this approach facilitates drug price reductions. On one hand, volume-based procurement commits to guaranteed sales volume during bidding, differing from traditional tenders that focused solely on price without quantity commitments. This ensures drugs are consumed within 8 to 15 months, eliminating the need for winning companies to engage in “sales efforts” within hospitals as previously required. This truly achieves “integrated bidding and procurement,” eliminating hospitals' room for “secondary price negotiations.” On the other hand, once the market price for these 11 drugs is established, it serves as a reference for other regions, further lowering drug prices elsewhere. In the short term, volume-based procurement may negatively impact the industry; however, in the long run, it will drive industrial upgrading, transitioning from generic to innovative drugs.

VI. Inclusion of 17 Anticancer Drugs in National Medical Insurance Creates Development Opportunities for Innovative Medicines

The National Healthcare Security Administration accelerated negotiations for anticancer drug inclusion in medical insurance coverage. In August 2018, it confirmed 18 varieties from 12 companies for the 2018 special negotiation list. On October 10, the National Healthcare Security Administration issued the “Notice on Including 17 Anticancer Drugs into Category B of the National Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalog.” Except for Novartis's ruxolitinib for treating myelofibrosis, the remaining 17 anticancer drugs were successfully added to the insurance catalog.

By country of origin, only two domestically produced drugs were selected: Pegaspargase from Hengrui Medicine and Anlotinib from Zhengda Tianqing (China Biologic Products). The remaining 15 were imported exclusive products (with BeiGene holding the domestic exclusive sales rights for Azacitidine).

From the perspective of market launch timing, 10 drugs were newly launched in China after 2017, indicating increased support for pharmaceutical innovation in the country. These products have limited historical sales volume, and their inclusion in the medical insurance catalog is expected to drive rapid volume growth with significant expansion potential.

Regarding drug pricing, using the lowest winning bid prices from 2017–2018 as a benchmark, the 17 negotiated drugs achieved an average price reduction of 56.7%. Compared to market prices in neighboring countries or regions, these drugs are on average approximately 36% lower, demonstrating strong willingness among pharmaceutical companies to enter the reimbursement list. Among them, Takeda Pharmaceutical's isatazomib saw the largest price reduction at 78.05%, while Hengrui Medicine's pegaspargase showed the smallest reduction at 21%. This also reflects China's support for domestically developed innovative drugs to some extent.

VII. New Essential Drug List Released, Promising Upgrades in Primary Care Medication

On October 25, the National Health Commission officially released the 2018 edition of the Essential Medicines List, comprising three sections: chemical drugs and biological products, Chinese patent medicines, and Chinese herbal decoction pieces. Chemical drugs and biological products are primarily classified by clinical pharmacology, totaling 417 varieties; Chinese patent medicines are mainly categorized by function, totaling 268 varieties; and Chinese herbal decoction pieces with established national standards are designated as national essential medicines.

The new essential drugs list addresses greater medication needs for common and chronic diseases, effectively advancing tiered diagnosis and treatment. By therapeutic area, respiratory diseases, diabetes, chronic cardiovascular diseases, antidepressants and psychiatric medications, digestive disorders, and viral hepatitis saw the most additions. The inclusion of numerous high-clinical-value varieties not only better meets the needs of patients with these common and chronic conditions but also facilitates the establishment of a tiered diagnosis and treatment system. Previously, primary healthcare institutions—especially community health centers and township hospitals—relied almost entirely on the essential drug list for medication, limiting their therapeutic options. This substantial expansion will provide greater convenience for patients seeking nearby medical care and is expected to effectively alleviate overcrowding in large hospitals.

VIII. Precision Medicine Remains in Its Infancy, Yet Holds Enormous Industry Potential

In recent years, China has issued a series of policies in the precision medicine sector, accelerating regulatory alignment. Since 2014, agencies including the China Food and Drug Administration have approved pilot clinical applications of high-throughput sequencing in reproductive health areas such as NPIT and PDG. Plans call for investing 60 billion yuan in China's precision medicine field by 2030, elevating precision medicine to a “national strategy.” In 2016, the National Development and Reform Commission (NDRC) released the “13th Five-Year Plan for the Development of the Biotechnology Industry,” accelerating the development of new precision medicine models. In April 2017, the “Special Plan for Biotechnology Innovation during the 13th Five-Year Plan Period” was issued, specifically highlighting gene sequencing, immunotherapy, and AI. In June of the same year, six ministries including the National Health and Family Planning Commission released the “13th Five-Year Plan for Health and Medical Science and Technology Innovation,” mandating the establishment of a multi-tiered precision medicine knowledge database system and a national biomedical big data sharing platform. The plan prioritized breakthroughs in core precision medicine technologies such as next-generation gene sequencing, omics research, and big data integration analysis. It also called for developing precision solutions and supporting technologies for major diseases, including early screening, molecular typing, personalized targeted drug therapy, targeted surgical procedures, and therapeutic efficacy prediction and monitoring. By late 2017, the National Health Commission issued the “Guidelines for Molecular Detection Technologies in Personalized Medicine for Infectious Diseases” and the “Technical Specifications for Microarray Gene Chips in Personalized Medical Testing” to regulate precision medicine practices.

