OTC drug market observation

Traditional Chinese Medicine (TCM) centralized procurement expands again to include Over-The-Counter (OTC) drugs.

Recently, the Anhui Provincial Medical Joint Procurement Office released the "Anhui Province 2024 Traditional Chinese Medicine Centralized Volume-based Procurement Document (Draft for Comments)" (hereinafter referred to as "Draft for Comments"). It is understood that this centralized procurement includes 18 product groups and 35 traditional Chinese medicines. However, unlike in the past, OTC drugs have also been included in the centralized procurement catalog.

China Business News reporters noticed that the varieties involved in the centralized procurement of traditional Chinese medicines carried out by Anhui Province are not many, but it has triggered a continuous two-day decline in the traditional Chinese medicine sector. Among them, China Resources Sanjiu (000999.SZ) has fallen for four consecutive trading days, with the company's stock price falling by 18.87% from September 10th to 13th, and its market value has evaporated by more than ten billion yuan.

Regarding the impact of this centralized procurement of traditional Chinese medicines and the company's relevant countermeasures, our reporter recently sent a letter to China Resources Sanjiu for an interview. The staff of its securities department said that they currently do not accept telephone interviews. Those who have interview needs can send an interview letter to the company's email, and someone will respond. However, as of the time of publication, no further reply has been received from the company.

As for the inclusion of OTC drugs in this centralized procurement, Deng Yong, director of the Research and Innovation Center for Health Law and Transformation at Beijing University of Chinese Medicine, said in an interview with a reporter that the centralized procurement of traditional Chinese medicines carried out by Anhui Province this time will have a profound impact on the OTC drug market. First, centralized procurement will promote more reasonable market prices for OTC drugs and reduce patients' medication costs. Second, centralized procurement will promote traditional Chinese medicine companies to strengthen innovation and research and development, improve product quality and efficacy to meet market demand. In addition, centralized procurement will also promote the integration and optimization of the OTC drug market, increase market concentration, and eliminate some companies with weaker competitiveness. Finally, centralized procurement will also promote the pharmaceutical industry to strengthen supervision and standardization to ensure the safety of patients' medication.

In fact, this is not the first time that centralized procurement of traditional Chinese medicines has been carried out. As early as 2021, a provincial alliance led by Hubei Province and consisting of 19 provinces had already carried out centralized volume-based procurement of traditional Chinese medicines. At that time, a total of 157 companies and 182 products participated, and ultimately 97 companies and 111 products were selected, with a selection rate of 62%.

Although the centralized procurement of traditional Chinese medicines carried out by Anhui Province this time involves a small number of categories, the impact range may be broader.

The "Draft for Comments" shows that this centralized volume-based procurement catalog is divided into Catalog (I) and Catalog (II). In addition to the common varieties of traditional Chinese medicine centralized procurement, Catalog (I) also includes OTC varieties such as Gan Mao Ling capsules/granules, Gan Mao Qing Re granules, Qiang Li Luo Pi Lu, and Xiao Er Fei Re Ke Chuan granules. Catalog (II) includes five exclusive varieties: Shen Song Yang Xin capsules, Wen Xin granules, Nao Xin Tong capsules, Tong Xin Luo capsules, and Nao Xin An capsules.

It is understood that Nao Xin Tong capsules and Wen Xin granules are the core products of Buchang Pharmaceutical (603858.SH). Data from the Medical Network shows that Nao Xin Tong capsules and Wen Xin granules ranked in the top 20 in the market share of cardiovascular and cerebrovascular traditional Chinese medicines in 2022.Yiling Pharmaceutical (002603.SZ)'s two core traditional Chinese medicine products—Shensong Yangxin Capsules and Tongxinluo Capsules—also hold significant positions in the field of cardiovascular and cerebrovascular treatment. Data from Miness shows that in the ranking of traditional Chinese medicine oral medications for cardiovascular diseases in the public medical market in the first half of 2022 in China, Tongxinluo Capsules and Shensong Yangxin Capsules were ranked second and fourth, respectively.

Upon inquiry of the National Medical Products Administration data, it was found that among the over-the-counter (OTC) drugs included in the Anhui centralized procurement list, there are as many as 155 approval numbers for Gan Mao Qingre Granules, involving companies such as Baiyunshan (600332.SH), Teyi Pharmaceutical (002728.SZ), China Resources Sanjiu, Shenwei Pharmaceutical (2877.HK), and Kangenbei (600572.SH). Meanwhile, there are 121 approval numbers for Qiangli Luohupi Syrup, and 24, 30, and 4 approval numbers for Gan Mao Ling Capsules, Gan Mao Ling Granules, and Xiaoer Feire Kechuan Granules, respectively.

