According to a report from the Financial Associated Press on December 19 (Reporter Zhang Liangde), after three years of rising prices, the prices of Traditional Chinese Medicinal Materials have begun to fall. Prices for high-rise Traditional Chinese Medicinal Materials such as Atractylodes, Astragalus, and Moutan peel have significantly dropped in the second half of the year, and Chinese Patent Medicine production companies may welcome a cost 'turning point.'

Liu Feifei, the deputy chairperson of the Procurement Specialized Committee of the National Standardization and Quality Assessment Innovation Alliance for Traditional Chinese Medicinal Materials, stated at the Second Traditional Chinese Medicine Ecology Conference: 'We can see that in this wave of medicinal herb price fluctuations, the profits of both Chinese Patent Medicine companies and Traditional Chinese Medicine piece enterprises have undergone significant changes, mainly because of the fluctuations in herb prices. In the past, the industry felt that the upstream herbs were low-end, and the price fluctuations had little impact on industrial product profits, but this time we see that it has had a huge impact across the entire Traditional Chinese Medicine Industry Chain.'

Liu Feifei, the deputy chairperson of the Procurement Specialized Committee of the National Standardization and Quality Assessment Innovation Alliance for Traditional Chinese Medicinal Materials.

The price decline of medicinal materials is significant, and some herb growers are facing losses.

After the soaring prices of medicinal materials have hit the stop button, the herb market seems particularly quiet this second half of the year. An insider from Bozhou told the Financial Associated Press that now almost 90% of the Traditional Chinese Medicinal Materials prices have fallen, and prices for some herbs have dropped to levels seen three years ago.

Jia Haibin, the chief expert of the Traditional Chinese Medicine Industry Big Data Datacenter at Zhongkang Technology, summarized: 'The Traditional Chinese Medicinal Materials market experienced accelerated increases in the first half of the year, followed by a steep decline in the second half; everyone feels very cold.'

There are significant declines in the prices of some medicinal materials, with Aster falling from its highest price of 100 yuan/kg at the beginning of the year to 15 yuan/kg, a decrease of 85%; prunella from its highest price of 800 yuan/kg this year has dropped to around 150 yuan/kg, a decrease of over 80%; Atractylodes, which was dubbed 'golden Atractylodes' in the first half of the year due to a large new harvest, has seen a notable decline in market prices, with sales prices in Bozhou dropping to around 60 yuan/kg, more than 60% lower than the earlier high price of 180 yuan/kg.

This round of price decline has multiple factors. Among them, Xiangxue Pharmaceutical (300147.SZ) once stated on an interactive platform that the prices of Traditional Chinese Medicinal Materials have been affected by various factors such as macroeconomics, monetary policy, natural disasters, information asymmetry among growers, production areas, and output, making them prone to significant fluctuations.

Kang Maoqiang, President of the Anhui Provincial Traditional Chinese Medicinal Materials Association and Chairman of the Bozhou Medicine Delivery Information Platform.

From the supply side, the supply of some medicinal materials has clearly increased. Kang Maoqiang, President of the Anhui Provincial Traditional Chinese Medicinal Materials Association and Chairman of the Bozhou Medicine Delivery Information Platform, told the Financial Associated Press: "Some Traditional Chinese Medicinal Materials are annual crops, and some varieties only require a few months of growth cycle. The previous increase in profitability led to an expansion of planting area in the past two years. However, the market demand is just so large, and after their output increases, it cannot circulate in the market, leading to a rapid price decline. The market has recently retreated overall, and it may not suddenly reverse and rise in the next two years, but it cannot be ruled out that some varieties will still rise, which still needs to be observed based on the actual supply and demand in the market."