Currently, China's precision medicine industry is experiencing rapid development with a fast-growing market scale. As industry entry barriers remain undeveloped, new participants continue to enter the field, creating fresh market opportunities. However, technological limitations in precision medicine currently hinder the widespread adoption of novel therapies, while foundational infrastructure such as gene banks and big data systems still require development. Overall, China's precision medicine sector remains in its nascent stage.

In the precision treatment field, targeted drugs are expected to replace hormone-based and cytotoxic drugs in the future, playing a crucial role in personalized cancer therapy. Projections indicate that the global market share of targeted therapies will rise from 46% in 2013 to 66% by 2018, while hormone-based drugs and cytotoxic drugs will decline from 24% and 20% in 2013 to 13% and 12%, respectively. Monoclonal antibodies and small-molecule targeted drugs hold promising future prospects. Targeted drugs will remain a key focus in drug development, expanding from single-target to multi-target approaches and extending beyond oncology into other disease areas. Research on targets for complex chronic diseases like cardiovascular conditions and diabetes is expected to accelerate. Common therapeutic targets for cardiovascular diseases include: ETA, GLP-1, DPP-4, Cdc-2, PCNA, hDL, etc. Common therapeutic targets for diabetes include: PPAR, CGRP, GLP-1, DPP-4, NOS, etc.

IX. Deepening Population Aging Drives Significant Demand for Geriatric and Chronic Disease Medications

China's population aging shows accelerating trends. According to the latest data released by the National Office on Aging, by the end of 2017, the population aged 60 and above reached 241 million, accounting for 17.3% of the total population—a 0.6 percentage point increase from the previous year. Among them, the population aged 65 and above reached 158 million, accounting for 11.4% of the total population, an increase of 0.6 percentage points over the previous year. In 2017, the annual increase in the elderly population exceeded 10 million for the first time. It is projected that by around 2050, China's elderly population will peak at 487 million, and China's aging rate will reach 35.1%. This will rapidly shift the current ratio of one elderly person for every six people to one for every three people. At that point, China's aging rate will exceed the global average by 13.8 percentage points, placing the country among the world's highly aged nations. The market demand for medications targeting geriatric and chronic diseases will remain substantial in the future.

X. 2019 Outlook: Supply-side reforms advance, industrial value-added growth slows; robust demand drives main business revenue growth

On the supply side, influenced by factors such as consistency evaluation efforts, the implementation of the marketing authorization holder system, and strengthened quality oversight, the pharmaceutical industry will control the number of existing drug varieties and even existing manufacturers. This will purify the industry by optimizing existing products and manufacturers, thereby improving the competitive environment. The goal is to reduce low-end and ineffective supply in the pharmaceutical sector and achieve capacity reduction. Concurrently, regulatory review capabilities will be enhanced, guidance on corporate R&D will be strengthened, review and approval processes will be accelerated, and the policy environment will be optimized to encourage innovation. On the demand side, industry demand continues to rise amid China's aging population, heightened health awareness, and shifting disease patterns. In 2019, the pharmaceutical manufacturing sector is projected to achieve an industrial added value growth rate of approximately 8%, with main business revenue reaching around RMB 2.783 trillion—a year-on-year increase of about 15%.

2018 Import/Export Characteristics and Full-Year Forecast

I. Enhanced Import Substitution Effect for Domestic Pharmaceuticals Leads to Decline in Pharmaceutical Import Growth

At a State Council executive meeting chaired by the Premier on April 12, it was decided that starting May 1, 2018, import tariffs on all common pharmaceuticals—including anticancer drugs—alkaloid-based anticancer drugs, and traditional Chinese patent medicines with actual import volumes would be reduced to zero. This move achieves zero tariffs on all anticancer drugs imported into China. This measure facilitates the accelerated import and market entry of innovative drugs to meet domestic demand for high-end imported original research drugs. However, since 2018, China has expedited the consistency evaluation of generic drugs, fostered a favorable policy environment for pharmaceutical innovation, and encouraged pharmaceutical companies to intensify R&D efforts, further enhancing the import substitution effect of domestic pharmaceuticals. Overall, pharmaceutical imports continue to grow but at a slower pace. From January to September, pharmaceutical imports reached $21.51 billion, an 8.1% year-on-year increase, but the growth rate slowed by 15.0 percentage points compared to the same period last year.