Moreover, among the OTC drugs listed in this procurement catalog, only Xiaoer Feire Kechuan Granules are dual-cross products (i.e., the same drug is both an OTC and a prescription drug). Several OTC drug varieties, such as Gan Mao Ling and Gan Mao Granules, have mainly focused on the non-hospital market in the past, and their share in the hospital market is not significant.

According to Miness data, among the top ten best-selling traditional Chinese medicine brands in China's urban physical pharmacies (including cities at the prefecture level and above) in 2023, China Resources Sanjiu's Gan Mao Ling Granules ranked second with sales reaching 2.501 billion yuan.

According to China Resources Sanjiu's 2023 annual report, the company has 39 products with annual sales exceeding 100 million yuan, mainly focusing on the "999" series of products (China Resources Sanjiu's main brand), including "999 Gan Mao Ling," "999 Piyanping," "Sanjiu Weitai," "999 Xiaoer Gan Mao Granules," "999 Antiviral Oral Liquid," etc., all of which hold leading positions in their respective categories.

In the first half of 2024, China Resources Sanjiu's revenue from self-diagnosis and treatment (CHC) products, including 999 Gan Mao Ling, was 7.773 billion yuan, accounting for 55.11% of China Resources Sanjiu's total revenue. If 999 Gan Mao Ling is subsequently included in the centralized procurement scope, will it compress the company's profit space and thus pose a challenge to its profitability? Affected by the aforementioned centralized procurement news, the panic sentiment towards "centralized procurement" in the secondary market has also spread.

However, China Resources Sanjiu responded on the interactive platform that Gan Mao Ling is not a national medical insurance catalog product, and the company's 999 Gan Mao Ling product focuses on the OTC market, with consumers choosing to purchase autonomously. At present, the company believes that the notice has an extremely limited impact on 999 Gan Mao Ling in the cold category.

Price reduction may radiate to the non-hospital market.

It is worth mentioning that in the "Draft for Comments," there is also a corresponding penalty mechanism set for non-selected products.

Specifically, the procurement situation of non-selected products will be included in the key monitoring scope and regularly reported, and the procurement volume will also be strictly limited. During the procurement cycle, the procurement volume of non-selected products must not exceed 10% of the actual procurement volume of the same procurement group. If it is necessary to use drugs from non-selected companies, medical institutions need to submit a procurement demand to the medical insurance department and explain the situation. However, the actual procurement volume must not exceed 50% of the demand for the factory brand drug reported by the medical institution.The term "non-selected products" mainly includes medicines that are within the procurement scope but did not declare participation in this volume-based procurement, medicines that declared but were not selected, and those that were unsuccessful in the bidding process.

Deng Yong told the reporter that for the selected companies, this regulation ensures their market share, which is beneficial for the stable production and sales of the enterprises, and enhances their market competitiveness. At the same time, it also encourages enterprises to pay more attention to product quality and services to meet the needs of medical institutions.

"For companies that were not selected, their market share will be strictly limited, and they may face the risk of declining sales. This will encourage non-selected companies to actively improve product quality, reduce costs, or seek other market opportunities. In addition, the requirement for medical institutions to propose procurement needs to the medical insurance department and explain the situation also increases the difficulty and cost for non-selected companies to enter the market," said Deng Yong.

Although the main target of this traditional Chinese medicine (TCM) centralized procurement is the in-hospital market, will it affect the out-of-hospital market if the subsequent procurement is officially implemented? In response to this, Deng Yong said that the prices of in-hospital centralized procurement may have a certain transmission effect on the prices of the out-of-hospital market. If the in-hospital centralized procurement prices are lower, patients may prefer to buy medicines in hospitals, or choose more reasonably priced medicines in the out-of-hospital market, thereby prompting the adjustment of prices in the out-of-hospital market.

Moreover, centralized procurement may affect the production and sales strategies of enterprises. Enterprises may pay more attention to the supply of the in-hospital market, while reducing their investment in the out-of-hospital market. In addition, centralized procurement may also encourage enterprises to strengthen brand building and market promotion to improve the visibility and competitiveness of their products in the out-of-hospital market.