Despite a rebound and valuation repair in the innovative drug sector since August, driven by oversold conditions, profit-taking and divergent stock performances following earnings results suggest future trends will increasingly depend on commercialization progress and earnings validation.

The innovative drug index (8841049.WI) has gained 13.8% since August, with a maximum rebound of over 32% from its year-low in late June. This has led to a significant recovery in the net asset value of several innovative drug ETFs. However, the sector showed clear divergence and adjustment last Friday. On August 14, the CSI Innovative Drug Industry Index (931152.CSI) closed down 1.3%, while the Hong Kong market also exhibited a divided pattern, with the Hang Seng Stock Connect Innovative Drug Select Index falling 2.2% as its constituent stocks experienced mixed gains and losses.

This round of the rally was catalyzed by better-than-expected results from CXO leaders and active business development (BD) transactions. However, as interim reports are released, the market is now pricing in positive news and shifting focus to more certain factors. According to an analysis by Industrial Securities, market attention has moved from "the transaction itself" to the commercialization execution of core assets. Products that previously secured BD deals are now entering overseas pivotal clinical trials, registrations, and commercialization phases. In September and October, major academic conferences and key data disclosures are expected to provide continued catalysts for the sector. China International Capital Corporation (CICC) noted that the pricing logic for the innovative drug sector will gradually return to its intrinsic value, with a focus on commercialization ramp-up, BD sustainability and revenue recognition, and the internationalization of potential blockbuster drugs.

Valuation repair and profit-taking. Specifically, medical-themed funds have rebounded rapidly since August, showing a clear phase of valuation repair. Notably, profit-taking has emerged. According to Wind data, as of August 14, the total size of seven ETFs tracking the CSI Innovative Drug Industry Index had decreased by over 11 billion yuan in the past week due to net redemptions. During the same period, the combined size of 28 ETFs, including those covering Hong Kong-listed innovative drug stocks, shrank by over 24 billion yuan. Among them, the GF China Hong Kong Innovative Drug ETF (including its feeder fund) alone saw a size reduction of 978 million yuan. In contrast, over the first seven months of the year, the 28 innovative drug-related ETFs saw total net inflows of over 39.3 billion yuan, with the China Universal SSE Stock Connect Hong Kong Innovative Drug ETF attracting net inflows of nearly 6.7 billion yuan, and others like the GF Innovative Drug Industry ETF, Yinhua Innovative Drug Industry ETF, GF Hong Kong Innovative Drug ETF, and Guotai STAR Market Innovative Drug ETF also ranking high in net inflows.

Despite the market recovery, institutional interest remains high. Data from PaiPai.com shows that last week, the pharmaceutical and biotech sector topped the list of Shenwan primary industries with 104 research visits. BeiGene, Zelgen Biopharmaceuticals, and Zhejiang Jiuzhou Pharmaceutical were visited by institutions 42, 35, and 23 times, respectively, ranking third, fourth, and sixth among the most popular stocks for research. "The sudden surge in institutional research activity reflects a substantial increase in market attention to the pharmaceutical sector, but whether this can translate into sustained capital inflows remains to be seen," said an analyst. They believe the sustainability of this rally is stronger than previous ones, primarily due to generally positive CXO interim reports and the emerging globalization of Chinese pharmaceutical companies. However, market capital is limited, with AI and computing still occupying significant active funds, making it difficult to fully shift capital to the pharmaceutical sector. Lion Fund Management believes that the sector has recently rebounded after being oversold, and valuations have entered a reasonable range. However, an index-level rally requires a resonance between industrial logic and market cycles. The institution judges that the performance of CXO and life science services upstream is gradually being recognized by the market, but further upside still requires earnings validation. The innovative drug sector as a whole has also entered a period of earnings and clinical data validation, needing to see continuous progress in "deepening BD."

Divergence signals emerge, market begins to "verify authenticity." At the stock level, following several innovative drug leaders reporting better-than-expected results, the market has started to price in the positive news. Specifically, BeiGene (688235.SH) reported first-half revenue of 22.219 billion yuan, up 26.8% year-on-year, with a net profit attributable to parent company of 3.271 billion yuan, surging 627.1%. After the impressive earnings report, the market showed sharp divergence. On August 6, BeiGene's A-shares opened over 4% higher but then fluctuated lower, eventually closing down 4.13% with an amplitude of 10.19%. Similarly, Zelgen Biopharmaceuticals (688266.SH) reported first-half operating revenue of approximately 1.205 billion yuan, a massive 220.88% year-on-year increase, with a net profit attributable to parent company of 640 million yuan, up 946.91%. Following the earnings release, Zelgen's stock price closed at 107.42 yuan on August 3, down 12.02%. This week, stocks within the sector have continued to fluctuate, showing an alternating pattern of gains and losses. Additionally, several companies have reported significant growth in their interim results. In the CXO (Contract X Organization) sector, WuXi AppTec (603259.SH) reported record first-half results, with revenue of 28.897 billion yuan, up 38.93% year-on-year, and a net profit attributable to parent company of 11.08 billion yuan, up 29.43%. Among companies that have disclosed interim performance forecasts, Joinn Laboratories (603127.SH) expects its net profit attributable to parent company to increase by up to 1,377.4% year-on-year. During the same period, Biocytogen Pharmaceuticals (688796.SH) saw a year-on-year upper limit growth of 412.71%.

On the industry front, leading innovative drug companies have seen domestic commercialization ramp-up and significant net profit growth. However, the value of the highly watched industry signal—BD transactions—is also under market scrutiny. The National Medical Products Administration (NMPA) previously disclosed that in the first half of 2026, Chinese innovative drug companies concluded 81 out-licensing transactions with a potential nominal total value of approximately $110 billion, reaching about 80% of the total for the full year of 2025. "BD is an important validation of a company's innovation capability, but it cannot replace a company's own value judgment," the industry analyst explained. While the number and value of BD transactions in the first half of 2026 hit new highs, the transaction structure is changing. The proportion of upfront payments is declining, and cases of cooperation termination are increasing, reflecting stricter due diligence and clinical data validation of BD assets by global pharmaceutical companies. For example, Rongchang Bioscience (688331.SH) expects first-half 2026 revenue of approximately 5.85 billion yuan, a massive 433% year-on-year increase from 1.098 billion yuan in the same period of 2025. Its net profit attributable to parent company is forecast at 4.7 billion yuan, a complete turnaround from a net loss of 450 million yuan in the same period last year. The company attributed the change primarily to a "significant increase in RC148 technology licensing revenue." Industry analysis suggests that this type of profit is a one-time technology licensing revenue recognition, and its sustainability requires further observation. Institutions generally believe that as the intensive interim report disclosure period comes to an end, the quality of earnings delivery will determine the sector's next direction. Companies with truly sustainable profitability are expected to stand out amid the divergence. Currently, the internal differentiation within the sector is significant, with many small and medium-sized innovative drug companies still burning cash and incurring losses, lacking earnings delivery. Thematic speculation is unlikely to drive the entire sector into a sustained rally. Great Wall Fund Management reminds that the innovative drug sector's trend remains volatile with few major catalysts. The focus should be on a semi-annual to annual cycle, emphasizing targets with pipeline delivery certainty and high-speed earnings growth characteristics.