Looking back at the recent industrial landscape of innovative drugs, a clear path from research and development to commercialization is unfolding. The high-intensity R&D investment of the past few years is now being converted into tangible pipeline depth. Domestic innovative drugs in areas such as ADC, bispecific antibodies, and autoimmune diseases are successively entering late clinical stages. Their performance in global multi-center trials has shown they can compete with products targeting the same overseas targets. At the same time, supporting policies are deepening in tandem. With the implementation of the new version of the medical insurance catalog's pre-application mechanism, the "medical insurance + commercial insurance" dual payment system is gradually taking shape, clearing channels for the clinical penetration of innovative drugs.

This optimization of the industrial ecosystem is directly reflected in the reshaping of corporate profit models. As the dual payment system unblocks commercialization bottlenecks and Business Development (BD) deals going overseas open up incremental revenue space, innovative drug companies are gradually moving away from relying solely on financing and entering a self-sustaining cycle of commercial cash flow. When the long-term industry trend becomes increasingly clear, but the clinical and commercialization uncertainties at the individual stock level persist, using index-based tools to cover the entire track might be a pragmatic choice that balances returns and risks.

Positioning Upgrade: From Livelihood Security to Globally Competitive New Quality Productive Forces

If we zoom out to the perspective of national strategy, we find that the underlying logic of the innovative drug sector has undergone a fundamental shift. The 2026 Government Work Report explicitly listed biomedicine as an "emerging pillar industry" for the first time, placing it on the same strategic level as integrated circuits and aerospace. Prior to this, the "15th Five-Year Plan" had already established a full-chain support system around five dimensions: drug R&D, review and approval, clinical access, payment security, and industrial investment and financing. The goal is to elevate biomedicine from a project ensuring people's livelihood to a track for new quality productive forces participating in global competition, effectively promoting the rapid and precise R&D and market launch of domestic innovative drugs.

While vigorously supporting industrial development, foreign investment in biomedical innovation has also been further "liberalized." The "Catalogue of Encouraged Industries for Foreign Investment (2025 Edition)," issued by the National Development and Reform Commission and the Ministry of Commerce and implemented on February 1 this year, added new content in the pharmaceutical field, including the development and production of chemical innovative drugs with new targets and mechanisms, the production of antibody-drug conjugates (ADCs), the development and production of nuclear drugs, and the R&D and production of zero-magnetic medical equipment. Concurrently, the capital market is simultaneously broadening financing channels. The Shanghai Stock Exchange revised its listing rules for the STAR Market, adding support clauses for cutting-edge segments like biological drugs, gene drugs, and brain-computer interfaces, significantly relaxing the entry barriers for innovative drug companies to list on the capital market, thus opening a complete channel for direct financing in the industry.

The change in the payment mechanism might be an even more critical variable. The first edition of the Commercial Health Insurance Innovative Drug Catalog was implemented at the end of 2025, including 19 high-value innovative drugs. This marks a new stage for China's innovative drugs entering commercial insurance settlement, initiating the "medical insurance + commercial insurance" dual-track payment pattern. In April 2026, the General Office of the State Council issued a document granting a 3-year price stability protection period for high-level first-in-class (FIC) and best-in-class (BIC) innovative drugs, establishing a tiered initial pricing mechanism centered on clinical value. In May of the same year, the medical insurance catalog opened its pre-application mechanism for the first time, shortening the time from new drug launch to inclusion in the medical insurance catalog to one year. It also established a linkage mechanism between the commercial insurance innovative drug catalog and the medical insurance catalog, expanding the payment space for innovative drugs.

The true significance of this combination of policies may not lie in the intensity of individual stimuli, but in significantly enhancing the predictability of policy direction for innovative drug companies. Research indicates that with the implementation of a tiered initial pricing mechanism centered on clinical value and the supplementation of commercial insurance payments, innovative drugs with high clinical value are likely to match higher pricing. With the payment pressure shared by medical insurance and commercial insurance, the profit model of innovative drug companies is expected to gradually shift from "exchanging volume for price" to "value realization." On this basis, the sector's valuation system is also showing signs of shifting from a manufacturing-oriented pricing logic to that of tech growth stocks. Although the revaluation process may not be achieved overnight, the certainty of the direction is significantly higher than a few years ago.

Overseas Expansion Evolves: From Single Product Licensing to Deep Collaboration in the International Value Chain

Policy support provides the confidence for domestic innovative drug companies to go global, but what truly defines the nature of this market cycle is a profound qualitative change in the logic of domestic innovative drug overseas licensing (BD). Looking back from the present, BD for domestic innovative drugs should no longer be considered a temporary market phenomenon, but rather a long-term, globalized industrial wave. Statistics from PharmaCube show that in the first quarter of 2026, the total value of Chinese BD transactions accounted for 71% of the global total, while the proportion of upfront payments also reached 52%.

