As the timeline for innovative drugs to progress from laboratory to clinical application continues to shorten, and as medical insurance negotiations and innovation incentives form a virtuous cycle, we inevitably ask: where is the next breakthrough point for pharmaceutical innovation in China? The answer may not lie in a single-dimensional breakthrough but in the historic convergence of "policy" and "technology." Policy dividends are reshaping the industry ecosystem, while technological advancements are redefining research and development pathways. In the face of this profound transformation, gaining insight into innovation trends and embracing dual benefits is essential to understanding the underlying logic and future prospects of the pharmaceutical sector.
As one of the earliest fund companies to deeply engage in technology investments, the firm has assembled a research team with a blend of industrial and academic expertise, supported by strong collaborative capabilities. This has enabled continuous expansion and iterative exploration in the field of technology investment.
Fund manager Liu Xiao is a key figure in the pharmaceutical investment team, bringing a background in biological pharmacy and a family history spanning three generations in medicine. This has endowed her with a keen sensitivity to the evolving developments and policies in China's healthcare industry. With 15 years of professional experience and over seven years in investment management, Liu has continued to deepen her expertise in the pharmaceutical sector while broadening her horizons to identify truly high-quality investment targets since joining the firm in November 2021.
In the fourth installment of "Insights into New Industries," fund manager Liu Xiao shared the following key perspectives.
1. Dual Drivers of Policy and Technology: Pharmaceutical Innovation Enters a Value Realization Phase Moderator: Could you elaborate on the investment framework for the pharmaceutical industry and how it differs from traditional sectors? Liu Xiao: From a research perspective, pharmaceuticals possess both consumer attributes, being essential necessities, and characteristics of a typical technology sector—global biotech companies lead all listed companies in R&D investment intensity. The industry is perpetually evolving, driven by new technologies that enable sustainable growth, making it highly attractive to long-term capital.
Our research framework integrates macro and micro perspectives. On one hand, the pharmaceutical industry operates under a self-contained regulatory system, such as requiring approval from drug regulatory authorities for market entry. On the other hand, it benefits from policy support; this year’s government work report highlighted pharmaceuticals in plans for emerging and future industries—reflecting the global competitiveness of China’s biotech sector and its economic impact.
Thus, from an investment standpoint, we focus on identifying leading companies within this broad, essential sector that can consistently generate compound growth returns, aiming to share in the industry’s development dividends through long-term holdings.
Moderator: What investment opportunities lie ahead in the pharmaceutical sector? Liu Xiao: The current environment offers favorable conditions for investing in pharmaceuticals. Biotech companies are experiencing accelerated revenue and profit growth, supplemented by business development activities, with these gains increasingly reflected in financial statements. Broader market funds are gradually recognizing this value.
Over the next three to four years, a concentration of patent cliffs overseas will impact approximately 30% to 50% of revenues for the top ten global pharmaceutical firms. Chinese companies, with robust product pipelines and multiple candidates each potentially exceeding ten billion dollars in value, are poised to capitalize on substitution and leadership opportunities as these gains materialize in financial reports.
Moderator: How are policy and technological dividends manifested, and what is the impact of aging populations on pharmaceutical demand? Liu Xiao: Industrially, policies from R&D to commercialization and reimbursement have created a supportive landscape. Local incubation funds provide additional financing channels for research, while the advancement of commercial health insurance allows global innovative products to achieve pricing closer to international levels, contributing to an "innovation inflation" trend. Domestically, chronic diseases, oncology, and metabolic disorders are expected to see a surge in treatment options, surpassing previous peaks.
Data indicate that healthcare spending for individuals in their seventies and eighties is about four times higher than for those in their twenties. As physical functions decline, the prevalence of chronic conditions such as orthopedic, ophthalmic, cardiovascular, and respiratory diseases increases three- to fourfold after age 60–65, with central nervous system disorders seeing rates up to ten times higher by the seventies and eighties. Aging demographics indeed drive explosive demand for essential medications.
