China's innovative drug industry chain is entering a phase where earnings and international expansion are materializing. According to recent interim reports and earnings previews from listed companies, multiple innovative drug developers and their CXO (Contract X Organization) partners have posted results exceeding expectations, achieving their first-ever profitable half-year results or swinging sharply from losses to gains during the first six months of this year, providing ongoing validation of the sector's improving fundamentals.
With many leading innovative drug and CXO companies still unlisted on the A-share market, Hong Kong has become the primary venue for these players. For ordinary investors seeking to capture this industrial opportunity, the JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG TRADING OPEN ENDED INDEX SECURITIES INVESTMENT FUND (520970) and its feeder funds (Class A: 024700, Class C: 024701) offer a streamlined approach to gaining exposure across the full Hong Kong-listed innovative drug value chain, with a notably high allocation to CXO services.
CXO: The Essential 'Water Seller' for Innovative Drug Investment
As a specialized segment evolved from the innovative drug supply chain, CXO firms serve both as upstream suppliers and deeply intertwined partners to drug developers. While innovative drug companies act as decision-makers in disease research, target selection, and technology pathways, CXO companies function as the executors responsible for research, trials, and manufacturing. This mutually reinforcing, positive-feedback relationship has created a complete transmission chain in the secondary market: rising innovative drug momentum drives CXO order growth, which translates into earnings delivery and ultimately valuation recovery.
The strong performance reports from innovative drug and especially CXO sectors this year are largely attributed to continued product commercialization, accelerated translation of R&D achievements, and record-breaking overseas licensing deals. On one hand, supported by favorable policies and dense R&D pipeline breakthroughs, Chinese innovative drug companies are stepping onto the global stage, transitioning from "following" to "running alongside" and in some cases "leading" their international peers. This has pushed the CXO industry into a high-prosperity state. Data from the National Medical Products Administration shows that the total potential value of out-licensing deals for domestic innovative drugs reached approximately $110 billion in the first half of 2026, representing 80% of the full-year 2025 total and setting another historic record. Chinese pharmaceutical companies also claimed eight of the top ten slots in global pharmaceutical transaction rankings during this period.
On the other hand, overseas innovative drugs are entering a relatively lenient approval cycle, while the next five years mark a peak window for patent expirations on major global drugs. Industry statistics indicate that between 2025 and 2030, patented drugs representing hundreds of billions of dollars in annual sales will face the "patent cliff." To counter generic competition, overseas pharmaceutical companies will accelerate their innovative drug R&D efforts, generating substantial CXO demand. Chinese CXO firms, leveraging their critical position in global supply chains, are well-positioned to capture this wave of spillover orders, providing underlying support for future earnings growth.
Furthermore, the CXO sector possesses a unique "water seller" characteristic, offering one-stop services from drug discovery and preclinical research to commercial production. This model shields CXO companies from the risk of any single drug's R&D failure, as their revenue depends on R&D investment rather than drug sales outcomes. This business model grants CXO companies consumer-like stable cash flow characteristics while also enjoying the growth elasticity of the innovative drug industry, resulting in relatively stronger earnings visibility. Amid the global restructuring of pharmaceutical R&D supply chains, Chinese CXO companies have built formidable competitive barriers and moats based on four key advantages: talent pool, cost efficiency, patient base, and comprehensive industry chain coverage—factors that are increasingly driving global pharmaceutical companies to choose Chinese CXO partners.
Benefiting from robust primary market financing in global and Chinese biotech sectors during the first half of the year, along with sustained activity in out-licensing deals, some institutions anticipate accelerated global new drug R&D activity, which should benefit Chinese CRO/CDMO companies. China Securities Co., Ltd. (CSC) analysis points out that the long-term structural opportunities in the domestic innovative drug industry continue to materialize in 2026, with improving domestic financing conditions and booming novel drug modality tracks driving accelerated growth in new orders and earnings for domestic innovative drug CDMO companies, potentially ushering the CXO supply chain into a new development phase. Harvest Fund Management also believes that with the convergence of overseas demand release, China's strengthening competitive advantages, and business model resilience, the innovative drug sector—particularly the CXO segment—deserves close attention.
