Investment Rating - The report maintains an "Outperform" rating for the pharmaceutical and biotechnology sector [5] Core Views - The pharmaceutical sector underperformed the overall market, with a 0.39% decline in the biopharmaceutical sector compared to a 1.17% increase in the total A-share market [32] - The TTM price-to-earnings ratio for the pharmaceutical sector is 38.51x, which is at the 84.35th percentile of the historical valuation over the past five years [32][37] - The report highlights a shift in fund holdings, with a decrease in the proportion of pharmaceutical holdings in both pharmaceutical and non-pharmaceutical funds [11][16] Summary by Sections Market Performance - The overall A-share market increased by 1.17%, while the Shanghai and Shenzhen 300 index decreased by 0.62% [32] - The biopharmaceutical sector's performance was weaker than the overall market, with specific declines in chemical pharmaceuticals (-1.11%) and medical services (-2.17%) [32] Fund Holdings Analysis - As of Q4 2025, the net asset value of pharmaceutical funds reached 358.4 billion, a decrease of 9.0% from the previous quarter [11] - The proportion of pharmaceutical holdings in all funds was 7.97%, down 1.71 percentage points [16] - The largest sub-sectors by holdings were chemical preparations (37.5%) and other biological products (20.8%) [19] Company Earnings Forecasts and Ratings - Key companies such as Mindray Medical (237 billion market cap, "Outperform" rating) and WuXi AppTec (293.6 billion market cap, "Outperform" rating) are highlighted for their strong earnings forecasts [4] - The report lists several companies with projected earnings growth, including Aier Eye Hospital and New Industry, both rated "Outperform" [4] Investment Strategy - The report recommends focusing on innovative drugs and the CXO sector, emphasizing the competitive advantages of Chinese companies in the chemical CDMO space [41] - A portfolio of recommended stocks includes Mindray Medical, WuXi AppTec, and Aier Eye Hospital, among others [42][43]

Core Viewpoint - The report highlights the performance of the China Europe Medical Health Mixed Fund managed by Ge Lan and Zhao Lei, indicating a decline in total fund size and negative returns compared to benchmarks [1][4]. Fund Performance - As of December 31, 2025, the total size of the funds managed by Ge Lan decreased from 43.544 billion to 35.389 billion yuan [1]. - The A-class share of the China Europe Medical Health Mixed Fund recorded a net value growth rate of -14.81%, while the C-class share saw a decline of -14.98%, both underperforming the benchmark return of -8.21% [1][3]. Holdings Overview - The top ten holdings of the China Europe Medical Health Fund include WuXi AppTec, Heng Rui Medicine, and Kanglong Chemical, with notable increases in holdings for Hai Si Ke and Tai Ge Medicine, while reductions were seen in stocks like Ke Lun Pharmaceutical and Xin Li Tai [1][2]. Market Context - In Q4 2025, the CSI Pharmaceutical Index fell by 12.7%, underperforming the CSI 300 Index, which declined by only 0.2%. The report notes significant differentiation within sub-sectors, with innovative industries experiencing corrections while traditional Chinese medicine and pharmaceutical commerce remained relatively stable [3]. Future Outlook - Looking ahead to Q1 2026, improvements in global liquidity are expected to boost investment and financing in innovative pharmaceuticals, supported by domestic policy enhancements. The innovative drug and device industry is anticipated to maintain a high level of activity, with several key domestic drugs approaching critical data readouts [4][5]. - The report suggests that the pharmaceutical sector may continue to experience structural trends due to macroeconomic improvements, supportive industry policies, and ongoing innovation, with investment opportunities focusing on the progress of innovative drug and device exports, domestic substitution in equipment, and recovery in consumer healthcare demand [5].

Group 1 - The core viewpoint of the news highlights the positive performance of the innovative drug sector in the stock market, with significant gains in individual stocks and ETFs [1][3] - The new national medical insurance drug catalog will be implemented on January 1, 2026, adding 114 new drugs, including 50 Class 1 new drugs, marking a record high in both quantity and proportion [2] - The commercial insurance catalog will include 19 high-value innovative drugs, addressing accessibility issues for high-value innovative treatments [2] Group 2 - The collaboration between domestic innovative drug companies and multinational corporations continues, with 49 outbound transactions totaling over $39 billion since October last year [3] - The market is entering a peak season for business development (BD) and data disclosures, coinciding with the JPM conference and the upcoming annual report cycle [3] - The Hong Kong Stock Connect Innovative Drug ETF (520970) tracks the CSI Hong Kong Stock Connect Innovative Drug Index, with the top ten weighted stocks accounting for over 71.95% of the total weight [3]

Core Insights - The CXO (Contract Research Organization) sector in A-shares shows strong growth, with 20 out of 29 listed companies reporting year-on-year revenue increases in the first three quarters [1] - In the third quarter alone, 21 companies achieved year-on-year revenue growth, driven by international demand for innovative drugs and a supportive policy environment [2] Industry Overview - The innovative drug industry is experiencing a dual boost from policy support and surging demand, which is activating new drug research and development needs, benefiting the CXO sector [2] - The National Healthcare Security Administration and the National Health Commission issued measures to support high-quality development of innovative drugs, proposing 16 policies to enhance the entire chain of support [2] Company Performance - Several CXO companies reported robust order backlogs for the first three quarters. For instance, WuXi AppTec reported a backlog of 59.88 billion yuan, a 41.2% increase year-on-year [2] - Innosilicon reported a nearly 20% increase in order amounts compared to the end of 2024, while Haoyuan reported a 50% year-on-year increase in its small molecule business orders [3] Market Trends - The first half of the year saw a surge in Chinese innovative drugs going global, with total foreign licensing transactions reaching $60 billion, accounting for 99% of global related transactions [3] - Morgan Stanley's healthcare research head in Greater China anticipates stable long-term growth in foreign licensing transactions for Chinese innovative drugs, with multinational companies likely to be more active in acquiring Chinese assets [3] Future Outlook - The CXO industry is expected to benefit from a combination of demand recovery and structural upgrades, with policies, capital, and technology contributing to a more certain industry development [3] - The industry is transitioning from "scale dividends" to "technology premiums," with technological iteration and process innovation becoming the core of competition [3]

