[Summary]
The fourth national Chinese medicine federation (joint procurement) initiative underway in China has begun to include OTC drugs in earnest for the first time. This is not just an expansion of scope, but also means that the profit structure of the Chinese pharmaceutical market itself has begun to change.
This change will not only affect Chinese companies but also Japanese pharmaceutical companies involved in the Chinese market. In the future, it is likely that the evaluation will be more about ``can you maintain profit margins'' than ``whether you can generate sales?''
First of all, what is “collection”?
Simply put, China's concentration is state-led mass collective purchasing.
By coordinating procurement for hospitals and medical institutions, we aim to simultaneously achieve the following policy objectives:
- Significantly lower drug prices
- Control medical costs
- Promote price competition
Until now, the main targets have been generic drugs, chemical drugs, and medical devices. However, the major turning point this time is that we have begun to enter the OTC (over-the-counter drug) field.
Why is it relevant to Japanese companies?
The Chinese market is an important market for many Japanese pharmaceutical companies. In particular, the following fields have significant contact with China.
- Chinese medicine/herbal medicine *OTC brand
- Medicines for the elderly *Products for chronic diseases
Until now, China's OTC market has been able to maintain relatively high profit margins due to brand power, trust, sales channels, and consumer habits. For Japanese companies, the structure of ``emphasizing brand over price competition'' was a tailwind.
However, with OTC becoming a target of concentration, the market is beginning to change into one that cannot be protected by brands alone.
Main impacts on Japanese companies
1. Risk of declining profit margin in China business
This is the most direct one.
Until now, Chinese OTC products have had the following characteristics: ``prices do not easily fall,'' ``effective advertising and branding,'' and ``ability to maintain high prices.'' In the future, price competition, procurement price reductions, and supply capacity competition will likely intensify.
In other words, high value-added brand strategies may become less effective. Particular attention should be paid to companies that are highly dependent on sales from China and companies that have a high OTC ratio.
2. Towards an era of cost power rather than sales power
Until now, advertising investment, physician networks, retail channels, and sales force have been important in the Chinese OTC market.
However, in the case of clustering, the companies that are ultimately strongest are those that can mass produce. The market structure tends to shift as follows.
| Old model | New model |
|---|---|
| Focus on brand | Focus on cost |
| Sales-driven | Production efficiency-driven |
| High gross profit | Low price, mass sales |
| Advertising competition | Supply capacity competition |
This could be a headwind for the quality/brand strategy that Japanese companies have been relatively good at.
3. Potential for local Chinese companies to become even stronger
In recent years, major Chinese herbal medicine manufacturers have been rapidly expanding production scale, strengthening supply chains, and establishing nationwide distribution networks.
Clustering is essentially a system in which larger companies are more advantageous. Therefore, there is a possibility that major local Chinese companies that can withstand price competition will expand their market share.
If Japanese companies do not focus on premiumization, high value-added areas, and specialization in specialized fields, they will easily become caught up in price competition.
On the other hand, there are some advantages for Japanese companies.
It's not all pessimism. In the future, a re-evaluation of quality reliability may provide a tailwind for Japanese companies.
In China, while the overall market is becoming more price competitive due to the expansion of the population, there is also a growing trend among certain segments of the population to emphasize safety, quality control, and stable supply.
The reliability of Japanese brands can be a weapon, especially in the following areas:
- For the elderly
- For chronic diseases
- High price range
- Premium OTC
In other words, more companies may shift toward winning in high-quality markets rather than winning at all.
Important points from an investor's perspective
In the future, when looking at Japanese pharmaceutical stocks related to China, it will be important not only to look at their sales ratio in China, but also to consider which business model they are using to expand into China.
The points that the market is likely to pay attention to are as follows.
| Check items | Meaning |
|---|---|
| Level of OTC dependence | Size of influence of concentration |
| China sales ratio | Profit fluctuation risk |
| Dependence on high-priced brands | Resistance to price cuts |
| Production scale | Cost competitiveness |
| Premium strategy | Room for differentiation |
Japanese companies likely to be affected by the expansion of China's OTC concentration
As China's focus expands to include over-the-counter (OTC) synthetic medicines, it may have a medium- to long-term impact on Japanese pharmaceutical companies.