Extending the timeline, according to statistics from Dongwu Securities, the proportion of pipeline acquisitions from China by multinational pharmaceutical companies (MNCs) has steadily risen from 8% in 2020 to 30% in the first quarter of 2026. Although structural changes are slow variables, the direction is clear. China's position in the global pharmaceutical industry chain has shifted from the periphery to the center. BD is no longer an occasional event for a few leading companies but is gradually becoming an industry norm. One of the drivers of this wave is likely the patent cliff that the global pharmaceutical industry is facing. In the coming years, many major global MNCs will have a large number of core patents expire. Evaluate Pharma statistics show that between 2026 and 2030, the top 25 large pharmaceutical companies face a patent cliff for over $300 billion in cumulative market value, with approximately $50 billion annually facing patent cliff risks, which could directly impact the medium-to-long-term performance growth of MNCs.

Correspondingly, top MNCs have ample cash reserves on their books, giving them strong capabilities for pipeline mergers, acquisitions, and licensing. In the context of scarce global innovative asset supply, China, leveraging its demographic dividend of engineers and clinical efficiency advantages, can provide differentiated, clinically promising, and cost-effective innovative pipelines in bulk. This makes China a primary partner for MNCs looking to fill their pipeline gaps. This high degree of matching between supply and demand forms the core underlying logic for the long-term prosperity of BD, potentially bringing long-term opportunities for Chinese pharmaceutical companies going global. An even more profound change is the generational upgrade of the cooperation model itself. Early BD transactions were often described as "selling seedlings," where domestic companies mostly only collected upfront payments. The realization of subsequent milestones and sales royalties heavily depended on overseas partners, with domestic companies playing the role of primary suppliers.

In the past two years, the form of cooperation has clearly moved up the value chain, extending from single product licensing to deep binding through co-development and co-commercialization, retaining the potential future value of innovative drug assets. This evolution means that domestic pharmaceutical companies are transitioning from purely being pipeline suppliers to becoming deep collaborative partners in the global value chain, gaining more say in profit distribution and international market operations. Through this risk-sharing model, domestic companies can quickly recoup funds to reinvest in R&D, leverage the mature overseas systems of MNCs to achieve global product launches, and accumulate experience in globalized operations. This role change not only enhances the potential returns per transaction but, more importantly, signifies that the R&D capabilities and international vision of Chinese innovative drug companies have received substantive recognition from top global peers. The establishment of this trust relationship reflects a relatively long-term trend.

Accumulated Foundation: Triple Advantages Supporting a Long-Term Industrial Moat

The fact that the BD wave can evolve into an industrial trend does not rely solely on external patent cliff opportunities but ultimately depends on the underlying capabilities accumulated domestically over more than a decade. The three major advantages—review policies, high-end talent, and R&D efficiency—have been deeply entrenched over a long period, forming a substantial moat that other countries may find difficult to replicate in the short term. First is the systemic dividend from the continuous deepening of drug review reforms. Since the self-inspection of clinical trial data began in 2015, marking the start of reforms, China's drug regulatory system has undergone a transformative change. Joining the ICH in 2017 achieved global alignment of review standards. The 30-day IND fast-track review pilot was launched in July 2024 and expanded nationwide in January 2026. Currently, the standard NDA review timeline for innovative drugs has been compressed from 200 days to 130 days, further reduced to 70 days for rare disease drugs. The CDE's review speed is now roughly on par with the FDA. More symbolic is the reversal of review influence. The world's first bispecific ADC and some targeted innovative drugs have received global approval first from the CDE, completely rewriting the industry convention where overseas approval preceded domestic approval.

Second is the intellectual compound interest formed by the scale of returning scientists and engineers. In recent years, the wave of overseas scientists returning to China to start businesses has continuously expanded the supply of high-end R&D talent. They bring not only cutting-edge technologies and concepts but also establish a full-chain R&D system adapted to global standards, forming the backbone of China's innovative drug industry. Concurrently, the unique demographic dividend of domestic engineers continues to be released. Relying on large-scale R&D teams, domestic companies can carry out large-scale molecular iteration and optimization in core tracks like ADC linkers, toxin payloads, and bispecific antibody scaffolds. This efficient, low-cost trial-and-error mechanism enables domestic pipelines to quickly upgrade from Me-too to BIC (Best-in-Class) and further to FIC (First-in-Class). According to PharmaCube data, in the first quarter of 2026, China's share of global FIC pipelines reached 45%, surpassing the United States, indirectly confirming China's significant progress in original innovation capabilities.

Finally, there are the efficiency and resource advantages in clinical development domestically. According to PharmaCube statistics, the total number of clinical registrations in China in 2025 was 11,393. As early as 2019, the number of innovative drug-related clinical studies initiated in China surpassed that of the United States, reflecting the continuous enrichment of domestic clinical trial resources. More notably, 8,105 of these clinical registrations were Investigator-Initiated Trials (IITs), accounting for 71%, demonstrating the sustained investment by domestic clinical universities and research institutes in innovative medical transformation. These multiple advantages have gradually positioned China's clinical platform as a core vehicle for early-stage global innovative drug development, continuously attracting MNCs to conduct early pipeline clinical exploration in China. Based on the overlay of these three advantages, cutting-edge tracks like ADC, bispecific antibodies, and small nucleic acids have been able to transition from following to running neck-and-neck, and even leading locally, providing solid performance support for the industry's long-term development.

