The healthcare sector in 2026 is at a delicate crossroads where stock prices are out of sync with industry progress. In the first half of the year, the total value of China's innovation drug out-licensing deals approached $100 billion, representing a 40% year-on-year increase and reaching roughly 72% of the total for the full year 2025. Upfront payments also totaled nearly $5 billion, surging 68% from the same period last year. However, the performance of the secondary market has not fully reflected this industrial boom. Why is there such a disconnect between stock prices and industry developments? And will future excess returns come from industrial innovation or improvements in profitability?
At the Guotai Fund 2026 mid-year strategy conference, themed "Mountains and Rivers Stretch Far, Sky is Clear and Clouds are Wide," fund manager Qiu Xiaoxu shared his investment outlook for the healthcare sector in the second half of 2026. He pointed out that the primary reason for the divergence between stock performance and industrial progress is a structural "gap" in the market. While new concepts like brain-computer interfaces attracted early interest, they are still 4-5 years away from industrial realization and have a short supply chain, making it difficult to generate substantial pull for the A-share market. The core track of innovative drugs is in a critical "transitional phase." Last year, the market gained an initial understanding of the BD business model as a value driver. However, now that BD deals are closing, questions remain about whether bispecific antibodies can outperform Keytruda, whether ADC toxicity will be accepted by overseas doctors, and whether multinational corporations will meet sales-sharing commitments. The market needs new molecules or new business models to fulfill the next stage of expectations.
Valuation anchoring also faces challenges. The persistent "capital drain" effect from the AI sector has pushed valuations of profitable healthcare companies down from 25 times to 15 times or even 10 times, with no new valuation anchor yet established. On the macro front, the hospital anti-corruption campaign in May has created short-term disruptions to sales, while increased U.S. restrictions on biotech and the approaching prospect of U.S. drug price cuts have collectively weighed on sector sentiment. Regarding whether the sector can overcome these obstacles, Qiu Xiaoxu is optimistic. Policy signals are turning positive: state media has shown increased attention to innovative drugs, publishing multiple supportive articles. The pricing of innovative drugs under medical insurance is significantly higher than past me-too drugs, and the National Essential Drug List has included several innovative drug varieties, all of which are exceeding expectations. On U.S. market access, 2026 and 2027 are key years for testing the FDA's stance on molecules from China. Critical milestones to watch include the approval of a bispecific antibody from a Chinese company in November, approval of a combination therapy from another firm, and the filing of an ADC application. Based on the behavior of U.S. MNCs, the belief is that they have strong influence over regulators, and that approved products are likely to be cleared on schedule.
Earnings trends are also showing positive changes. The cash flow structure of innovative drug companies is steadily improving. As more companies see their commercial gross margins gradually rise, BD income is no longer a sporadic "windfall." The frequency of transactions is increasing, upfront payments are growing, clinical milestones are being progressively realized, and the rate of deal terminations remains low. This is transforming BD from a one-time gain into a stable source of cash flow. Furthermore, the potential for market capitalization revaluation is substantial. A static estimate based on just 15% of the BD milestones from the first half of the year, spread over a 15-year cycle, could contribute roughly 10% to 12% of the current market capitalization of the healthcare sector. Given that overall revenue growth for innovative drug companies remains above 25%, achieving a 35% increase in market capitalization is considered a reasonable target.
Investment Outlook for 2026: Focus on Three Key Themes
Based on this analysis, Qiu Xiaoxu has summarized the investment opportunities in the healthcare sector for the second half of 2026 into three main themes. The first theme is high-elasticity, centered on innovative drugs, which can be broken down into "answer questions" and "fill-in-the-blanks." Innovative drugs are the most explosive direction in the healthcare sector. "Answer questions" focuses on how large, out-licensed, pan-cancer drugs can complete the entire chain from domestic proof-of-concept to overseas approval, indication expansion, inclusion in clinical guidelines, and ultimately, commercial success that exceeds expectations. Successfully navigating this path would create a new business model, showing the market the true potential for cash flow. "Fill-in-the-blanks" involves discovering new molecular paradigms, such as bispecific antibodies in oncology, new ADC toxins, and new varieties in autoimmune diseases. Over the next three years, more molecules will enter critical proof-of-concept stages, acting as key catalysts for small and mid-cap companies.
The second theme is low-competition, focusing on bottom-fishing stocks driven by earnings with higher-than-expected flexibility. For investors seeking a margin of safety, Qiu Xiaoxu suggests two types of bottom-fishing stocks. The first is "export to rescue domestic demand": companies where domestic volume-based procurement (VBP) has bottomed out, but overseas profitability and sustainability have been verified. Examples include dental aligners, biosimilars (including insulin), and medium-value medical devices. The second is "domestic demand with room for growth": sectors like ventilators and precision diagnostics, which are currently scarce consumption upgrades, as well as low-growth recovery tracks like AI healthcare, brain-computer interfaces, and the silver economy. Investors can maintain confidence and watch for new breakthroughs from the sidelines.
The third theme is high-certainty, involving the supply chain, which acts as a "ruler" for measuring industry sentiment and valuations. The supply chain is the direction with the highest certainty. Overseas CDMO valuations are at low levels, with strong resilience against risks like tariffs, the BIOSECURE Act, and RMB appreciation. Investment themes revolve around large-molecule products (peptides, cyclic peptides, oral weight-loss drugs) and new, high-penetration drug modalities (bispecific antibodies, ADCs). The domestic R&D chain benefits from the high-turnover model of innovative drugs, with early-stage CROs gaining the most. The highest order elasticity is in GLP-1 related fields, the largest market expansion is in pharmacodynamics, and the strongest platform is in reagent instruments.
Reconciling Innovation and Profit Growth
In a Q&A session, when asked whether excess returns come from industrial innovation or earnings improvement, Qiu Xiaoxu believes the two are complementary. Industrial innovation is the alpha source for healthcare funds. China now accounts for half of the new drug modalities globally, even producing "Only-in-Class" drugs, which is a testament to the engineering dividend. Meanwhile, improvements in profitability are the beta that attracts broader market capital, requiring single large drugs to unlock overseas commercialization milestones and demonstrate real cash flow. Only when innovation continuously accumulates and earnings gradually materialize can healthcare stocks be compared in valuation with sectors like optoelectronics and consumer goods, attracting more incremental capital. He specifically noted that in the future, Chinese innovative drug companies could reach profit margins of 40%, similar to overseas MNCs. At that point, the market will grant a valuation premium for innovative business models, rather than manufacturing-based valuations. The views expressed are for reference only and are subject to change due to market factors. They do not constitute investment advice or promises. Market risk exists, and investment should be made with caution.
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