From January to October, pharmaceutical imports totaled $23.97 billion, up 10% year-on-year. While this growth rate increased by 1.9 percentage points compared to January-September, it still fell 11.9 percentage points below the same period last year. It is anticipated that from November to December, with the arrival of the peak consumption season for pharmaceuticals, the growth rate of pharmaceutical imports will increase. Preliminary estimates suggest that the total value of pharmaceutical imports for the full year of 2018 will reach approximately $30 billion, representing a year-on-year increase of about 12%.

II. Global Economic Recovery Leads to Significant Increase in Pharmaceutical Export Growth Rate

On March 22, 2018, U.S. President Trump signed a presidential memorandum imposing large-scale tariffs on Chinese imports based on the findings of the “Section 301 investigation,” while also restricting Chinese enterprises' investment and M&A activities in the United States. However, the impact of the Sino-U.S. trade war on China's pharmaceutical enterprises remains limited, primarily due to the following reasons: First, although China exports a wide variety of pharmaceutical products to the United States annually, the overall scale remains relatively small. Second, the vast domestic market demand, comparable or even higher profit margins, and more familiar policy and market environment have led the domestic pharmaceutical industry to remain predominantly inward-oriented.

Globally, the “triple-low” state of low growth, low inflation, and low interest rates that characterized the first three quarters of 2018 has been broken. China's pharmaceutical export trade has shown marked improvement, with export growth accelerating significantly. From January to September, pharmaceutical exports reached $13.21 billion, marking a 24.5% year-on-year increase—an acceleration of 18.7 percentage points compared to the same period last year.

As the synchronized global economic recovery nears its end, diverging economic and policy trajectories among nations are expected to slow worldwide growth in the fourth quarter, potentially impacting China's pharmaceutical exports. From January to October, pharmaceutical exports reached US$14.43 billion, a year-on-year increase of 22.1%, with the growth rate declining by 2.4 percentage points compared to January-September, indicating a slowing trend. Preliminary estimates suggest that pharmaceutical imports for the full year of 2018 will reach approximately US$18.1 billion, a year-on-year increase of about 20%.

III. Consistency Evaluation and Volume-Based Procurement Will Accelerate Import Substitution, and the Growth Rate of Pharmaceutical Imports Will Decline

Since March 2016, the State Food and Drug Administration issued the "Opinions of the General Office of the State Council on Carrying Out Consistency Evaluation of the Quality and Efficacy of Generic Drugs," officially launching the consistency evaluation work for generic drugs. The Opinions required that 289 drugs listed in the National Essential Medicines List, except those requiring clinical efficacy trials or existing special circumstances, should complete consistency evaluation by the end of 2018. Those failing to complete it by the deadline would not be re-registered. With only one month left until the 2018 deadline for completing consistency evaluation for drugs in the "289" list, some companies are accelerating their applications to catch the last train. Carrying out consistency evaluation of the quality and efficacy of generic drugs is a way to promote supply-side structural reform in the pharmaceutical industry. Its purpose is to enable generic drugs to be clinically interchangeable with original drugs, thereby improving the international competitiveness of Chinese pharmaceutical companies.

On November 15, 2018, the "4+7 Cities Drug Centralized Procurement Document" was officially released, organizing centralized bidding and procurement of pilot varieties in 11 cities. The final winning bid price in this centralized procurement is likely to become the basis for setting the medical insurance reimbursement price. The medical insurance reimbursement price will fundamentally change doctors' motivation to prescribe drugs, making medical institutions a force for lowering drug prices, thus bringing about profound structural changes to the entire pharmaceutical market, especially the generic drug market. High-quality therapeutic drugs with effectively controllable costs will benefit in the long term.

With the advancement of consistency evaluation and the launch of volume-based procurement, the review and approval of new drugs is accelerating, and the pharmaceutical market will form a pattern where innovative drugs and high-quality generic drugs are equally important. Therefore, the import substitution effect of domestically produced innovative and high-quality drugs on foreign drugs will become more pronounced in the future. It is estimated that pharmaceutical imports will reach approximately US$32.4 billion in 2019, a year-on-year increase of about 8%, with the growth rate slowing down.

IV. The risk of a global economic downturn will increase, and the growth rate of pharmaceutical exports will slow down.

In the past few years, under the joint stimulus of economic policies in developed countries, the global economic recovery has formed a relatively good cycle. However, in the short term, the supporting role of the global economic cycle and macroeconomic policies will weaken. Specifically, from an economic cycle perspective, the decline in manufacturing purchasing managers' indices and the cooling of the stock and real estate markets in major economies both indicate a potential slowdown in economic growth. Regarding macroeconomic policies, the stimulative effects of tax cuts in developed economies are gradually diminishing, and monetary policy is tightening. The market expects the Federal Reserve to raise interest rates multiple times, and the European Central Bank to reduce the scale of quantitative easing, which will further impact the global economy. Therefore, international organizations have lowered their forecasts for the global economy in 2019. The International Monetary Fund (IMF) predicts global economic growth of 3.7% in 2019, a downward revision of 0.2 percentage points from its previous forecast. With the increasing downside risks to the global economy, the growth rate of my country's pharmaceutical exports will slow down. It is estimated that pharmaceutical exports will reach approximately US$20.54 billion in 2019, representing a year-on-year increase of about 13.5%.


