To The Moon

After the Federal Reserve's rate hike was confirmed, A-shares experienced a midday pullback with all three major indices closing lower. The market absorbed the major fundamental event with some lingering pressure, and sector rotation has been rapid. Meanwhile, in Hong Kong, innovative drug and related pharmaceutical sectors showed notable activity.

Many investors are likely wondering: now that the Fed has raised rates and A-shares are under pressure, why does the innovative drug sector, typically sensitive to interest rate movements, continue to display resilience?

On the fundamental side, the Fed raised rates by 25 basis points to 3.75%-4.00% overnight. With the hike now in place, future policy direction remains uncertain, and overseas liquidity has not yet clearly shifted toward easing. For innovative drugs, external uncertainties persist, and near-term performance may continue to be influenced by interest rates and risk appetite. (Source: Wind, 2026.09.17)

However, once the market gradually digests these interest rate changes, pricing for innovative drugs is likely to return to industry fundamentals. Rather than focusing solely on short-term valuation swings, it may be more useful to track three key threads - research efficiency, validation and conversion, and industrial synergy - to assess whether the sector can achieve sustained value delivery.

Looking first at research efficiency, recent activity in AI-driven drug discovery partnerships and financing has been brisk. Advances in algorithms and computing power provide the application foundation for AI pharmaceuticals, and AIDD could potentially reshape early-stage drug discovery processes, improving screening efficiency and success rates. This does not necessarily mean technology has already translated into earnings, but it does indicate the industry is attempting to address issues of lengthy R&D cycles, high investment costs, and expensive trial-and-error through more efficient methods. (Source: Wind, China Securities, 2026.09.17)

Nevertheless, research efficiency addresses whether directions can be identified faster, while validation and conversion determine whether those directions are viable. Algorithms can narrow screening ranges and propose research paths, but predicted results still require wet-lab experiments to generate data, followed by clinical studies and regulatory approval processes. There is no shortcut from algorithmic prediction to clinical value; experimentation and validation remain indispensable steps. (Source: Wind, 2026.09.17)

Consequently, the transformation brought by AI pharmaceuticals may not be limited to technology platforms alone. As front-end R&D efficiency improves, demand for experimental validation and clinical research services may also warrant continued monitoring. From an industrial chain perspective, CXO and life science upstream segments have remained relatively stable, with the sector showing signs of recovery. With overseas investment and financing activity staying robust and AIDD continuing to develop, future demand for experiments and validation could increase, potentially benefiting related industry chains. (Source: CITIC Securities, Sinolink Securities, 2026.09.17)

But R&D and validation primarily solve whether drugs can be developed; converting R&D outcomes into industrial value requires navigating partnership, review, and market application stages. Chinese innovative drugs are transitioning from sporadic outbound licensing to more routine global BD transactions, and overseas collaborations help expand the validation and conversion space for innovative outcomes. Meanwhile, Hong Kong has recently proposed deepening pharmaceutical and medical device regulatory reforms to promote innovative drug R&D, approval, and market availability. These changes may not immediately reflect in daily market movements, but they contribute to smoother connectivity between R&D, review, conversion, and commercialization. (Source: Sinolink Securities, Wind, 2026.09.17)

Therefore, while external liquidity may still cause periodic fluctuations, if research efficiency, experimental and clinical validation, global partnerships, and commercialization can form a closed loop, this could provide more sustainable support for the sector. This industry-inherent certainty may well be the underlying reason innovative drugs can demonstrate resilience amid macroeconomic disruptions.

For average investors, innovative drugs is not an easy sector for picking individual winners - a single clinical data point, one approval milestone, or even a BD partnership can lead to significant divergence. Rather than betting on one company or a single pipeline, focusing on the broader industry might be an alternative approach. Using index-based tools to diversify attention could be a relatively convenient path.

Take the Hang Seng Biotechnology Index as an example; it aims to reflect the overall performance of the 30 largest biotechnology companies listed in Hong Kong and eligible for Stock Connect. Its structure features a dual allocation to CXO and innovative drugs, providing broader coverage across the upstream and downstream industry chain. By accessing this index-based product, investors may not only diversify single-stock risk but also potentially capture industry chain growth dividends.

Interested investors may consider the Hang Seng Biotech ETF Southern (159615) and its feeder funds (Class A: 018078, Class C: 018079) - this product is rated R4 medium-to-high risk, with the rating sourced from Southern Fund's official website; investors should invest prudently based on their own risk tolerance. Alternatively, for those interested in actively managed products, the Southern HK Healthcare Industry Mixed QDII (Class A: 019415, Class C: 019416) may be worth attention - also rated R4 medium-to-high risk as per Southern Fund's official website.

