Lin Yuan's recent speech has gone viral.

In his view, the main areas for future investment are concentrated in the pharmaceutical industry.

Weight loss drugs, antihypertensive drugs, lipid-lowering drugs, and diabetes drugs, targeting the "three highs" population, will become the mainstream and essential needs.

In addition, high-end health care products such as health-preserving traditional Chinese medicine will also be a major trend in the future.

After being criticized for several years and causing countless investors to suffer losses, is the pharmaceutical industry about to turn from bear to bull?

For the pharmaceutical industry, the story is the same every year, what new tricks can be played this time?

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Why did the bear market in 2021 not lead to a bull market in 2022, but suddenly the pharmaceutical bull was called out in 2023?

Today, from the perspective of favorable timing, location, and people, let's talk about the future development and opportunities of the pharmaceutical industry.

1. From the perspective of valuation.

The valuation of the pharmaceutical industry has finally come to a reasonable range after the recent two-year decline.Taking Quanzhi Pharmaceutical as an example, in August 2020, the static price-to-earnings ratio (median) reached as high as 60 times. After about three years of valuation digestion, it is now only around 27 times, with the previous low point at 23 times.

Historically speaking, a price-to-earnings ratio of less than 25 times is absolutely safe for the pharmaceutical industry and represents a highly valuable investment valuation range.

From a valuation perspective, the pharmaceutical sector as a whole has already become quite attractive.

This is also why, starting from May of this year, there has been a noticeable focus on the pharmaceutical sector by medium to long-term funds.

The leading funds are often those that have a preference for valuations, and they are good at long-term concealment, with the entry standard being to reach the low valuation range they desire.

The fact that the bargain-hunting funds have entered the market indicates that the valuation bottom is not far away. However, whether it is 23 times, 20 times, or something else, we will have to wait for the market to reveal the answer.

2. Market demand perspective.

The market demand referred to here is the overall demand for pharmaceuticals.

The reason why the pharmaceutical industry is favored by the market is mainly due to the huge demand for medical resources.

Internally, with the aging population in China, the demand for pharmaceuticals is destined to be stable and rising, which is an irreversible trend.At the same time, high-end pharmaceuticals will gradually become a necessity, as people hope to have better medical conditions and are more willing to spend money on healthcare.

In terms of foreign markets, the demand for low- to mid-range drugs and medical devices has already been met, so there should be no problem in terms of market demand.

However, the regulation of pharmaceuticals is actually very strict in all countries. The introduction of drugs is not just a matter of price and safety, but may also rise to the level of politics. This risk needs to be paid special attention to.

Therefore, even if the demand in overseas medical markets is huge, it does not completely constitute a favorable situation.

The overall good news for the pharmaceutical industry is still mainly in the domestic market. Serving 1.4 billion people, especially the future 500 million + elderly people, is a major market and an incremental market.

Aging population is the underlying dividend of the growth of the pharmaceutical industry, and the upgrade of pharmaceutical consumption is also an important opportunity.

3. From the perspective of net profit of listed companies.

The net profit issue of pharmaceutical listed companies is the root cause of the change in the pharmaceutical logic in the past two years and the continuous decline.

Centralized procurement is a straw that breaks the camel's back for the pharmaceutical industry.

In principle, centralized procurement is not a bad thing. Entering centralized procurement means that a large number of sales channels can be saved.Although it will significantly compress the profits of pharmaceutical companies, at least survival is no longer a problem.

However, after the net profit is greatly reduced, pharmaceutical companies need to undergo a revaluation.

A company that originally had a net profit of 1 billion a year now only has 200-300 million, and it is normal for the stock price to be discounted.

The reshaping of valuation has actually been carried out almost completely in the past two years, and the darkest time has basically passed.

4. From a policy perspective.

Regarding pharmaceutical policies, it has always been the case, and the biggest weather vane recently may be the anti-corruption in the medical field.

The country firmly encourages the pharmaceutical industry, especially in the field of innovative drugs, on the other hand, it is the protection of traditional Chinese medicine.

The former is the necessary breakthrough in the field of pharmaceutical science and technology, or the research level of pharmaceuticals.

The latter is the national treasure, traditional Chinese medicine is a Chinese characteristic, which has been precipitated for hundreds of thousands of years and can be said to be priceless.

Of course, the promotion of traditional Chinese medicine in the global market requires time to precipitate, and there is no shortcut.Sometimes we view time too narrowly. Building brand recognition requires a very long cycle, decades, or even hundreds of years.

The favorable policy winds for the pharmaceutical industry are undoubtedly beneficial, but the feedback of these winds to pharmaceutical companies will not have a particularly significant reaction in the short term.

5. From the perspective of time and space.

From the spatial point of view, the entire pharmaceutical sector has fallen by more than 50%, around 60%.

A large number of pharmaceutical stocks have been cut to the knees, leaving only 20-30% of their market value.

So from a spatial perspective, the pharmaceutical industry already has room for growth, and it is 2-3 times.

But from a temporal point of view, it seems that the pharmaceutical industry still needs time for the big cycle.

From 2021 to 2023, more than two years, the pharmaceutical industry has been declining, but the bottom time period is only a little more than half a year.

A little more than half a year is not enough for such a large sector as the pharmaceutical industry to make a layout.

Usually, the layout of a large sector requires at least 1-2 years for these long-term funds to make a layout.So, from a temporal perspective, it is highly likely that the pharmaceutical sector will remain in a bottom area, fluctuating up and down for a while.

6. From the perspective of industry segmentation.

The pharmaceutical industry is too large.

The innovative drugs, traditional Chinese medicine, and biopharmaceuticals mentioned earlier, as well as cell immunotherapy and drug testing, all fall within the scope of pharmaceuticals.

It also includes medical services, hospitals, medical consumables, medical equipment, and so on, all of which are part of the pharmaceutical sector.

The overall pharmaceutical market will also show differentiation internally, as the investment logic is not the same.

At present, it is observed that the spear of the pharmaceutical industry is innovative drugs, and the shield is traditional Chinese medicine.

There will be too many differentiations within the pharmaceutical industry.

The treatment of cancer, heart disease, hypertension, and diabetes are all hard needs.

Therefore, the entire pharmaceutical sector is a large sector, and the so-called bull market may appear in the sub-industries of pharmaceuticals.Focus on the core tracks, and seek out the core listed companies, which is what real investors should do under the pharmaceutical dividend.

The next bull market may not be driven by the pharmaceutical industry, but the performance of the pharmaceutical sector in the next bull market will definitely be good.

There is a certain demand, a certain market, a certain industry, and a certain trend.

Opportunities in the pharmaceutical industry require patient exploration and reasonable timing for layout.

The pharmaceutical industry is not like technology, which has such explosive power, but is mainly based on steady and solid progress.

Innovative drugs in the pharmaceutical industry have a technological content, but they also have high risks, just like technology.

The opportunities in the entire pharmaceutical industry have always been there, but the premise is that they can be laid out at a low valuation, rather than listening to stories at a high valuation.

Bull markets and bear markets are actually just parts of a cycle.