The innovative drug sector has quietly begun a recovery since mid-June, yet there remains widespread skepticism in the market regarding the sustainability of this rally. In reality, looking beyond short-term sentiment swings to the industry's fundamentals, the sector is currently in a highly attractive phase for positioning, whether judged by fundamental prosperity, the density of upcoming catalysts, valuation levels, or the pace of capital inflows. Multiple industrial logics—accelerating domestic penetration, a simultaneous rise in the quantity and quality of outbound BD deals, and the concentrated fulfillment of global clinical trials—continue to be validated, indicating that the rebound in innovative drugs has only just begun.

Four Dimensions Confirm High Sector Prosperity: Domestic and External Demand in Sync, Globalization Enters Fulfillment Phase

On the domestic demand side, the overall size of China's pharmaceutical market is approximately 1.5 trillion yuan, yet innovative drugs account for only about 10%. The increase in penetration rate is a long-term, irreversible core trend. Currently, the innovative businesses of core innovative drug companies generally maintain growth rates above 20%, demonstrating robust resilience. This year's anti-corruption campaign in healthcare primarily aims to standardize sales practices, having minimal impact on the performance of innovative drugs; interim reports from the sector are highly likely to show stable results. Simultaneously, the structure of medical insurance expenditures continues to tilt towards innovative drugs. Against the backdrop of pressure on generics and in-hospital medical devices, the market share of innovative drugs is expanding against the trend.

On the external demand side, the industrial trend of innovative drug globalization is accelerating. The proportion of Chinese innovative drug assets in the pipelines of multinational pharmaceutical companies has rapidly increased from around ten percent in 2024 to over forty percent in the first half of 2026. Collaboration models have also evolved from single-asset licensing to platform-based, multi-asset deep partnerships. More significantly, nine domestic innovative drugs are set to complete global Phase III clinical trials this year, with a concentrated entry into the global commercialization phase next year. Companies like Kelun-Biotech and Microcyto have already delivered successful results, with follow-up candidates continuing to advance, indicating that the global value of China's innovative drugs is gradually transitioning from expectation to reality.

Catalysts: Dense Schedule in the Second Half Provides Continuous Trading Opportunities

A succession of catalytic events in the second half of the year will provide sustained momentum for the sector. Stable interim results will further solidify the sector's fundamental foundation. Major global oncology conferences such as ESMO and WCLC will be held successively, with a large volume of domestic innovative data from cutting-edge fields like bispecific antibodies, ADCs, and KRAS inhibitors set to be presented. Platform-based, multi-asset BD collaborations are expected to exceed expectations, continuously validating the global value of domestic innovation. The release of global Phase III data for key bispecific antibodies by year-end will serve as a core catalyst in the oncology field. Bispecific antibodies, as a long-term high-growth sector, see the long-term value of related leaders still significantly undervalued by the market.

Valuation: Still in Mid-Recovery Phase, Overseas Value Not Fully Priced In

From a relative valuation perspective, the current A-share innovative drug index has not yet broken through its year-to-date high, merely recovering to a mid-level point from after last year's rally began. The extent of recovery lags far behind the degree of fundamental improvement. In terms of absolute valuation breakdown, using metrics like 3x PS for domestic business and 1x PS for overseas business, only a very few leaders have reached new highs. For most top-tier companies, the value of their overseas business is not fully reflected, while mid-tier leaders like Hengrui have an even larger valuation gap for their international operations. The domestic market will see a wave of innovative drug companies achieving tens of billions in revenue, yet their current market capitalizations are far from matching their long-term growth potential.

Capital Flows: Incremental Funds Just Beginning to Enter, Room for Further Inflow

Recently, non-healthcare thematic funds have shown significantly increased interest in innovative drugs. However, judging by overall holdings and the pace of entry, this is still in its early stages, far from reaching a level of excessive capital enthusiasm. As the sector's profitability effect gradually becomes apparent, coupled with continuous industrial catalysts, subsequent incremental funds are expected to steadily enter, driving further valuation recovery.

Positioning Strategy Across Three Core Tiers

Following the logic of "holding front-tier leaders for long-term structure, investing in mid-tier laggards for valuation repair, and capturing alpha in back-tier stocks through event catalysts," core A-share targets can be divided into three main tiers for positioning.

Front-Tier Leaders: High-Quality Assets with Strongest Long-Term Growth Certainty

Baili Tianheng is a leading enterprise in China's bispecific antibody and ADC field, possessing a top-tier R&D pipeline and management team. Its core products are globally competitive, offering vast long-term growth space, making it a core elastic target in this innovative drug rally.

Kelun Pharmaceutical is a benchmark for domestic ADC globalization, with a leading global clinical advancement pipeline and continuous breakthroughs in BD collaborations. Its domestic innovative business maintains rapid growth, driving strong performance certainty from dual domestic and external demand, making it a core asset combining growth and stability.

Haisco Pharmaceutical continues to deliver on its innovative transformation results, with a well-developed pipeline and innovative business revenue growth leading the industry. The company's R&D efficiency and governance capabilities are outstanding, making it a high-quality target with both growth potential and value.

Mid-Tier Laggard Leaders: Solid Fundamentals, Ample Room for Valuation Repair

Hengrui Pharmaceuticals, as the absolute domestic leader in innovative drugs, leads the industry in R&D pipeline depth and commercialization capability. Its gains in this recovery have been relatively lagging, and the long-term value of its overseas business is not yet fully reflected in its market capitalization, leaving ample room for valuation repair. It serves as a stabilizing anchor for the sector's rally.

BeiGene is a globalized innovative drug leader, with its product commercialization capability already validated in global markets and its overseas revenue share continuously increasing. Currently trading at low valuations, it stands to benefit fully from the major trend of innovative drug globalization.

Back-Tier Alpha Targets: Clear Independent Catalysts, Attractive Value

Beta Pharma has deep expertise in targeted innovative drugs, with a solid core product foundation. Upcoming global Phase III data for its pipeline provides clear event catalysts, and its valuation is within a reasonable range.

InventisBio focuses on the precision targeted therapy field, with its core pipeline advancing smoothly and key clinical data readouts expected within the year, highlighting its independent alpha attributes.

ZhongSheng Pharmaceutical possesses dual business lines in innovative drugs and traditional Chinese medicine. Its innovative pipeline is gradually entering a harvest period, giving it independent market logic.

Microcyto saw its original innovative drug's global Phase III clinical results exceed expectations, accelerating its globalization process. The value of its original R&D platform is undervalued by the market, and ongoing performance delivery will continue to validate its growth attributes.

Overall, this round of recovery in the innovative drug sector is a valuation regression supported by fundamentals, not short-term thematic speculation. Current industrial prosperity continues to rise, with a dense schedule of catalysts ahead, while valuations and capital flow conditions remain at low levels, indicating the rally is far from over. Positioning along the three-tier strategy allows investors to capture the long-term growth returns of leaders while also seizing opportunities from laggard recovery and event-driven elasticity.