2018 Investment Characteristics and Full-Year Forecast

In the past two years, with the comprehensive implementation of generic drug consistency evaluation and self-inspection of drug manufacturing processes, the state has placed higher requirements on the safety and efficacy of pharmaceutical companies' drug production. This has undoubtedly increased the production and operating costs of pharmaceutical companies, leading some to directly abandon certain varieties and projects or postpone the construction of projects for varieties under evaluation. This has had a significant impact on fixed asset investment in the pharmaceutical manufacturing industry. However, with the deepening transformation and upgrading of the pharmaceutical industry, some pharmaceutical companies have increased their investment in emerging pharmaceutical fields, resulting in a continuous narrowing of the year-on-year decline in fixed asset investment since 2018. From January to September, fixed asset investment in the pharmaceutical manufacturing industry increased by 1.5% year-on-year, reversing the negative growth trend since August 2017. From January to October, fixed asset investment in the pharmaceutical manufacturing industry increased by 1.9% year-on-year, an increase of 0.4 percentage points compared to the January-September period, indicating a continued upward trend in investment. It is preliminarily estimated that the growth rate of fixed asset investment in the pharmaceutical industry in 2018 is expected to reach 3%.

I. Mergers and acquisitions in the pharmaceutical industry will intensify, with investment demand remaining strong.

According to incomplete statistics, from January 1, 2018 to June 29, 2018, 140 mergers and acquisitions occurred among listed pharmaceutical and healthcare companies, totaling nearly 66 billion yuan, involving various sectors including biopharmaceutical companies, medical service institutions, and retail pharmacies. Specifically, listed companies disclosed 25 merger and acquisition announcements in January, 18 in February, 19 in March, and 23, 24, and 31 respectively from April to June. Furthermore, according to relevant statistics, one acquisition exceeded 10 billion yuan: China Biopharmaceutical acquired a 51% stake in China Biologic Products Holdings and a 52% stake in Super Demand for approximately HK$12.896 billion (approximately 10.874 billion yuan). There were 17 transactions with a single amount of 10 million yuan or less, 30 transactions with an amount between 10 million and 50 million yuan, and a total of 15 transactions with an amount between 50 million and 100 million yuan.

   The pharmaceutical M&A market in the first half of 2018 exhibited the following characteristics: First, there was consolidation among listed companies. For example, China Resources Pharmaceutical's acquisition of Jiangzhong Pharmaceutical can be seen as a typical case of consolidation among listed pharmaceutical companies. Many small-cap pharmaceutical companies face significant survival pressure, and given the intense competition, more listed companies will likely engage in equity participation, mergers, or consolidation in the future. Second, several listed companies acquired loss-making companies at high prices.

For instance, Kang Enbei acquired a 652 million yuan stake in the loss-making company, Jiahe Biopharmaceutical; in May, Buchang Pharma announced it would acquire a 51% stake in the insolvent Liaoning Jiuzhou Longyue Pharmaceutical Co., Ltd. through acquisition and capital increase, with a total investment of 161 million yuan. Experts analyzed that previously, listed companies acquired assets primarily for profit considerations, but now, due to strategic development considerations, they are forced to acquire some loss-making targets to build development platforms. Third, biopharmaceutical M&A was booming. Of the 140 M&A deals, biopharmaceuticals accounted for 28.

Furthermore, the individual amounts in biopharmaceutical deals were relatively high, with 10 deals exceeding 500 million yuan. Several biopharmaceutical companies and investment institutions stated that the current surge in mergers and acquisitions (M&A) and investments in the biopharmaceutical sector is primarily due to favorable policies and talent pools supporting the industry's development. Fourthly, overseas M&A activity is relatively weak. Companies actively involved in overseas M&A are mainly large conglomerates, such as Fosun Pharma, Shanghai Pharmaceuticals, Humanwell Healthcare, and Luye Pharma.

Entering the second half of 2018, M&A activity in the pharmaceutical industry remained strong. On November 22, Shanghai RAAS announced its plan to acquire GDS, the global leader in blood testing, for approximately US$5 billion. Through a share swap, GDS's original shareholder, international blood giant Grifols, will become a strategic shareholder. Simultaneously, the company plans to acquire Biotest, a 70-year-old global full-chain blood products company in Germany, for approximately €589 million. These two transactions total nearly RMB 40 billion. If successfully completed, Shanghai RAAS will have completed the largest pharmaceutical M&A transaction in Chinese history.

