德意志银行--China Healthcare——China Edge P14


NDR feedback: mixed risk.reward 。

On fundamental, the most frequently asked question is whether recent sector growth deceleration is structural or temporary. We believe it is more likely to be structural as the growth of reimbursement funding (pooled accounts and individual accounts) is correlated with GDP growth, which has been slowing down. However, we also believe anti-bribery campaign added a layer of complexity to current situation, and expect modest growth recovery once the campaign completes. On valuation multiple, investors largely believe the sector is reasonably valued but not over-valued. The concerns focused on potential downward revision of consensus, caused by potential pricing pressure from incoming tender. Investors also indicated readiness to shift to medical device/consumables names and healthcare service players if drug sector is under the siege. Heading into the earning season, we believe risk .reward slightly favors long side as current weakness represents a buying opportunity for names with better growth sustainability including Sihuan, CSPC and PHG. Anti-bribery campaign ongoing but sales/marketing activities back to normal According to industry experts, sales and marketing activities have gradually resumed to normal level since 2Q14, after two quarters of cautious practices by MNCs and few domestic players. This is confirmed by high frequency data indicating MNCs are taking back market share in selective therapeutic areas. While we would not be surprised with additional headlines, the worst is behind us in our opinion. For medical equipment players, the struggle might take longer than drug manufacturers as part of the decision-making involves multiple stakeholders.

CFDA drug review to be outsourced

Regulatory experts estimated that approximately 6,400 marketing applications are pending, while the number of reviewers is approximately 250-260. In June, the Associate Director of CFDA, Mr. Yin Li, indicated that the pressure could be alleviated through outsourcing. The CFDA would either designate some reviews to provincial CFDA or external professional agencies. For clinical approval process (to start clinical trials), a new rule has been proposed. The applicant might be allowed to start clinical study if the agency does not respond within 90 days of the IND filing. In addition, we continue to expect delays in drug approval process in the near to mid-term.

More volatility ahead; Highlight top pick Sihuan, WX and Phoenix

We reiterate our expectation for more volatility ahead for the sector, and highlight names with upside earning revision potential such as Sihuan and Phoenix. We also remind investors to position for upside from potential M&As in 2H14 and 2015. The names include those with successful track records such as Sihuan and PW Medtech.

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