Industrial Securities released a research report stating that "innovation + globalization" will remain the core theme for the pharmaceutical and biotechnology sector in 2026. The focus should be on innovative drugs with sustained positive industry trends, characterized by strengthening global competitiveness, ongoing international expansion, and realization of commercial profitability. Attention is also advised on the innovative drug industry chain, where favorable conditions are expected to persist. Concurrently, factors affecting the medical device industry are continuing to ease, with innovation and globalization accelerating, potentially leading to improvements in 2026. Furthermore, if consumer sentiment improves, consumer healthcare sectors (including medical services, over-the-counter traditional Chinese medicine, and chain pharmacies) are expected to enter a recovery phase.
The main views of Industrial Securities are as follows:
**Sector Stabilized and Recovered in 2025, Growth Extended into Q1 2026** For all listed companies in the pharmaceutical sector (excluding those with significant non-recurring gains/losses, goodwill, or fair value changes on a comparable basis, new listings, and companies with abnormal operational fluctuations, see notes to Figures 1 and 2 for details), 2025 operating revenue increased by 1.05% year-on-year, net profit attributable to shareholders of listed companies increased by 7.92% year-on-year, and adjusted net profit attributable to the parent company decreased by 0.37% year-on-year. In the first quarter of 2026, operating revenue increased by 2.25% year-on-year, net profit attributable to shareholders of listed companies increased by 5.49% year-on-year, and adjusted net profit attributable to the parent company increased by 9.65% year-on-year. The pharmaceutical sector achieved stabilization and recovery in revenue and profit for 2025, with the growth trend continuing into Q1 2026.
**Significant Divergence Within the Pharmaceutical Sector, Medical Services Industry Performs Well** Based on Shenwan tertiary industry classification, the year-on-year revenue growth rates for various pharmaceutical subsectors in 2025 were: Biological Products > Medical Services > Chemical Preparations > Pharmaceutical Commerce > Medical Devices > Chinese Patent Medicines > Active Pharmaceutical Ingredients. The year-on-year growth rates for adjusted net profit attributable to the parent company were: Medical Services > Chemical Preparations > Biological Products > Chinese Patent Medicines > Pharmaceutical Commerce > Medical Devices > Active Pharmaceutical Ingredients. In Q1 2026, the year-on-year revenue growth rates for various pharmaceutical subsectors were: Medical Services > Medical Devices > Chemical Preparations > Pharmaceutical Commerce > Active Pharmaceutical Ingredients > Chinese Patent Medicines > Biological Products. The year-on-year growth rates for adjusted net profit attributable to the parent company were: Medical Services > Chemical Preparations > Pharmaceutical Commerce > Chinese Patent Medicines > Medical Devices > Active Pharmaceutical Ingredients > Biological Products.
**Institutional Holdings in Pharmaceuticals Retreat to Mid-to-Low Levels, Sector Valuation Appeal Continues to Improve** The firm analyzed mutual fund holdings data for the pharmaceutical sector in Q1 2026 (estimated based on major holdings). The active fund allocation to the A-share pharmaceutical sector in Q1 2026 was 7.31%, an increase of 0.56 percentage points from the previous quarter. Excluding dedicated pharmaceutical funds, the allocation was 3.30%, up 0.43 percentage points quarter-on-quarter. Dedicated pharmaceutical funds allocated 4.01% to the sector, a quarter-on-quarter increase of 0.13 percentage points. During the same period, pharmaceutical stocks accounted for 5.58% of the total A-share market capitalization. Overall, the sector is overweight, but it is underweight when excluding dedicated pharmaceutical funds. The top three subsectors by allocation within pharmaceutical holdings were: Chemical Preparations (43.70%); Contract Research, Development, and Manufacturing Organizations/CROs & CDMOs (23.29%); and Other Biological Products (8.27%). For dedicated pharmaceutical theme funds, the top three subsectors by allocation were: Chemical Preparations (58.36%); CROs & CDMOs (23.34%); and Other Biological Products (7.58%). Compared to Q4 2025, the top three subsectors that saw increased allocation in Q1 2026 were: CROs & CDMOs (+2.71pp); Other Biological Products (+2.37pp); and Medical Consumables (+1.61pp). This indicates a marginal recovery in active fund allocation to the pharmaceutical sector in Q1 2026, with a structural trend towards concentration in chemical preparations, CXO (CRO/CDMO), and biological products. The active increase in CRO & CDMO allocations reflects heightened attention from funds towards expectations for order recovery in the CXO sector and the potential for valuation rebound.
**Risk Warning:** Risks include industry policy changes exceeding expectations, slower-than-expected product R&D and approval speeds, and weakening comparative advantages of the sector.
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