Pharma industry chain: 1) Prescription drugs: innovative access drives performance growth, while internationalization moves from business development to organizational overseas expansion and strategic alliances, becoming a second growth curve. 2) Dense catalysts in 2026 are expected to further validate the industry's development logic, with major conferences such as ESMO set to deliver verification through many high-impact data readouts this year. 3) Domestic market demand is gradually recovering, overseas layout is being actively expanded, and over the medium to long term, import substitution across the industry chain is imperative.

Medical devices and services: In the third quarter, domestic tendering in the medical equipment sector continued to improve, and ongoing attention to policy progress is advised, while high growth in the overseas business of some companies has become an important driver of steady performance growth. Some upstream medical equipment companies are benefiting from new business expansion, with high performance growth or improvement, and attention is advised on key catalysts such as new product launches or the landing of business orders. Price adjustments from centralized procurement of some high-value consumables and in the IVD industry are about to take effect, with the impact on individual companies diverging; if the policy impact proves limited, the sector is expected to see a dual recovery in performance and valuation.

Performance review: In the first half of 2026, both revenue and non-GAAP net profit attributable to parent companies achieved growth. In the first half of 2026, revenue for the entire pharmaceutical sector rose 1.81% year on year, while non-GAAP net profit attributable to parent companies rose 6.05% year on year. Overall, the pharmaceutical industry saw an improving trend in both revenue and non-GAAP net profit in the first half of 2026. By sub-sector, in the first half of 2026, biopharmaceutical upstream, low-value consumables, home medical devices, CRO/CMO, other devices, scientific research reagents, pharmaceutical retail and pharmaceutical distribution all achieved dual growth in revenue and non-GAAP net profit attributable to parent companies, with biopharmaceutical upstream and low-value consumables showing strong growth. Looking at changes in the ranking of non-GAAP growth in the first half of 2026, low-value consumables, home medical devices, other devices, scientific research reagents, vaccines, pharmaceutical distribution and in vitro diagnostics all moved up in the rankings, with scientific research reagents, low-value consumables and vaccines rising fastest.

Global perspective: innovation value is becoming prominent, and Chinese strength is accelerating its penetration. China's pharmaceutical sector has the advantages of "innovation upgrading plus supply chain resilience." In 2025, upfront payments from overseas licensing of innovative drugs significantly exceeded the full total of the prior year, and medical devices are also actively exploring paths to go overseas. The United States leads in early-stage research and development and high-end pricing, but demand remains strong amid the patent cliff facing multinational pharmaceutical companies, making Chinese assets highly cost-effective globally and leaving broad room for domestic and international synergy. Domestic value reshaping: focusing on high-quality development and consolidating the foundations of innovation and compliance. 1) Policy: focusing on high-quality development, advancing centralized procurement optimization, diversified payment, and reform of medical service pricing. 2) Pharma chain: innovative drugs are entering a phase of commercial ramp-up, with attention on supply chain security. 3) Devices: import substitution is extending toward the mid-to-high end, with a positive view on overseas expansion, new technologies such as AI and brain-computer interfaces, and the landing of new technologies including mergers and acquisitions integration. 4) Tracking opportunities for bottoming out, recovery and transformation and upgrading in traditional Chinese medicine, pharmacies and medical services.

Value reshaping through going overseas: multi-dimensional breakthroughs are building a new global landscape. 1) Innovative drugs: business development is becoming normalized, entering the era of internationalization 2.0. 2) Industry chain: domestic and overseas demand is recovering. 3) Active pharmaceutical ingredients: resolving short-term disruptions and transitioning toward specialty APIs/CDMO. 4) Devices: opening up overseas markets, with innovative devices pursuing both independent sales and business development in parallel. 5) Blood products/vaccines: overseas registration of intravenous immunoglobulin and diversified vaccine overseas expansion models.

Industry policy risk: risks arising from changes in research and development design requirements, price changes, changes in volume-based procurement policy, and changes in the scope and proportion of medical insurance reimbursement due to industry policy adjustments. In particular, changes in centralized procurement and medical insurance payment policies have a relatively large impact on industry development expectations. Risk of research and development falling short of expectations: in the R&D process for new drugs and devices, there are risks of uncertainty in clinical enrollment progress and uncertainty in efficacy and safety data results. Risk of approval falling short of expectations: in the approval process, there is a risk of prolonged approval cycles due to factors such as supplementary materials and changes in approval procedures. Macro environment fluctuation risk: a further slowdown in global economic growth may affect downstream demand, and risks related to international relations, climate change, inflation, and exchange rates and interest rates also need to be considered. Risk of performance falling short of expectations: affected by the above factors and changes in company operating strategies, our earnings forecasts may fall short of expectations.

Yuan Qinghui: Co-head of healthcare and life sciences at the research and development department of China Securities Co., Ltd. and chief analyst for the pharmaceutical industry. Bachelor of Science from Sun Yat-sen University, Master of Science from Georgia State University, and research scholar at the University of North Carolina at Chapel Hill School of Medicine. Joined the research and development department of China Securities Co., Ltd. (601066) in 2018. Core member of teams ranked as finalists, 5th, 4th and 3rd in the New Fortune Best Analyst pharmaceutical industry from 2020 to 2023, and core member of the team ranked 2nd in the Securities Times Best Analyst pharmaceutical industry in 2024-2025. Ranked 1st and 2nd in the Sina Golden Qilin Best Analyst innovative drug industry in 2024-2025.

Wang Zaicun: Chief analyst for medical devices and services, PhD in biomedical engineering from Peking University, editorial board member of the Blue Book of the Medical Device Industry. The team studies development trends and investment opportunities across various sub-sectors of medical devices and medical services.

Shen Yi: Co-chief analyst for pharmaceuticals and biotechnology at China Securities Co., Ltd., Master's degree from the Chinese University of Hong Kong, with more than 10 years of industry and equity research experience, having previously worked at Hengrui Pharmaceuticals and AstraZeneca, where he received a President's Award. Entered the secondary market in 2021, focusing mainly on innovative drugs and generic drugs research.

Xu Yunxiang: Researcher in the pharmaceuticals and biotechnology team at China Securities Co., Ltd., Bachelor of Science in bioscience from Zhejiang University, Master of Finance from Renmin University of China, joined the research and development department of China Securities Co., Ltd. in 2024, covering innovative drugs and other fields.

He Juying: Chief analyst for the pharmaceutical industry at China Securities Co., Ltd., Master of Management from Fudan University. Honors include 7th place in the Sina Finance Golden Qilin Analyst pharmaceutical industry in 2020, finalist in the New Fortune Best Analyst pharmaceutical industry, and 4th place in the Wind Best Analyst pharmaceutical industry. Ranked 1st in the Wind "Gold Analyst" pharmaceutical industry in 2019. Ranked 3rd in the Wind "Gold Analyst" pharmaceutical industry in 2018, and 1st in the Yicai Best Analyst pharmaceutical industry in 2018. Ranked 3rd in the New Fortune pharmaceutical industry in 2013 and 5th in the Crystal Ball pharmaceutical industry.