Pharmaceutical equipment industry: across the cyclical, to meet the new momentum

1. Basic situation and development trend of pharmaceutical equipment industry

1.1 Intelligence and digitalization are the development trend, and the demand for overall solutions continues to increase

Pharmaceutical equipment refers to the mechanical equipment and packaging materials used for drug production, testing, packaging and other process purposes. The pharmaceutical equipment industry mainly provides various types of production equipment for pharmaceutical manufacturing enterprises (including drug manufacturers and CMO/CDMO enterprises). According to the classification method of China Pharmaceutical Equipment Industry Association, pharmaceutical equipment can be divided into raw material machinery and equipment, preparation machinery and equipment, pharmaceutical crushing machinery, decoction machinery, pharmaceutical water, gas (steam) equipment, pharmaceutical packaging machinery, drug testing equipment, other pharmaceutical machinery and equipment (such as conveying devices and auxiliary machinery), etc. A total of more than 3,000 specifications, respectively, are used in all aspects of the production of traditional Chinese medicine, chemical drugs and biological agents. In practice, it is usually classified according to the use of equipment, such as raw material equipment, preparation equipment (solid preparations, injections, etc.), packaging equipment, etc., of which raw material equipment and preparation equipment are the two most core types of pharmaceutical equipment in the production process of chemical drugs and biological drugs. Different product and dosage form requirements correspond to different equipment and production lines, such as biological drug production needs to be equipped with cell incubators, bioreactors, chromatographic columns, ultrafiltration membranes, freeze-drying machines, isolators and a large number of complex equipment and integrated systems.

The upstream of the pharmaceutical equipment industry is mainly for steel, machinery, parts, control systems and membrane materials and other raw material suppliers, involving the steel industry, electronic components and automation control system industry. Downstream is the pharmaceutical manufacturing industry, including chemical drugs, biological drugs, traditional Chinese medicine, raw material drug manufacturers and CMO/CDMO enterprises. The development of the pharmaceutical industry directly affects the demand for pharmaceutical equipment, and the two have a strong correlation. On the one hand, the growth of the output value of the pharmaceutical industry and the increase of fixed asset investment will bring about the improvement of the demand for pharmaceutical equipment; On the other hand, pharmaceutical enterprises have increasingly strict requirements for the stability, continuity, accuracy, integration, automation level and intelligence of pharmaceutical equipment, which also prompts pharmaceutical equipment enterprises to continuously increase R&D investment and carry out technological innovation.

Pharmaceutical equipment plays an important role in drug production. The setting of quality and process route parameters not only directly affects the quality and efficacy of drugs, but also affects the energy consumption, cost and economic benefits of pharmaceutical enterprises, and pharmaceutical enterprises need more technical equipment. The structure of the drug market is also changing, and pharmaceutical equipment companies must also follow the needs of drugs and adjust the product structure in time to meet the market demand.

From the perspective of the development trend of pharmaceutical equipment, automation, intelligence, digitalization and continuous production represent the future development direction of the industry. Leading enterprises in the pharmaceutical equipment industry have also accelerated the improvement of system design and integrated delivery capabilities in recent years from the original provision of stand-alone or system equipment, and gradually upgraded to provide overall engineering solutions.

In January 2022, the China Pharmaceutical Equipment Industry Association issued the "14th Five-Year Plan" Technology Development Outline for Pharmaceutical equipment, during the "14th Five-Year Plan" period, the pharmaceutical equipment industry will focus on the "deep integration of information and pharmaceutical equipment", and innovate and develop high-efficiency, low-energy, low-carbon, automated and intelligent pharmaceutical equipment. The development direction of traditional Chinese medicine pharmaceutical equipment and biological drug making equipment is put forward. We believe that the demand upgrade and product iteration of pharmaceutical equipment help leading enterprises with strong technical capabilities and complete product categories to stand out.

