The sentiment in the market has shifted dramatically. Investors who chased the latest technology trends have been left nursing losses, while those who held onto more traditional, value-oriented sectors are now seeing gains. This contrast has sparked a renewed conversation about the healthcare sector's prospects.
The healthcare sector has endured a prolonged period of adjustment over the past several years. Factors such as centralized procurement policies, national medical insurance negotiations, anti-corruption campaigns within the industry, and a contraction in investment and financing have collectively driven down valuations across the board, pushing market sentiment to a low point. Currently, the overall market capitalization of the healthcare sector as a proportion of the total A-share market has fallen to a near-decade low, with valuations broadly returning to historical bottom regions.
Low valuations often signal that new opportunities are forming.
As policy direction gradually shifts from "cost control" towards "supporting innovation," and with breakthroughs in the internationalization of innovative drugs and the continuous implementation of new technologies such as AI-driven drug discovery, brain-computer interfaces, and surgical robots, the healthcare industry is entering a new cycle of industrial upgrading. What areas are most worthy of attention in the second half of the year?
Innovative Drugs: The Core Theme of This Cycle
If one must choose a single focus area, innovative drugs remain the most critical allocation direction. Over the past few years, Chinese innovative drug companies have completed the transition from "Me-too" to "Best-in-class" and even "First-in-class" drugs. An increasing number of domestically developed innovative drugs are gaining recognition from multinational pharmaceutical companies, with large business development (BD) deals continually setting new records. This indicates that China's innovative assets are gradually entering the global pricing system. More importantly, after a prolonged adjustment, many leading innovative drug companies still offer relatively attractive valuations. In the coming years, the market's focus will not solely be on domestic medical insurance volume but increasingly on global commercialization capabilities. Companies that can consistently secure significant BD deals and launch products with global competitiveness are likely to experience a re-rating of their valuations. From a technology standpoint, new technology platforms such as ADCs, bispecific antibodies, multispecific antibodies, PROTACs, and small nucleic acids remain areas of intense global capital interest, and Chinese firms have become significant participants in these fields. Therefore, the primary investment thesis for innovative drugs in the second half of the year is shifting from mere "policy improvement" to a "value re-assessment driven by internationalization."
CXO: The Recovery in Orders Has Begun to Materialize
If innovative drugs represent the future, then the CXO (Contract Research, Development, and Manufacturing Organization) sector is entering a phase where financial performance is being realized. Following the adjustments of recent years, CXO valuations and market sentiment are at historical lows, but industry fundamentals are showing clear signs of improvement. On one hand, overseas CDMO (Contract Development and Manufacturing Organization) orders continue to grow, with high-end businesses like peptides, ADCs, and small nucleic acids experiencing rising demand. On the other hand, financing for domestic innovative drugs is gradually recovering, leading to renewed growth in CRO (Contract Research Organization) orders. Many leading companies reported order book growth in the first quarter that significantly exceeded market expectations. Concurrently, a resurgence in capital expenditures suggests companies are regaining confidence in future demand. In essence, the CXO sector is transitioning from a phase of "valuation compression" in recent years to a stage where "earnings are in focus." The sector's overall gross margin also showed some improvement in Q1. For this segment, the key development to watch in the second half of the year is the translation of order growth into revenue and profit.
Research Services: An Overlooked Segment with High Potential
Compared to innovative drugs and CXO, research services receive less attention but could emerge as a dark horse in the second half of the year. The reason is straightforward: research activity is recovering. Since 2025, research service revenue has ended two consecutive years of decline and maintained growth in the first quarter of this year. Several sub-sectors, such as model animals and bioprocessing, have shown marked improvement. As innovative drug R&D regains momentum, upstream research demand will naturally recover in tandem. Areas benefiting from the commercialization of new technologies like ADCs, peptides, and small nucleic acids—such as materials, chromatography, and bioprocessing platforms—stand to gain from both import substitution and global market expansion. While overall valuations for this segment may not be low, future performance is likely to be more stock-specific, with growth potential still worthy of attention.
Active Pharmaceutical Ingredients (API): The Industry Enters a Supply Improvement Cycle
The primary pressure on the API sector in recent years has been price competition. This dynamic is now changing. In recent years, a significant number of small and medium-sized enterprises have exited the market. Pressures from environmental regulations, costs, and profitability have accelerated industry consolidation, while some overseas production capacity has also contracted. Meanwhile, downstream demand has maintained stable growth, and prices have begun to stabilize and recover. The biggest future opportunity for the industry is not merely price increases but industrial upgrading. An increasing number of companies are extending into CDMO, high-end specialty APIs, and the innovative drug supply chain. Their profit models are gradually shifting from traditional manufacturing to higher value-added businesses. Consequently, in the second half of the year, it is more worthwhile to focus on specialty API companies with a second growth curve rather than traditional bulk API producers.
Medical Devices: Innovative Products Regain Focus
The current defining characteristic of the medical device sector is that valuations have returned to relatively low historical levels, while innovative directions are once again attracting capital attention. As of the end of May 2026, according to Shenwan industry classification, the overall valuation of medical devices was below 34 times PE, with medical equipment at 34x PE, medical consumables at 38x PE, and in-vitro diagnostics at 27x PE. Previously, the market was primarily concerned about the impact of centralized procurement. Now, as policies are gradually implemented, much of this risk has been largely priced in. Future growth drivers for the industry will stem more from new product launches, import substitution, and overseas market expansion. Several new directions are particularly noteworthy: surgical robots, brain-computer interfaces, high-end interventional consumables, and the overseas expansion of medical equipment. These fields align with national industrial upgrade policies and possess high technological barriers. Once products enter the volume growth stage, profit elasticity is typically significant.
Medical Services and Retail Pharmacy Chains: Awaiting a Consumption Recovery
Compared to innovative fields, medical services and pharmacy chains represent more stable opportunities. The most significant change in medical services is the marginal improvement in consumer healthcare. For instance, in the ophthalmology sector, product upgrades driven by new technologies are helping to restore both average customer spending and demand. High-end procedures like SMILE and ICL are re-entering a growth phase. For retail pharmacy chains, after years of rapid expansion, the industry is now entering a stage of "quality and efficiency improvement." Store expansion is slowing, the proportion of franchised stores is increasing, inventory turnover is improving, and industry concentration continues to rise, which should support a gradual recovery in the profitability of leading companies. While these two areas may lack the short-term explosive power of innovative drugs, they still hold value as defensive allocations.
In summary, the core investment logic for healthcare in the second half of this year has shifted.
The past market focus was on policy pressures, whereas the future focus will be on industrial upgrading. The internationalization of innovative drugs, the recovery of CXO orders, the rebound in research service activity, supply-side improvements in APIs, and the volume growth of new medical devices all indicate that the healthcare industry is gradually moving from a multi-year phase of "valuation derating" into a new cycle focused on "growth, earnings, and innovation." If we rank by growth momentum, the key areas to focus on in the second half of the year can be summarized as follows:
First Tier: Innovative Drugs, CXO.
Second Tier: Research Services, Specialty APIs.
Third Tier: Innovative Medical Devices.
Fourth Tier: Medical Services, Retail Pharmacy Chains.
For the entire healthcare sector, what is truly worth anticipating is no longer a simple valuation recovery, but a new growth cycle driven by innovation and internationalization.
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