China Securities has released a research report stating that the total number of drugs in the 2026 edition of the National Essential Medicines List (NEML) has increased to 794. The inclusion of GLP-1 drug semaglutide for the first time and the large-scale entry of monoclonal antibodies indicate that adding innovative drugs to the list will accelerate sales growth at the grassroots level. For the traditional Chinese medicine (TCM) sector, market focus is on the release of the NEML and second-quarter earnings expectations. The pharmacy sector is primarily focused on Q2 performance and June same-store sales, while the distribution sector is watching Q2 results and accounts receivable collection.

China Securities Co., Ltd.'s key views are as follows:

Weekly Review by Sub-Sector: Pharmaceutical Industry Chain

The pharmaceutical industry performed well this week. The total number of drugs in the 2026 NEML increased to 794 (+15.9%). The first-time inclusion of GLP-1 semaglutide and the large-scale entry of monoclonal antibodies suggest that the inclusion of innovative drugs in the NEML will accelerate grassroots market penetration. Hengrui Medicine reported positive Phase II clinical results for its GLP-1/GIP dual-target drug, tirzepatide, for obesity combined with PMOS, showing up to a 20.2% weight reduction at 32 weeks. The company is also developing a TCE technology platform for a PSMA/EGFR/CD3/CD28 tetra-specific antibody prodrug. China Biologic Products expanded its commercialization partnership with GSK for respiratory products, covering over 9,000 hospitals. It also secured a licensing deal with AstraZeneca for the PDE3/4 inhibitor TQC3721, involving a $200 million upfront payment and up to $1.9 billion in milestones. Haisco Pharmaceutical Group reported H1 2026 net profit attributable to shareholders of RMB 790-870 million, a year-on-year increase of 513%-575%. Vertex acquired Crinetics for $10 billion. Novartis acquired Myricx Bio, a novel toxin ADC company, for $1.5 billion.

Medical Devices and Services

This week (July 6-10), companies like Yirui Technology and Haitai New Light experienced adjustments, possibly related to the overall adjustment in the technology sector. It is recommended to increase allocation to the medical device sector for 2026. In the short term, it is advisable to seize opportunities for earnings improvement and valuation recovery in companies expected to see better performance in 2026. Multiple leading companies in various sub-sectors are expected to enter a period of accelerated growth in 2026. It is also recommended to monitor new technological directions such as surgical robots and brain-computer interfaces, as related technological breakthroughs and commercialization progress are expected to continue driving sector sentiment.

Traditional Chinese Medicine, Biologics, and Commercial Sectors

1) Traditional Chinese Medicine: The sector outperformed the Shenwan Pharmaceutical Index and the broader market this week. The sector continued its recovery, with market focus on the NEML release and Q2 earnings expectations. Additionally, the market continues to monitor the impact of external policy changes, such as the special pricing regulation for "four same drugs" and centralized procurement of TCMs.

2) Biologics: The sector outperformed the pharmaceutical index and the broader market this week. The sector adjusted along with the overall pharmaceutical industry this week, likely due to fund flow factors.

3) Pharmaceutical Commerce: The sector outperformed the Shenwan Pharmaceutical Index and the broader market. The pharmacy segment is primarily focused on Q2 performance and June same-store sales, while the distribution segment is focused on Q2 results and accounts receivable collection.

Public Fund Holdings in Pharmaceuticals for Q1 2026

Public fund holdings in the pharmaceutical sector increased quarter-over-quarter in Q1 2026, with increased allocations to innovative drugs and the CXO industry. The proportion of public fund holdings in pharmaceuticals for Q1 2026 was 8.51%, an increase of 1.42 percentage points from the previous quarter. Excluding index funds and pharmaceutical-specific funds, the shareholding ratio was 2.24%, an increase of 0.49 percentage points from the previous quarter. Viewed over a longer period, the current fund holding ratio is below the historical average. In Q1 2026, funds increased their holdings in the innovative drug and CXO industries.

A-Share Market Review

The pharmaceutical sector outperformed the broader market this week, with CRO/CMO and pharmaceutical distribution performing well. The pharmaceutical index fell 1.14% this week, while the Wind All-A Index fell 2.88%, meaning the pharmaceutical index outperformed the broader market by 1.74%. Since the start of 2026, the pharmaceutical index has underperformed the broader market by 12.12%. In terms of sub-sectors, CRO/CMO (+1.73%) and pharmaceutical distribution (+0.48%) performed well this week.

Hong Kong Stock Market Review

The pharmaceutical sector underperformed the broader market in Hong Kong this week, with health supplements and internet healthcare performing well. The Hang Seng Healthcare Index rose 0.07% this week, while the Hang Seng Index rose 3.53%, meaning the healthcare index underperformed the broader market by 3.46%. Since the start of 2026, the Hang Seng Healthcare Index has outperformed the broader market by 0.06%. In terms of sub-sectors, health supplements (+26.15%) and internet healthcare (+3.68%) performed well this week.

Risk Warnings

Industry policy risks; risks of research and development falling short of expectations; risks of regulatory approval delays; risks from macroeconomic environment fluctuations.