It is expected that in 2019, driven by a series of reform policies in the pharmaceutical and healthcare sector, mergers and acquisitions in the pharmaceutical industry will become even more intense, with the value and number of acquisitions potentially reaching new highs, resulting in robust investment demand.

II. Pharmaceutical Companies' R&D Investment Will Continue to Increase

Since 2018, my country's pharmaceutical industry has seen frequent policies regarding innovative drugs, prompting listed pharmaceutical companies to increase their R&D investment in order to seize a larger market share. According to statistics from the third-quarter reports of 224 A-share listed pharmaceutical manufacturing companies, the top ten companies in terms of R&D expenditure in the first three quarters of 2018 all had R&D expenditures exceeding 300 million yuan, with two companies exceeding 1 billion yuan. As a giant in the innovative drug industry, Hengrui Medicine highly values R&D investment and is committed to innovative drug development. In the first half of 2018, the company invested a total of 995 million yuan in R&D, an increase of 27.26% year-on-year, with R&D investment accounting for 12.82% of sales revenue, effectively supporting the company's project R&D and innovative development. In the first three quarters of 2018, Hengrui Medicine continued to increase its R&D investment, with quarterly R&D expenditure reaching 741 million yuan and total R&D expenditure for the first three quarters reaching 1.737 billion yuan, a year-on-year increase of 39.68%. The proportion of R&D investment to operating revenue also increased again, reaching 13.94%. It is expected that in 2019, R&D innovation will drive the development of the pharmaceutical industry, and industry investment will gradually increase.

III. Foreign Investment Confidence Strengthens, and the Growth Rate of Foreign Investment in the Pharmaceutical Industry Will Rebound

Since 2018, although the number of foreign direct investment contracts in the pharmaceutical industry has increased, the actual amount of foreign capital utilized has decreased. From January to October, there were 110 foreign direct investment contracts in the pharmaceutical industry, an increase of 9 compared to the same period last year; the actual amount of foreign capital utilized in the pharmaceutical industry was US$1.06 billion, a year-on-year decrease of 43.6%, while the same period last year saw a year-on-year increase of 4.1%.

Looking ahead to 2019, foreign investors are expected to increase their investment in the pharmaceutical industry. A week before National Day, the State Council executive meeting once again signaled the implementation of a "more proactive opening-up strategy," deploying a series of opening-up measures, including promoting the implementation of major foreign investment projects, encouraging the expansion of foreign investment scope, and vigorously protecting intellectual property rights. This will undoubtedly benefit foreign companies investing in China. Following this, at the opening ceremony of the China International Import Expo (CIIE) on November 5th, the country's top leader stated that expanding opening-up requires continuously easing market access and accelerating the opening-up of the medical, telecommunications, education, and cultural sectors—areas that foreign investors have long hoped to enter.

IV. 2019 Outlook: Investment Growth in the Pharmaceutical Industry Will Continue to Rise

Looking ahead to 2019, firstly, driven by pharmaceutical industry reform policies, pharmaceutical mergers and acquisitions will remain active; secondly, listed pharmaceutical companies will continue to increase R&D investment to seize a larger market share; and thirdly, my country will accelerate the opening-up of the medical field, strengthening foreign investment confidence. Therefore, investment growth in the pharmaceutical industry will continue its upward trend. Preliminary estimates indicate that fixed asset investment in the pharmaceutical manufacturing industry will reach approximately 678.2 billion yuan in 2019, representing a year-on-year increase of about 10%. 2018 Operating Performance Characteristics and Full-Year Forecast

I. Pharmaceutical Industry Profit Growth Declines Due to Factors Such as Cost Control and R&D Expenses

Since 2018, the profit growth rate of the pharmaceutical industry has been declining, falling below the growth rate of main business revenue. The main reasons for this decline are as follows: First, 2018 saw peak cost control/drug control measures in large hospitals, requiring many hospitals to cut certain drug varieties to meet standards. Second, large pharmaceutical companies, facing policies promoting rapid industry consolidation such as volume-based procurement, increased investment in innovative drugs, resulting in R&D expense growth rates generally significantly exceeding revenue growth, thus leading to a decline in profit growth. Third, with the implementation of the Golden Tax Project and the two-invoice system, value-added tax (VAT) is largely unavoidable, with some VAT being passed on to manufacturers, impacting profit growth. From January to September, the pharmaceutical industry achieved a total profit of 230.59 billion yuan, a year-on-year increase of 11.5%, a decrease of 6.9 percentage points compared to the same period last year. Preliminary estimates suggest that the total profit of the pharmaceutical manufacturing industry in 2018 will reach approximately 305 billion yuan, a year-on-year increase of about 9%.