In addition to the main changes in the market supply pattern, Xu Hongwei, President of the Anhui Provincial Traditional Chinese Medicinal Materials Industry Association and Chairman of Yaotong.com, told the Financial Associated Press that there are certain patterns to the rise and fall of Traditional Chinese Medicinal Materials prices. Price increases in the past two years were rapid, largely due to a sudden surge in prices of heat-clearing and detoxifying medicinal materials such as Forsythia and Honeysuckle during the pandemic, which created a certain profit effect that attracted some idle funds into the medicinal market. However, the prices of medicinal materials cannot rise indefinitely. Some early investors realized profits and sold off as prices rose, combined with factors such as centralized procurement and medical insurance reforms, led to a decrease in usage, which caused prices to start falling.

The significant decline in prices of some medicinal materials has led to some farmers' planting income being unable to cover cultivation costs. Kang Maoqiang stated that many growers of Traditional Chinese Medicinal Materials are already incurring losses. A few days ago, we were also researching this; currently, for example, the costs of planting Isatis root, safflower, and Dioscorea cannot be covered. The reason for this situation partly stems from farmers' erroneous market judgments, as most farmers are not professionals and are unaware of market trends. He calls for relevant departments and regulatory bodies to jointly promote and guide the industry back to healthy and orderly development.

Regarding the fluctuations in the Traditional Chinese Medicinal Materials market, Liu Feifei stated that the most vulnerable part in the Traditional Chinese Medicine Industry Chain is the agriculture sector. The cyclical nature of Traditional Chinese Medicinal Materials is also determined by their agricultural characteristics, which carry productivity uncertainties and lack effective information support. Xu Hongwei stated that there is now greater emphasis on changes in market information. Yaotong.com is also collaborating with Huawei on building a large model for Traditional Chinese Medicinal Materials, hoping to predict the trends in price increase and decrease, allowing farmers, pharmaceutical companies, and government to have a basic forecast to minimize significant fluctuations.

In addition to further improving the construction of the information market, there have been new changes in this round of fluctuations in the Traditional Chinese Medicinal Materials cycle, including a trend of younger practitioners among farmers and merchants, as well as the optimization of supporting industries like Logistics and cold storage.

Xu Hongwei stated that people used to believe that Traditional Chinese Medicinal Materials had a ten-year cycle, but now it may shorten accordingly. This is also in line with current trends, as the number and scale of enterprises, the workforce, market capital, industry characteristics, and economic environment have all changed, and the new supply-demand pattern may lead to new changes in the Traditional Chinese Medicinal Materials cycle.

The cost for some Chinese Patent Medicine companies will decrease.

This year's semiannual and third-quarter Earnings Reports show a significant decrease in gross margin for some publicly listed Chinese Patent Medicine companies, indicating that the fluctuation in Traditional Chinese Medicinal Materials prices has a notable impact on costs. Many pharmaceutical companies have mentioned in their Earnings Reports and investor Q&As that the rise in Traditional Chinese Medicinal Materials prices has affected their profits.

The price of Traditional Chinese Medicinal Materials for clearing heat and detoxifying has risen first and fallen back the fastest. Among the listed companies, Xiangxue Pharmaceutical's main products, antiviral oral liquid and orange peel phlegm syrup, are both respiratory system Chinese Patent Medicines. The key raw materials used for clearing heat and detoxifying, stopping cough and resolving phlegm, such as Ban Lan Gen, Lu Gen, Huo Xiang, Lian Qiao, Hua Ju Hong, and Ban Xia, peaked in price from the end of 2022 to the first half of 2023, but currently, most of these raw material prices have significantly declined. From the company's Earnings Reports, it can be seen that the gross margin for the pharmaceutical manufacturing sector at the end of 2020 was 52.32%, while at the end of 2022, it dropped to only 34.96%, and currently, the gross margin for the pharmaceutical manufacturing sector is rebounding to 44.14% in the 2024 mid-year report.

Previously, Xiangxue Pharmaceutical stated on an interactive platform that the company has always paid attention to the prices of Traditional Chinese Medicinal Materials and has done well in procurement and storage according to market conditions, but the rising prices of Traditional Chinese Medicinal Materials have increased the company's operating costs to some extent.

