China's pharmaceutical sector has seen a significant pullback in its overall valuation from previous highs and is currently positioned at a historical median level. Broadly, the pharmaceutical manufacturing segment remains in a challenging transitional phase. In the first half of 2026, the number and value of business development (BD) deals involving domestic pharmaceutical companies continued to set new records, with the total annual value of outbound transactions expected to reach another all-time high. This outlook supports a positive view on the potential revaluation of domestic innovative drugs. Regarding medical equipment, attention is advised towards emerging technological directions, such as brain-computer interfaces.

Wanlian Securities primary views are outlined as follows:

Pharmaceutical Sector Underperformed in First Half 2026

In the first half of 2026, the Shenwan Pharmaceutical Index declined by 10.26%, significantly underperforming the CSI 300 Index by 17.81 percentage points and ranking 16th among the 31 primary Shenwan industry sectors. Looking at sub-sector performance, only the healthcare services sector managed to record a positive gain following a rebound in June. The sector's overall valuation has retreated considerably from prior peaks and now sits at a median historical level.

Production Data Shows Low Volatility, Payment Side Stable, Industry Operations Steady

From January to May 2026, cumulative operating revenue for the pharmaceutical manufacturing industry fell by 1.50% year-on-year, while total profit saw a cumulative decline of 1.30%. Overall, the pharmaceutical manufacturing sector is currently experiencing the growing pains of transformation. Data from medical insurance funds shows that from January to May 2026, income reached 1.346268 trillion yuan, with expenditures at 974.182 billion yuan, resulting in a current surplus of 372.086 billion yuan. Fund operations remain generally stable, with medical insurance reserves relatively ample.

Innovative Drugs: BD Deal Value and Volume Hit New Highs, Chinese Innovation Steps onto World Stage

Domestic innovative drugs are demonstrating sustained momentum across policy support, R&D achievements, and commercialization progress. The overall policy direction has shifted from a past emphasis on cost control to vigorously encouraging high-quality original innovation. The first half of 2026 saw the number of new drug reviews and approvals reach new highs. Concurrently, the volume and value of BD events involving domestic pharmaceutical firms continued to break records, with the total value of China's pharmaceutical outbound transactions reaching $99.7 billion, close to 73% of the full-year 2025 figure, suggesting the annual total is poised for another record. In terms of innovation quality, the results presented by Chinese companies at international academic conferences validate that their innovative drug R&D quality has reached global standards, marking a transition from follower to leader. A positive outlook is held for the revaluation of domestic innovative drugs.

CXO: AI Enhances Drug R&D Efficiency

Since the first quarter of 2025, the CXO sector has achieved five consecutive quarters of positive year-on-year growth in both operating revenue and net profit attributable to shareholders, with growth rates maintained above 20%. Simultaneously, market size is expected to grow steadily, with a projected industry CAGR of 18.3% from 2023 to 2030. The application of artificial intelligence technology in the drug R&D process can significantly reduce the time and cost required for development while improving success rates. AI is rapidly reshaping the entire pharmaceutical value chain, covering stages from early research to commercial production and post-market surveillance.

Medical Devices: Focus on Emerging Technologies Like Brain-Computer Interfaces

Influenced by industry factors such as DRG/DIP payment controls and centralized procurement of high-value consumables, the overall performance of the medical device sector is still in a consolidation phase, with the industry experiencing revenue growth without corresponding profit increases. It is advisable to monitor emerging technological directions, such as brain-computer interfaces. Currently, the brain-computer interface industry is in its early stages, with expected compound growth rates significantly faster than the overall medical device sector. Various technological pathways are not yet solidified, presenting opportunities for both domestic and international companies to gain a first-mover advantage.

Risk factors include the potential for R&D failure in innovative drugs and devices, BD progress for innovative drugs falling short of expectations, and innovative drug pricing not meeting forecasts.