II. Rising Gross Profit Margins and Continued Improvement in the Pharmaceutical Industry

Since 2018, the profitability of the pharmaceutical industry has continued to improve, mainly benefiting from the organic growth of the pharmaceutical manufacturing industry, increased industry concentration, and the expansion of drug price increases. From January to September, the gross profit margin of the pharmaceutical industry was 40.02%, 24.33 percentage points higher than the overall gross profit margin of the national industrial sector, and 19.53 percentage points higher than the same period last year. From January to October, the gross profit margin of the pharmaceutical industry was 40.17%, 0.15 percentage points higher than the January-September period. It is expected that the pharmaceutical industry will be in its peak consumption season in the fourth quarter, and the industry's profitability will continue to strengthen.

Looking ahead to 2019, on the one hand, the National Healthcare Security Administration will implement stricter management of the medical insurance fund, leading to a stronger demand for medical insurance cost control tools and cost management solutions. Coupled with the impact of consistency evaluation, the trend of price reductions for generic drugs is irreversible. On the other hand, under the national policy of encouraging innovation, investment in innovative drug R&D has increased, and pharmaceutical companies have stronger bargaining power. However, the market launch of innovative drugs takes a long time, and in the short term, their contribution to pharmaceutical company profits will be limited. Therefore, with the declining impact of policies such as medical insurance cost control, volume-based procurement, and consistency evaluation, the pressure to lower drug prices is significant, and the large investment in new drug R&D leads to increased production costs for enterprises. The profit growth rate of the pharmaceutical industry may continue to decline. Preliminary estimates suggest that the total profit of the pharmaceutical industry in 2019 will reach approximately 323.3 billion yuan, representing a year-on-year increase of about 6%.

Policy Trend Forecast

I. Supporting the Development and Innovation of the Pharmaceutical Industry and Creating a Favorable Policy Environment for New Drug R&D

To meet the urgent drug needs of the general public, in recent years, my country has introduced a number of policies to encourage and accelerate the market launch of domestic and foreign anti-cancer drugs and innovative drugs. Since 2018, almost every one or two months, a new drug independently developed in my country has been approved for market launch, showing an unprecedented concentrated surge. "Despite the rapid development of domestically produced innovative drugs, my country still lags significantly behind the advanced levels of developed countries in new drug research and development. Currently, the vast majority of innovative drugs in my country are developed based on mechanisms of action and targets discovered abroad.

In the long run, the ability to develop innovative drugs remains the core competitiveness of enterprises, and a favorable policy environment is crucial. The most obvious effect is the change in the drug marketing authorization holder system. The three-year 'Pilot Program for the Drug Marketing Authorization Holder System,' implemented in 2015, explicitly states that drug research institutions or researchers who obtain drug marketing authorization and drug approval numbers can become holders. This policy clarifies that the owner of drug technology can hold the approval number and legally enjoy the market returns after the drug is launched. Taking caspofungin acetate and gefitinib as examples, if the technology is transferred to a pharmaceutical company, the technology transfer fee would be 10 million yuan and 50 million yuan respectively, while the annual sales after launch would be 40 million yuan and 100 million yuan respectively. The market returns from holding the approval number for the drug technology owner are far higher than the benefits of technology transfer. To continuously promote the vitality of new drug research and development, in 2018..." In October, the National Medical Products Administration (NMPA) submitted an explanation to the Standing Committee of the National People's Congress regarding the draft decision to extend the pilot period of the drug marketing authorization holder system in certain regions, proposing to extend the pilot period until the implementation date of the revised and improved Drug Administration Law.

To meet clinical drug needs and promote increased R&D investment by pharmaceutical companies, the NMPA will, on the one hand, adjust the registration and inspection procedures for imported chemical drugs, changing all pre-market registration and inspection of imported chemical drugs to post-market supervision and sampling, accelerating the process of bringing new drugs from overseas to market; on the other hand, it will implement a drug patent linkage and patent term extension system to ensure that innovators have reasonable expected benefits, strengthen intellectual property protection, create a favorable policy environment for drug R&D innovation, and allow more innovative achievements to benefit patients.

II. Implementation of the National Essential Medicines List (2018 Edition), with Future Dynamic Adjustments

On November 1, my country's National Essential Medicines List (2018 Edition) officially came into effect. Overall, the 2018 edition has the following characteristics: First, the number of drugs has increased from 520 to 685. The essential medicines list includes 417 Western medicines and 268 traditional Chinese medicines (including ethnic minority medicines), better serving medical and health institutions at all levels and promoting the comprehensive allocation and priority use of essential medicines. Secondly, the structure has been optimized, highlighting the basic medication needs for common diseases, chronic diseases, and diseases with heavy burdens and significant harm, as well as public health, with a focus on medication for special populations such as children. New additions include 12 oncology drugs and 22 clinically urgently needed pediatric drugs. Thirdly, dosage forms and specifications have been further standardized, with 685 drugs involving over 1110 dosage forms and over 1810 specifications, which will be of great significance for guiding the production, distribution, bidding, procurement, rational drug use, reimbursement, and full-process supervision of essential medicines. Fourthly, the principle of giving equal importance to both Western and traditional Chinese medicine continues, expanding the scope of indications to cover more clinical symptoms in traditional Chinese medicine. Fifthly, clinical necessity has been strengthened; among the newly added drugs in this list adjustment, 11 are clinically essential. These drugs are not covered by medical insurance and are mainly clinically essential and effective, such as the direct-acting antiviral drugs sofosbuvir and velpatasvir, which experts unanimously agree can cure hepatitis C with proven efficacy.

