The pace of licensing deals is accelerating, pipeline value is being realized, and profits are seeing significant growth. Despite these positive fundamental developments, the performance of the innovative drug sector in the secondary market has not kept pace. As of June 9, 2026, the CSI Innovative Drug Index has fallen by 13.36% over the past year, while the CSI 300 Index has risen by 23.59% over the same period. Can the innovative drug sector experience a valuation recovery?
Valuations at Low Levels: What Could Drive a Recovery?
After a period of correction and consolidation, the latest price-to-earnings ratios for the CSI Innovative Drug Index and the SZSE-HK Connect Innovative Drug Index stood at 40.57x and 39.50x respectively as of June 9, 2026. These figures place them around the 35th and 36th percentiles of their respective historical ranges since their inception, indicating valuations have entered a historically low zone.
Some analysts suggest that a shift in market style and capital preferences since May, combined with policy-related fluctuations affecting US-China innovative drug dynamics, have led to irrational volatility in the sector. They emphasize that evaluating innovative drugs should not be confined to short-term market movements; a longer-term perspective is needed to rationally assess the industry's intrinsic value. So, what could be the drivers for a valuation recovery in innovative drugs?
Key Drivers for a Potential Re-rating
1. Strong Momentum in Out-licensing Deals, Annual Scale May Hit New Highs
Data shows that as of May 31, the total value of domestic pipeline out-licensing deals has reached $89.4 billion, already accounting for 66% of the full-year 2025 total ($135.7 billion), with the full-year 2026 figure expected to reach a new record. Analysis indicates the industry's globalization model is rapidly evolving, with international capabilities significantly improving. The sector is transitioning from "scale expansion" to "deep construction of systematic capabilities." Deep collaboration models emphasizing risk-sharing and benefit-sharing are increasingly becoming mainstream, propelling China's innovative drugs to a higher position in the global value chain.
2. Reform and Optimization of Medical Insurance Payment Methods Accelerating Innovation Adoption
On the policy front, the 2026 adjustments to the national reimbursement drug list and commercial health insurance innovative drug lists have officially commenced, which is expected to further expand the payment scope for innovative therapies. Analysis suggests this is the most comprehensive and supportive round of adjustments since the 2020 medical insurance reform. The core logic lies in adhering to medical insurance's fundamental role of providing basic coverage while guiding pharmaceutical innovation through optimized payment policies. Supported by multi-layered payment pathways, the volume expectations and profit potential for high-value innovative drugs are likely to become clearer.
3. Breakthroughs Across Multiple Therapeutic Areas, Impressive Innovation Achievements
Data indicates that China's share of global first-in-class pipelines has surged from single digits to approximately 45% in Q1 2026, marking a shift from a "major R&D country" to a "strong R&D nation." During the same period, 30% of projects and 71% of procurement value in multinational pharmaceutical companies' global pipeline acquisitions originated from Chinese innovative drug pipelines. Domestic pharmaceutical companies have moved beyond single-point breakthroughs, advancing concurrently in multiple fields such as immuno-oncology multi-specific antibodies, antibody-drug conjugates (ADCs), and small molecule targeted therapies. They are frequently producing internationally competitive clinical data, with domestically originated innovative assets gaining significant global market recognition.
Is an Inflection Point Near? How Can Investors Seize Opportunities?
Overall, leveraging the dual advantages of "innovation upgrade" and "supply chain resilience," China's pharmaceutical industry is undergoing a systematic value reshaping.
Internally, the focus is on high-quality development, strengthening the foundation of innovation and compliance. Externally, multi-dimensional breakthroughs are being achieved, with out-licensing deals becoming a normalized activity, marking the entry into the "Internationalization 2.0" era. As existing pressures gradually dissipate, driven by both internal and external forces, the industry as a whole is returning to a growth trajectory. From a long-term perspective, the investment appeal of the pharmaceutical sector may be approaching an inflection point, suggesting potential opportunities in the low-valuation recovery of innovative drug stocks.
For investors optimistic about the long-term prospects of the innovative drug sector, the following tools offer convenient access to leading innovative drug companies in the A-share and Hong Kong markets.
A-Share Innovative Drug Investment Vehicles
Yinhua CSI Innovative Drug Industry ETF (159992) and its feeder fund (Class A: 012781; Class C: 012782), which tracks the CSI Innovative Drug Index (931152.CSI).
Hong Kong Innovative Drug Investment Vehicles
Yinhua SZSE-HK Connect Innovative Drug ETF (159567) and its feeder fund (Class A: 023929, Class C: 023930), which tracks the SZSE-HK Connect Innovative Drug Index (987018.CNI).
Important Risk Disclosures
Investing involves risks. Funds are long-term investment instruments designed to diversify investments and reduce the specific risk associated with investing in a single security. Unlike savings deposits that offer fixed returns, when you invest in a fund, you may share in the investment gains or bear the losses. Before making any investment decision, please read the fund's legal documents, including the fund contract, prospectus, and product key facts statement, to fully understand the fund's risk-return characteristics and features, carefully consider all risk factors, and assess your own risk tolerance based on your investment objectives, time horizon, experience, and financial situation. Make rational and prudent investment decisions based on your understanding of the product and suitability assessments.
Fund managers manage funds with integrity and diligence but do not guarantee a fund will be profitable or promise a minimum return. A fund's past performance does not predict its future results. The performance of other funds managed by the manager does not guarantee the performance of this fund. The regulatory registration of a fund by the China Securities Regulatory Commission does not indicate an endorsement of its investment value, market prospects, or returns, nor does it guarantee that investing in the fund is risk-free.
Specific risks include, but are not limited to, market risks, management risks, and liquidity risks associated with the funds and their underlying indices. ETFs and their feeder funds carry specific risks related to tracking error and the ETF structure. Funds investing in Hong Kong-listed stocks via Stock Connect are subject to specific risks arising from differences in the investment environment, targets, market systems, and trading rules under the Connect mechanism.
Comments