Summary of the Conference Call on Innovative Drug Investment Industry Overview - The conference call focuses on the innovative drug industry, particularly in China, and its expansion into overseas markets [2][6][14]. Key Points and Arguments 1. **Risk-Adjusted Success Rate Assessment** - The success rate of innovative drugs is assessed based on existing clinical data, with phase I data improving success rate expectations to 70%-80% if results are favorable [2][4]. 2. **Market Expansion Strategies** - Chinese innovative drug companies expand overseas through two main strategies: "borrowing a boat" (collaborating with foreign companies) and "building a boat" (establishing their own teams abroad) [2][6]. 3. **Global Recognition of Chinese Innovative Drugs** - The recognition of Chinese innovative drugs internationally is attributed to the engineer dividend, accumulated experience in small molecule drug development, and the emergence of globally competitive products [2][7]. 4. **License Out Transaction Process** - The license out process involves several steps: finding partners, signing confidentiality agreements, material transfer agreements, letters of intent, due diligence, and final licensing agreements, with a joint steering committee established for management [2][8][9]. 5. **Geopolitical Factors** - Geopolitical factors have a limited impact on the international layout of Chinese pharmaceutical companies, despite potential restrictions from U.S. policies [10]. 6. **Advantages in Macromolecule Drug Development** - China has advantages in macromolecule drug development due to the engineer dividend and cost-effectiveness, with lower R&D costs compared to the U.S. [11]. 7. **Performance of Innovent Biologics** - Innovent Biologics has shown outstanding performance in innovative drug development, particularly in the PD-1 interleukin 2 field, showcasing a shift from quantity to quality in Chinese drug innovation [12]. 8. **U.S. Pharmaceutical Companies' Interest in China** - U.S. pharmaceutical companies are interested in acquiring Chinese assets due to the impending expiration of patents and the high cost of U.S. assets [13]. 9. **Trends in Chinese Innovative Drug Exports** - The trend of Chinese innovative drugs going overseas is strong, with expectations of a more than 50% increase in outbound activities in the latter half of the year compared to the first half [4][15]. 10. **Valuation Methodology** - The valuation of innovative drugs is based on relative and absolute valuation methods, with current PS multiples in Hong Kong and A-shares being significantly lower than expected [3][16]. 11. **Future Valuation Potential** - The innovative drug sector has the potential for significant valuation increases, with estimates suggesting a doubling of current valuations compared to historical highs [17]. 12. **Outlook for the Innovative Drug Sector** - The innovative drug sector is expected to enter a new phase of rapid valuation restructuring and high-quality development, supported by favorable policy, industry upgrades, and a growing number of companies entering profitability [18][19]. 13. **Impact of Macroeconomic Factors** - Current macroeconomic disturbances have minimal impact on the innovative drug sector, allowing for strategic investments despite market sentiment [20]. Additional Important Insights - The innovative drug sector is experiencing a transformation with a focus on both domestic and international markets, indicating a robust growth trajectory [19]. - The emphasis on early-stage investments to capture potential returns is highlighted as a strategic approach for investors [5].

