According to a research report released by China Securities Co., Ltd., innovative drug companies maintained revenue growth in H1 2025 with significantly narrowed losses, while valuations surged substantially, reflecting enhanced global competitiveness. Innovative drug companies are gradually scaling up their performance and entering a harvest period. The industry is accelerating development driven by three forces: technological breakthroughs, accelerated internationalization, and policy support.

The CXO industry overall demonstrated strong recovery momentum in 25H1, with Q2 continuing the improvement trend from Q1. Industry adjustment is basically complete and is expected to enter a new phase of development. Good trends in both external and domestic demand are driving industry valuation recovery.

In Q2 2025, the biopharmaceutical upstream sector saw slight year-over-year revenue growth and substantial increases in net profit attributable to shareholders. The industry has reached its bottom overall, with revenue gradually stabilizing, corporate profitability significantly recovering, and sector stabilization and recovery trends becoming clear.

**Global Perspective: External Challenges Intensify While China's Pharmaceutical Industry Competitiveness Continues to Rise**

From an international comparative advantage perspective, China possesses population and domestic demand advantages, manufacturing and supply chain advantages, while innovation capabilities are rapidly improving. The number of Chinese assets going overseas continues to increase. The United States maintains clear advantages in innovation and early-stage R&D, along with a high-pricing domestic market. Although external challenges are increasing, overseas markets still present significant opportunities. It is recommended to focus simultaneously on domestic market share expansion and overseas expansion opportunities.

**Domestic Focus: Stabilizing Domestic Foundation, Embracing Innovation and Integration**

1) Policy Outlook: Reform enters deep waters, with high-quality growth becoming the norm. In the second half of 2025, key focus areas include optimization of drug and medical consumables centralized procurement policies, diversified payment systems, and medical service price reforms.

2) Pharmaceutical Industry Chain: Optimizing centralized procurement, actively pursuing innovative transformation, focusing on supply chain security.

3) Medical Devices: Optimistic about import substitution and M&A integration opportunities, actively monitoring new technology directions such as AI and brain-computer interfaces.

4) Focus on the timing of operational recovery and long-term transformation and upgrading directions in traditional Chinese medicine, pharmacies, distribution, medical services, and vaccine industries.

**External Expansion: Grasping Rhythm and Pathways, Actively Developing Overseas Markets**

1) Innovative Drugs: Chinese innovation shines on the international stage, with industry trends continuously strengthening.

2) Pharmaceutical Upstream and Life Sciences: Actively developing overseas markets, seeking second growth curves.

3) Active Pharmaceutical Ingredients: Tariff disruptions have limited short-term impact, focus on industry transformation opportunities.

4) Medical Device Internationalization: Firmly optimistic about overseas expansion trends, focusing on independent sales and business development opportunities for some innovative devices.

5) Blood Products Overseas Expansion: IVIG provides opportunities for blood products overseas expansion, with overseas registration continuing to advance.

6) Vaccine Overseas Expansion: Business models becoming more diversified, progress expected to accelerate.

**Investment Outlook for H2 2025: Continuing to Seek New Growth and Industry Integration Opportunities**

Looking ahead to the second half of 2025, we remain optimistic about:

**Innovation Theme**: Global liquidity is expected to continue improving, which is favorable for pricing innovative assets. National policies encourage industry innovation. It is also recommended to actively monitor developments in frontier technologies. This includes innovative drugs and pharmaceutical companies (bispecific and multispecific antibodies, TCE, nuclear medicine, etc.), and medical devices (AI, brain-computer interfaces, etc.).

**Overseas Expansion Theme**: China's pharmaceutical industry is gradually gaining global competitiveness. In the long term, the pharmaceutical industry is expected to produce global large companies, but investors need to have adequate expectations for challenges brought by overseas expansion, which will inevitably be a long and complex process. Representative sub-sectors are innovative drug and device companies, with assessment of companies' product and team international competitiveness being the core stock selection criterion.

**Marginal Change Theme**: (1) Policy Improvements: Including pharmaceutical distribution and medical equipment renewal themes. Distribution-related companies; equipment renewal theme includes Mindray Medical, United Imaging Healthcare, Carestream Health, etc. (2) Supply-Demand Relationship Improvement: CXO industry, which has undergone sufficient adjustment previously, with global investment and financing recovery expected to drive gradual warming of global client demand; life sciences and biopharmaceutical upstream.

**Integration Theme**: It is recommended to focus on medical device and traditional Chinese medicine sub-sectors, some pharmaceutical companies, and central and state-owned enterprises.

**Risk Warnings**: Industry policy risks; R&D progress falling short of expectations; regulatory approval delays; macroeconomic environment volatility risks.