Although the positive changes at the industrial level are continuous and solid, the capital market's pricing of innovative drugs is influenced by multiple factors, and the current industry valuation is still at a relatively low level. Wind data shows that as of July 27, 2026, the Guozheng HK Stock Connect Innovative Drug Index (987018), reflecting the operating characteristics of listed companies in the innovative drug sector within the scope of the Stock Connect, had a PE-TTM at the 48.96% percentile of the past decade. The CSI HK Stock Connect Healthcare Theme Index (932069), reflecting the overall performance of securities in the medical sector within the scope of the Stock Connect, had a PE-TTM at the 57.27% percentile of the past decade. Both are within the opportunity value range of the indices. This mismatch between an advancing industry and lagging valuations may offer a relatively comfortable window for long-term positioning.

In terms of choosing investment tools, products linked to these two indices can form a complementary allocation. The HK Stock Connect Innovative Drug ETF ICBC (159217), tracking the Guozheng HK Stock Connect Innovative Drug Index (987018), focuses on the core links of innovative drug R&D and production, offering high purity. Its quarterly rebalancing mechanism promptly removes samples with weakened innovative drug attributes. The HK Stock Connect Healthcare ETF ICBC (159167), tracking the CSI HK Stock Connect Healthcare Theme Index (932069), comprehensively covers core leaders in various medical fields in Hong Kong, including medical devices, medical services, and pharmaceutical and biotechnology services, encapsulating the broad-spectrum opportunities of the entire healthcare industry chain. The Hong Kong market gathers many leading healthcare companies not listed on the A-share market and is a major force in recent Chinese innovative drug BD going overseas. The compilation rules of these indices may better reflect the industry's continuous positive development trend. For investors aiming to reduce the risks of individual stock clinical trial failures and BD deal volatility, while not wanting to miss the long-term logic of China's rising global share in innovative drugs, a one-basket allocation through a reasonable combination of these two index products might be a relatively pragmatic path.

Note: 1. Annual returns for the Guozheng HK Stock Connect Innovative Drug Index from 2021 to 2025 were -21.59%, -25.60%, -22.80%, -10.50%, and 66.52% respectively, according to Wind. Index past performance does not predict future results, does not represent fund performance, and does not constitute a guarantee of fund performance. 2. Annual returns for the CSI HK Stock Connect Healthcare Theme Index from 2021 to 2025 were -28.26%, -15.99%, -32.92%, -25.08%, and 48.20% respectively, according to Wind. Index past performance does not predict future results, does not represent fund performance, and does not constitute a guarantee of fund performance. Fund Fee Explanation: 1. On-exchange trading fees for the HK Stock Connect Innovative Drug ETF ICBC are subject to the actual fees charged by the securities company. When investors apply for or redeem fund shares, the subscription/redemption agent broker may charge a commission of up to 0.5% of the transaction amount, which includes related fees charged by the stock exchange and registration institution. The annual management fee rate for this fund is 0.4%, and the annual custody fee rate is 0.07%. 2. On-exchange trading fees for the HK Stock Connect Healthcare ETF ICBC are subject to the actual fees charged by the securities company. When investors apply for or redeem fund shares, the subscription/redemption agent broker may charge a commission of up to 0.3% of the transaction amount, which includes related fees charged by the stock exchange and registration institution. The annual management fee rate for this fund is 0.5%, and the annual custody fee rate is 0.1%. Risk Warning: The views expressed are for reference only, are time-sensitive, and do not constitute investment advice or return commitments, nor do they represent the specific future allocation direction of the fund. The fund manager manages and uses fund assets in accordance with the principles of due diligence, honesty, credit, and prudence. However, the fund manager does not guarantee a profit or a minimum return. The HK Stock Connect Innovative Drug ETF ICBC and the HK Stock Connect Healthcare ETF ICBC are equity funds, with risks and returns higher than hybrid funds, bond funds, and money market funds. These funds are index funds that primarily adopt a full replication strategy to track the market performance of the underlying index. They have similar risk and return characteristics to the underlying index and the stock market it represents. If these funds invest in stocks eligible for the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects, they also bear exchange rate risks and specific risks arising from differences in the investment environment, investment targets, market systems, and trading rules under the Stock Connect mechanism. Investing in ETFs carries specific risks such as the risk of underlying index fluctuations and the risk of divergence between the fund's portfolio return and the underlying index return. Fund investment carries risks. Before investing in a fund, investors should carefully read the "Fund Contract," "Prospectus," "Fund Product Information Summary," and updates and other legal documents. Based on a comprehensive understanding of the product, fee structure, charging standards of each sales channel, and the suitability opinions of the sales institution, investors should choose an investment product suitable for their own risk tolerance. Fund investment is subject to caution.