Investment Rating - The report maintains an "Outperform" rating for the healthcare sector, indicating that it expects the sector to perform better than the market over the next 6 to 12 months [39]. Core Views - The report is optimistic about the long-term development trend of innovative drugs, supported by domestic engineering advantages, abundant clinical resources, and favorable policies. Domestic innovative drugs are transitioning from a follower to an innovator phase, with commercialization gradually increasing [6][7]. - The report highlights the potential for improved profitability for innovative drug companies due to policy reforms in payment systems, which are expected to enhance their earnings capabilities [6]. - There is an anticipated revival in investment and financing activities in the innovative drug sector, with a notable turnaround observed since the second quarter of this year. This is expected to benefit domestic contract research organizations (CROs) and upstream research sectors [6][7]. Industry Dynamics - In the past month (September 1 to September 30), the pharmaceutical sector index declined by 1.7%, while the Shanghai Composite Index rose by 0.6%, the Shenzhen Component Index by 6.5%, and the ChiNext Index by 12.0%. Among sub-sectors, chemical pharmaceuticals fell by 2.7%, medical devices by 0.2%, while medical services rose by 1.8% [5][11]. - The report notes that commercial medical insurance policies are being continuously promoted, which is expected to accelerate reforms in the medical payment system and alleviate supply-demand imbalances [7]. Valuation and Recommendations - The report recommends several stocks for investment, including: - A-shares: Bai Jie Shen Zhou, Heng Rui Yi Yao, Ke Lun Yi Yao, Yao Ming Kang De, Tai Ge Yi Yao, Xin Chan Ye, Hua Da Zhi Zao, Hui Tai Yi Liao, Di An Zhen Dui [8][17]. - H-shares: Ke Lun Bo Tai Sheng Wu, Shi Yao Ji Tuan, Zhong Guo Sheng Wu Zhi Yao, Kang Fang Sheng Wu, Yao Ming Sheng Wu, Jun Shi Sheng Wu, Zai Ding Yi Yao [8][17].

Group 1 - The core viewpoint of the news highlights the performance and investment trends of the Tianhong Innovation Drug ETF (517380) and the Biopharmaceutical ETF (159859), indicating a positive inflow of funds into these ETFs [1][2] - As of September 15, the Tianhong Innovation Drug ETF (517380) has seen a net inflow of over 120 million yuan in the past six days, while the Biopharmaceutical ETF (159859) has attracted over 220 million yuan in the last five days [1][2] - The Tianhong Innovation Drug ETF (517380) is noted as the largest ETF in the market that spans the Shanghai, Shenzhen, and Hong Kong markets, tracking the Hang Seng Shanghai-Shenzhen-Hong Kong Innovation Drug Selected 50 Index, which covers both A-shares and Hong Kong stocks [1] Group 2 - The Biopharmaceutical ETF (159859) closely tracks the National Securities Biopharmaceutical Index, which selects the top 30 stocks in the biopharmaceutical sector based on market capitalization and liquidity, reflecting the overall performance of the biopharmaceutical industry [2] - According to CITIC Securities, the performance of sub-sectors such as innovative drugs, CXO, and biopharmaceuticals has shown recovery, indicating that China's pharmaceutical industry has gained global competitiveness [2] - CICC expresses optimism about the long-term development of the innovative drug industry, noting that domestic innovative drugs have transitioned from following trends to achieving FIC/BIC innovation, entering a new phase of qualitative improvement [2]

