JL Warren Capital

JL Warren Capital LLC is a leading independent equity research firm focused on Chinese companies and listed multinationals in China. We employ a bottom-up research approach that takes great care to avoid the acquisition of material non-public information. Through investigative due diligence including channel surveys and interviews, our research helps clients to pinpoint the dislocations in the market.

Investment Advisors

China Biologic Products - Great Track Record Should Help to Digest the Large Deal

Investment Advisors, JL Warren Capital

Junheng Li

Equity Bottom-Up

China Biologic Products / Equity Bottom-Up

Rolling Out A “Two Invoices” System Nationwide:Although the announcement of a new policy to consolidate the distribution channels for both pharmaceutical products and medical devices was widely anticipated (as early as H2 2016), the implementation mandate came much earlier than the industry had expected.  In January 2017, Chinese authorities called for each province to develop a detailed timeline and nationwide implementation plan to begin in 2018 (Exhibit 1). The core driver for the “two invoices” system is to squeeze margins among the distribution chain as well as the hospitals and by doing, so alleviate the government (both local and central) healthcare funding gap as the aging population grows in China.The new regulation requires that there can only be one (1) distributor from manufacturer to hospital.  The objective is to reduce the number of “middle men” in the distribution channel thereby reducing the drug price that the government pays. Government is the single payer of the healthcare insurance in China.  Therefore, reducing drug prices and consequently government spending is a primary motivation. Chinese hospitals are both prescribers and dispensers of medicines, therefore, the non-indicated and often unnecessary use of medicine to increase hospital revenues are widespread.  As the Chinese demographic ages, the ever-increasing healthcare and pension funding burdens motivates the government to expedite the reforms.

Rolling Out A “Two Invoices” System Nationwide:Although the announcement of a new policy to consolidate the distribution channels for both pharmaceutical products and medical devices was widely anticipated (as early as H2 2016), the implementation mandate came much earlier than the industry had expected.  In January 2017, Chinese authorities called for each province to develop a detailed timeline and nationwide implementation plan to begin in 2018 (Exhibit 1). The core driver for the “two invoices” system is to squeeze margins among the distribution chain as well as the hospitals and by doing, so alleviate the government (both local and central) healthcare funding gap as the aging population grows in China.The new regulation requires that there can only be one (1) distributor from manufacturer to hospital.  The objective is to reduce the number of “middle men” in the distribution channel thereby reducing the drug price that the government pays. Government is the single payer of the healthcare insurance in China.  Therefore, reducing drug prices and consequently government spending is a primary motivation. Chinese hospitals are both prescribers and dispensers of medicines, therefore, the non-indicated and often unnecessary use of medicine to increase hospital revenues are widespread.  As the Chinese demographic ages, the ever-increasing healthcare and pension funding burdens motivates the government to expedite the reforms. 

Hualan Biological Engineering (002007 CH)

China's Healthcare Reform Consolidates Drug Distribution and Cuts Manufacturer Margins