Core Viewpoint - The Hong Kong pharmaceutical sector continues its upward trend, driven by strong performances in innovative drugs, vaccines, and biopharmaceuticals, with significant gains observed in related ETFs and stocks [1] Group 1: Market Performance - The Hong Kong medical ETF, 富国 (159506), saw an intraday increase of 3.21%, with stocks like 映恩生物-B rising over 8% and 三生制药 and 康方生物 increasing more than 7% [1] - The innovative drug ETF, 富国 (159748), experienced a 2.54% rise during the trading session [1] Group 2: Upcoming Events - The 2025 European Society for Medical Oncology (ESMO) annual meeting is scheduled from October 17 to October 21 in Berlin, Germany, expected to showcase significant clinical research results that may enhance market interest in innovative drug assets [1] Group 3: Industry Trends - The trend of Chinese innovative drugs entering international markets is gaining momentum, with expectations of more business development (BD) deals being finalized by year-end, indicating potential collaborations between Chinese pharmaceutical companies and large overseas firms [1] - Historically, the end of the year has been a peak time for major BD agreements in the innovative drug sector [1] - The current U.S. interest rate cut environment is anticipated to further boost performance in the CXO industry [1] Group 4: ETF Composition - The 富国 medical ETF (159506) closely tracks the Hang Seng Stock Connect Healthcare Index (HSSCHI), with a unique index composition strategy that excludes companies with the lowest average R&D/revenue rankings over the past two years [1] - Companies with high R&D expenditure ratios and significant innovative drug business proportions are prioritized, enhancing the ETF's ability to capture investment opportunities in the Hong Kong pharmaceutical sector [1]

Summary of CXO Industry Conference Call Industry Overview - The CXO industry is experiencing a marginal increase in domestic demand in Q2 2025, with leading indicators such as rising monkey prices and increased hiring validating the sustainability of order recovery, which is expected to drive price increases for CRO companies [1][2] - The overseas CDMO business is performing well, with an upward trend in small molecule orders and an increase in the number of effective Phase III clinical trials, indicating a positive outlook for small molecule CDMO orders over the next three years [1][4] Key Insights - The small molecule drug sector is being reassessed for its potential, with new technologies like molecular glue and ProTAC making previously non-druggable targets viable. This has led to significant production expansions in the second half of the year, with leading companies planning large-scale hiring [1][5] - The CDMO industry shows a strong growth trend, with high capacity utilization among leading companies and increased scheduling reflecting rising market demand. Price increases for monkeys in July and August 2025 indicate heightened demand for experimental animals [7] - Clinical trial activities are on the rise, with the number of newly announced clinical trials increasing by approximately 17% and 16% year-on-year in Q2 and Q3 2025, respectively. This trend is accompanied by a rise in CRO price discounts, alleviating budget pressures for biotech companies [8] Market Dynamics - The perception of the CXO industry has shifted significantly over the first three quarters of the year, with a focus on the recovery of overseas preclinical demand and the sustainability of performance for companies like WuXi AppTec [2] - The CRO sector is particularly focused on changes in demand from biotech companies, which have a high outsourcing ratio. Improved cash flow for large pharmaceutical companies positively impacts CRO business [10] - The small molecule drug demand is expected to be underestimated, with a notable increase in early pipeline activities transitioning to later stages, suggesting a substantial improvement in demand by 2026 [11] Future Outlook - There is optimism regarding potential price increases in Q4 2025 and a strong market performance anticipated for 2026, likely leading to further price hikes [12] - The impact of overseas policy uncertainties on the market is diminishing, with recent legislative proposals having limited actual effects on CRO companies [13] - The proposed 100% tariff on imported drugs by Trump is viewed as a negotiation tactic, with major pharmaceutical companies managing to secure favorable terms, thus limiting the proposal's market impact [14] Additional Considerations - The relationship between semaglutide and companies like WuXi AppTec is minimal, with potential indirect impacts on revenue from price fluctuations of related products. Current observations indicate no significant effects, but ongoing monitoring of government actions is advised [15][16]

