With a weekly surge of 15.17%, the innovative drug sector has ignited market sentiment. The first half of the year was dominated by the hot optical module theme, leading to rising trading concentration. As the year progressed, capital began seeking a rotation. The long-overlooked biotech sector has now returned to the spotlight with top-tier gains. Some optimistic investors have quipped: the first half belonged to "optics," while the second half may belong to "pharma."

A single bullish candle can change convictions. However, behind this rebound, two significant "disconnects" persist within the innovative drug sector: first, the divergence between a hot industry and cold stock prices; second, the misalignment between capital flows and price gains.

Data shows that the median gain for 56 healthcare-themed ETFs this week reached 14.2%, with a combined net inflow of 66.5 billion yuan. In contrast, while semiconductor and equipment ETFs saw some pullback, single ETFs saw net inflows exceeding 70 billion yuan, indicating capital has not genuinely chased the biotech rally.

So, is this a rebound or a true reversal? Fund companies have provided their latest analysis on four key issues: the reasons behind the fundamental versus stock price disconnect, the logic reassessment of overseas licensing (BD), China's evolving role in global biotech, and the outlook for the sector.

Unpacking the Two Disconnects in Biotech

After a significant rise in 2025, the innovative drug sector faced a deep correction in 2026. Fund managers have analyzed this trajectory. In the first half of 2025, a flurry of BD deals, coupled with a temporary cooling in the AI theme, drove a rapid valuation expansion as capital flowed in. However, the pace of BD deals slowed in the second half, and the continued strong performance of the tech sector created a capital siphoning effect, putting sustained pressure on biotech.

By 2026, the divergence between industry fundamentals and secondary market performance intensified. The primary reason is capital rotation. Analysts note the dominant market theme in 2026 was AI computing hardware, which continued to drain liquidity from sectors like biotech that are sensitive to it. The Hong Kong market, with its high proportion of foreign capital, was particularly affected by outflows amid a strong US dollar, impacting Hong Kong-listed biotech stocks first.

A deeper cause is a mismatch in pricing systems. The short-term secondary market often uses a discounting framework based on "earnings visibility + capital flows," whereas the true value of innovative drug companies stems from long-term global cash flows, often 5 to 10 years out. This mismatch leads to a systematic undervaluation of assets with global potential. Additionally, market "narrative fatigue" and a long validation window for clinical and commercial success have also contributed to the disconnect.

BD Deals: Transitioning from Storytelling to Financial Realization

From a data perspective, the total value of Chinese innovative drug out-licensing deals reached $135.655 billion in 2025. In just the first quarter of 2026, the figure surpassed $60 billion, nearly half of last year's total. More noteworthy than the amount is the structural change: Chinese companies are moving from traditional license-out models to Co-Co global co-development models, sharing risks and profits with multinational giants.

As overseas BD deals begin contributing to revenue, the valuation framework is being reshaped. The market is shifting from a singular "pipeline sales valuation" to a dual approach incorporating "pipeline PS valuation + overseas BD deal PE valuation." However, institutions remain cautious, noting that many smaller biotechs only receive short-term upfront payments, with long-term royalty payments still uncertain.

China's Evolving Role: From Follower to Innovation Source

Fund managers see a qualitative change in the role of Chinese biopharma in the global industry chain. Data shows that as of the end of 2025, Chinese companies originated 4,751 innovative drug pipelines in active development globally, accounting for 33.7% of the total and ranking first worldwide. From 2018 to 2025, the proportion of global innovative drug approvals where China was the first launch region rose from 13.6% to 48.4%.

Analysts point out that Chinese companies are driving approximately 70% of global ADC (antibody-drug conjugate) and 60% of bispecific antibody R&D. In the first half of this year, nearly half of new molecular entities entering clinical trials originated from China, a stark increase from just 17% a decade ago. This growing reliance is partly due to a looming "patent cliff" for multinational pharmaceutical companies, creating a need to acquire Chinese pipelines.

Policy support has also been elevated, with biopharma recently being classified alongside semiconductors and aerospace as a "new pillar industry." Supportive measures include the introduction of commercial insurance catalogs for innovative drugs and rules exempting certain innovative drugs from volume-based procurement during their patent period.

Fund Managers' Outlook: Optimistic but Cautious on Liquidity

Overall, public fund institutions hold a positive view of the sector's outlook. Firstly, valuation and sentiment appear to have bottomed. Key indices are trading at historically low valuation percentiles. Secondly, a series of near-term catalysts are on the horizon, including earnings seasons and major international medical conferences in the coming months, where critical clinical trial data for early overseas BD assets are expected to be released.

However, liquidity remains a key variable. A sustained valuation recovery depends on the broader market liquidity environment and a potential return of incremental funds to the sector. The high-risk appetite of capital also means the sector may experience significant volatility, suggesting potential opportunities on dips.

Key Investment Themes Identified

Fund managers have converged on four main investment directions:

1. Globally leading therapeutic platforms like ADC, bispecific antibodies, and small nucleic acids, which represent the clearest areas of Chinese global competitiveness.

2. The clinical and commercial validation of pipelines following BD deals, where subsequent overseas trial progress, data readouts, and sales royalties will drive value.

3. Industry enablers like Contract Research, Development, and Manufacturing Organizations (CXOs), which benefit from robust fundamentals and high order visibility.

4. Leading companies that have confirmed a profitability inflection point, as the industry moves towards a stage of self-sustaining growth.

In conclusion, while the sector faces near-term volatility linked to liquidity, the long-term view remains constructive. The combination of improved fundamentals, compressed valuations, and pessimistic sentiment may present a favorable window for long-term capital allocation.