China Galaxy Securities released a research report stating that it is seeking out hard-tech opportunities in pharmaceuticals, favoring sectors with certain earnings growth, innovation, and overseas expansion, while looking for alpha in specific sub-sectors. The firm is optimistic about investment opportunities in the pharmaceutical sector for 2026, believing that after recent fluctuations and adjustments, the sector is poised to restart an upward trend in 2026. The investment strategy focuses on identifying pharmaceutical hard technology and alpha in niche segments, recommending attention to innovative drugs (leaders with BIC and FIC pipelines), innovative medical devices (imaging, high-value consumables, consumer medical devices, etc.), and medical AI. It also suggests monitoring the recovery in healthcare consumption (aesthetic medicine, branded traditional Chinese medicine, ophthalmology, etc.) and independent third-party ICLs. In the fourth quarter of 2025, the pharmaceutical holdings of public funds declined, with the overall position at an underweight level. The value of heavy pharmaceutical holdings in pharma-themed funds decreased slightly, while the reduction in positions by non-pharma-themed funds was more pronounced. The total value of heavy holdings in the pharmaceutical and biological industry in Q4 2025 fell by 18.81% quarter-on-quarter to 312.5 billion yuan, with a holding proportion of 8.12% (down 1.65 percentage points QoQ), which is 3.89 percentage points below the historical average. The allocation ratio by non-pharma-themed funds was 2.93% (down 1.30 ppts QoQ), 4.48 ppts below the historical average. The value of heavy pharmaceutical stock holdings in pharma-themed funds was 205.9 billion yuan in Q4 2025, down 9.73% from Q3 2025, but still 66.54% above the average level since 2019. Heavy positions in pharmaceutical stocks were significantly reduced, with concentration diffusing from innovative drugs to areas like devices and services. The top five pharmaceutical stocks by the number of heavy-holding public funds and total holding value in Q4 2025 were Hengrui Pharmaceuticals (461 funds, down 228 QoQ; 31.282 billion yuan, down 1.333 billion QoQ), WuXi AppTec (389 funds, down 158 QoQ; 29.005 billion yuan, down 2.107 billion QoQ), Innovent Biologics (195 funds, down 70 QoQ; 16.587 billion yuan, down 2.538 billion QoQ), Mindray Medical (189 funds, down 37 QoQ; 14.668 billion yuan, down 286 million QoQ), and Akeso (100 funds, down 26 QoQ; 10.427 billion yuan, down 1.964 billion QoQ). Among the top 30 pharmaceutical stocks by total heavy-holding market value, United Imaging Healthcare, Tigermed Consulting, Baili Pharmaceutical, WuXi Biologics, and Hansoh Pharma saw significant increases in the number of heavy-holding funds. In contrast, Hengrui Pharmaceuticals, WuXi AppTec, Innovent Biologics, RemeGen, and Sansheng Pharmaceuticals experienced notable declines. The changes in fund heavy holdings reflect a shift in the market's investment focus, diffusing from innovative drugs prior to September towards areas like medical devices and services. Tracking industry data for the full year 2025 shows an overall stable picture. 1) Pharmaceutical manufacturing revenue experienced a slight decline: From Q2 2022 to Q2 2024, the cumulative year-on-year revenue of the pharmaceutical manufacturing industry was in a state of decline, turned positive in Q3 2024, was flat year-on-year in Q4 2024, and has been on a downward trend year-on-year since the beginning of 2025, with revenue declining 1.2% year-on-year in Q4 2025. 2) Control of medical treatment costs and policy effects are evident: Outpatient costs peaked historically in early 2023, were well-controlled from 2024 to March 2025, and inpatient costs showed a declining trend, reflecting the cost-control effects of healthcare reforms like DRG. 3) Medical service volumes remained stable: From January to March 2025, the total number of diagnoses and treatments in national healthcare institutions was 1.86 billion, down 0.1% year-on-year. 4) Healthcare insurance funds operated steadily overall: From January to November 2025, the total income of China's basic medical insurance pooling funds was 2,632.068 billion yuan, while total expenditures were 2,110.046 billion yuan. The pharmaceutical sector's performance has been weaker than the CSI 300. As of January 28, 2026, the one-year rolling price-to-earnings ratio for the pharmaceutical sector was 38.19 times, compared to 14.14 times for the CSI 300. The current premium of the pharmaceutical sector's P/E ratio relative to the CSI 300 is 170.14%, compared to a historical average of 166.90%. The current premium is 3.24 percentage points higher than the average since 2005, positioning it around the historical median level. From the beginning of 2024 to January 28, 2026, the SW Pharmaceutical Biological Index rose by 1.44%, while the CSI 300 rose by 37.15%, meaning the pharmaceutical sector underperformed the CSI 300 by 35.71 percentage points. Risk warnings include the risk of insufficient growth in pharmaceutical consumption capacity due to increasing macroeconomic pressures, the risk of policies such as innovative drug医保 reimbursement falling short of expectations, the risk of global order shifts due to geopolitical factors, and the risk of volume-based procurement or fee reductions exceeding market expectations.
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