The following five points are particularly likely to attract market attention.
- China sales ratio
- OTC dependence
- Chinese medicine/herbal medicine field
- Depth of local expansion in China
- Reliance on high gross profit model
Japanese companies whose impact is likely to be conscious
Tsumura
It is one of the most easily associated companies.
Tsumura is a top herbal medicine company, has a crude drug procurement network in China, and has deep ties to the traditional Chinese medicine field, so it is easily associated with changes in China's traditional Chinese medicine policy.
Although we do not directly sell large quantities to Chinese OTC groups, the market tends to be focused on intensifying price competition in the Chinese herbal medicine market, raw material procurement prices, and competition with local Chinese companies.
In particular, if Chinese companies promote lower prices, mass supply, and standardization in the future, this may affect price expectations for the entire Chinese herbal medicine/herbal medicine field.
Rohto Pharmaceutical
We are a company with strong connections to the Chinese OTC market.
Rohto Pharmaceutical is strengthening its brand development of skin care, eye drops, and OTC healthcare in China. In the Chinese market, companies have traditionally been able to maintain premium prices due to their brand power, but if the market as a whole shifts to focus on price and cost due to the expansion of OTC markets, there are concerns that brand premiums will be compressed.
On the other hand, Rohto's high added value and consumer brand power are relatively strong, so this will not necessarily have an overall negative impact.
Kobayashi Pharmaceutical
The company is relatively dependent on China and is easily influenced by the Chinese consumer market.
Kobayashi Pharmaceutical appears to have strong ties to inbound tourism, Chinese e-commerce, and OTC/self-medication. In the future, if OTC price competition, local manufacturer dominance, and distribution restructuring progress in China, the ability of Japanese brands to maintain prices will be tested.
In particular, we need to be careful about the possibility that the assumption that ``we can sell at a high price'' becomes weaker.
Taisho Pharmaceutical
It is a stock that is easily associated with being an OTC-focused company.
Key points that the market will be looking at include China's OTC market strategy, development of Lipovitan products, and brand sustainability. As China's OTC market shifts to a mass-selling, price-competitive model, people are more likely to be wary of high-margin models.
Santen Pharmaceutical
Although it is a bit unusual, it is a company that tends to attract attention due to its high proportion of China.
Santen's direct impact is likely to be limited due to its high ratio of prescription drugs, but as China's overall medical policy is tightening price controls and medical expense restraints, it is likely to be seen as a stock at risk of Chinese policy.
A company that could actually be a tailwind
On the other hand, companies that strongly focus on high quality and high added value are relatively resilient.
For companies like Daiichi Sankyo and Takeda Pharmaceutical, which are expanding globally with a focus on new drugs and are less dependent on OTC, the direct impact of this theme is thought to be relatively small.
In fact, as long as demand for safety, quality, and high-value-added medical care remains in China, the premium market may be maintained.
Points that investors should look at in the future
From now on, it will no longer be simply a matter of whether a stock is related to China, but rather how it is making money in China.
The points that the market tends to focus on are as follows.
| Points | Reasons for attention |
|---|---|
| OTC dependence | Direct hit risk |
| China sales ratio | Profit fluctuation |
| Brand dependent | Price drop resistance |
| Production scale | Cost competitiveness |
| High added value | Possibility of differentiation |
Summary
This round of Chinese medicine consolidation is not just a policy to lower drug prices. Essentially, this is a structural change in the Chinese pharmaceutical market that has begun to shift from being brand-driven to being cost- and scale-driven.
As the scope has expanded to include OTC, the impact is beginning to spread not only to the hospital market, but also to retail, consumer markets, and overseas companies.
For Japanese pharmaceutical companies, it will be difficult to compete solely with the conventional ``quality + brand,'' and supply capacity, cost control, differentiation, and high value-added strategies may become more important in the future.
The Chinese market is still huge, but from now on it seems we are entering an era where the question will be less about whether it will sell and whether it will be able to maintain profits. In particular, when analyzing Japanese companies, differences in OTC dependence, Chinese sales ratio, and price maintenance ability may lead to future valuation differences.