CITIC SEC: Accelerating the "Four Modernizations" of pharmaceutical retailing, beneficial for policy-based classification treatment and separation of medicine and business.

CITIC SEC released a research report stating that the Ministry of Commerce and nine other departments have issued the "Opinions on Promoting the High-Quality Development of the Pharmaceutical Retail Industry," proposing to enhance pharmaceutical services capabilities, promote the circulation of prescriptions, optimize the coordination of designated pharmacy outpatient services, build a commercial insurance payment guarantee system, improve health services, enrich the format of pharmaceutical retail, and support the merger and reorganization of retail pharmacies. CITIC SEC believes that the implementation of outpatient coordination in pharmacies is expected to accelerate, mergers and acquisitions will benefit leading companies in increasing market share, and commercial insurance will create new payment opportunities. Furthermore, with the start of the "Fifteenth Five-Year Plan," policies promoting the acceleration of the "four transformations" in the medical retail industry are favorable for the progress of policy differentiation in medical treatment and the separation of pharmaceuticals. CITIC SEC's main points are as follows: Event: Recently, the Ministry of Commerce and nine other departments issued the "Opinions on Promoting the High-Quality Development of the Pharmaceutical Retail Industry," proposing to actively optimize the policy environment, cultivate and strengthen operating entities, and promote the professionalization, intensification, digitalization, and standardization ("four transformations") of the pharmaceutical retail industry. The "Opinions" propose enhancing pharmaceutical services capabilities, promoting the circulation of prescriptions, optimizing the coordination of designated pharmacy outpatient services, building a commercial insurance payment guarantee system, improving health services, enriching the format of pharmaceutical retail, and supporting the merger and reorganization of retail pharmacies. The acceleration of outpatient coordination, the benefits of mergers and acquisitions for leading companies in increasing market share, and the opening of new payment opportunities for commercial insurance. 1. The "Opinions" encourage eligible physical medical institutions, internet hospitals, and pharmaceutical retail enterprises to utilize electronic prescription circulation platforms for prescription circulation, allowing designated pharmacies to enjoy equal medical insurance treatment to basic medical institutions, with the same medical insurance policy terms as basic medical institutions in the coordination region. We believe that promoting medical institutions to enhance external prescription services aligns with the trend of medical reform in China, with the acceleration of prescription circulation imminent and a clearer trend of outpatient coordination in pharmacies. 2. The "Opinions" encourage localities to optimize the business environment, for integrated chain or single pharmacies, by streamlining the application and issuance process for the "Pharmaceutical Business License" and allowing the continuation and use of original medical insurance qualifications. We believe that chain pharmacies are expected to rapidly increase market share during the industry consolidation period with the financing advantage of the capital market, providing assistance to the industry in its transformation and compliance processes. 3. The "Opinions" encourage commercial insurance and pharmacies to collaborate and develop insurance products tailored to pharmacy scenarios, proposing the creation of health stations and encouraging the provision of services such as chronic disease management, medication guidance, and health consulting, to promote companies in better expanding their large health-related businesses. We believe that chain pharmacies will benefit from the development of commercial insurance and multi-level medical payment systems, to meet higher-tier medical health demands. The acceleration of the "four transformations" in medical retail is conducive to policy differentiation in medical treatment and the separation of pharmaceuticals. Recent releases of the "Fifteenth Five-Year Plan" by various locations and departments are worth noting for the direction of medical reform in China. Based on the recommendations of the "Fifteenth Five-Year Plan," National Health Work Conference, National Medical Security Work Conference, the frequent mention of measures such as the coordination of the three medical services, prioritizing health, establishing a multi-tier medical security system, promoting the development of commercial health insurance, and stabilizing basic medical services and controlling secondary services, indicate that medical reform will enter a new stage during the "Fifteenth Five-Year Plan." Referring to the development paths of overseas medical systems, strong primary healthcare and a vast out-of-hospital market are common characteristics. A rational view of the progress of medical reform in China suggests that scattered pharmaceutical retail enterprises have been hindering medical reform, due to inadequate levels of specialization, intensification, and compliance, making it difficult to meet the requirements of prescription outflow and tiered medical treatment. The recent release of the document by nine departments encouraging industry concentration is expected to provide infrastructure support for the separation of pharmaceuticals and tiered medical treatment and facilitate the promotion of medical reform. Risk factors: Mergers and acquisitions do not meet expectations; excessive competition leads to a decline in gross profit margins; slower than expected progress in prescription outflow; unforeseen impact of personal medical insurance account reform; slower than expected expansion of stores; the effect of price comparison to promote price balance and reasonableness is not as expected. Investment strategy: Considering the increasing requirements of industry compliance regulation and service capacity, the continued promotion of the outpatient coordination policy, and the encouragement of mergers and acquisitions in the industry by policies, leading chain pharmacies restarting their expansion are expected to reach a turning point in performance. The clear trend of increasing industry concentration in pharmacies is promising.