Zhitong Finance and Economics APP learned that Ping An Securities released a research report stating that with the intensive arrival of patent cliffs, generic drugs and related specialty active pharmaceutical ingredient companies are ushering in a new development window. Currently, the upstream and downstream supply and demand relationship of active pharmaceutical ingredients continues to improve, the integration of active pharmaceutical ingredients + formulations is gradually being realized, the trend of active pharmaceutical ingredient prices and quantities is starting to improve marginally, and companies may achieve long-term sustained growth. Based on the export volume of Chinese medical and healthcare products and the data on import and export of active pharmaceutical ingredients, active pharmaceutical ingredient sectors such as heparin, iodine, and GLP-1 exhibit significant potential. Along with the improvement in supply and demand relationships, the price of sartan-type active pharmaceutical ingredients is expected to gradually recover, while the prices of certain varieties such as Vitamin E are expected to maintain relatively high levels in the short term, warranting continuous attention.

The main points of Ping An Securities are as follows:

Improvements in supply and demand, patent cliffs, and the integration of formulations are driving the full-cycle growth of the active pharmaceutical ingredient sector.

Short-term: The continuous improvement of upstream and downstream supply and demand relationships, with the active pharmaceutical ingredient price and quantity trend marginally improving.

According to the China Medical and Healthcare Products Import and Export Chamber of Commerce and the National Bureau of Statistics data, from the perspective of exports, in H1 2024, China's total export of active pharmaceutical ingredients was 21.343 billion USD, a slight increase of 0.13% year-on-year, turning from negative to positive, while the export volume of active pharmaceutical ingredients surged by 23.4%. In terms of prices, from January to September 2024, China's chemical drug active pharmaceutical ingredient manufacturing PPI increased from 94.7% to 97.1% month-on-month, indicating a trend of ongoing price recovery amid increasing demand for active pharmaceutical ingredients.

Mid-term: With the intensive arrival of patent cliffs, specialty active pharmaceutical ingredient companies are entering a window of opportunity.

According to IQVIA data, from 2024 to 2028, the global pharmaceutical sales lost due to patent cliffs amount to approximately $192 billion, a significant increase compared to $81 billion from 2019 to 2023. Among them, the loss of small molecule drugs is about $133 billion, averaging around $26.6 billion per year, providing development opportunities for generic drugs and related special active pharmaceutical ingredient companies.

Long-term: Gradual realization of integration of active pharmaceutical ingredients and preparations, helping companies achieve sustained long-term growth.

Representative integrated companies combining active pharmaceutical ingredients and preparations such as Zhejiang Huahai Pharmaceutical, Zhejiang Xianju Pharmaceutical, Chengdu Easton Biopharmaceuticals, Ningbo Menovo Pharmaceutical, Aurisco Pharmaceutical, Zhejiang Starry Pharmaceutical etc., have far more approvals for active pharmaceutical ingredients than the number of generic drugs, and in recent years, the number of newly approved and reported generic drugs has remained stable or grown rapidly. The scale and proportion of business revenue from preparations show an overall growth trend, while exploring relevant preparation markets based on advantageous active pharmaceutical ingredients, preparations have the advantage in gross margin, creating the company's second growth curve. In addition to domestic preparation business, the regulatory market for preparations has high profitability and market access barriers, attracting companies with advantages in special active pharmaceutical ingredients, such as Nanjing King-Friend Biochemical Pharmaceutical and Hainan Poly Pharm in China, to continue exploring.

Heparin, iodine, and GLP-1 active pharmaceutical ingredient sectors have great potential, while sectors such as sartans and vitamins are worth continuous attention.

Heparin active pharmaceutical ingredients are expected to enter a new cycle, benefiting the heparin active pharmaceutical ingredient sector. According to the General Administration of Customs data, as of August 2024, the price of heparin is $4923/kg, already at the endpoint of the second heparin cycle. From January to August 2024, China's heparin exports were approximately 93 tons, a year-on-year increase of about 25%. The downstream destocking cycle is basically over, coupled with the low base effect of heparin exports in the second half of 2023, the full-year 2024 heparin exports are expected to achieve rapid growth, the supply-demand relationship continues to improve. We expect to start a new upward cycle for heparin prices in the second half of 2024, benefiting companies related to heparin active pharmaceutical ingredients.

