Orient Securities has released a research report indicating that, based on 2025 annual and 2026 first-quarter results, the innovative drug sector and its industrial chain have demonstrated strong overall performance growth, driven by the rapid commercialization of domestic innovative drugs and the continuous realization of BD potential. The pharmaceutical industry is now comprehensively transitioning from "Made in China" to "Created in China," with the innovation-driven global expansion process still in its early stages, presenting a clear and definitive high-growth trajectory for the sector. Coupled with institutional holdings in the sector being at historically low levels, investing in the pharmaceutical sector at this stage offers high value and remains a prime window for strategic allocation. Key viewpoints from Orient Securities are as follows:
The industry is showing overall recovery, with the innovative drug industrial chain leading the way. The sector's total operating revenue returned to positive growth in 2025, and the decline in net profit attributable to shareholders narrowed: operating revenue increased by 0.8% year-on-year, net profit attributable to shareholders decreased by 3.9% year-on-year, and adjusted net profit attributable to shareholders increased by 12.5% year-on-year. Performance rebounded rapidly in Q1 2026: revenue grew by 1.4% year-on-year, net profit attributable to shareholders increased by 3.2%, and adjusted net profit attributable to shareholders rose by 6.3% year-on-year. The recovery in both revenue and profit across the industry indicates an overall revival, attributed primarily to increasingly moderate domestic volume-based procurement and healthcare reform policies, alongside the established and accelerating expansion of international operations cultivated over many years.
CXO performance is outstanding, while other sub-sectors remain relatively stable. 1) Revenue: In terms of revenue performance for 2025 and Q1 2026, the CRO/CMO sub-sector led overall industry growth with revenue increases of 12.0% and 18.0% year-on-year, respectively. 2) Adjusted Net Profit: During 2025 and Q1 2026, the CRO/CMO and chemical pharmaceutical sub-sectors, which revolve around the innovative drug industrial chain, significantly outperformed the industry average. The CRO/CMO sub-sector saw growth of 32.3% and 63.2% year-on-year, respectively, while the chemical pharmaceutical sub-sector grew by 37.6% and 14.8% year-on-year, respectively. The biological products sub-sector continues to face significant performance pressure. Overall, the innovative drug industrial chain shows impressive results: the commercialization of innovative drugs combined with the realized value of BD-driven global expansion has substantially improved profitability; CXO companies, with full order books and reduced risks, are entering a new upward cycle with accelerating performance; other sub-sectors remain stable, while the biological products segment requires further recovery.
"Low Holdings + Steady Growth" presents high allocation value. The proportion of pharmaceutical holdings in the top holdings of public fund products fell to a historical low of 7.9% in Q4 2025, before recovering to 8.9% in Q1 2026. Among these, the proportion of pharmaceutical holdings in the top holdings of non-pharmaceutical themed funds also showed a recovery trend, increasing from a historical low of 4.0% in Q4 2025 to 4.7% in Q1 2026, though it remains underweight. Regarding valuation, the industry's price-to-earnings ratio (TTM) has been fluctuating within a range, but its central point has shifted higher compared to the beginning of last year. As of the end of April 2026, the P/E ratio for the pharmaceutical and biological sector stood at 30 times. CXO holdings have increased significantly, and the innovative drug industrial chain remains the preferred choice. The combined holdings in chemical pharmaceuticals and CXO account for 56% of the pharmaceutical sector's fund allocation. Chemical pharmaceuticals remained the sub-sector with the highest allocation weight in Q1 2026, with a stable holding proportion. Notably, the CXO industry reached an inflection point in Q3 2025 and entered a rapid growth phase in Q1 2026, with its allocation proportion seeing a significant increase again (up 3 percentage points from Q4 2025).
Investment Recommendations and Targets: From a segmented perspective, 1) the global expansion-related innovative drug industrial chain (Pharma + CXO/upstream), with relevant targets including 3SBio Inc., Akeso Inc., Kelun-BTB Biopharmaceutical, CSPC Pharmaceutical Group, Haisco Pharmaceutical Group, Salubris, Innovent Biologics, WuXi AppTec, Joinn Laboratories, Medicilon, Innostar, Sepax Technologies, and Biocytogen; 2) innovative products + hospital demand (chemical drugs/medical devices), with relevant targets including Jiangsu Hengrui Pharmaceuticals, Kelun Pharmaceutical, Asymchem Laboratories, Jingxin Pharmaceutical, Tianjin Teda, Gan & Lee Pharmaceuticals, Hybio Pharmaceutical, and Mindray Medical.
Risk Warnings: 1. Significant adverse disruptions in hospital诊疗秩序 could impact the procurement of departmental medical devices and the sales of drugs/medical devices within hospitals, leading to performance fluctuations for related companies. 2. If global biopharmaceutical industry investment and financing remain persistently low, it could result in a reduction in the scale of research pipelines, also putting pressure on CXO and upstream-related enterprises.