Core Viewpoint - The recent news indicates a significant negative impact on the A-share and Hong Kong stock markets for innovative drugs, primarily due to potential U.S. government actions targeting Chinese innovative drug companies [1][3]. Market Reaction - On September 11, the A-share innovative drug ETF (562050) dropped by 5% in early trading, while the Hong Kong innovative drug ETF (520880) saw a decline of over 7% at one point, with many constituent stocks experiencing declines exceeding 10% [1]. - After initial panic, the Hong Kong innovative drug ETF's decline narrowed to over 3%, with most constituent stocks' losses falling below 10% [1]. Potential U.S. Actions - Reports suggest that the U.S. may issue an executive order aimed at cutting off the import of innovative drugs from China, targeting both acquisitions by U.S. pharmaceutical companies and the use of clinical trial data from Chinese patients [3]. Industry Resilience - Analysts believe that the proposed U.S. executive order may not be implemented, similar to the previous CXO-related legislation, but it could lead to significant negotiations and market dynamics [4]. - The Chinese innovative drug industry is expected to withstand this pressure, as it has become a crucial source of global innovative drugs, reflecting an irreversible trend in the optimization of global innovative resources [4]. Market Activity - Despite initial declines, the Hong Kong innovative drug ETF (520880) showed strong buying interest, with a trading volume of nearly 600 million yuan, significantly exceeding the previous day's total [4]. - The ETF has seen continuous inflows, accumulating nearly 280 million yuan over the past week, indicating robust investor confidence [4]. Index Adjustments - The Hong Kong innovative drug ETF (520880) underwent a "purification" adjustment on September 8, removing CXO stocks and including 14 pure innovative drug companies, enhancing its focus on genuine innovative drug firms [6]. - Following this adjustment, the index has shown a year-to-date increase of 119.75%, outperforming other innovative drug indices [6][7].

Core Insights - The National Innovative Drug Insight System was officially launched during the 17th China Bio-Industry Conference, aimed at addressing key challenges in the innovative drug industry [1] - The system is developed under the guidance of the National Development and Reform Commission (NDRC) and involves collaboration with various organizations, including Shenzhen National High-tech Industry Innovation Center and Beijing Duwell Digital Technology Co., Ltd [1] - It leverages a comprehensive data support system from an international innovation industry information service platform to enhance the development of China's innovative drug sector [1] Summary by Categories Government Initiatives - The system is strategically guided by the NDRC, indicating strong governmental support for the innovative drug industry [1] - It aims to resolve core pain points faced by various stakeholders, including government, enterprises, and financial institutions [1] Industry Development - The initiative is designed to help the innovative drug industry overcome critical bottlenecks and achieve high-quality cluster development [1] - The system employs a full-chain capability of "data integration - intelligence analysis - precise empowerment" to facilitate industry growth [1] Collaboration and Technology - The collaboration involves multiple entities, showcasing a multi-faceted approach to innovation in the pharmaceutical sector [1] - The use of an international data service platform highlights the importance of data-driven decision-making in the industry [1]

Group 1 - The Hong Kong innovative drug sector opened high and fluctuated, with the Hang Seng Hong Kong Stock Connect Innovative Drug Index rising by 0.5% as of 10:50 AM [1] - The Hang Seng Innovative Drug ETF (159316) recorded a trading volume exceeding 200 million yuan, with a net subscription of 6 million units, and has seen over 500 million yuan in net inflows since August, reaching a historical high of over 1.5 billion yuan [1] - A recent report from the West Pharmaceutical 2025 DTP Pharmacy New Development Summit indicates that the retail pharmacy (DTP) innovative drug sales are expected to reach 88.7 billion yuan in 2024, representing a year-on-year growth of 16.6% [1] Group 2 - In the first quarter of 2025, the sales scale is projected to reach 23.3 billion yuan, with a year-on-year increase of 15.0%, indicating a sustained growth trend in innovative drug sales [1] - Shenwan Hongyuan pointed out that the revenue from innovative drug products and external licensing has maintained rapid growth over the past three years, with significant BD transactions occurring this year, leading to a trend of expanding the innovative drug market [1] - The recent revision of the Hang Seng Hong Kong Stock Connect Innovative Drug Index has officially taken effect, removing contract research organizations (CROs) and becoming the first index with a "purity" of 100% for innovative drugs [1]

