Southwest Securities released a research report stating that the CXO sector warrants continuous attention on: 1) the growth momentum continuously injected into R, D, and M outsourcing by new molecules such as peptides, conjugate drugs, and oligonucleotides in the global market; 2) the potential reversal and improvement in sector sentiment following the clearing of geopolitical risk uncertainties; 3) the transmission of domestic market recovery and innovative drug R&D demand (from preclinical toxicology and safety evaluation to clinical CRO and other sub-sectors); and 4) AI-enabled drug discovery. The main views of Southwest Securities are as follows:

A review of the sector's performance from 2024-2025 shows that in the first half of 2024, the CXO sector continued to decline, influenced by factors such as the US Biosecure Act and adjustments to corporate earnings growth expectations. By September 2024, a policy-driven bull market emerged in domestic stocks, geopolitical risks were temporarily cleared, and CXO stock prices rose accordingly. In March 2025, order data from some leading listed CXO companies exceeded expectations, injecting value into secondary market valuations. April 2025 saw short-term market volatility due to frequent changes in tariff policies under the Trump administration. During the second and third quarters of 2025, as short-term disruptions subsided, a structural bull market emerged in downstream innovative drugs in the domestic market, and periodic reports from leading companies met or exceeded expectations, leading to a further rise in sector stock prices. In the fourth quarter, uncertainties surrounding the US 2026 National Defense Authorization Act and the Section 1260H list escalated, coinciding with a market style adjustment that caused stock price declines for some companies. Towards year-end, rising monkey prices and strong domestic data led to significant price increases for some stocks reliant on domestic demand.

From a macro perspective, the pharmaceutical and biotech investment environment is expected to continue improving under the Federal Reserve's interest rate cutting cycle, while geopolitical uncertainties are gradually being resolved. 1) Monetary Policy: Following another 25 basis point cut on December 10th, the federal funds rate target range stands at 3.50%-3.75%. The median projections from the Fed officials' dot plot for 2026/2027/2028/longer-term are 3.25%-3.50%/3.0%-3.25%/3.0%-3.25%/3.0%, largely unchanged from the previous forecast. Overall, the interest rate cutting cycle bodes well for the pharmaceutical and biotech investment environment, benefiting demand for pharmaceutical outsourcing services. 2) Gradual Resolution of Geopolitical Uncertainty: The US 2026 fiscal year National Defense Authorization Act has been enacted. As the Section 1260H list referenced by SEC 851 is updated and adjusted in the future, geopolitical risk uncertainty for leading CXO companies will be further resolved. Judging by the current direct impact scope and the implementation cycle of NDAA SEC 851, the impact is limited.

From an industry perspective, domestic demand is accelerating its recovery, while global market conditions are warming. Demand for CXO services stems from downstream pharmaceutical companies' research activities and the funding supporting that research. 1) Domestically: The number of new drug IND applications accepted by the Center for Drug Evaluation (CDE) steadily increased in 2025, with Q1/Q2/Q3/Q4 figures at 395/410/526/509, respectively. Furthermore, total investment and financing in China's healthcare sector reached 93.54 billion yuan in 2025 (a year-on-year increase of 83.7%), with 626 investment and financing events (a year-on-year increase of 26.7%), indicating a potential recovery in domestic demand for CXO services. 2) Overseas: Global healthcare industry investment and financing totaled 591.19 billion yuan in 2025 (a year-on-year decrease of 20.9%), with 2185 global investment and financing events (a year-on-year decrease of 16.7%). The year-on-year decline narrowed quarter by quarter, with quarterly/monthly data showing fluctuating recovery in 2025. A total of 4297 new clinical trials (excluding Phase IV) were initiated in North America and Europe in 2025, of which 1801 were Phase I or early exploratory trials, and 2496 were Phase II-III clinical trials, reaching the historically high levels seen in 2021.

Relevant companies include: WuXi AppTec, Pharmaron, Asymchem, WuXi Biologics, Tigermed, XtalPi, Insilico Medicine, Joinn Laboratories, and Porton Pharma. Risks include potential underperformance of innovative drug outsourcing demand, as well as geopolitical and macroeconomic risks.