Tus-Pharmaceutical Group (000590.SZ) mentioned in its third-quarter report this year that the overall gross margin and profitability decreased mainly due to a decline in revenue and an increase in the prices of raw and auxiliary materials. According to the company's Earnings Reports, in the third quarter of 2024, Tus-Pharmaceutical Group's gross margin was 43.89%, down 10 percentage points from 53.89% in the second quarter of 2023. Some major components of the company's main product, Gu Han Yang Sheng Jing, such as Bai Shao, Huang Qi, and Tu Si Zi, reached a recent high price in the second and third quarters of this year, but entering the fourth quarter, the prices of these major products have significantly declined and are basically back to the price levels of the first half of 2023, while the prices of other major raw materials have also mostly decreased.

Change in prices of major raw materials for some listed companies' Chinese Patent Medicine (data source: listed company Earnings Reports, Traditional Chinese Medicinal Materials Tian Di Network).

Looking at the fluctuations in gross margin in the Chinese Medicine industry for listed companies such as Xiangxue Pharmaceutical, Tus-Pharmaceutical Group, and Zhejiang Xinguang Pharmaceutical (300519.SZ), these kinds of companies have a few major products that account for a large proportion, leading to significant changes in gross margin amidst fluctuations in raw material prices. On the other hand, pharmaceutical companies with more diversified product sales experienced some changes in gross margin but, under the overall rise in Traditional Chinese Medicinal Materials prices, the relative change was smaller.

It is noteworthy that manufacturing companies producing Chinese Patent Medicines usually purchase their raw materials three months to half a year in advance, so the changes in gross margin for some listed companies' products are relatively lagging behind the changes in Traditional Chinese Medicinal Materials prices.

Jianmin Pharmaceutical Group (600976.SH) reported a significant decline in profits for the third quarter. The company's financial indicators show that the sales gross margin for the third quarter was 43.01%, a decrease of 6 percentage points compared to 49.01% in the same period last year. The company attributed the changes in performance to the increase in procurement costs due to rising prices of Traditional Chinese Medicinal Materials and other factors.

From the main products of Jianmin Pharmaceutical Group, the Jianpi Shengxue Granules (Jianpi Shengxue Tablets), primarily sold through hospital channels, as well as the Longmu Zhuanggu Granules which have a larger market share outside hospitals, include key ingredients such as Atractylodes, Codonopsis, Astragalus, Ophiopogon, Dragon Bone, and Turtle Shell. After entering the fourth quarter, prices for the aforementioned medicinal materials have seen varying degrees of decline. Apart from the previously mentioned Atractylodes, the price of Codonopsis (Zhongtiao) has decreased from a peak of 160 yuan/kg to 110 yuan/kg, a drop of over 30%; Ophiopogon has fallen from 155 yuan/kg at the beginning of the year to 95 yuan/kg, nearly a 40% decrease; the price of Dragon Bone has dropped from 310 yuan/kg at the start of the year to 250 yuan/kg. With the overall continued downturn in the Traditional Chinese Medicinal Materials market, it is expected that the procurement costs for the aforementioned materials will gradually decline.

Lanzhou Foci Pharmaceutical (002644.SZ) previously increased the ex-factory prices of its main Chinese Patent Medicine products by an average of 9% in the first half of the year due to rising raw material and production costs; however, the impact of rising medicinal material prices has gradually subsided. The prices of several important raw materials needed for the company's main products such as Compound Astragalus Jianpi Oral Liquid, Concentrated Dong Quai Pills, and Xiaoyao Pills have noticeably decreased. For instance, the price of Dong Quai has fallen from 150 yuan/kg in the third quarter of last year to the current 85 yuan/kg, and the price of Licorice has dropped from 33 yuan/kg last year to 15 yuan/kg, which has basically returned to the price level of three years ago.