2. Rising Tide of Global Business Development: Reshaping Valuation Systems Through Competitiveness Moderator: What dimensions should investors focus on for higher-threshold innovative drugs? Liu Xiao: Innovative drug development involves extended timelines. Although AI can shorten preclinical screening and design to around 18 months, comprehensive evaluation of safety, efficacy, and accessibility through multiple stages remains necessary for successful market entry.
Given the inherently high risks of drug development, closely tracking R&D progress is crucial for capturing rolling value and achieving a snowball effect. When researching innovative drugs, we monitor clinical data from top global conferences and expert reviews, which validate drug viability and inform pricing assessments.
Moderator: Does the frequent occurrence of global business development deals signal a substantive rise in the competitiveness of Chinese pharmaceutical firms? How do these deals influence investment valuations? Liu Xiao: China’s share in global biopharma licensing deals continues to climb, with mid-to-high-value transactions accounting for nearly 50% last year, up from 30% the previous year, reflecting growth in both quantity and quality—surpassing Japan and Europe and trailing only the United States. This is underpinned by an engineer dividend, with abundant talent in biology and chemistry enabling leadership in immuno-oncology, cell therapy, oligonucleotides, ADCs, and other novel modalities.
Business development provides cash flow during R&D, accelerating pipeline advancement. From January to April this year, combined BD and primary market fundraising grew over 20% year-on-year, demonstrating sector resilience despite global high-interest rates. This vitality is why biotech was emphasized in recent policy discussions.
Global market access expands addressable markets tenfold compared to domestic ones, with higher pricing in Europe and the United States amplifying advantages. As major global pharma face patent cliffs and pipeline gaps, Chinese innovations have garnered significant attention from multinational corporations over the past few years.
BD deals represent early value recognition by industrial capital. Current valuations in A-shares and Hong Kong markets often incorporate only upfront payments, remaining conservative. As phase II candidates report phase III data, milestone achievements will drive value upward. Future global pricing still has room for appreciation, with peak sales potential for blockbuster products becoming a core driver. By 2028, candidates in oncology, autoimmune diseases, and metabolic disorders with global competitiveness could achieve multi-billion-dollar potential, making leading companies compelling at current levels.
3. Deep Industry Engagement and Disciplined Frameworks: Capturing Compound Returns with a Long-Term View Moderator: How does your family background in medicine influence your investment decisions? Liu Xiao: With parents and uncles in healthcare, the reverence for the "angel in white" ethos instills a deep respect for the industry. While AI disrupts many sectors, healthcare remains a rigorous domain requiring stringent animal and clinical trials before commercialization, endowing pharmaceuticals with enduring value and deep moats.
Moderator: What support does the firm’s research platform provide? Liu Xiao: Having focused on pharmaceuticals for 14 years, I encounter constant innovation. Primary markets are vibrant, with biotech expanding into anti-aging, aesthetics, and consumer-adjacent areas—single-target weight-loss drugs alone could reach markets worth hundreds of billions. Staying abreast of new directions and engaging with cutting-edge developments is imperative.
The firm embodies a dynamic team attuned to capturing zeitgeist trends and tracking growth-oriented, forward-looking biotech avenues. We conduct quarterly visits to listed companies in innovation hubs like Guangzhou-Shenzhen, Suzhou, Beijing, and Chengdu, supported by senior analysts covering innovative drugs, devices, and services. By deeply engaging primary markets and global R&D progress, conducting head-to-head comparisons, we identify top companies, leading technologies, and novel drug formats. Adhering to long-term industry trends rather than chasing short-term hype enables independent judgment—a principle we steadfastly maintain.
Investment risks: Fund management companies do not guarantee profits or minimum returns. Past performance does not predict future results, and the performance of other funds managed by the same company does not assure returns. Fund products are subject to volatility; investors should exercise caution and review prospectuses and legal documents carefully.
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