The iodine contrast agent market is steadily growing, benefiting downstream iodine contrast agent companies in the long term. The global contrast agent market continues to expand. According to General Administration of Customs data, from January to August 2024, China's iodine imports were about 5759.96 tons, a 25% year-on-year increase. With increasing demand, upstream small and medium capacity is expected to enter, driving the downward trend of iodine prices, improving the gross margin of downstream iodine contrast agent active pharmaceutical ingredient companies, benefiting domestic downstream iodine contrast agent active pharmaceutical ingredient companies.

The expiration of GLP-1 blockbuster original patents is beneficial for domestic peptide active pharmaceutical ingredient companies. According to YiMedic data, as of August 2024, there are a total of 21 registered manufacturers of Liraglutide active pharmaceutical ingredient in the United States, and 6 in China, including approximately 11 domestic active pharmaceutical ingredient manufacturers. For Semaglutide, a total of 22 registered active pharmaceutical ingredient manufacturers in the United States and 5 in China, with approximately 15 domestic active pharmaceutical ingredient manufacturers. Chinese active pharmaceutical ingredient manufacturers play an important role in the global supply chain of GLP-1 products. In addition, with the improvement of supply-demand relationships, sartan active pharmaceutical ingredient prices are expected to gradually recover, and prices of certain varieties such as vitamin E are expected to maintain relatively high levels in the short term.

Investment advice:

In the short to medium term, the upstream and downstream supply and demand relationship continues to improve, the interval of patent cliffs is approaching, distinctive active pharmaceutical ingredient companies are entering a window of opportunity, it is recommended to pay attention to jiangxi synergy pharmaceutical (300636.SZ), zhejiang huahai pharmaceutical (600521.SH), zhejiang tianyu pharmaceutical (300702.SZ), ningbo menovo pharmaceutical (603538.SH), etc.

In the long term, the gradual realization of active pharmaceutical ingredient + formulation integration will help companies achieve long-term and sustainable growth, it is recommended to pay attention to nanjing king-friend biochemical pharmaceutical (603707.SH), zhejiang huahai pharmaceutical, zhejiang xianju pharmaceutical (002332.SZ), chengdu easton biopharmaceuticals (688513.SH), ningbo menovo pharmaceutical, zhejiang tianyu pharmaceutical, zhejiang jingxin pharmaceutical (002020.SZ), aurisco pharmaceutical (605116.SH), zhejiang starry pharmaceutical (603520.SH), etc.

Looking at different sectors: the new cycle of heparin active pharmaceutical ingredient is expected to start, it is recommended to pay attention to nanjing king-friend biochemical pharmaceutical, changzhou qianhong biopharma (002550.SZ), yantai dongcheng biochemicals (002675.SZ), etc.; the steady growth of the iodine contrast agent market is favorable for downstream iodine contrast agent companies, it is recommended to pay attention to zhejiang starry pharmaceutical; with the imminent expiration of patents for GLP-1 blockbuster varieties, it is bullish for domestic peptide active pharmaceutical ingredient companies, it is recommended to pay attention to novtech biopharma (688076.SH), shengnuo biopharm (688117.SH), hybio pharmaceutical (300199.SZ), aurisco pharmaceutical, etc.

Risk Warning: 1) Risk of active pharmaceutical ingredient price fluctuations: The products of various companies are influenced by supply and demand relationships, and significant price fluctuations may exist. 2) Impact of national policies: Medical insurance negotiation policies may be adjusted, thereby affecting the sales of generic drugs by various companies. 3) Risk of new varieties not meeting expectations: Various companies have many new formulation varieties, the downstream customer demand for different varieties varies, combined with factors such as the company's sales promotion capabilities, there may be the risk of new varieties not meeting expectations.