Summary of Conference Call on Innovative Pharmaceuticals Industry Overview - The conference focuses on the innovative pharmaceutical industry, particularly in China, discussing the valuation system and market dynamics of innovative drugs [1][2]. Key Points and Arguments - **Revaluation of PS Valuation**: The traditional price-to-sales (PS) ratio of 3-4 times is deemed insufficient to reflect the current macroeconomic changes. A new model should consider factors such as improved net profit margins, accelerated peak sales, extended plateau periods, and positive perpetual growth rates [1]. - **Significant Increase in Net Profit Margins**: Companies like Elysium have reported net profit margins exceeding 40%, with specific drugs like Furmetin achieving over 50%. This represents an increase of more than 10% compared to a decade ago, driven by economies of scale, clinical value orientation, and a mature domestic payment system [1][4]. - **Accelerated Market Penetration of Innovative Drugs**: The time for oncology drugs to enter the medical insurance system has significantly decreased, from an average of 7.9 years in 2017 to just over one year in 2024. This rapid entry into hospitals enhances market penetration [1][5]. - **Extended Peak Plateau Period**: Regulatory controls on supply have allowed high-quality products to consolidate market share, extending the peak plateau period to an estimated 4-5 years [1][5]. - **Favorable Medical Insurance Policies**: The medical insurance system is favoring innovative drugs over generics, with a potential perpetual growth rate of 1%-2% due to the clearing of generic drug production capacity [1][5]. - **Rapid Growth of Chinese Innovative Drugs Overseas**: The number and value of Chinese innovative drugs entering international markets have surged, with Q1 exports accounting for 50% of the global total. Increased recognition in overseas academia enhances the likelihood of successful international expansion [1][6]. Additional Important Insights - **Improved Profitability of Innovative Drug Companies**: High-quality innovative pharmaceutical companies such as BeiGene, Hutchison China MediTech, and Innovent Biologics are entering a profitability phase, improving cash flow and attracting foreign investors, leading to a positive market outlook and a revaluation of the industry [2][11]. - **Changes in Valuation Calculation**: The valuation of innovative drugs typically involves calculating peak sales multiplied by the PS ratio and success probability. The current macro environment necessitates a re-evaluation of this approach, with the PS ratio potentially increasing to 4.5-5 times [3][5]. - **Marginal Impact of Domestic and International Macro Environment**: The pressure on medical insurance reserves in China is not significantly greater than in previous years, and there is a potential rebound in insurance payments. The geopolitical situation has minimal impact on the innovative pharmaceutical sector [6][7]. - **Commercialization Strategies for Chinese Companies**: Most Chinese companies utilize a "borrowing ship" model, selling patent rights to U.S. firms for clinical or commercial advancement, which avoids customs and tariffs [8]. - **Production Decisions Post-Commercialization**: Once a drug is commercialized, U.S. companies typically prefer to produce in the U.S. If they opt for Chinese companies to handle production, the customs declaration can be done at cost price, minimally affecting overall valuation [9]. - **Impact of U.S. Drug Price Controls**: U.S. government measures aimed at lowering drug prices may not significantly affect ex-factory prices due to high overseas deductions, while Chinese drugs remain competitively priced [10].

Investment Rating - The report maintains a "Positive" investment rating for the innovative drug industry [12]. Core Insights - The innovative drug industry is experiencing a convergence of policy, industry, and performance factors, indicating a potential new cycle of value reassessment [4][9]. - The previous valuation methods under "bear market thinking" may no longer be applicable, necessitating a re-evaluation of the valuation system for innovative drug companies [9][10]. Policy Insights - The pharmaceutical industry is characterized by strong regulation and exhibits a certain "policy cyclicality." Since 2024, supportive policies for the entire innovative drug industry chain have gradually been implemented, including the introduction of incremental insurance funds and adjustments to centralized procurement [7][24]. - From 2018 to 2024, the sales of newly negotiated drugs during the agreement period exceeded 540 billion yuan, accounting for only 2% of the total expenditure of the medical insurance fund during this period, indicating significant room for growth [32]. Industry Insights - Chinese innovative drugs are gaining global recognition, with a record number of 126 companies showcasing nearly 300 research results at the 2025 AACR conference, marking a historical high for both participation and achievements [33][35]. - The quality and quantity of business development (BD) transactions for Chinese innovative drugs have significantly improved, with substantial out-bound deals in areas such as ADCs and dual antibodies [33][40]. - The number of original innovative drugs developed in China has surpassed that of the United States, with the proportion of first-in-class (FIC) drugs increasing to 24% globally [36]. Performance Insights - The leading biopharma companies are showing improved performance, with the total net profit of A/H innovative drug-related companies projected to reach 11.67 billion yuan in 2024, a significant increase from 670 million yuan in 2023 [70]. - Companies like Innovent Biologics and BeiGene are expected to achieve profitability by 2025, while others like Rongchang Biologics and Kelun-Biotech are narrowing their loss trends [70]. - The BD business for domestic innovative drug companies has become a sustainable profit-generating business, contributing positively to cash flow and overall profitability [72].