Cathay Pacific Haitong: Leading pharmacies are the first to break out of the quagmire and have reached an inflection point on both sides of supply and demand

The Zhitong Finance App learned that Cathay Pacific Haitong Securities released a research report saying that against the backdrop of weakening demand side of retail pharmacy chains, competitive pressure in the industry is showing a gradual contraction on the supply side. The operating inflection point of leading pharmacies has reached an inflection point, focusing on the potential for endogenous and epitaxial growth in 2026. We recommend leading pharmacy chains in the industry that are expected to benefit from supply-side clean-up and demand-side recovery.

After a period of pressure on growth, a month-on-month recovery trend was evident. In 2024, the retail scale of China's physical pharmacy market (pharmaceuticals+non-drugs) reached 61.1.9 billion yuan, down 1.8% from the previous year. It is mainly related to factors such as population decline, decrease in the number of physical pharmacy orders and customer products, and health insurance account reform. The industry adjustment trend continued in the first three quarters of 2025. The scale of the physical pharmacy industry reached 449 billion yuan, down 1.9% year on year, but showed a month-on-month recovery trend. In September 2025, the industry size was 53.8 billion yuan, up 0.8% year on year, up 6.7% month on month; by category, physical pharmacy drug revenue in the first three quarters of 2025 fell 0.8% year on year, devices fell 1.8% year on year, Chinese medicine tablets fell 4.8% year on year, health products fell 16.6% year on year, and the decline in the above major categories was narrower than the January-August 2025 data.

The impact of demand-side consumption weakened, and the pharmaceutical sector achieved restorative growth. Against the backdrop of relatively weak terminal demand and consumption, pharmacies, represented by health products, saw a sharp decline in consumer terminal sales categories, and the consumer consumer category, represented by Nakanishige Pharmaceutical, achieved a month-on-month recovery. In September '25, the retail scale of drugs in physical pharmacies was 43.7 billion yuan, up 6.9% month-on-month and 2.2% year-on-year. Increased sales of innovative drugs drove the growth of the pharmaceutical market. At the same time, due to differences in growth rates between categories, the share of drug sales in pharmacies increased by 0.8 pct year on year to reach 81.4% in the first three quarters, while the share of health products decreased by 0.5 pct year on year to 3.8%. Cathay Pacific Haitong Securities believes that due to changes in category structure, the impact of consumption variables on offline retail pharmacies is gradually weakening.

Supply-side clean-up helps to passively increase the concentration of leading pharmacy chains. Since the number of physical pharmacies reached a new high in 2024, the number once surpassed 700,000 during the year, up more than 60% from 435,000 at the end of 2014. The average single-store service customer base level dropped to about 2,000 people/store. Competitive pressure on the industry was prominent. Some small to medium pharmacy chains began to file for bankruptcy or cancellation due to poor operation, and the number of stores in the Q4 and Q1 industries decreased net by 4,000 and 3,000 respectively. At the same time, leading pharmacy chains in the industry benefited from stronger business resilience and management capabilities, and the closing rate was lower, according to Zhongkang (25Q1 data) vs24q3), in Among pharmacies of various sizes, the lowest closing rate of the top 10 chains in the industry is 2.3%, and the highest closing rate of other small chains is 4.5%. Cathay Pacific Haitong Securities believes that industry concentration is expected to increase further under this trend.

Leading pharmacy chains are expected to take the lead in recovering, and they are still optimistic about increasing concentration in the long term. Cathay Pacific Haitong Securities believes that leading pharmacies will simultaneously drive growth through “endogenous+extension” in 2026. 1) Endogenous aspect: The recent rapid rise in the incidence of influenza will drive sales of respiratory drugs and other drugs. In the 47th week, the number of positive influenza cases at the Northern Sentinel Hospital reached 8.6%, which is already significantly higher than the same period in 22-24. At the same time, the reduction in the number of stores in the industry is expected to boost passenger flow in remaining pharmacies; 2) The number of leading pharmacy chains is expected to achieve continuous expansion through mergers and acquisitions. Currently, the number of leading direct-run stores in some industries is about 10,000, accounting for only 1.5%, and is still at a low level. Concentration enhances the main line of development.