Note: The Hang Seng Biotech ETF Southern tracks the Hang Seng Biotechnology Index (HSBIO), which recorded annual returns of -27.79%, -18.71%, -23.98%, -15.75%, and 64.46% for 2021-2025 respectively. Historical index performance does not predict future results and does not represent fund performance. Note: Southern HK Healthcare Industry Mixed QDII is an actively managed equity product.

Risk disclaimer: Funds carry risks; investment requires caution. Publicly offered securities investment funds are long-term investment vehicles primarily designed to diversify risk and reduce concentration in any single security. Funds differ from bank deposits or other financial instruments that can provide fixed income expectations; when purchasing fund products, investors may share in investment gains according to their holdings or bear losses arising from fund investments. Before making investment decisions, please carefully read the fund contract, prospectus, and product summary documents, fully understand the risk-return characteristics of the fund, consider various risk factors, and evaluate your own risk tolerance based on investment objectives, time horizon, experience, and financial condition. Rational and careful decisions should be made with a clear understanding of the product and sales suitability opinions.

According to relevant laws and regulations, Southern Fund Management Co., Ltd. provides the following risk disclosures: First, funds are categorized into equity funds, hybrid funds, bond funds, money market funds, funds of funds, commodity funds, and other types; different fund types come with different return expectations and varying degrees of risk. Generally, higher return expectations entail greater risk. Second, funds may face various risks during operations, including market risk, management risk, technical risk, and compliance risk. Large redemption risk is unique to open-end funds - when daily net redemption requests exceed a certain percentage of total fund units (10% for open-end funds, 20% for periodically open funds, except for special products approved by the CSRC), investors may be unable to redeem all units in a timely manner or redemption payments may be delayed. Third, investors should fully understand the difference between regular fixed-amount investment plans and traditional savings methods. Regular fixed-amount investment is a simple method to guide long-term investing and average costs, but it does not eliminate inherent fund investment risks, does not guarantee returns, and is not an equivalent alternative to savings. Fourth, if the product invests in overseas securities, beyond general investment risks similar to domestic securities investment funds, the fund also faces special risks including currency risk. Fifth, the fund manager commits to managing fund assets with honesty, diligence, and responsibility but does not guarantee profitability or minimum returns. Past performance does not indicate future results, and performance of other funds managed by the manager does not constitute a guarantee of this fund's performance. Southern Fund reminds investors of the "buyer beware" principle - after making investment decisions, investment risks arising from fund operations and NAV changes are borne by investors. Fund managers, custodians, distributors, and related institutions make no promises or guarantees regarding fund investment returns.

Sixth, the Southern Hang Seng Biotech ETF and its feeder funds, and the Southern HK Healthcare Industry Mixed QDII (Class A and Class C shares) are registered with the CSRC. For the ETF, on-exchange trading fees are subject to actual brokerage charges; subscription agents may charge commissions up to 0.2%, and redemption agents may charge up to 0.2%. For the feeder fund Class A: subscription fees are 1,000 yuan per transaction for amounts of 5 million yuan and above; 0.4% for 2 million to 5 million yuan; 0.8% for 1 million to 2 million yuan; 1.2% for amounts below 1 million yuan. Redemption fees: 0% for 7 days or more; 1.5% for less than 7 days. For feeder fund Class C: subscription fee is 0%; redemption fee is 1.5% for less than 7 days, 0% for 7 days or more; sales service fee is 0.3% per year. Management and custody fees for the ETF and its feeder funds are 0.5% and 0.15% per year respectively. For the Mixed QDII Class A: management fee 1.2% per year, custody fee 0.2% per year; subscription fees are 1.20% for below 1 million yuan; 1.00% for 1-2 million yuan; 0.80% for 2-5 million yuan; 1,000 yuan per transaction for 5 million yuan and above. Redemption fees: 1.50% for less than 7 days; 0.75% for 7-30 days; 0.50% for 30-365 days; 0.00% for 365 days and above. For the Mixed QDII Class C: management fee 1.2% per year, custody fee 0.2% per year; redemption fees are 1.50% for less than 7 days, 0.50% for 7-30 days, and 0.00% for 30 days and above. Class C shares carry no subscription fee but have a sales service fee of 0.60% per year. Fund contracts, prospectuses, and product summaries have been publicly disclosed through the CSRC fund electronic disclosure website and the manager's website. CSRC registration does not constitute a substantive judgment or guarantee of the fund's investment value, market prospects, or returns, nor does it indicate that investing in the fund is risk-free.