For a long stretch, innovative drug companies left investors with an impression of "burning cash for stories." Huge R&D spending, commercialization that seemed perpetually distant, and valuations that leaned heavily on the promise of sprawling late-stage pipelines. But the latest interim reporting season has begun to erode that image. According to Guosen Securities, the A-share innovative drug sector posted total revenue of RMB 43.75 billion in the first half of 2026, a 44.1% year-on-year jump, with net profit attributable to shareholders reaching RMB 7.51 billion, reinforcing a sustained earnings recovery trend. Hong Kong-listed names confirm the shift. Huafu Securities data shows 44 H-share innovative drug companies generated RMB 93.01 billion in first-half revenue, up 27.0% year-on-year, while attributable net profit rose 10.04% to RMB 9.58 billion. Driven by both BD income and accelerating commercial launches of new products, the sector continues to deliver substantial profits. This is not just one company's earnings blowout; it looks like a sector-wide turning point. More crucially, proprietary pipelines at leading innovative drug firms are entering harvest season, and key product commercialization is expected to sustain strong momentum. The narrative is shifting from clinical progress updates to real, verifiable profits. The interim data has transformed the "earnings inflection point" from a vague expectation into a fundamental fact. So what else makes this rally different this time?

If only fundamentals were improving, the market's frenzy might still be unjustified. Innovative drugs have seen periodic uptrends before, often driven by policy headlines or event-driven bounces that arrive quickly and fade just as fast. After the fanfare, valuations typically face prolonged digestion and sentiment cools. What sets this cycle apart is that earnings delivery is not an isolated event. It is resonating with substantial improvements in the industry environment, meaning the multiple drivers behind innovative drugs have, for the first time, genuinely aligned at every level.

Policy gains real teeth. The 2026 edition of the National Essential Medicines List, officially implemented on September 1, breaks precedent by accommodating high-priced innovative therapies. For the first time, GLP-1 drugs are included, while anti-tumor monoclonal antibodies and targeted therapies also see expanded coverage. Meanwhile, a State Council Information Office press conference on September 14 signaled further support for the innovative drug industry, backing efforts to smoothen the entire "R&D-to-launch-to-commercialization" chain and bolster long-term R&D investment confidence. Policy is no longer a directional slogan; it is becoming an institutional dividend for the sector.

Overseas expansion redefines value. The global market is repricing Chinese innovative drugs. According to PharmaCube data, outbound licensing deals from China reached USD 99.7 billion in the first half of 2026, roughly double the full-year 2024 total and about 73% of the 2025 full-year figure. In the global top 10 pharma BD deals for 1H26, Chinese companies claimed eight spots. These firms have built platform-level advantages in cutting-edge modalities like bispecific antibodies and ADCs, meaning international appeal is now backed by real capital commitments.

Clinical data density. This is where the rally gains its most significant new information. The September World Conference on Lung Cancer (WCLC) delivered pivotal updates. First-line PD-1/VEGF bispecific antibody data in non-small cell lung cancer continued to improve: at roughly 36 months of follow-up, median overall survival (OS) rose from 22.6 months in the control arm to 30.8 months, a relative 27% reduction in death risk compared to earlier readouts. An anti-B7H3 ADC achieved registration-level breakthroughs, with two Phase III interim analyses in China showing superior OS, progression-free survival, and objective response rate versus standard chemotherapy; a major cross-border licensing deal has been completed. Early data for an EGFR-mutant-targeting ADC also impressed, with an objective response rate of about 33% at the recommended Phase II dose in third-line-or-later patients, plus significantly improved disease control, and an overseas partner has already launched a global Phase III study. From first-line bispecifics to second-line ADC licensing and encouraging late-line signals, Chinese innovative drugs are now providing globally competitive evidence across multiple fronts.

Which sub-sectors will capture the upside first? The innovative drug sector is not rising uniformly. Several niches, aligning with multiple catalysts, deserve attention.

CXO stocks as dual beneficiaries of order recovery and overseas expansion. The surge in BD out-licensing and pipeline acceleration is underpinned by tangible order recovery for CXO companies. Leading CXO firms are seeing robust growth in orders in hand, driven by R&D outsourcing needs from domestic innovator pipeline expansion and licensing collaborations with multinationals in hot areas like bispecifics and ADCs. Improving order mix is lifting earnings visibility across the CXO space.

Bispecifics, ADCs, and other frontier biologics face valuation resets. The clinical data deluge at WCLC essentially validated platform capabilities in bispecific and ADC technologies. From PD-1/VEGF bispecifics to B7H3 ADCs, Chinese innovative drug firms are no longer just followers. They are global leaders in select targets. Companies with platform-based R&D strengths and completed cross-border licensing are being reassessed by the market.

HK-listed innovative drug assets offer a dual case for scarcity and liquidity. Compared to the A-share market, Hong Kong hosts a higher concentration of innovative drug firms that are pre-profit but have strong pipelines, alongside leading CXO players. With sustained southbound capital inflows and rising global attention to Chinese drug assets, liquidity and valuation flexibility in the HK innovative drug segment are gradually improving. Investors looking to participate in the sector may consider these tools: Innovative Drug ETF Guotai (517110), which covers quality A+H innovative drug assets and suits those seeking balanced exposure. Biomedicine ETF Guotai (512290), spanning innovative drugs, CXO, medical devices, vaccines, and blood products to reflect the broader biomedical sector. Sci-Tech Innovative Drug ETF Guotai (589720), offering 20cm high elasticity with a higher proportion of preclinical CRO names, suitable for investors with higher risk appetite.

From the inflection point onwards, the real journey begins. This innovative drug rally has been building for years. It represents a systematic validation of the industry's accumulated progress. Of course, the path is not a straight line. Periodic volatility and sharper individual stock differentiation are likely. Investors may consider staged entry during pullbacks. At minimum, though, the emphasis is shifting from "storytelling" to "earnings."

Connecting funds for Innovative Drug ETF Guotai (517110): A-share 014117, C-share 014118. Connecting funds for Biomedicine ETF Guotai (512290): A-share 006756, C-share 006757, E-share 022498. Sci-Tech Innovative Drug ETF Guotai (589720) offers high elasticity for risk-tolerant investors. Risk disclosure: This content reflects a point of view as of its publication date and may change with market conditions. It does not constitute investment advice or a commitment. Funds carry risks, and investing requires caution. Sci-Tech Innovative Drug ETF Guotai, Innovative Drug ETF Guotai, and Biomedicine ETF Guotai are equity funds with expected risk-return profiles theoretically higher than hybrid, bond, and money market funds. As index funds using full replication strategies, their risk-return characteristics resemble their underlying indices. Sci-Tech Innovative Drug ETF Guotai invests in STAR Market securities and faces unique risks associated with that board, including price volatility, liquidity, delisting, and concentration risks. Innovative Drug ETF Guotai, when investing in Stock Connect eligible securities, faces risks specific to that mechanism, arising from differences in investment environment, targets, market rules, and trading regulations. The feeder funds target equity index funds, with expected risk-return profiles theoretically higher than hybrid, bond, and money market funds. Through investment in target ETFs, they aim to track index performance and share risk-return characteristics similar to the underlying index and its represented market. Before investing, please carefully read the Fund Contract, Prospectus, Product Summary, and Risk Disclosure to understand the risk-return profile and ensure the fund matches your investment objectives, horizon, experience, and risk tolerance. Funds carry risks; invest with caution.