The innovative drug sector, which has been quiet for a long time, is experiencing a strong and long-awaited recovery.

Recent simultaneous improvements across three key areas—policy, industry, and capital—are driving the sustained strength of the innovative drug segment. The latest data from China's National Medical Products Administration shows that the total value of outbound licensing deals for domestic innovative drugs hit a record high in the first half of this year. Concurrently, the preliminary review pass rate for the 2026 national reimbursement drug list has set a new record, and the pricing mechanism for innovative drugs has been further optimized. These developments are starting to shift market expectations regarding the industry's profit models and valuation frameworks.

The secondary market has responded swiftly. On July 16th, the innovative drug concept continued its strong performance. Harbin Pharmaceutical Group Co., Ltd. achieved its fifth consecutive daily limit-up, while Borui Pharmaceutical Co., Ltd. surged nearly 20%, and Hai Chuang Pharmaceutical Co., Ltd. rose close to 10%. Major players like Jiangsu Hengrui Pharmaceuticals Co., Ltd., BeiGene, Ltd., and WuXi AppTec Co., Ltd. also showed strength, with A-shares and H-shares rising in tandem.

However, following a period of deep adjustment, the market's biggest question remains unchanged: Is this rally merely another temporary rebound, or does it signal the true beginning of a new cycle for the innovative drug industry?

A comprehensive industry report released by Sinolink Securities on July 13th argues that, compared to past rebounds, the core distinction this time lies in a clear industry inflection point, marginally accommodative policies, continuous performance delivery, and accelerated capital inflows. This combination signals that innovative drugs are experiencing a convergence of improving fundamentals and enhanced liquidity. The window for bottom-fishing in the pharmaceutical sector may have already opened, leading the firm to assign a "Buy" rating.

Global Expansion Enters Harvest Phase

The most significant catalyst for the current market movement is the continuous breakthroughs in the global expansion of Chinese innovative drugs. Data from the National Medical Products Administration indicates that in the first half of this year, domestic innovative drugs completed 81 overseas licensing deals, with a total transaction value of approximately $110 billion, a historical record. This figure already represents about 80% of the total transaction scale for the entirety of 2025.

Citing Insight database statistics, Sinolink Securities reports that as of July 7th, domestic innovative drugs have completed 82 BD licensing deals year-to-date, with a disclosed total transaction value of $96.767 billion, surpassing the full-year level of 2024.

Notably, several multi-billion-dollar deals have been secured. Innovent Biologics, Inc. entered a global collaboration with Pfizer Inc. on 12 early-stage oncology pipelines, with a potential deal size of $10.5 billion. Jiangsu Hengrui Pharmaceuticals Co., Ltd. initiated a global partnership with Bristol-Myers Squibb Company on 13 innovative projects, with a potential value as high as $15.2 billion. BeiGene, Ltd. had previously reached overseas cooperation agreements with Novartis AG for tislelizumab and a TIGIT monoclonal antibody.

Simultaneously, the influence of Chinese innovative drugs on the international academic stage continues to grow. The recently concluded ASCO 2026 conference featured 94 Chinese studies selected for oral presentations, with 12 of them included in the Late-Breaking Abstract session, both figures setting new records. For the first time, a Chinese innovative drug study was presented on the main stage of the ASCO plenary session.

Sinolink Securities believes that as of July 2026, Chinese companies account for approximately 32% of the global innovative drug BD transaction share, indicating rapidly improving global competitiveness.

Reform of Reimbursement Rules Alters Policy Outlook

If industrial breakthroughs form the long-term logic, then policy changes have served as the direct catalyst for this market upswing.

The preliminary review for the 2026 national reimbursement drug list received 818 applications, with 557 drugs entering the preliminary review for the basic medical insurance list and 54 drugs entering the commercial health insurance innovative drug directory. Excluding pre-application products, the overall preliminary review pass rate reached 92%, a record high since the inception of the drug list adjustment process.

More importantly, the logic behind drug pricing for reimbursement has undergone systematic optimization. For first-class innovative drugs that are globally pioneering or fill domestic gaps, new regulations allow price stability during the initial market launch period, with multi-year price protection granted. For drugs that have undergone eight years of national reimbursement negotiations and achieved sales exceeding 300 million yuan, only a uniform 10% price reduction is required to transition into the regular reimbursement list, significantly improving price expectations.

Concurrently, the formal establishment of the commercial insurance innovative drug directory creates a dual-payment system comprising "basic medical insurance + commercial insurance," providing a new payment channel for high-value innovative drugs.

Another significant policy was also implemented. On July 9th, the National Health Commission released the "National Essential Medicines List (2026 Edition)." The new version added 109 drugs and will be officially implemented in September. Sinolink Securities points out that inclusion in the essential medicines list signifies eligibility for widespread use in public medical institutions, which is crucial for the sales volume expansion of innovative drugs.

Transition from "Storytelling" to Profit Realization

Compared to previous rebounds driven more by sentiment, the current market is placing greater emphasis on actual performance delivery.

Following the continuous adjustments from 2021 to 2025, the innovative drug industry has undergone a relatively thorough consolidation. Data from Sinolink Securities shows that as of June 2026, the price-to-earnings ratio of the Hong Kong Stock Exchange Innovative Drug Index is only at the 14.56th percentile of its five-year history. The PE (TTM) of the A-share CSI Innovative Drug Index is approximately 40 times, corresponding to a historical percentile of around 32%, indicating valuations remain near historical bottom regions.

At the same time, industry fundamentals are beginning to improve. In the first quarter of 2026, the overall revenue of the innovative drug sector grew over 40% year-over-year, and net profit attributable to shareholders grew over 120%. More than 40% of previously consistently loss-making biotech companies turned profitable.

The market's focus is also gradually shifting from R&D investment and clinical progress towards commercialization capabilities, cash flow, and profit realization. Sinolink Securities believes the industry is transitioning from the previous phase of "burning cash on R&D" to a stage of "commercialization realization," and the framework for evaluating corporate value is evolving.

Global M&A Cycle and Capital Return

Improvements in capital flows have also become a significant factor supporting the market trend.

On one hand, after a prolonged adjustment in Hong Kong-listed innovative drug stocks, foreign capital selling appears to be nearing a temporary end. Southbound capital continues to increase holdings, gradually shifting pricing power in the sector towards domestic funds. On the other hand, the overseas innovative drug market is also recovering.

Recently, the U.S. SPDR S&P Biotech ETF (XBI) and the Nasdaq Biotechnology Index (NBI) have shown sustained strength. Mergers and acquisitions among multinational pharmaceutical companies have noticeably warmed up, and an improved pace of new drug approvals by the U.S. FDA has also contributed to a recovery in global risk appetite for innovative drugs.

From a longer-term perspective, global demand is also changing. Institutional estimates suggest that around 2030, global multinational pharmaceutical companies will face a "patent cliff" of approximately $236 billion, sustaining the demand for externally sourced innovative pipelines. As of July 2026, the external capital expenditures for the year by the global top 15 pharmaceutical companies have already reached $200.3 billion, close to three-quarters of last year's full-year figure.

Sinolink Securities forecasts that 2027 could be a crucial year for the concentrated realization of overseas commercialization for Chinese innovative drugs. The industry is expected to gradually shift from "License-out for royalty income" to "global commercial sales contributing profits."

Based on the above analysis, Sinolink Securities recommends focusing on three main investment themes: first, innovative drug companies benefiting from sustained global expansion; second, leading companies entering a cycle of performance realization; and third, opportunities arising from the valuation gap convergence between H-shares and A-shares of innovative drug companies.