The pharmaceutical and biotechnology sector declined by 8.4% in the first half of 2026, underperforming the CSI 300 Index by 13.7 percentage points. However, the market stabilized and began to recover by the end of June, following the approval of the world's first bispecific antibody-drug conjugate and the preliminary review of both the national reimbursement and commercial insurance drug lists.
The sector is expected to exhibit a K-shaped divergence in the second half of the year. Key investment themes to watch include technology-driven advancements, continued acceleration in global business development, and the value of high-dividend-yielding assets.
First-Half Performance Review: Sector Underperforms but Stabilizes with Policy Catalysts
From the start of 2026 to July 9th, the pharmaceutical and biotechnology sector fell by 8.4%, underperforming the CSI 300 Index by 13.7 percentage points and ranking 14th among primary Shenwan industries. The A-share pharmaceutical index and the innovative drug index underperformed the broader market by 13.7 and 6.8 percentage points, respectively. The Hong Kong pharmaceutical sector performed in line with the Hang Seng Index, while the Hong Kong innovative drug index outperformed it by 7.6 percentage points.
Policy developments provided support. The 2026 Government Work Report for the first time defined biomedicine as a new pillar industry and highlighted the cultivation of future industries like brain-computer interfaces. The "Several Opinions on Improving the Drug Price Formation Mechanism" publicly mentioned the possibility of setting higher prices for drugs outside the national reimbursement scheme. The sector's stabilization in late June coincided with the approval of the world's first bispecific ADC and the preliminary review outcomes for the national and commercial insurance drug lists.
As of July 9, 2026, the price-to-earnings ratio of the pharmaceutical index stood at 28.25 times, below the 10-year median of 30 times. In terms of individual stock performance, five stocks within the Shenwan pharmaceutical sector achieved absolute gains exceeding 100%.
Technology Theme: AI in Healthcare and Brain-Computer Interfaces Enter New Implementation Phase
In November 2025, five national ministries jointly issued implementation opinions to promote and standardize "AI + Healthcare" applications. The 2026 Government Work Report reinforced this by defining biomedicine as a pillar industry and explicitly calling for the cultivation of brain-computer interfaces. Several provinces have introduced fee schedules for brain-computer interface procedures, with Zhejiang and Hubei including some items in their local insurance schemes. China's first invasive brain-computer interface product has also received market approval.
Six key application areas are recommended for focus: AI-powered health management, AI in clinical decision support systems, AI for medical imaging diagnostics, integration of AI with surgical robots, AI in gene sequencing, and AI for drug discovery.
Global Expansion: Accelerated Business Development Deals, Continued Focus on Bispecifics and Small Nucleic Acids
In the first half of 2026, the number of out-licensing deals for Chinese innovative drugs, along with upfront and total deal values, increased significantly. There were 86 such deals, with upfront payments totaling $5.68 billion, up 77.6% year-over-year, and total deal values reaching $97.62 billion, a 40.0% increase. These figures represent 57%, 72%, and 69% of the full-year 2025 totals for deal count, upfront payments, and total value, respectively. Milestone payments are being realized, with several companies triggering payouts in 2026.
Deal activity remains concentrated in oncology and immunology, metabolic diseases, and small nucleic acids. Transaction models are evolving from traditional license-out agreements to include co-development, co-commercialization, and platform-level strategic partnerships.
Looking ahead to the second half of the year, key catalysts include major research data releases at conferences. The parallel structure of commercial insurance and basic national drug lists is taking shape, providing ample payment and commercialization space for high-value innovative drugs. Progress on relevant international legislative bills also warrants close attention.
Dividend Theme: Essential Drug List Adjustment Creates New Opportunities for Traditional Chinese Medicine, Focus on Undervalued High-Yield Assets
Traditional Chinese Medicine companies generally maintain robust cash flows. Some state-owned enterprises within the sector are actively responding to policies aimed at enhancing shareholder returns, demonstrating a strong willingness to pay dividends. The average historical dividend payout ratio for the Shenwan TCM sector is 49.2%, with a median of 43.9%, indicating a consistently high level of distributions.
Three investment sub-themes are suggested: branded TCM companies with strong pricing power and high competitive barriers; leading TCM firms benefiting from state-owned enterprise reforms, optimized asset structures, and expectations for new product launches; and TCM varieties that may benefit from increased hospital adoption following the first update to the National Essential Drugs List in eight years, which added 50 new TCM entries.
Key risks include slower-than-expected global expansion, delays in drug R&D and commercialization, uncertainties in healthcare policy, and potential earnings disappointments.
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