The future list will be dynamically adjusted, with the adjustment cycle generally not exceeding three years. Next, the National Health Commission will revise and improve the "National Essential Medicines List Management Measures" as soon as possible, guided by the clinical value of drugs, emphasizing evidence-based medicine, pharmacoeconomics, and real-world research, vigorously promoting drug use monitoring and comprehensive evaluation, establishing a dynamic adjustment mechanism for the National Essential Medicines List, adhering to the principle of both adding and removing drugs, continuously improving the structure and quantity of drugs in the list, and effectively meeting the needs for disease prevention and treatment. The specific number of drugs in each dynamic adjustment will be determined based on changes in my country's disease spectrum and clinical treatment needs, comprehensively considering factors such as clinical application practices, changes in drug standards, adverse drug reaction monitoring, and comprehensive clinical evaluation of drugs.

III. Reducing drug prices remains a policy focus

2018 Since the second half of the year, reducing drug prices has become a major target of central and local pharmaceutical policies. For major diseases, particularly anti-cancer drugs, prices have significantly decreased through various means, including national negotiations, alliance group purchases, preferential inclusion in drug lists, and volume-based procurement. In October, after three months of national negotiations, 17 anti-cancer drugs covering multiple cancer types, including non-small cell lung cancer, kidney cancer, colorectal cancer, melanoma, and lymphoma, were included in Category B of the "National Basic Medical Insurance, Work Injury Insurance, and Maternity Insurance Drug Catalog (2017 Edition)," with an average price reduction of 56.7%. Local governments have also introduced nearly 100 policies to promote drug price reductions. In August, Jiangxi Province took the lead in initiating drug price reductions, requiring imported drugs and anti-cancer drugs already included in the Jiangxi Provincial Online Procurement Platform and falling within the scope of reduced tariffs and value-added tax to declare procurement prices based on the principle that the price reduction amount should not be less than the tax reduction amount. Drugs that fail to reduce prices as required will be penalized with corresponding point deductions, up to and including the cancellation of their bidding and online procurement qualifications. In [Month], Sichuan Province implemented dynamic adjustments to the maximum listed price. Any maximum listed price higher than the latest lowest provincial listed price nationwide will be adjusted according to that lowest provincial listed price. For the same drug from the same manufacturer, different dosage forms and specifications cannot have inverted maximum listed prices; otherwise, the lower price will be used to balance the prices. It is expected that in 2019, reducing drug prices will remain a policy focus, ensuring that people can afford and access quality medications, and reducing their financial burden.

IV. The establishment of the National Healthcare Security Administration will accelerate the introduction of medical insurance payment standards.

To date, medical insurance payment standards have been delayed. In May 2015, the National Development and Reform Commission issued the "Opinions on Promoting Drug Price Reform," which for the first time mentioned that relevant departments would introduce medical insurance payment standards to encourage medical institutions and retail pharmacies to proactively reduce procurement prices under market competition. In August 2015 and November 2016... In [Month], the former Ministry of Human Resources and Social Security, in conjunction with the former National Health and Family Planning Commission, drafted two versions of rules for setting basic medical insurance drug payment standards for public comment. The policy implementation was generally more detailed, but a nationwide, officially implemented policy has not yet been released.

The reasons for the delayed official launch of the medical insurance payment standard policy are twofold: First, the former Ministry of Human Resources and Social Security lacked sufficient influence over drug procurement and pricing. Its functions were limited to drug payments, with weak influence over drug pricing (bidding) and drug procurement supervision (medical practice). The prerequisite for implementing the drug medical insurance payment standard is that the medical insurance management body needs clear control over drug pricing and procurement. Given the existing bidding and procurement mechanism, implementing the medical insurance payment standard is difficult. Second, the slow progress of supporting work—the consistency evaluation—also hindered the release of the medical insurance payment standard.

On March 13, 2018, the State Council's institutional reform plan was announced, which included the establishment of the National Healthcare Security Administration. On May 31... On [date], the newly established National Healthcare Security Administration was officially inaugurated, integrating the responsibilities of the Ministry of Human Resources and Social Security for basic medical insurance and maternity insurance for urban employees and residents, the National Health and Family Planning Commission for the new rural cooperative medical system, the National Development and Reform Commission for drug and medical service price management, and the Ministry of Civil Affairs for medical assistance. In October, local healthcare security bureaus were successively established.

