Recent performance data indicates the pharmaceutical and biological sector has been underperforming the broader market since 2026. At the operational level, the sector's listed companies reported year-on-year revenue and net profit growth of 2.16% and 7.13% respectively for the first quarter of 2026, suggesting a continued stabilization in business conditions. From a valuation perspective, the sector's current valuation is near its low point over the past year, indicating limited room for further decline. Overall, the sector presents significant medium- to long-term investment value, and it is advisable to actively position in high-quality stocks within relevant sub-sectors. The key views from Donghai Securities are outlined below.
Innovative Drug Chain as the Core Focus
The innovative drug and CXO segments have demonstrated strong overall performance since 2025, with this rapid growth momentum continuing into Q1 2026. Full-year performance for 2026 is expected to maintain this fast pace. Several innovative drug companies have already crossed or are nearing their breakeven points, indicating the sector as a whole is entering a period of earnings acceleration. On the international front, business development transactions remain highly active, with the total transaction value for the year projected to potentially surpass the $200 billion mark. Regarding R&D progress, the latest data released by multiple companies in areas such as IO bispecific antibodies and ADCs is setting or rewriting historical benchmarks, positioning domestic innovative drug firms as among the most competitive globally. The innovative drug chain remains the most critical investment direction within the pharmaceutical and biological industry.
Medical Device Sector Outlook
The medical device industry is still in a phase of gradual overall recovery. Based on 2025 annual reports and 2026 Q1 data, medical equipment and consumables segments have shown relatively better performance, while in-vitro diagnostics continue to face short-term pressure. Overseas market demand remains stable, with international business generally outperforming domestic operations. As most conventional devices, consumables, and reagents have been included in centralized procurement schemes, the policy's impact on the sector is diminishing, supporting the continuation of the sector's stabilization and recovery trend.
Medical Consumption Trends
Medical service consumption is influenced by the broader macroeconomic environment. First-quarter 2026 reports indicate that both hospital and pharmacy segments are exhibiting positive growth momentum. With ongoing improvements in medical payment reforms, the hospital sector, particularly specialized chain hospitals, is expected to be among the first to regain strong growth. The pharmacy industry continues to see the phase-out of excess capacity. As policies provide both regulatory constraints and support, the drug retail sector is poised for transformation in its functional positioning, service models, and product categories, with leading chain pharmacy companies likely to be the primary beneficiaries.
A suggested stock portfolio includes: Kelun Pharmaceutical, Rongchang Biotechnology, Beta Pharma, Dizal Pharmaceutical, ZhongSheng Pharma, Tipogen, BioPepsis, Livzon Pharmaceutical Group, Qianhong Bio-pharma, SonoScape Medical Corp., Haier Biomedical, Huaxia Eye Hospital Group, Yifeng Pharmacy Chain, LBX Pharmacy Chain JSC, and Lingrui Pharmaceutical.
Risk factors include policy changes, performance volatility, R&D outcomes, and unforeseen events.