Key takeaways from the report:
We believe that the short-term operating data of the pharmacy industry is well restored, and the first half of next year will usher in a clear performance inflection point, and at the same time, the accelerated implementation of the pharmacy outpatient co-ordination policy in various places is expected to bring significant performance increments. In the medium to long term, outpatient prescription outflow and store expansion remain the two main engines of pharmacy growth, and we continue to see industry leaders benefit from increased industry concentration.
The scale of the pharmacy industry is still expanding, and after short-term adjustments, the performance inflection point is about to appear, and the valuation is relatively attractive. The overall market size of pharmacies in China reached 872.5 billion yuan in 2022, with a CAGR of 105%。The number of retail pharmacies has also continued to increase in the past decade, and has now exceeded 640,000.
After more than half a year of inventory depletion, outpatient reshoring, consumption power decline and other unfavorable factors, the performance of the industry in the third quarter of this year is relatively weak, but we believe that the pharmacy industry will usher in a performance inflection point next year:On the one hand, the impact of hoarding medicines at the end of last year has been basically digestedThe customer flow and order volume of pharmacies have gradually picked up since July, and the flu epidemic in the fourth quarter of this year is expected to bring a new wave of drug purchase demand. On the other hand,The acceleration of outpatient co-ordination in various provinces will effectively alleviate the pressure of outpatient return brought about by the reform of individual accountsOutpatient co-ordination pharmacies in areas with better policy implementation conditions will significantly benefit from the increase in customer flow. From the perspective of P/E ratio, the current TTM P/E ratio of the industry is around 22x, which is still at the lowest level since 2019, with a percentile of 4%.
The negative impact of the personal account reform has gradually weakened, and the favorable policies and the implementation of the prescription circulation center will accelerate the outflow of prescriptions. The importance of the retail pharmacy channel has been increasing with the influence of a series of policies to promote the separation of medicines in recent years, and the launch of the prescription circulation platform and the implementation of the outpatient co-ordination policy can further boost the sales of prescription drugs in pharmacies. Outpatient co-ordination: The inclusion of pharmacies in the payment scope of co-ordination is an important part of the realization of hierarchical diagnosis and treatment guarantees, which can reduce the occupation of in-hospital diagnosis and treatment resources, facilitate patients and reduce the corresponding examination and outpatient expenses, and have a limited impact on customers' spending power in pharmacies. 
In the short term, the overall planning and promotion speed of outpatient clinics in various provinces is different, and the landing conditions in Hunan, Hubei, Jiangxi, Jiangsu, Shanxi and other places are relatively relaxed, which is good for chain pharmacies with relative advantages in the province, but with the continuous rollout of policies, we expect that the overall reimbursement of pharmacies will increase significantly next year.
Why is prescription outflow not noticeable?
At present, prescriptions are still concentrated in public hospitals, and the overall outflow rate is still relatively slow. After the implementation of the "zero price difference" policy for hospital drugs, hospitals no longer make money by selling drugs, but first of all, drugs as a traffic password can still bring a stable number of patients to the hospital, and the hospital has a payment period for drug supply companies, and the account can always maintain a certain amount of liquidity. In addition, the National Health Insurance Bureau has clear regulations and assessments on the amount of centralized procurement, and doctors also need to try to complete relevant indicators when prescribing. Moreover, doctors can still benefit from the right to prescribe and have no incentive to drain prescriptions in the short term.
However, we believe that this time's overall reform will not be "thunder and rain", but will take time. Behind the detailed medical insurance payment reform in recent years are two larger and more sustainable main linesThe first is the construction of a multi-level medical security system, and the second is the promotion of the outpatient co-ordination system. This is a fundamental continuation and improvement of China's medical insurance system laid at the beginning of this century. Outpatient co-ordination is the main line of reform, while prescription outflow is the auxiliary line. The former has to be changed, while the latter is changed by the trend. As long as the main line of outpatient co-ordination remains unchanged, the auxiliary line of prescription outflow will not end in vain. 
Prescription circulation platform to accelerate the landing: The provincial prescription circulation platform has been basically completed, and it is still necessary to solve the problem of doctor's cooperation and consistency of drug catalog inside and outside the hospital from large-scale operation and useWe have seen that the promotion of prescription outflow has been significantly strengthened in various places** this year, and we are expected to see more results next year. We**: In 2024-26, the increase in the scale of prescription outflow undertaken by pharmacies can reach 251 38853.3 billion yuan, and the overall scale increase will exceed 100 billion yuan. 
There is a lot of room for improvement in the concentration and chaining rate of retail pharmacies in China, and the leading chain pharmacies have maintained rapid growth through continuous expansion. Through self-construction + mergers and acquisitions + franchise, the chain pharmacies of various chain pharmacies continue to expand, and the chaining rate of the overall industry is also further improved, reaching 57 in 20228%。The proportion of the top 10 and top 100 pharmacy chains in terms of total sales has shown a trend of increasing year by year, reaching 22 in 20223% and 365%。
At the same time, there is still a lot of room for improvement in the concentration of head chains, and many places are also actively introducing policies to promote the development of pharmacy chains, and to relax restrictions and provide more convenience for the mergers and acquisitions of pharmacies. We believe that the inclusion of retail pharmacies in outpatient co-ordination and the accelerated implementation of prescription circulation will continue to strengthen the concentration increase, and the living space of a large number of small and medium-sized pharmacies that do not meet the norms, have a low degree of system maturity, and lack advantages in varieties and purchase prices will be further compressed. We see that the leading pharmacy chains will maintain a rapid pace of store expansion, and we are also more optimistic about the industry leaders with more liquidity. 
Optimistic about the chain leader with professional ability, diversified operation and omni-channel layout. We believe that chain enterprises that can form advantages in professional services, diversified operations and omni-channel layout can better achieve differentiated competition and find new growth curves faster.
Professional pharmacies can bring more high-value customers to pharmacies, and improve user stickiness while achieving higher customer unit prices. The expansion of non-pharmaceutical products can reduce the dependence of pharmacies on medical insurance funds, broaden revenue**, and improve gross profit margins. Online channels, especially O2O, enable pharmacies to ease competition from pharmaceutical e-commerce and adapt to the consumption Xi of young customers. 
Investment suggestions: It is recommended to pay attention to chain pharmacies with high performance flexibility, strong refined management capabilities, and diversified operation capabilities, focusing on Dashenlin, Yifeng, Yixintang, and Jianzhijia.
Dashenlin has regional advantages, a steady and pragmatic management style, and strong refined management capabilities, and has relatively good performance in terms of ping efficiency, ROE and turnover rate. Yifeng has the highest profit margin in the industry and has remained relatively stable in recent years. The company's investment in chronic disease management and the improvement of professional service capabilities have enabled it to have a large number of high-value customer groups. Yixintang has the largest number of self-operated stores, and at the same time actively expands outside the province, and expects that by the end of this year, the proportion of stores outside Yunnan Province will begin to exceed the number of stores in the province. Jianzhijia continues to expand its product categories, with non-pharmaceutical sales accounting for the highest proportion in the industry, and its ability to expand channels makes it have a large number of public and private domain traffic.
This is an abridged excerpt from the report, the original PDF of the report
Pharmaceutical Biology - Offline Pharmacy Industry In-depth Report: The Marginal Inflection Point is Coming, and the Leading Pharmacy Continues to Benefit from the Improvement of Concentration and the Outflow of Prescriptions-Pacific [Zhou Yu, Zhao Yuelun]-20231207 [Page 56].
Report**: Value Catalog