1.2 Domestic pharmaceutical equipment market space of more than 80 billion yuan, high-end products have import substitution space; Overseas market expansion will open the growth ceiling of domestic enterprises

The market size of China's pharmaceutical equipment industry has a variety of statistical calibers. According to the industry data of "Pharmaceutical professional equipment manufacturing" released by the National Bureau of Statistics (the main statistical scope is pharmaceutical equipment enterprises above designated size), the revenue of pharmaceutical professional equipment manufacturing industry in 2021 is 27.690 billion yuan, an increase of 39.94%. Among them, the export delivery value of the "pharmaceutical special equipment manufacturing" industry from 2018 to 2021 was 2.011 billion yuan, 1.696 billion yuan, 1.83 billion yuan, 2.185 billion yuan, accounting for 12.47%, 9.82%, 9.26% and 7.89% of the total industry revenue in the same period, respectively. Since the export delivery value from 2015 to 2017 has not been released, we calculated the proportion of export delivery value in the total industry revenue of the year from 2008 to 2014, with an average of about 7%. It can be seen that the export proportion of the pharmaceutical equipment industry is basically stable, and domestic demand is still the main factor leading the industry performance at this stage.

China Pharmaceutical Equipment Industry Association also carried out statistics on the market size of the domestic pharmaceutical equipment industry, and the data source is the statistical report reported by the member units. In 2018, the sales revenue of pharmaceutical machinery products was 33.7 billion yuan, assuming that the growth rate of member units from 2018 to 2021 is the same as that of the "pharmaceutical professional equipment manufacturing" industry released by the National Bureau of Statistics, the total revenue of domestic pharmaceutical equipment enterprises in 2021 is 57.9 billion yuan.

We can calculate the demand scale of the pharmaceutical equipment industry according to the proportion of "equipment purchase amount" in the fixed assets investment completed in the pharmaceutical manufacturing industry. According to the industry division, the pharmaceutical manufacturing industry is composed of seven sub-industries: chemical raw material manufacturing, chemical preparation manufacturing, Chinese herbal medicine processing, Chinese patent medicine production, veterinary medicine manufacturing, biological medicine manufacturing and health materials and medical supplies manufacturing. After eliminating veterinary medicine manufacturing and health materials and medical supplies manufacturing, The total investment in fixed assets of the five sub-industries related to pharmaceuticals accounted for about 85-90%.

Since the National Bureau of Statistics no longer disclosed the completed amount of fixed asset investment in sub-industries after 2017, we calculated on the basis of 85% of the completed amount of fixed asset investment in five sub-industries related to pharmaceuticals in 2017. In 2021, the fixed asset investment in China's pharmaceutical manufacturing industry will be 958.4 billion yuan, and the fixed asset investment in the pharmaceutical field will be 814.6 billion yuan in 2021.

In 2017, the proportion of fixed asset investment completed in the biopharmaceutical industry accounted for 25% of the pharmaceutical field, considering that the growth rate of biopharmaceutical is faster than the average level of the drug market, it is expected that the proportion is continuing to rise. We assume that the proportion of completed fixed asset investment in the biologic pharmaceutical industry in 2021 is 35%(taking into account the investment in COVID-19 vaccine production capacity), then the completed fixed asset investment in the biologic pharmaceutical industry in the year will be 285.1 billion yuan. In 2017, the proportion of "equipment purchase" in the completed investment in fixed assets of the biopharmaceutical industry accounted for about 30%, and according to this proportion, the purchase amount of various types of equipment in China's biopharmaceutical industry will be 85.5 billion yuan in 2021.

