Xiangcai Securities: Imported musk is planned to be used in the production of traditional Chinese medicine on a trial basis, which is expected to alleviate the tight supply situation on the domestic market.

Shanghai Securities believes that the announcement of the draft "Notice on Allowing the Pilot Import of Cattle Bile for Use in the Production of Traditional Chinese Medicine" aims to strengthen the management of cattle bile imports, meet the clinical medication needs, and better serve the high-quality development of the traditional Chinese medicine industry. The pilot import of cattle bile is expected to alleviate the domestic supply shortages and reduce the cost pressures on relevant companies. "Medicine" innovation represented by innovative traditional Chinese medicine and "Medicine" rejuvenation represented by branded traditional Chinese medicine are driving the traditional Chinese medicine industry to focus on "new" and achieve "innovation + quality improvement." Furthermore, as state-owned enterprise reforms progress, the traditional Chinese medicine industry is expected to benefit from these reforms and achieve improved quality and efficiency. On July 1, 2024, the General Office of the National Medical Products Administration and the General Administration of Customs publicly solicited opinions on the draft "Notice on Allowing the Pilot Import of Cattle Bile for Use in the Production of Traditional Chinese Medicine." The pilot import of cattle bile aims to strengthen import management and meet clinical medication needs. As cattle bile, which is extremely rare, cannot meet the demand for traditional Chinese medicine production in China, the resource of cattle bile faces scarcity. Importing cattle bile has traditionally been an important source of cattle bile medicinal materials in China. The announcement of the draft "Notice on Allowing the Pilot Import of Cattle Bile for Use in the Production of Traditional Chinese Medicine" aims to strengthen the management of cattle bile imports, meet clinical medication needs, and better serve the high-quality development of the traditional Chinese medicine industry. Due to the global spread of mad cow disease around 2000, the original State Food and Drug Administration issued notices to strengthen the management of imported cattle-derived drugs. This led to the ban on using imported cattle-derived materials to prepare traditional Chinese medicines such as natural cattle bile, cattle bile, and bovine bone powder. The pilot import of cattle bile sets requirements for the pilot region, including Beijing, Tianjin, Hebei, Shanghai, Zhejiang, Jiangxi, Shandong, Hunan, Guangdong, Sichuan, Fujian, and Guangxi, among others. Importers of cattle bile must be the holders of marketing licenses for prescription traditional Chinese medicines containing cattle bile in the pilot region. The imported cattle bile is only for use in the production of relevant traditional Chinese medicines by the importers and cannot be sold. The pilot program is set to last for two years from the date of the announcement, with plans to gradually expand nationwide based on the pilot's performance. The pilot import of cattle bile is expected to alleviate the tight domestic supply situation As cattle bile is a pathological product of cattle, and normal cattle do not naturally produce cattle bile. Additionally, changes in farming practices, such as an increase in beef cattle farming and a significant decrease in draught cattle, make it challenging to obtain cattle bile. This has resulted in low production of natural cattle bile. Global data shows that cattle bile has a formation probability of 1-2, with global annual production of natural cattle bile around 4000kg. In China, the annual production of natural cattle bile is approximately 600-700kg. Due to the shortage in supply, the price of cattle bile has remained high in recent years, reaching around 20,000 RMB per kilogram in 2014, gradually increasing to approximately 50,000 RMB per kilogram in January 2023. It showed a rapid upward trend, reaching around 70,000 RMB per kilogram in April 2023, approximately 100,000 RMB per kilogram in August 2023, around 140,000 RMB per kilogram in November 2023, and approximately 160,000 RMB per kilogram in January 2024. The pilot import of cattle bile is expected to alleviate the tight domestic supply situation and reduce the cost pressures on relevant companies. Investment recommendation: Focus on "new", improve quality and efficiency, and pay attention to three main trends Innovation and heritage are the core and focus of industry development. Inheritance innovation and transformation empowerment are the new productive forces that lead the high-quality development of the traditional Chinese medicine industry. "Medicine" innovation represented by innovative traditional Chinese medicines and "Medicine" rejuvenation represented by branded traditional Chinese medicines are driving the traditional Chinese medicine industry to focus on "new" and achieve "innovation + quality improvement." Furthermore, as state-owned enterprise reforms progress, the traditional Chinese medicine industry is expected to benefit from these reforms and achieve improved quality and efficiency. We maintain a "hold" rating on the industry and suggest focusing on three main trends: Trend one: "Medicine" innovation, focusing on innovative traditional Chinese medicines. Under the dual drivers of policy and clinical demand, innovation in traditional Chinese medicines has accelerated, with an increase in the proportion of first-class new drugs. Research and development innovation is the core, entering the national essential drug list is an important condition for expansion, and the adjustment of the essential drug list in the second half of the year is a high probability event and may become a catalyst for the industry. Recommendations include: (1) enterprises with strong research and development capabilities, rich in research products with rapid progress, good integration of Chinese medical theory and clinical practice (especially those that can rewrite clinical treatment guidelines through evidence-based medicine), and large categories with exclusive varieties; (2) new varieties added to the 2023 medical insurance catalogue and unlocked varieties and related enterprises; (3) "medical insurance + non-essential drug" varieties and related enterprises. Trend two: "Medicine" rejuvenation, focusing on branded traditional Chinese medicines. Formula advantages, raw material advantages, and brand advantages together create high competitive barriers for branded traditional Chinese medicines. Market and model innovation have opened up the entire industry chain of "prevention + treatment + care," further highlighting the consumption attributes of branded traditional Chinese medicines. Coverage of both treatment and prevention, as well as health care, combined with the favorable silver economy, demonstrates the "treatment + consumption" attributes of branded traditional Chinese medicines, increasing the hierarchy of demand for traditional Chinese medicines and expanding market growth. Recommendations include: (1) products with strong product strength, formula advantages, raw material advantages, and brand advantages; (2) branded traditional Chinese medicines that actively explore new business models, expand the industry chain, and broaden market areas through market and model innovation. Trend three: State-owned enterprise reform, focusing on state-owned holding companies that improve quality and efficiency. Central SOE state-owned holding, provincial state-owned holding, and other state-owned holding ratios in the traditional Chinese medicine industry are higher than the industry average. The traditional Chinese medicine industry benefits significantly from state-owned enterprise reforms and is expected to improve quality and efficiency through these reforms.Indicate/Show/Point out(1) Policies, including industry group procurement, are becoming stricter, leading to a significant decrease in the prices of traditional Chinese medicine products; (2) The research and development progress of listed companies' products is below market expectations; (3) The proportion of traditional Chinese medicine in medical insurance and essential medicine lists is increasing at a lower rate than market expectations.