Hong Kong Stock Connect Innovative Drug Index: Concentrated Exposure to Hong Kong's Innovative Drug Leaders with Higher CXO Weighting
Innovative drugs and CXO represent classic "long slope, thick snow" tracks encompassing numerous specialized sub-sectors. The Hong Kong market hosts a large number of high-quality biotech companies not yet listed on A-shares. For ordinary investors, participating directly poses significant technical barriers and professional thresholds, making individual research and allocation challenging. Index-based investment offering one-click access to the entire innovative drug value chain may present a more cost-effective alternative.
The JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG TRADING OPEN ENDED INDEX SECURITIES INVESTMENT FUND (520970) tracks the CSI Hong Kong Stock Connect Innovative Drug Index (Index Short Name: HK Stock Connect Innovative Drug, Index Code: 931250), which encompasses the full industrial chain from preclinical research to commercial launch, with a prominent CXO component. The index selects 50 securities from the Hong Kong Stock Connect universe whose businesses involve innovative drug R&D or provide drug research, development, and production services to pharmaceutical companies, reflecting the overall performance of innovative drug companies within the Hong Kong Stock Connect scope.
According to data from the CSI website as of August 20, 2026, based on CSI Level-4 industry classification, the index's constituent stocks primarily span pharmaceutical preparations, other biological drugs, and pharmaceutical & biotech services (CXO), with CXO weighting exceeding 33% (33.29%). Analysts suggest that incorporating CXO companies into the index ecosystem acts as a "stabilizer" embedded within the portfolio, potentially smoothing index volatility during R&D lulls or disappointing clinical data from innovative drug companies, thanks to the rigid demand for outsourced services.
Looking at the current top ten constituent weights of the HK Stock Connect Innovative Drug Index, it includes both leading CXO companies and Hong Kong-listed innovative drug champions that are scarce on the A-share market, spanning preclinical research, clinical CRO, and CDMO operations across the entire chain. These companies stand to benefit from the cyclical recovery in innovative drug R&D spending and service outsourcing demand. (Source: CSI website, as of August 20, 2026. The above is solely a listing of the index's top ten constituents and does not constitute any form of individual stock recommendation or investment value assessment.)
For on-exchange investors seeking efficient exposure to the high prosperity of Hong Kong innovative drugs and CXO leaders, the JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG TRADING OPEN ENDED INDEX SECURITIES INVESTMENT FUND (520970) may be well-suited, offering same-day T+0 trading for enhanced investment efficiency. For off-exchange investors without a securities trading account, the feeder fund—JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG ETF FEEDER FUND (Class A: 024700, Class C: 024701)—provides an alternative access point. During industry pullbacks, adopting a phased buying approach to average down costs may improve the overall investment experience.
Note: The JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG TRADING OPEN ENDED INDEX SECURITIES INVESTMENT FUND (520970) does not charge subscription/redemption fees or sales service fees; transaction commissions follow securities company fee standards. For the JIASHI CSI HONG KONG STOCK CONNECT INNOVATIVE DRUG ETF FEEDER FUND Class A shares (024700): Subscription fee is 1.0% for amounts below RMB 500,000; 0.6% for amounts between RMB 500,000 and RMB 1 million; and RMB 1,000 per transaction for amounts of RMB 1 million or above. Redemption fee is 1.5% for holding periods under 7 days; 0.1% for holding periods between 7 and 30 days; and zero for holding periods of 30 days or more. Class A shares carry no sales service fee. For Class C shares (024701): Redemption fee is 1.5% for holding periods under 7 days and zero for holding periods of 7 days or more. Sales service fee is 0.25% per annum. Class C shares carry no subscription fee.
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