The Veterinary Drug Industry is Facing a Period of Opportunity for Change, and Leading Animal Health Companies are Expected to Grow Rapidly

The animal health industry is a typical post-breeding industry, and its prosperity is highly correlated with the prosperity of the aquaculture industry.
 
Affected by the decline in the pig breeding market since the second half of 2021, the demand for immunization and medication in the breeding industry has been affected to a certain extent, and the demand for animal health care for pigs has declined significantly. However, we have observed that with the sharp rebound in pig prices since April, the breeding-side immunization program is expected to gradually resume, and the fundamentals of the entire animal health sector are expected to bottom out.
 
Taking the pseudorabies vaccine, which can be vaccinated by both sows and piglets, as an example, the number of batches issued from April to June has rebounded significantly month by month. The number of batches issued only slightly decreased by -1.57% from June.
 
From a longer-term perspective, we believe that the next 3-5 years will be a major opportunity period for the reform and development of the animal health industry. The industry is expected to usher in the dual changes of supply-side optimization and quality improvement + demand-side marketization development. Fully benefit from it and grow rapidly.
 
From the supply side, the continuous tightening of veterinary drug production quality management will prompt the industry to clear outdated production capacity. In April 2020, the Ministry of Agriculture and Rural Affairs officially released the new version of veterinary drug GMP (Good Manufacturing Practice for Veterinary Drugs) to comprehensively improve the quality management of veterinary drug production, which will be implemented from June 1, 2020.
 
According to the arrangement of the Ministry of Agriculture and Rural Affairs, the new version of veterinary drug GMP has given veterinary drug manufacturers a two-year transition period. In May 2022, the Bureau of Animal Husbandry and Veterinary Medicine of the Ministry of Agriculture and Rural Affairs issued the "Notice on Organizing the Cleanup of the Implementation of the New GMP for Veterinary Drugs".
 
The notice stated that as of 0:00 on June 1, 2022, veterinary drug production enterprises (production workshops) that have not passed the inspection and acceptance of the new version of veterinary drug GMP will all stop veterinary drug production activities; For enterprises (production workshops) that have been approved by the competent authority to postpone the GMP inspection and acceptance of veterinary drugs, the provincial animal husbandry and veterinary authorities and the Ministry of Agriculture and Rural Affairs shall cancel their veterinary drug production licenses or corresponding production scopes in a timely manner, as well as the relevant veterinary drug product approval numbers.
 
We believe that the deadline for the new version of GMP has come, and the small and medium-sized enterprises in the industry will face centralized clearance in the short term due to their inability to complete the transformation and acceptance. According to data from the National Veterinary Drug Basic Database, there were less than 1,000 veterinary drug manufacturers registered at the end of July 2022, and the elimination rate was nearly 40% compared with more than 1,600 at the end of 2020. The animal health industry has accelerated its development towards the head of the industry, and the supply-side pattern of the industry is expected to continue to improve.
 
From the perspective of demand, in recent years, the reform of the national compulsory exemption system and the continuous promotion of the scale of downstream farming are expected to promote the further marketization, quality improvement and expansion of the animal health industry. On the one hand, the reform of the national compulsory immunization system for animal diseases with the core of "fighting first and making up later" is gradually advancing. For highly pathogenic avian influenza, foot-and-mouth disease and other strong immune diseases, we will comprehensively promote the work of "fighting first and then making up for it".
 
To achieve full coverage of large-scale farms (households) by the end of 2022, and gradually stop government recruitment by the end of 2025. The gradual withdrawal of political mining means that the full marketization of the animal health industry is coming. In the market competition, product + marketing advantages will be the key to the competition of animal health enterprises. At the same time, the market-based pricing after the withdrawal of Zhengcai is also expected to solve the problem of "good seedlings cannot be sold at good prices", and leading animal health companies with advantages in product quality and marketing channels are expected to fully benefit.
 
On the other hand, the process of large-scale breeding has accelerated under the background of ASF. From the perspective of medium and long-term development plans of major breeding companies, at least the speed of this process will not slow down in the next 3-5 years, and it will inevitably follow in the long run. Continue to develop in the direction of large-scale farming.
 
Large-scale farming brings more attention to biosafety, more standardized immunization and medication procedures, and higher penetration of animal health care products. At the same time, it also puts forward higher requirements for the quality of animal health products, which is expected to promote the further development of animal health care industry. With quality improvement and capacity expansion, leading animal health companies are expected to usher in greater growth opportunities.