Group 1 - The Hong Kong innovative drug sector experienced a pullback after four consecutive days of gains, with the Hang Seng Hong Kong Stock Connect Innovative Drug Index down by 2.2% as of 14:57 [1] - The Hang Seng Innovative Drug ETF (159316) recorded a trading volume of 700 million yuan, with a net subscription of nearly 100 million shares, indicating significant growth with over 500 million yuan net inflow in the past month [1] - The 18th Western Pacific Conference, dubbed the "Davos of the Health Industry," recently opened in Boao, focusing on drug research and development, payment innovation, and outpatient services, highlighting the new value in the pharmaceutical industry [1] Group 2 - Experts at the conference believe that China's innovative drug industry is poised for a new growth wave, driven by advantages in the entire chain of innovation, accelerated internationalization, and continuous policy support [1] - The recent revision of the Hang Seng Hong Kong Stock Connect Innovative Drug Index has officially excluded CXO companies, making it the first index with a 100% "purity" in tracking innovative drugs [1] - Backtesting data shows that the adjusted index has higher annualized returns and Sharpe ratios since its launch on July 10, 2023, making the Hang Seng Innovative Drug ETF (159316) the only product tracking this index, providing investors with precise opportunities in the innovative drug sector [1]

Group 1 - The National Healthcare Security Administration has announced the preliminary results for the 2025 "Medical Insurance Directory + Commercial Insurance Innovative Drug Directory," with 534 generic names approved for medical insurance and 121 for commercial insurance, marking the beginning of a dual-track payment system for innovative drugs [1] - Recent market sentiment for innovative drugs continues to rise, with significant potential for further growth in the sector. There have been ongoing developments in outbound licensing transactions, indicating that many high-quality domestic innovative drugs may have opportunities for international expansion [1] - The adjustment of the medical insurance directory and the advancement of commercial insurance policies in the second half of the year are expected to serve as important catalysts for the industry [1] Group 2 - The new compilation scheme for the Hang Seng Hong Kong Stock Connect Innovative Drug Index has taken effect, focusing exclusively on innovative drug companies and achieving a "100% purity" in the ETF tracking index [1] - Backtesting shows that since the adjustment, the index has demonstrated higher annualized returns and Sharpe ratios since its launch on July 10, 2023 [1] - The Hang Seng Innovative Drug ETF (159316) is the only product tracking this index, having attracted significant investment with its latest scale exceeding 1.2 billion yuan, reaching a historical high, thus enabling investors to share in the industry's development dividends [1]

Core Viewpoint - The recent revision of the Hang Seng Hong Kong Stock Connect Innovative Drug Index has removed five CXO companies to enhance the index's focus on core innovative drug companies, achieving a "purity" of 100% [1][3][4]. Group 1: Index Revision and Performance - The Hang Seng Hong Kong Stock Connect Innovative Drug Index has excluded five CXO companies, which previously accounted for approximately 20% of the index's weight and underperformed compared to the overall index [2][4]. - The revised index has shown improved performance since its announcement, with an annualized return exceeding 47% and a higher Sharpe ratio compared to the previous index [4][5]. - The removal of CXO companies allows the index to more accurately reflect the development trends of the innovative drug industry, as CXO companies operate under a different business model and do not directly engage in the core intellectual property of innovative drugs [3][5]. Group 2: Market Trends and Fund Manager Sentiment - Public funds have reduced their allocation to the CXO sector, with the proportion of CXO holdings in pharmaceutical theme funds at a historical low as of Q2 2025 [2][5]. - The innovative drug sector has gained significant attention, with the Hang Seng Hong Kong Stock Connect Innovative Drug Index experiencing a year-to-date increase of approximately 100% [5][6]. - Fund managers are increasingly optimistic about the long-term returns of innovative drugs, citing improved research and commercialization capabilities, as well as a favorable market environment for growth-oriented sectors [6][5].

