As the A-share tech sector experiences high-level volatility and rapid rotation of hot themes, the long-dormant innovative drug sector has quietly initiated a recovery rally. To understand the current stage of the innovative drug industry, the sustainability of this trend, and the risks for the latter half of the year, we examine the insights of Liang Furui, fund manager of the Great Wall Medical Industry Fund.

Regarding data on the BD (Business Development) out-licensing of innovative drugs, Mr. Liang noted that the figures are outstanding. In the first half of 2026, total transaction value for Chinese innovative drug BD out-licensing reached $99.7 billion, which is 1.9 times the total for the full year 2024 ($52.2 billion) and 73% of the 2025 total ($135.7 billion). Upfront payments totaled approximately $5 billion, already representing 70% of the 2025 full-year total. Chinese companies accounted for 8 out of the top 10 global transactions, with multiple major cross-border deals completed. Comparing this year to last year reveals three new characteristics. First, the cooperation model has shifted from License-out to Co-Development and Co-Commercialization. Previously, Chinese drug companies primarily used a "sell seedlings" model, transferring overseas rights or development rights for new drugs to multinational corporations (MNCs) in exchange for upfront and milestone payments, without participating in future overseas sales revenue. This year, more projects are adopting a risk-sharing, global profit-sharing model, making long-term sales royalties a second growth curve. This shift elevates Chinese pipelines from a "seller being scanned by MNCs" to an "equal partner with MNCs," raising pricing power and royalty ceilings. Second, platform-based transactions have become mainstream. MNCs are no longer purchasing single drug candidates but are instead locking in a company's entire technology platform, encompassing systems like siRNA, AI drug discovery, and ADCs. This indicates that MNCs value not just a specific molecule but the "technology engine room" of Chinese companies. Third, both the level of partners and the coverage of therapeutic areas are upgrading. Seven of the Global Top 10 MNCs have placed major orders in China in 2026, moving beyond small biotech-to-biotech deals. The focus areas have diversified from the ADC-dominated trend last year to include bispecific antibodies, siRNA, AI-driven drug discovery, and TCE therapies. Notably, of the six bispecific ADCs with globally first-disclosed clinical data at ASCO 2026, five originate from China, suggesting that China has advanced from a follower to a first/best-in-class echelon in certain complex molecular designs.

When asked about the outlook for the innovative drug market in the second half of the year and its potential to absorb capital flowing out of the AI sector, Mr. Liang offered a preliminary assessment of a rebound rather than a reversal, though the rebound has the potential to develop into a trend. This potential depends on the fulfillment of mid-year performance reports and the "narrative of delivery" being sustained by the BD peak season before Christmas. He clarified that a reversal requires several signals to align: defending key support levels, volume and price increases synchronizing, confirmation of a mid-year earnings inflection point, and the emergence of 2-3 major BD deals before Christmas. Currently, only part of this has been realized. The Hong Kong Stock Connect Innovative Drug Index in late June showed a pattern of "decelerating decline, testing support, attempting a weekly rebound," but the monthly chart remains within a broad range. Future stock selection should shift from "sector beta" to "individual stock alpha" as the sector is expected to "narrow." Intensified international competition in major indications will eliminate lagging pipelines, boosting valuations for winners while pressuring those at the tail end. The era of broad-based gains for innovative drugs is becoming increasingly difficult. Regarding the potential for AI outflows, Mr. Liang believes the sector can absorb a portion, but it will not simply replace the AI sector. Amid an asset scarcity environment, innovative drugs possess "tech-like" attributes, including a global narrative and technological density, but they are not a "tech substitute," with distinct valuation systems and catalyst rhythms. They can accommodate some capital but will follow their own independent pace. Key catalysts for the second half of the year include the mid-year reporting season in July-August, which will verify the earnings inflection point, the WCLC and ESMO conferences in September and October, the implementation of the medical insurance and commercial insurance directory adjustments in October-November, and the ASH conference along with the pre-Christmas BD peak season in December. If data and BD deals are consistently delivered at these points, the rebound could evolve into a second wave of trend-driven momentum.

Regarding risks in innovative drug investment for the second half of the year, Mr. Liang highlighted three key areas. First, there is the trading risk of clinical data falling short of expectations. Overly optimistic assumptions without proof of drugability may be baseless. Following ASCO, the data releases at ESMO and WCLC in the second half represent a double-edged sword; positive results can be a strong catalyst, but disappointing data could lead to significant stock price corrections and heightened volatility. Second, there is the "royalty illusion" associated with the Co-Co model. While the current trend of "co-development + co-commercialization" appears to involve large total packages, the actual royalty schedule, overseas expense sharing, and credit levels of partners vary greatly. The pace of pipeline milestone achievement differs considerably between collaborations with top-tier MNCs and smaller overseas biotech firms. Investors must carefully separate "certain payments" from "probability-weighted milestone payments." Third, there is the risk of pipeline consolidation and valuation divergence. Intensified international competition in major indications like PD-1 and HER2 ADC will weed out lagging pipelines, preventing a broad rally. The sector will experience internal "narrowing," where successful players see valuations rise while laggards face valuation compression. In the Hong Kong market, which is more liquidity-sensitive, exchange rates and the flow of Southbound Stock Connect are crucial. Hong Kong dollar interest rates and foreign capital flows amplify the sensitivity of innovative drug stocks. Sustained net inflows through Southbound Stock Connect can first repair the sector's liquidity discount; conversely, even with strong fundamentals, valuations may struggle to recover effectively. The core of Hong Kong-listed innovative drug valuation recovery is a dual-driver process of "liquidity repair + BD delivery," where both are indispensable.

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