Core Viewpoint - The pharmaceutical sector, particularly innovative drugs, is experiencing significant volatility, with both A-shares and Hong Kong stocks showing sharp declines in recent trading sessions, indicating potential investment opportunities amidst market fluctuations [1][3][5]. Group 1: A-Share Market Performance - A-share market saw major declines in innovative drug stocks, with Beida Pharmaceutical dropping by 10.63%, Hengrui Medicine down 4.05%, and Baili Tianheng falling 6.18%, leading to a 2.21% drop in the only drug ETF (562050) [1]. - The CXO sector also faced declines, with WuXi AppTec falling 3.82%, while the largest medical ETF (512170) only decreased by 1.32%, indicating some resilience in the market [1]. Group 2: Hong Kong Market Performance - The Hong Kong pharmaceutical market experienced even more volatility, with innovative drug stocks like Kelun-Bio dropping 9.82% and major players like CSPC Pharmaceutical and Innovent Biologics falling over 6% [3]. - The Hong Kong Stock Connect innovative drug ETF (520880) opened up 1.86% but ended the day down 4.22%, marking its largest single-day drop since inception, with a trading volume of 4.1 billion [3]. Group 3: Investment Sentiment and Opportunities - Despite the ongoing market downturn, there is a noticeable increase in buying interest, as evidenced by a significant inflow of capital into the medical ETFs, suggesting that investors may be looking for "golden pit" opportunities in the pharmaceutical sector [5][6]. - Analysts suggest that the recent declines may be a release of short-term risks and emotional volatility, with potential for greater opportunities than risks if the market undergoes significant adjustments [5]. Group 4: Market Dynamics and Future Outlook - The fund manager of the Hong Kong Stock Connect innovative drug ETF highlighted the interconnectedness of the US and Chinese biopharmaceutical industries, suggesting that recent tariff tensions may lead to a "TACO trade" strategy, where investors anticipate a reversal of aggressive policies [6]. - The innovative drug sector is supported by strong fundamentals, including innovation capabilities and global competitiveness, which remain unchanged despite market fluctuations [6]. - With the global liquidity easing cycle initiated by the Federal Reserve, many institutions view Hong Kong stocks as undervalued and a favorable investment opportunity [7].

Group 1 - Pharmaceutical stocks have been experiencing a continuous decline, with notable drops in companies such as Viatris (01873) down 7.53% to HKD 2.58, and Singlomics (01672) down 7.09% to HKD 9.17 [1] - Huaxin Securities indicates that the trend of going global will continue into Q3 2025, but there are fewer significant business developments (BD) from listed companies, and NewCo-style BDs have not met market expectations [1] - The escalation of Sino-US trade conflicts may raise concerns about future decoupling risks, but the shift of global innovative R&D towards more efficient Chinese solutions is an unstoppable trend [1] Group 2 - Cinda Securities believes that Chinese innovative pharmaceutical companies are gaining global competitiveness in various niche markets, and while there may be short-term policy impacts, the long-term industry trend remains unchanged [2] - The innovative drug sector is expected to be a key focus in the next 2-3 years, despite potential short-term pullbacks [2] - The CXO sector is currently in a recovery phase, with continuous growth in performance expected to restore market confidence, and the recent iterations of the Biodefense Act have had minimal impact on leading companies [2]

Group 1 - The pharmaceutical stocks have been experiencing a continuous decline, with notable drops in companies such as Viatris (down 7.53% to HKD 2.58), Genscript Biotech (down 7.09% to HKD 9.17), and CanSino Biologics (down 5.74% to HKD 64) [1] - Huaxin Securities indicates that the trend of going global will continue into Q3 2025, but there are fewer significant business developments (BD) from listed companies, and the NewCo format of BD has not met market expectations [1] - The escalation of Sino-US trade conflicts may raise concerns about future decoupling risks, but the shift of global innovative research and development towards more efficient Chinese solutions is an unstoppable trend [1] Group 2 - Cinda Securities believes that Chinese innovative pharmaceutical companies are gaining a foothold on the global stage, possessing global competitiveness in various niche areas, despite potential short-term policy impacts [2] - The innovative drug sector is expected to remain a key focus for the next 2-3 years, with the CXO industry playing a crucial role in the global innovative drug supply chain [2] - The revised version of the Biodefense Act has undergone multiple iterations, with minimal impact on leading companies, and the CXO sector is currently experiencing a recovery phase, with continuous growth in performance likely to restore market confidence [2]

