Recent data from SEIBro, a subsidiary of Korea Securities Depository, shows that South Korean investors were net buyers of the Innovative Medicine ETF (Ticker: 159992) to the tune of $1.48 million over the past month, as of March 9, 2026, making it one of their key A-share targets for increased positions.

What positive developments in the innovative drug sector are attracting this international investor attention?

**Policy Support: Favorable Winds for Innovative Drugs** This year's Government Work Report reiterated the goal of "promoting the high-quality development of innovative drugs and medical devices" while also calling to "accelerate the development of commercial health insurance." How will this benefit the innovative drug industry?

1. **Elevated Strategic Position** The 2026 Government Work Report for the first time identified biomedicine as an emerging pillar industry. Analysts view this as recognition of the rapid improvement in both the quality and scale of China's biomedicine sector. Given its dual nature of serving public welfare and constituting an industrial sector, this new designation is expected to strengthen its industrial attributes and further elevate its strategic importance.

2. **Improved Payment Mechanisms** The report also emphasized accelerating commercial health insurance to support high-quality development and better meet diverse public healthcare needs. Industry observers note that while basic medical insurance provides essential coverage, commercial insurance is better suited for cutting-edge, high-cost drugs. This complementary approach is seen as beneficial for driving industry advancement while meeting varied health demands.

3. **Optimized Industrial Environment** Following the 2025 report's call to "optimize centralized procurement policies for drugs and consumables," the latest report continues this theme by proposing to "optimize medical centralized procurement and price governance." Some institutions believe optimized procurement will further reduce public financial burdens, improve healthcare efficiency, ensure payment for clinical value, and ultimately guide pharmaceutical companies toward innovation-driven development.

**Industry Fundamentals: Core Logic Remains Intact** Beyond policy support, the core investment thesis for innovative drugs in the Hong Kong market remains unchanged. Many companies are reaching a critical inflection point toward profitability as their commercial capabilities improve. Preliminary 2025 results indicate that numerous firms achieved profit growth or reduced losses, primarily driven by new drug sales and business development (BD) licensing revenue, with several leading companies already turning profitable. The momentum for overseas expansion of domestic innovative drugs continues strongly in 2026. Data shows that as of March 6, 2026, the total deal value for outbound BD transactions by Chinese innovative drugmakers has reached $56.8 billion, with upfront payments of $3.3 billion. The total value already represents 41% of the full-year 2025 figure and exceeds the total for 2024. Analysts suggest that despite short-term stock volatility, the long-term growth narrative for drug出海 remains solid, supported by China's engineering talent pool and favorable policies, with 2026 expected to see continued BD deal flow.

**Market Dynamics: Foreign Investment Positions Strategically via ETFs** In secondary markets, the A-share and Hong Kong healthcare sectors have been in a correction phase since September of the previous year, showing significant pullbacks from 2025 highs. After sustained valuation digestion, the sector may now offer attractive risk-reward profiles. As of March 9, 2026, the PE ratios (TTM) for the Hong Kong Stock Connect Innovative Drug Index and the CSI Innovative Drug Index were 33.81x and 42.94x, respectively, sitting at just the 21.87th and 50.06th percentiles of their 10-year historical ranges, suggesting potentially high value. Coupled with improving fundamentals, this has attracted global investors to build positions. Some institutions indicate that the profitability turning point for innovative drug companies may be arriving, with a dense calendar of clinical data catalysts expected throughout the year, alongside positive progress in overseas clinical trials for out-licensed assets, leading to a positive outlook on the sector.

For investors with a long-term positive view on China's innovative drug prospects, the following ETF tools from Yinhua Fund may be of interest: - Hong Kong Innovative Drug ETF (Ticker: 159567) and its feeder funds (Class A: 023929; Class C: 023930) - Innovative Medicine ETF (Ticker: 159992) and its feeder funds (Class A: 012781; Class C: 012782)