We further analyzed the fixed assets of some biological drug enterprises. Generally speaking, the company's fixed assets are mainly composed of houses and buildings, machinery and equipment, transportation equipment, etc., in addition, the company will also disclose the original value of the assets of the main equipment. We analyzed the original value of major machinery and equipment (including pharmaceutical equipment, research and development equipment, infrastructure and other equipment, etc.) of some biopharmaceutical enterprises, and calculated the proportion of the original value of major pharmaceutical equipment assets to the original value of machinery and equipment assets. It can be seen that the proportion of different companies is quite different. We believe that on the one hand, it is related to the disclosure caliber of the company, and on the other hand, due to the characteristics of non-standard customization of pharmaceutical equipment, the pricing difference between different customers and projects is quite large. According to the average level of 33%, the market size of China's biopharmaceutical pharmaceutical equipment in 2021 will be 28.2 billion yuan (85.5 billion yuan *33%). At the same time, we calculated that the market size of biopharmaceutical pharmaceutical equipment accounted for 35%, and the market size of China's pharmaceutical equipment was about 80.6 billion yuan.

Previously, we have calculated that the total revenue of the domestic pharmaceutical equipment industry in 2021 will be 57.9 billion yuan. According to incomplete statistics, by the end of 2019, there are more than 1,000 specialized and part-time pharmaceutical machinery enterprises in the pharmaceutical equipment industry, of which 469 are members of the China Pharmaceutical Equipment Industry Association. Considering that the statistical scope only includes member units, it is expected that the actual income of domestic pharmaceutical equipment industry enterprises is between 65-70 billion yuan. Compared with the estimated demand, there is a gap of 10-15 billion yuan, we believe that it is mainly concentrated in the field of biological drug equipment such as vaccines and monoclonal antibodies, and there is a greater opportunity for domestic substitution in the future.

According to Frost & Sullivan's analysis, the global drug market will reach $144.5 billion in 2021, and China's drug market will account for about 20%. With the growth of economic and medical demand, the growth rate of the Chinese market is higher than the global average, and it is expected that by 2023, the proportion of China's drug market will reach 24%. Assuming that the size of China's pharmaceutical equipment market in 2021 is 20% of the global market size (the same as the drug market), the global pharmaceutical equipment market size is about 400 billion yuan that year. Biologics will account for about 24% of the global pharmaceutical market in 2021 and is expected to reach 37% by 2030. We believe that in the future global pharmaceutical equipment market, the growth rate of biological drug equipment demand will be faster than chemical drugs. (Report source: Future Think Tank)

2. The pharmaceutical equipment industry has long-term growth, and its periodicity is expected to gradually weaken

From a long-term point of view, the pharmaceutical equipment industry has good growth, and does not reflect the obvious cyclical. From 2006 to 2021, the revenue of the "pharmaceutical professional equipment manufacturing" industry increased from 3.496 billion yuan to 27.69 billion yuan, with a compound annual growth rate of 14.79%. In the same period, the revenue of pharmaceutical manufacturing industry increased from 473.7 billion yuan to 2,928.9 billion yuan, with a compound annual growth rate of 12.91%, which basically kept pace with the growth of the pharmaceutical industry.

However, from a specific time period, the pharmaceutical equipment industry is still cyclical, reflected in the decline in industry revenue growth and profitability fluctuations. The operation of the pharmaceutical equipment industry is closely related to the growth rate of fixed asset investment in the pharmaceutical manufacturing industry. Since 2004, the pharmaceutical equipment industry has experienced three stages of development.

1.2004-2013: Rapid growth stage

Pharmaceutical manufacturing industry in 2004-2013 in general in the rapid growth stage, the industry income compound annual growth rate of up to 24%, the strong demand for drugs led pharmaceutical companies to increase fixed asset investment, pharmaceutical manufacturing fixed asset investment completion growth rate has always remained at a high level, thereby bringing pharmaceutical equipment demand increase. In 1999, China began to implement mandatory GMP certification in the pharmaceutical industry, which put forward mandatory requirements for the production equipment and production environment of pharmaceutical enterprises, making the demand for pharmaceutical equipment industry increase significantly, and enterprises need to re-certify every 5 years. In order to meet the requirements of GMP certification, pharmaceutical companies need to increase investment, new purchase, update or replace the original pharmaceutical equipment, GMP certification brings periodic incremental demand for pharmaceutical equipment. Fixed asset investment in the pharmaceutical manufacturing industry showed a cyclical acceleration trend (2004-2005, 2009-2011 can be regarded as equipment replacement nodes). The State Food and Drug Administration began to implement the new GMP certification standards in March 2011, and requires drug manufacturers to produce sterile drugs such as blood products, vaccines, injections, and so on, to meet the requirements of the new GMP before December 31, 2013. The production of other categories of drugs should meet the requirements of the new GMP by December 31, 2015. Compared with the 1998 version of the old standard, the new version of the GMP certification standard has more stringent requirements for aseptic production of pharmaceutical enterprises, and the demand for pharmaceutical equipment has exploded in the short term.