Group 1 - The core viewpoint of the news is that the escalation of US-China trade tensions, particularly the announcement of a 100% additional tariff on Chinese goods and new export controls on key software products, has led to significant volatility in global markets [1] - The Chinese stock market experienced a downward trend, with major indices falling over 1% and the Hang Seng Index dropping more than 3% [1] - The A-share market saw a decline in the innovative drug sector, with notable drops in companies like Hengrui Medicine and WuXi AppTec [1][3] Group 2 - The Hong Kong stock market also faced declines in innovative drugs, with the Hong Kong Stock Connect Innovative Drug ETF (520880) experiencing a drop of over 10% for leading stocks [3] - Despite the downturn, the Hong Kong Stock Connect Innovative Drug ETF (520880) showed strong buying interest, accumulating over 680 million yuan in inflows over the past 20 days [3] - East Wu Securities believes that the impact of tariff policies on China's pharmaceutical industry is limited, as the market had already anticipated the drug tariffs [5] Group 3 - The analysis indicates that many Chinese innovative pharmaceutical companies utilize licensing and new overseas company models, which are not affected by tariffs as they involve intellectual property transactions rather than physical drug exports [6] - The CRO (Contract Research Organization) services are not impacted by tariffs, and the long-term competitiveness of China's CRO/CDMO (Contract Development and Manufacturing Organization) remains intact [6] - The report suggests that the medical device sector is minimally affected by tariffs, with a positive outlook for domestic substitution and self-control [6] Group 4 - The fund manager of the Hong Kong Stock Connect Innovative Drug ETF (520880) noted that macro geopolitical factors have become significant in pricing the innovative drug sector, leading to increased volatility in stock prices [7] - The market is expected to eventually return to fundamentals, considering the interconnectedness of the US and Chinese biopharmaceutical industries [7] - The TACO trading strategy, which bets on Trump's tendency to back down from threats, is highlighted as a potential investment approach during market downturns [7] Group 5 - Investment strategies suggested include focusing on innovative drugs, leading pharmaceutical companies, and medical leaders, with specific ETFs recommended for each category [7] - The medical ETF has the largest scale in the market at 26.4 billion yuan, while the drug ETF is the only one tracking the China Pharmaceutical Index [8]

Investment Rating - The report maintains a "Recommended" investment rating for the pharmaceutical industry [1] Core Insights - The trend of Chinese innovative drugs going overseas is a long-term phenomenon, with external environmental changes having limited impact. In the first half of 2025, there were 72 License-out transactions, exceeding half of the total for 2024, with a total transaction amount 16% higher than in 2024. Notably, there were 16 transactions exceeding $1 billion each [2] - The small nucleic acid drug sector has seen significant breakthroughs, particularly in the treatment of chronic diseases such as hypertension and hyperlipidemia, with major collaborations and potential milestone payments indicating a robust commercial outlook [3] - The trend towards oral autoimmune drugs is gaining attention, with significant partnerships and clinical advancements in this area, highlighting the importance of oral formulations in autoimmune therapies [4] - Recent clinical data on long-acting insulin analogs shows promising weight loss results, with ongoing developments in combination therapies for metabolic diseases, indicating a growing market potential [5] - The CXO sector is gradually recovering, with an increase in License-out transactions serving as a vital funding source for biotech companies, leading to a resurgence in innovation and clinical development [6] - The 2025 national medical insurance negotiations and the commercial insurance innovative drug directory are crucial for companies involved, with a focus on orphan drugs and imported PD-1/L-1 products [7] Summary by Sections Industry Tracking - The pharmaceutical sector has underperformed compared to the CSI 300 index, with a recent weekly decline of 1.20% and a monthly decline of 3.38%, ranking 25th among 31 industry indices [22][26] Industry Trends and Valuation - The pharmaceutical industry index currently has a PE ratio of 39.05, above the five-year historical average of 31.36, indicating a higher valuation compared to historical trends [48][50] Recent Research Achievements - The research team has published several in-depth reports on various pharmaceutical topics, including the growth of the blood products industry and the potential of GLP-1 drugs in chronic disease management [53] Important Policies and News - Recent regulations have been introduced to standardize clinical research and ensure drug traceability, which will impact the pharmaceutical landscape significantly [55][56]

Investment Rating - The report maintains a positive outlook on the innovative drug sector, suggesting it will continue to show high revenue growth and reduce losses [4][16]. Core Insights - The pharmaceutical sector experienced a decline of 1.2% this week, ranking 25th among 31 sub-industries [5][7]. - The overall valuation of the pharmaceutical sector is at 30.9 times earnings, placing it 10th among 31 primary industries [8][15]. - Notable transactions include the licensing agreement between Innovent Biologics and Zenas BioPharma, valued at over $2 billion, which includes a $100 million upfront payment [4][14]. - The report highlights the importance of monitoring the performance of innovative drug companies in the upcoming quarterly reports, particularly those showing consistent high growth [4][16]. Market Performance - The pharmaceutical index decreased by 1.2%, while the Shanghai Composite Index increased by 0.4% during the same period [5][7]. - The performance of various sub-sectors includes: - Raw materials: -0.7% - Chemical preparations: -2.5% - Traditional Chinese medicine: +1.5% - Blood products: +1.4% - Vaccines: +0.7% - Other biological products: -1.7% - Medical devices: -0.2% - Medical consumables: +0.2% - In vitro diagnostics: -0.6% - Pharmaceutical distribution: +0.8% - Offline pharmacies: +0.3% - Medical R&D outsourcing: -5.3% - Hospitals: +1.8% [8][12]. Key Events - The National Medical Products Administration released a draft for further promoting post-marketing research and evaluation of traditional Chinese medicine injections [4][16]. - The report notes the upcoming IPOs in the sector, including He Yuan Biology and Biotech [19].