Investment Rating - The investment rating for the CXO industry is "Outperform the Market" [1] Core Insights - The CXO index has increased by over 50% in the past year due to the easing of geopolitical risks, recovery in investment, and the digestion of high pandemic baselines [2] - Chinese CXO companies are analyzed from short-term, medium-term, and long-term perspectives to understand their global competitiveness [2] - Major players in the large molecule CDMO sector include WuXi Biologics and WuXi AppTec, with over 70% of their revenue coming from overseas [2] - The small molecule CDMO sector shows strong recovery in domestic companies, with significant order growth and a favorable competitive landscape [2] - Clinical and preclinical CROs are currently in an adjustment phase, with domestic order prices stabilizing but showing no significant recovery [2] Summary by Sections Large Molecule CDMO - Short-term performance shows high growth with competition from Japan, South Korea, and Europe [2] - Medium-term order growth is led by South Korean companies like Samsung Biologics, indicating intense competition for Chinese firms [2] - Long-term capital expenditures remain high, reflecting confidence in future demand [2] Small Molecule CDMO - Domestic companies are recovering from pandemic-related performance dips, with overall growth expected in 2025 [2] - Order growth is robust, with WuXi AppTec's orders increasing by 47% year-on-year by the end of 2024 [2] - Long-term capital expenditures show divergence, with some leaders like WuXi AppTec expected to continue increasing investments [2] Clinical/Preclinical CRO - Both domestic and international CROs are in an adjustment period, with 2022-2023 investment cooling reflected in 2024 performance [2] - Medium-term order volumes and values are beginning to show growth, while international orders remain stable [2] - Long-term capital expenditures vary among companies, indicating potential supply-demand mismatches in the short term [2] Emerging Business Opportunities - Rapid development in new molecular businesses such as peptides and oligonucleotides is expected to open up growth opportunities in the CXO sector [3] - Generic drug CROs are actively pursuing innovative transformations to seek new growth points [3]

Group 1 - Domestic leading CXO companies have recently announced strong growth in their Q2 performance, attracting attention to pharmaceutical-related ETFs [1] - The Kexin Pharmaceutical ETF (588860) has shown active trading, with an average daily turnover of 22.46 million yuan since July [1] - The management fee for Kexin Pharmaceutical ETF is 0.45%, and the custody fee is 0.07%, making it the lowest among ETFs tracking the Shanghai Stock Exchange Science and Technology Innovation Board Biopharmaceutical Index [1] Group 2 - The Kexin Pharmaceutical ETF closely tracks the Shanghai Stock Exchange Science and Technology Innovation Board Biopharmaceutical Index, which includes 50 large-cap companies in the biopharmaceutical and biomedical engineering sectors [1] - As of July 29, the biopharmaceutical index covers 74.6% of the chemical pharmaceuticals and medical devices industries [1] - The introduction of the "market value + R&D" listing standard on the Science and Technology Innovation Board has significantly aided innovative pharmaceutical companies in overcoming funding bottlenecks and accelerating R&D results [1] Group 3 - Overseas CXO leaders have reported stable R&D conditions and slightly raised their annual performance guidance for 2025 [2] - The CXO industry is transitioning from a recovery phase to a performance inflection point, primarily driven by overseas revenue [2] - With a more favorable external environment and the Federal Reserve entering a rate-cutting cycle, the CXO sector is expected to experience a comprehensive recovery due to ongoing global innovation in drug development and supportive domestic policies [2]

Macro and Strategy Research - The US core PCE in May slightly exceeded expectations, primarily driven by core services, while household income saw its largest decline in nearly a year due to reduced government transfers, impacting consumer spending negatively [2][3] - The manufacturing PMI in June remains in contraction territory, indicating cautious production outlooks among businesses due to insufficient orders and accelerating inflation expectations [2] - In Europe, inflation data showed a slight rebound driven by services, and the unemployment rate has slightly increased, which may influence ECB decisions amid ongoing US-EU tariff negotiations [3] Fixed Income Research - The June manufacturing PMI showed improvements in both domestic and external demand, but July's manufacturing sentiment may be constrained by weather factors [5] - After the quarter transition, the funding environment has turned more relaxed, with DR007 dropping below 1.50%, marking a new low for the year [5] - The issuance of bonds in the primary market slowed down, with a total issuance of 56 bonds amounting to 335 billion yuan, reflecting a significant drop in new local special bond issuance in early July [5] Industry Research - In May, the healthcare CPI rose by 0.3% year-on-year, while the pharmaceutical manufacturing PPI fell by 2.0% year-on-year, indicating challenges in the pharmaceutical sector [8] - The pharmaceutical sector saw a slight increase in the stock market, with the SW pharmaceutical industry PE ratio at 27.81 times, representing a 143% premium over the CSI 300 [9] - Recent policies have been introduced to support the pharmaceutical industry, including measures to optimize clinical trial reviews and approvals for innovative drugs, which are expected to enhance the sector's growth [10][11] - The recent approval of the first GCG/GLP-1 dual receptor agonist for weight control by domestic companies highlights the increasing innovation capabilities within China's pharmaceutical sector [10][11]