CITIC Securities notes that the short-term base pressure in the traditional Chinese medicine (TCM) sector is expected to ease. Companies are actively promoting channel reforms and quality/ efficiency improvements, with channel adjustments accelerating consolidation. Both year-on-year and quarter-on-quarter performance are expected to improve. Long-term focus is advised on policy catalysts like the National Essential Medicines List and the sector's transformation and upgrading progress.
In the active pharmaceutical ingredient (API) sector, overcapacity is expected to gradually clear. Corporate transformation may bring opportunities in specialty APIs, weakening the cyclicality of performance. For the blood products sector, attention should be paid to the "15th Five-Year Plan" plasma station construction plans and industry M&A integration progress, with anticipation for subsequent demand recovery and new product R&D.
The vaccine industry should focus on sales improvement of blockbuster products, progress in innovative pipeline R&D, and industry consolidation. The pharmaceutical retail sector shows clear upcoming turning points in both performance and valuation, warranting attention to subsequent diverse catalysts. The pharmaceutical distribution industry maintains steady revenue growth, with the effects of payment collection policies gradually materializing. Continued optimism is held for large central/state-owned enterprises and targets with expectations for operational improvement.
CITIC Securities' main views are as follows: The industry is ushering in an improving trend, with innovation-related segments showing more pronounced performance. In 2025, the overall pharmaceutical sector's operating revenue declined by 0.56% year-on-year, a narrowing compared to the first three quarters. In Q1 2026, the sector's operating revenue grew by 2.16% year-on-year, indicating an overall improving trend. For 2025, the sector's non-GAAP net profit attributable to shareholders fell by 18.91% year-on-year. In Q1 2026, it grew by 2.69% year-on-year, also showing an improving trend.
In Q1 2026, segments including biopharma upstream, CRO/CMO, medical services, chemical formulations, home-use medical devices, and high-value consumables demonstrated dual growth in both revenue and non-GAAP net profit, with CRO/CMO showing the most significant growth.
From a global perspective, Chinese pharmaceuticals possess advantages in "innovation upgrade + supply chain resilience." In 2025, upfront payments for overseas licensing of innovative drugs significantly exceeded the total for the previous year, and medical devices are also actively exploring overseas pathways. While the US dominates early-stage R&D and premium pricing, strong demand exists from multinational pharmaceutical companies facing patent cliffs, highlighting the global cost-effectiveness of Chinese assets and broad potential for internal-external synergy.
Domestic value reshaping focuses on high-quality development, strengthening the foundations of innovation and compliance. Policies emphasize high-quality development, with optimized centralized procurement, diversified payment systems, and medical service pricing reforms advancing. In the pharmaceutical chain, innovative drugs are entering the commercial scaling phase, with attention on supply chain security. For medical devices, import substitution is extending into mid-to-high-end segments, with optimism for overseas expansion, new technologies (AI, brain-computer interface), and M&A integration. Opportunities are also tracked in sectors like TCM, pharmacies, and medical services for bottoming out and transformation.
Overseas value reshaping involves multi-dimensional breakthroughs to build a new global landscape. For innovative drugs, business development (BD) is becoming normalized, entering an internationalization 2.0 era. Industry chain demand is recovering both domestically and overseas. The API sector is navigating short-term disruptions while transforming towards specialty APIs/CDMO. Medical devices are expanding into overseas markets, with parallel strategies of independent sales and BD for innovative devices. For blood products/vaccines, overseas registration of intravenous immunoglobulin and diversified vaccine出海 models are key.
Existing pressures are gradually clearing, with the industry overall returning to growth. Innovative companies are breaking through via differentiation, realizing global value.
Looking ahead to the second half of 2026, the firm is optimistic about the innovation theme, supported by national policies encouraging industry innovation, and advises actively following frontier technology developments. This includes innovative drugs and pharmaceutical companies (ADC, second-generation IO, small nucleic acids, weight loss, TCE, AI drug discovery), innovative drug industry chain companies (preclinical CXO, AICXO, CDMO), and medical devices (AI, brain-computer interface, surgical robots, etc.).
The出海theme highlights the gradual attainment of global competitiveness by China's pharmaceutical industry. Long-term, the sector有望produces globally significant companies, though investors must fully anticipate the challenges of overseas expansion, which is inevitably a long and winding process. Representative sub-sectors are innovative drugs and medical device companies, where assessing the international competitiveness of products and teams is the core stock selection criterion.
The marginal change theme includes policy improvements in areas like pharmaceutical distribution, high-value consumables, electrophysiology, and medical equipment,看好high-end equipment import substitution and出海. It also covers marginal recovery in demand and pricing, such as the mild recovery in consumer healthcare within medical services, the marginal stabilization of policy impacts on serious medical care, the long-term刚性demand nature, potential marginal improvement for TCM post-channel adjustments catalyzed by policies like the Essential Medicines List, and the accelerated transformation of pharmaceutical retail towards "health stations."
The consolidation theme suggests focusing on sub-sectors like medical devices and TCM, some pharmaceutical manufacturers, and central/state-owned enterprises.
Risks include industry policy risks, R&D falling short of expectations, approval delays, and macroeconomic volatility.
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