2. 2013-2018: Industry demand shrank and profitability declined

After 2013, the revenue growth of pharmaceutical manufacturing industry declined, and the growth rate of fixed asset investment slowed down. Influenced by factors such as the gradual coming to an end of the new GMP certification, the demand for pharmaceutical equipment has continued to fall, and the growth rate of industry revenue has declined significantly. On the other hand, due to weakening demand, competition within the industry has intensified, and corporate profitability has declined. From the annual reports of Dongfulong and Chutian Technology, the industry leaders, it can be seen that the industry is facing greater difficulties.

3. From 2018 to now: The pharmaceutical manufacturing industry has entered a new round of fixed asset investment cycle, and new demands are emerging in an endless stream

Since 2018, due to the recovery of fixed asset investment growth in the pharmaceutical manufacturing industry, the pharmaceutical equipment industry has gradually come out of the bottom, revenue growth has resumed, and profitability has been significantly improved. The new production capacity will further increase the demand for integrated, automated and intelligent high-end pharmaceutical equipment. In addition, there is a 5-10 year renewal cycle of pharmaceutical equipment, on the one hand, from the natural replacement of the original equipment after the expiration of the service life, on the other hand, it also comes from the upgrading of pharmaceutical companies. Enterprises are increasingly inclined to configure production lines with higher automation level, better accuracy and better product quality consistency. Meet the needs of automation, integration and intelligent production. Due to the rapid release of demand in the pharmaceutical equipment industry after the implementation of the new GMP certification in 2011, these equipment have entered the update and upgrade cycle in accordance with the service life, so this part of the demand is also one of the reasons for promoting the current round of the pharmaceutical equipment industry boom cycle.

After analyzing the capital expenditure situation of listed companies, we found that the fixed asset investment situation in different segments has a certain differentiation.

The "cash paid for the purchase and construction of fixed assets, intangible assets and other long-term assets" of companies in the chemical and pharmaceutical industry (preparations + apis) grew steadily, but the growth rate fell after the implementation of the collection policy in 2018. The amount of fixed assets maintained rapid growth before 2018, but the growth rate also declined after that, reflecting the decline in the profitability of post-mining chemical preparations and the more cautious investment of enterprises. However, capital expenditure, fixed assets and construction in progress still increased to a certain extent, which is expected to be mainly due to: (1) there is still a natural increase in the demand for chemical drugs, there is a need to expand production; (2) The market size of complex preparations such as microspheres, liposomes, drug-loaded fat milk, etc., has grown rapidly, thus driving the demand for equipment to increase; (3) The collection of generic drugs continues to advance, and pharmaceutical and API companies have the power to improve their own industrial chain upstream and downstream, hoping to cover the entire supply chain, better control costs and expand production capacity.

The amount of fixed assets of A-share listed companies in the Chinese medicine industry is relatively stable, but they still maintain A certain intensity of capital expenditure. We believe that the main reasons include: (1) The traditional Chinese medicine industry has undergone structural changes in recent years. Due to the unclear clinical value of some Chinese medicine injections and the high incidence of adverse reactions, various restrictive policies have been introduced successively (limited medical insurance reimbursement indications, medical institutions applicable to reimbursement policies, inclusion in the auxiliary drug monitoring catalogue, etc.), the market size has declined, and enterprises are less willing to invest. The demand for oral dosage forms is relatively stable, the market size increases slightly, and enterprises still have the willingness to increase investment; (2) The original production line has automation.