Core Viewpoint - The Hong Kong stock market's innovative drug sector has seen a significant rebound in performance this year, driven by favorable policies, accelerated R&D, and a surge in overseas expansion. The Hang Seng Innovative Drug Index (HSIDI.HI) has gained over 100% year-to-date, attracting considerable market attention. In light of this positive trend, the index's compilation rules have undergone important revisions [1][2]. Summary by Relevant Sections Index Adjustments - On August 1, 2025, the Hang Seng Index Company announced key revisions to the Hang Seng Innovative Drug Index, effective from August 11, 2025. The main changes include the removal of companies in the CXO sector, which encompasses Contract Research Organizations (CRO), Contract Manufacturing Organizations (CMO), and Contract Development and Manufacturing Organizations (CDMO) [1][2]. Focus on Core Enterprises - The index has removed seven companies with relatively low "innovative drug content," resulting in a renewed focus on core innovative drug enterprises. These companies typically possess strong R&D capabilities and core patent technologies, enhancing the index's ability to capture the industry's driving forces [3][5]. Top Constituents and Their Weightings - The top ten constituents of the revised index and their respective weights are as follows: - 9926.HK: 10.31% - 6160.HK: 9.80% - 1801.HK: 9.52% - 1177.HK: 9.47% - 6990.HK: 9.18% - 1093.HK: 6.98% - 1952.HK: 6.22% - 9688.HK: 6.12% - 1530.HK: 5.90% - 2157.HK: 2.94% [4]. Enhanced Liquidity and Trading Efficiency - The index's selection criteria have been modified to include only companies eligible for trading under the Southbound Stock Connect, thereby enhancing liquidity and trading convenience. This change is expected to attract more mainland capital, further improving the index's trading dynamics [7]. Investment Opportunities - The Huatai-PineBridge Fund's Hang Seng Innovative Drug ETF (520500) is the first ETF tracking the Hang Seng Innovative Drug Index. As of August 8, 2025, the ETF has seen a significant increase in both shares and scale, with year-to-date growth rates of 389.34% and 854.55%, respectively. The ETF has also demonstrated strong liquidity, with daily trading volumes exceeding 1 billion HKD for 15 consecutive trading days [8].

Core Insights - The Chinese pharmaceutical industry is transitioning from "generic" to "innovative" drugs, entering a phase of explosive growth after years of technological accumulation and industry maturation [1][3] - In the first half of this year, China approved 43 innovative drugs, a 59% increase year-on-year, marking a historical high for the same period [1] - Business development (BD) activities have exceeded 50 cases with a total value surpassing $48 billion, indicating strong market interest in domestic innovations [1] Industry Trends - The Chinese innovative drug sector has moved from initial exploration to a mature growth phase, significantly reducing the time gap for drug approval compared to the U.S. from 10 years in 2010 to 3.7 years in 2024 [3] - The industry faces challenges of high homogeneity in drug development, with 29% of all drug applications targeting the top 20 drug development targets [3][4] - Companies are focusing on creating differentiated advantages by targeting unmet clinical needs or developing new products in less explored areas [4] Policy and Capital Support - The Chinese government has introduced a comprehensive support system for innovative drugs, including 16 measures covering research, insurance access, and clinical use [5][6] - Recent regulatory changes have facilitated capital access for innovative drug companies, allowing them to secure funding for research and development [5][6] Globalization and Market Expansion - Chinese pharmaceutical companies are increasingly becoming key contributors to global innovation, with nearly half of the global BD transactions exceeding $50 million involving Chinese firms [2][7] - The trend of "license out" and strategic partnerships is becoming more prevalent as companies seek to expand their international presence [8][9] - The cost advantages in clinical trials in China, where the cost per participant is about one-third of that in the U.S., are enhancing the competitiveness of Chinese biotech firms [9] Technological Innovation - The application of AI technologies is revolutionizing the Chinese innovative drug sector, improving efficiency in drug development and clinical research [9] - Companies are integrating AI into their processes to enhance research efficiency and data value, which is crucial for global competitiveness [9]