Overview - The article discusses the valuation of innovative drugs, focusing on the choice between absolute and relative valuation methods, and the factors influencing these valuations, such as target patient population, market share, and drug pricing [2]. Valuation Methods - The innovative drug industry is characterized by patent protection periods, which allow for significant pricing power and excess profits during the patent period, but face steep competition post-patent expiration [4]. - The absolute valuation method, specifically the DCF model, is deemed unsuitable for innovative drugs due to the high uncertainty in predicting revenues, profit margins, and capital expenditures [5]. - Relative valuation methods such as P/B, P/E, P/DCF, and P/S are explored, with P/S being highlighted as the most stable and practical for innovative drug companies due to the predictability of sales [6][9]. Commercial Forecasting Model - A robust commercial model is essential for predicting sales, with methodologies like those used by Frost & Sullivan being noted for their representativeness [11]. Patient Population - The starting point for predicting sales is the patient population, which can be assessed through prevalence and incidence rates. Prevalence reflects the total number of existing cases, while incidence measures new cases over a specific period [15][16]. - Disease subtyping is crucial for accurate market predictions, as different subtypes may respond to different treatments [17]. - Treatment rates indicate the proportion of patients receiving effective treatment, which can vary based on economic and healthcare access factors [20]. Market Share - Market share predictions depend on several factors, including target competition, real-world efficacy of drugs, treatment sequencing, commercialization capabilities, and accessibility policies [21]. - The competitive strength of drug targets and the real-world efficacy of drugs significantly influence market share [23][25]. - The order of drug usage and expert consensus play a role in determining market share, with first-line treatments generally being preferred [27][29]. - Commercialization capabilities vary among companies, impacting the sales outcomes of similar drugs [30]. Drug Pricing - Drug pricing is influenced by the initial price at launch, pricing in different countries, and price changes over time [35]. - The starting price is typically based on the annual cost of similar drugs, clinical benefits, and development costs [36]. - Price differences across countries highlight the importance of market access, with the U.S. generally having higher drug prices compared to other regions [37]. - Over time, drug prices may decrease in markets like China due to negotiations, while they may increase in the U.S. due to favorable protections for innovative drugs [39]. Product Sales Curve - The sales curve of a drug typically follows a pattern of market introduction, rapid growth, maturity, and decline, with effective commercialization strategies leading to faster growth [40]. - Historical data indicates that the median time to peak sales is approximately six years [42]. - Different drug types exhibit varying sales growth patterns, with small molecules often experiencing rapid rises and falls, while biologics tend to have steadier growth [44][45]. Data Objectivity/Uncertainty - The objectivity and uncertainty of data can vary significantly, especially in high-uncertainty scenarios where subjective assumptions may dominate [46].

Investment Rating - The report assigns a "Buy" rating to several companies in the Chinese pharmaceutical industry, indicating a potential upside of over 15% in the next 12 months [31]. Core Insights - The MSCI China Healthcare Index has increased by 41.4% since the beginning of 2025, outperforming the MSCI China Index, which rose by 25.2% [2]. - The report emphasizes the need for a rational perspective on the valuation of innovative drugs, as their prices are expected to continue rising due to high expectations for overseas transactions [2]. - The Chinese innovative drug sector is characterized by high risk, long development cycles, and high returns, with a strong global competitive edge in R&D capabilities [2]. - Recent policy measures from the National Healthcare Security Administration are expected to support the long-term payment space for innovative drugs, including encouraging commercial health insurance to expand investment in innovative drugs [5]. Summary by Sections Company Ratings and Valuations - Companies such as Sanofi (1530 HK), Junshi Biosciences (2367 HK), and others are rated as "Buy" with significant upside potential, with target prices indicating potential increases of 15% to 54% [3]. - For instance, Junshi Biosciences has a market cap of $7,720 million and a target price of $79.96, suggesting a 37% upside [3]. Market Trends and Policy Impact - The report highlights that the innovative drug sector will benefit from new policies that support high-quality development, which will open up payment avenues for innovative drugs [5]. - The commercial health insurance market is projected to grow significantly, with expected premium income reaching 977.3 billion yuan in 2024, a year-on-year increase of 8.2% [5]. Investment Opportunities - The report identifies specific companies with strong growth potential, including Junshi Biosciences, Guo Shengtang, and Angelalign, which are expected to benefit from robust product offerings and market expansion [5]. - The overseas business of Angelalign is noted for its improving profitability, with expectations for continued growth driven by a large international market [5].

Group 1 - The innovative drug sector has emerged as a significant "dark horse" in the growth track since 2025, with the Hong Kong innovative drug ETF (513120) showing a year-to-date increase of over 60% as of June 10, reflecting strong market interest in the sector [1] - The recent surge in the innovative drug market is attributed to a combination of clinical breakthroughs, major business development deals, and favorable policies, with a notable example being the $12.5 billion collaboration between 3SBio and Pfizer [2][3] - The global competitiveness of domestic innovative drugs is on the rise, with China expected to account for 40% of clinical trials in the oncology field by 2024, up from 5-10% a decade ago, indicating a significant shift in the market landscape [3] Group 2 - Recent policy support includes the issuance of a commercial health insurance directory for innovative drugs, aimed at enhancing multi-tiered medication security for the public [4][5] - The new policy is expected to address key pain points in the innovative drug sector by promoting the distribution of high-quality medical resources to grassroots levels and establishing a multi-tiered payment system combining basic medical insurance and commercial insurance [5] - The commercial health insurance directory is seen as a more operationally feasible innovation compared to the anticipated "Class C" insurance directory, providing a buffer for new drugs to validate their clinical efficacy and value in real-world settings [6]

Core Viewpoint - The article discusses the impact of the recent reciprocal tariff policies between the U.S. and China on the innovative pharmaceutical industry, highlighting that the tariffs have minimal effect on China's innovative drug exports and may even benefit domestic companies in the long run [2][12]. Industry-Level Impact - The innovative drugs from China are exempt from the new tariffs, making the industry relatively insulated from the trade conflict, thus acting as a safe haven [5]. - Even if tariffs were to be applied in the future, the high gross margin of around 95% for innovative drugs means that any potential tariff impact on gross margins would be negligible, estimated at only 2-3% [5]. - The cost differences between China and the U.S. for innovative drug production are not significant, and companies like BeiGene have established substantial production capabilities in the U.S., further minimizing the impact [5]. - For imported innovative drugs, if China does not exempt U.S. imports, the impact on pricing and competition will be limited, especially for drugs already included in the insurance system [6][8]. - The potential price increase for non-reimbursed drugs due to tariffs could benefit domestic competitors, enhancing their market position [7][8]. Financing Environment Impact - The U.S. tariff policy is expected to negatively affect small innovative drug companies in the U.S. by tightening the financing environment, as they rely heavily on funding for research and development [9]. - In contrast, China's low import ratio and high export ratio mean that the tariff policy will not raise inflation levels in China, potentially leading to lower financing rates and a more favorable environment for domestic pharmaceutical companies [10]. Valuation Impact - The global market downturn is likely to affect the valuation levels of innovative drug companies in China, leading to short-term declines in stock prices [11]. - However, it is believed that this will be temporary, as stock prices will ultimately reflect the underlying fundamentals of the companies [11]. Summary - Overall, the reciprocal tariff policies have a minimal impact on China's innovative drug exports, and may improve the competitive landscape and financing conditions for domestic companies. The innovative drug sector is expected to remain one of the most promising growth areas for China in the future [12].