At Cathay Fund's 2025 Autumn Institutional Strategy Conference themed "Riding the Wind Across Vast Distances," fund manager Qiu Xiaoxu shared insights on innovative healthcare investments—
**Recognition of Chinese Innovation**
The asset value of Chinese innovative pharmaceuticals is gaining recognition among global investors. As representatives of China's finest innovative drugs, the Hong Kong innovative pharma index has surged 101% year-to-date as of August 11th, significantly outperforming the Hang Seng Tech Index since April.
In June, a prominent U.S. commercial news channel extensively reported on Chinese innovative pharmaceutical developments. Statistics show that Chinese assets now account for 42% of global innovative drug BD (Business Development) deals worth over $50 million, compared to China's contribution of only 4%-5% to annual innovative drug launches three years ago. Additionally, numerous U.S. securities firms have organized large-scale research visits by overseas investors to Chinese innovative pharmaceutical targets (up to 30 institutions per batch), a scale of research unprecedented during the 2017 and 2019 innovative drug bull markets.
Regarding the main driving factors behind this round of innovative pharmaceutical market performance, we believe the underlying cause is industry breakthrough.
BD outperformance is a manifestation, with the core being recognition of the inherent attributes of efficient R&D and clinical development following industry maturation. The 2017 and 2019 innovative drug markets involved domestic enterprises' me-too products following overseas benchmark varieties to capture the domestic market, while overseas expansion attempts failed (all first-generation IO products were rejected). Starting in 2024, Chinese biotech companies achieved innovation breakthroughs through second-generation IO (PD-1/VEGF, PD-1/IL-2 bispecific antibodies) and faster ADC development capabilities (higher-affinity monoclonal antibodies, more innovative bispecific ADCs), finally taking the lead in R&D rankings over overseas pharmaceutical companies and opening up both existing and incremental overseas oncology markets (capable of replacing existing PD-1 and chemotherapy while creating new treatment spaces for drug resistance). As this represents an industry trend, high-frequency events in sectors and individual stocks provide continuous catalysts.
Secondly, sufficient decline depth and style alignment.
Hong Kong's Hang Seng Healthcare has fallen for four consecutive years, with annual declines exceeding 20%, leaving many targets with market capitalizations at only 10% of their 2019 peak levels. Innovative pharmaceuticals align with this year's growth style, featuring forward-looking narratives that are difficult to disprove due to their independence from short-term performance, attracting growth capital beyond pharmaceutical funds (such as TMT funds). Sustained U.S. interest rate cut expectations benefit innovative pharmaceuticals through improved liquidity.
Additionally, domestic positioning changes and overseas tariff immunity.
The National Development and Reform Commission has positioned innovative drugs and medical devices as new quality productive forces, transitioning from public utilities to internationally-oriented industries. Continuous implementation of supporting policies with fewer sudden events like volume-based procurement price cuts has improved the holding experience. As innovative drug patents and clinical results constitute virtual assets relatively immune to trade frictions, excess returns became more pronounced after April 2025.
Overall, analyzing through our demand, innovation, and payment three-factor framework, this round of pharmaceutical industry performance differs from the 18+ month pharmaceutical market of 2019 in that the previous demand was created by epidemiological changes, while this round is actively created by drug development model innovation. In terms of payment, the previous round involved industrial chain transfer to China, while this round represents the transfer of higher-value innovation to China. The difference in innovation levels is more evident, so we believe innovation is the core factor this round, and the market cap increase will exceed the previous round.
**Multi-Track Rotation in Pharmaceuticals**
Reviewing the multi-track rotation in this pharmaceutical market cycle: Starting from August last year was a wave of commercialized biopharma gains, primarily driven by high growth in 2024 interim reports, especially unexpected growth in the U.S. market, with leading pharmaceutical companies raising growth centers and providing profitability timelines.
In Q4 last year, with USD strengthening and unexpected BD performance, non-traditional innovative pharmaceutical tracks performed prominently due to sufficient decline (90% level) and continuous overseas BD implementations by small companies in H2 2024.
Starting in January this year, A-H share innovative pharmaceuticals began significant gains, especially H-share innovative pharma, following Hang Seng Tech's major rebound. From April, with innovative pharmaceuticals' relative immunity to tariffs and repeatedly exceeding BD expectations, innovative pharmaceuticals officially entered independent market performance, with overall industry advantage logic gradually clarifying and determining this bull market's sustainability.
In June, with tariff wars settling, security bill impacts lifting, innovative pharmaceutical industry logic spillover, and domestic and overseas CXO pharmaceutical company data beginning to reverse. While overseas orders faced China-U.S. relationship interference, unchanged overseas profitability fundamentally enables rapid recovery of leading company performance. Combined with sufficiently low stock prices, almost all companies experienced doubling markets, with H-shares showing larger gains due to price gap narrowing.
Since July, the market rapidly expanded from innovative pharmaceutical tracks to CRO, scientific research services, innovative medical devices and other sectors, creating stronger profit effects and accelerating overall fund entry.
We remain optimistic about the overall pharmaceutical market, primarily because current overall fund allocation ratios to various pharmaceutical sub-sectors (including innovative pharmaceuticals) are at historical lows, and overseas long-term capital remains hesitant, ensuring incremental capital. Comparatively, pharmaceutical industry logic implementation is clearer than other A-share growth tracks, while newly opened European and American markets have high entry barriers, and primary market supply also remains hesitant, providing price trend advantages in mitigating competition risks.
**Outlook: Innovative Pharmaceuticals Remain the Main Theme**
For the future of innovative pharmaceuticals, we are long-term bullish on three directions: First, innovative pharmaceuticals, based on marginal competitive changes in subdivided industries globally, Chinese innovative pharmaceutical enterprises are entering a profit explosion phase (new product upfront payments + existing product revenue/royalties); Second, medical AI, based on data complexity, incremental value, and demand-supply gaps, medical AI will be an important AI field in the future, and current medical AI valuations are generally at low levels; Third, new cycle low-positioned segment leaders, with non-pharmaceutical track industry leaders' valuations still at historical lows. As anti-corruption normalizes and precision diagnosis and treatment advance, hospital varieties enter new growth cycles, while consumer varieties may enter valuation repair phases alongside economic recovery.
Drawing from overseas pharmaceutical company stock price cycle patterns (major variety indication expansion cycles), we believe Chinese innovative pharmaceuticals are still in: 1) Early confirmation of new markets and indications for existing major varieties; 2) Validation sprint phase for future new drug modalities.
Therefore, we favor the following directions:
**New Oncology Treatment Mechanisms:** Large molecules including PD-1 bispecific antibodies, new ADC toxins or payloads, IO and ADC combinations, protein degradation; small molecules including lineage plasticity modulators, pan-KRAS inhibitors, fourth-generation EGFR inhibitors, etc.
**New Autoimmune Treatment Breakthroughs:** Autoimmune bispecific antibodies, TCE autoimmune bispecific antibodies, universal CAR-T, novel small molecules
**Long-Acting Drugs:** siRNA (cardiovascular, liver, weight loss, metabolism, etc.), AAV-mediated gene therapy (ultimately achieving lifelong efficacy)
**Stem Cell Therapy:** Cell therapy from various MHC sources, IPS-derived somatic cells, etc.
**Risk Disclaimer:** Views are for reference only and do not constitute investment advice or commitments. Markets carry risks; investment requires caution.
MACD golden cross signals forming - these stocks show promising upward trends!
Comments