The establishment of the healthcare security bureau will increase expectations for the release of medical insurance payment standards. The new healthcare security bureau combines the three major functions of medical insurance drug payment, pricing, and procurement supervision, clearing away the biggest obstacle to the previous policy release. Driven by the need to improve the efficiency of cost control measures, it is expected that the healthcare security bureau will accelerate the formulation of medical insurance payment standard policies.

Investment Recommendations

I. Domestic Innovative Drugs Enter a New Stage of Development, Ushering in an Initial Harvest Period

my country's innovative drug development started relatively late. In 2011, Betta Pharmaceuticals' icotinib was approved, becoming the first truly innovative drug in China. As of the end of 2017, fewer than 10 innovative Class 1 new drugs had been approved in China, with apatinib (Hengrui Medicine) having the highest sales in 2017. Annual sales are approximately 1.5 billion yuan. In February 2016, the CFDA implemented a priority review policy, propelling innovative drugs into a new development phase. As of October 2018, a total of 710 applications in 34 batches were included in the priority review process, and by October 2018, 80 varieties (approximately 200 registration applications by generic name) had received production approval.

If calculated from the priority review announcement date, the average time from announcement to approval is 8.8 months, significantly shorter than 17 months, fully demonstrating the efficiency of the priority review policy in the drug review and approval process. After initial accumulation, domestic pharmaceutical companies have entered a preliminary harvest period, with several innovative products approved in 2018. In 2018, several domestic pharmaceutical companies submitted applications for innovative drug marketing authorization, and in 2019... This year will see a concentrated harvest of innovative drugs in China. Therefore, investors are advised to strongly support innovative drug research and development, with a focus on leading listed companies such as Hengrui Medicine.

II. Generic Drugs Accelerate Substitution of Original Drugs, High-Quality Generic Drug Companies Will Benefit

Replacing original drugs with generic drugs is an objective necessity for the development of my country's pharmaceutical industry. Economic development, population growth, an aging society, and increasing public health awareness have enabled my country's pharmaceutical industry to maintain rapid growth. At the same time, excessive pressure on medical insurance and the government's advocacy for further medical insurance cost control have led to a continued reliance on increasing the proportion of generic drugs used to control medical insurance expenditures, creating significant opportunities for the long-term development of my country's generic drug industry.

Replacing original drugs with generic drugs is also a subjective requirement for the development of my country's pharmaceutical industry. Since 2010, the overall success rate of innovative drug development worldwide has gradually declined, and the increasing difficulty of innovative drug development has further highlighted the importance of developing generic drugs. With more and more drugs facing patent expiration in recent years, more generic drugs will be launched into the global and Chinese pharmaceutical markets.

According to calculations by the China Pharmaceutical Industry Information Center, the market size of original drugs with expired patents in my country has reached 1419... The market size of chemical and biological drugs is estimated at 14.23% of the total market size, reaching 1.4116 trillion yuan. By 2025, 48 imported chemical drugs in my country will have their core patents expire. The expiration of patents will provide a huge market space for my country's generic drug market, which is expected to reach approximately 1.4116 trillion yuan by 2020. Therefore, investors are advised to pay attention to high-quality generic drug companies, such as Kelun Pharmaceutical and China Biopharmaceutical.

III. The Market Prospects for Consumer Blockbuster Vaccines are Broad

Currently, the top three traditional Class II vaccines in China are rabies, varicella, and influenza. Even based on annual batch release volume, the largest, rabies, is only around 3 billion yuan. For blockbuster vaccines such as HPV and PCV-13, even with a penetration rate of only 10% in the incremental market, the industrial market size is still over 2 billion yuan and 5 billion yuan respectively. For Hib-X combination vaccines, due to their ability to reduce the number of vaccinations, they also have a strong momentum in replacing Hib vaccines. For Hib-AC combination vaccines... For the Hib-DaTP quadruple vaccine, a mere 30% Hib replacement rate could generate industrial market values of 1.2 billion and 1.65 billion respectively. The market for blockbuster consumer vaccines is vast, and investors are advised to pay close attention to listed companies such as Zhifei Biological Products and Kangtai Biological Products, which possess blockbuster vaccine products.

IV. Vigilance Against Risks Including Policy Uncertainty and Slower-than-Expected Approval of Innovative Drugs

First, risks stemming from policy uncertainty in the pharmaceutical sector. Should future policy announcements deviate from expectations in timing or content, the pharmaceutical industry could face significant impacts. For instance, if volume-based procurement remains confined to 11 cities, its promotion of import substitution may fall short of projections. Second, risks associated with slower-than-expected approval of innovative drugs. R&D inherently involves uncertainty, particularly during clinical trials and regulatory review. Unforeseen factors—such as unanticipated clinical side effects or personnel changes within regulatory agencies—could substantially delay the approval of innovative drugs.