Core Viewpoint - WuXi AppTec's major shareholder, WuXi PharmaTech, has reduced its stake in WuXi AppTec again, selling 30.3 million shares for over HKD 2.3 billion, leading to significant stock price declines for both companies [2][4]. Group 1: Shareholder Actions - WuXi PharmaTech has conducted its fourth large-scale reduction of WuXi AppTec shares in the past year, totaling approximately HKD 69.5 billion in cash from these sales [4]. - The recent sale represents 2.47% of WuXi AppTec's total shares, with the stock price dropping by 7.29% following the announcement [2][4]. Group 2: Financial Impact - The sale of WuXi AppTec shares is classified as a "long-term equity investment," and the estimated net profit impact for WuXi PharmaTech in 2025 is approximately HKD 1.679 billion, accounting for over 10% of the company's net profit for 2024 [4]. - WuXi PharmaTech's revenue and net profit declined in 2024, with revenues of approximately CNY 39.241 billion, down 2.73%, and net profit of CNY 9.45 billion, down 1.63% [4]. Group 3: Business Performance - In 2025, WuXi PharmaTech's performance improved, with a revenue of CNY 20.8 billion in the first half, a 20.6% increase year-on-year, and a net profit of CNY 8.56 billion, more than doubling compared to the previous year [5]. - The company has a strong order backlog of CNY 56.69 billion, reflecting a 37.2% year-on-year growth, indicating sustainable performance recovery [5]. Group 4: Market Concerns - Concerns exist regarding the high proportion of overseas revenue, which accounted for over 80% of total revenue in the first half of the year, with significant contributions from U.S. clients [5]. - Geopolitical uncertainties and intensified competition in the CXO sector pose risks to long-term orders and profitability for WuXi PharmaTech [5][6]. Group 5: Strategic Moves - The continuous reduction in shareholding is seen as a strategic move to fund future global expansion, with planned expenditures of approximately CNY 7-8 billion for capacity expansion in various countries [8]. - The cash generated from the sale of WuXi AppTec shares will be used to enhance the company's integrated CRDMO business model to meet the growing demands of global clients [8].

Market Overview - A-shares and Hong Kong stocks experienced synchronized fluctuations, with the Shanghai Composite Index falling below 3900 points and the ChiNext Index dropping by 4.55% [1] - The AH pharmaceutical sector declined across the board, with major players like WuXi AppTec leading the drop at 7.2% [1] - The largest medical ETF (512170) saw a decrease of 2.03%, halting its three-day upward trend, with a total trading volume of 640 million yuan [1] Pharmaceutical Sector Performance - The A-share pharmaceutical sector showed relative resilience, primarily due to traditional Chinese medicine stocks performing well, with companies like China Resources Sanjiu and Jilin Aodong rising over 2.5% [3] - Innovative drug stocks faced more declines than gains, with BeiGene (BGNE) leading the drop at 6.2% [3] - The only drug ETF in the market (562050) fell by 1.07%, indicating increased buying interest as evidenced by 2.23 million yuan of funds entering on dips [3] Innovation Drug Sector Insights - The innovative drug sector, previously a strong performer, has entered a phase of adjustment since September, but investor interest remains high [5] - The Hong Kong Innovation Drug ETF (520880) has attracted over 675 million yuan in the last 20 days, indicating strong buying momentum despite recent declines [5] - Analysts suggest that the short-term adjustment is due to profit-taking after significant gains and a lack of catalysts, but the long-term outlook remains positive [7] Future Catalysts and Strategies - Upcoming academic conferences, such as ESMO and ASH, are expected to reignite interest in the innovative drug sector [8] - The fourth quarter will see the implementation of various policies, including adjustments to medical insurance directories, which may accelerate support for domestic innovations [8] - Investment strategies focus on identifying companies with strong Q3 performance and exploring opportunities in the innovative drug sector for potential rebounds [8] ETF Performance and Characteristics - The Hong Kong Innovation Drug ETF (520880) is fully invested in innovative drug development companies, while the drug ETF (562050) balances innovative and traditional Chinese medicine stocks [9] - The medical ETF (512170) includes medical devices and services, with a significant portion allocated to CXO [9] - As of September 30, 2025, the medical ETF has a scale of 26.4 billion yuan, making it the largest in the pharmaceutical category [10]