Summary of Key Points
In the past month, pharmaceutical funds have experienced a strong rebound, with the innovative drug sector leading the gains. Funds have flowed back from previously popular sectors such as AI. The reasons for this rebound include capital rebalancing due to overcrowding in AI trading, positive fundamentals such as clinical successes by innovative drug companies and external licensing agreements, as well as earnings that exceeded expectations. Most of the funds have focused on innovative drug ETFs, which have seen significant growth in scale. Institutions believe that the sector will not experience widespread gains in the future, and attention should be paid to companies with global capabilities and robust innovation. The current valuation of the innovative drug sector is low, making it an opportune time for investment.
I. How Strong Has the Rebound in Pharmaceutical Funds Been?
In the past month (June 17 - July 17), out of 325 pharmaceutical funds, 308 were profitable, with 68 funds increasing by more than 15%, and the highest-performing fund rising by over 30%.
- Active Equity Funds: 44 funds increased by more than 20%, such as Chuangjin Hexin Pharmaceutical Preferred A (up 31.7%) and Chuangjin Hexin Healthcare A (up 30.9%). Other funds like Morgan China Biomedical A and Yinhua Healthcare A also saw increases of over 26%.
- ETF Funds: Out of 83 pharmaceutical ETFs, 80 were profitable, with the innovative drug theme leading the gains. ETFs such as Tianhong Hang Seng Shanghai-Hong Kong-Guangzhou Innovative Drugs ETF and Huitianfu STAR Market Innovative Drugs ETF increased by over 15%, and more than a dozen other innovative drug ETFs rose by over 14%.
II. Why the Sudden Rebound?
The rebound is due to two main factors: the diversion of AI-related funds and positive developments within the pharmaceutical sector.
1. Diversion of AI Funds: AI has been extremely popular in the first half of the year, leading to overcrowded trading and increased volatility. Funds are looking for new investment opportunities. The pharmaceutical sector had been declining for half a year and was at a low valuation, making it an ideal destination for these funds seeking new investments.
2. Positive Fundamentals: Multiple innovative drug companies have announced good news, such as obtaining external licensing agreements or achieving success in phase III clinical trials (which brings them one step closer to market launch). Additionally, the release of mid-year reports has shown that many companies’ earnings exceeded expectations, providing momentum for the sector.
III. Where Is the Capital Flowing?
Innovative drug ETFs have become the main destination for capital flows:
- The seven ETFs in the CSI Innovative Drug Industry Index have seen a combined increase of 4.6 billion yuan.
- Five ETFs focused on Hong Kong stocks related to innovative drugs have gained 3.369 billion yuan.
- Two ETFs targeting the STAR Market have increased by 3.148 billion yuan.
The total scale of 28 innovative drug funds in the market has reached 132.1 billion yuan, with an additional 3.2 billion yuan added in the past week and 5.5 billion yuan in the past three months—everyone is investing in innovative drugs.
IV. What Do Institutions Think About the Future?
The key trend is differentiation, with a focus on companies with global capabilities and robust innovation.
Institutions generally believe that the pharmaceutical sector will not experience uniform growth as before. It is important to select companies with genuine strengths:
- Low Valuations: The P/E ratio of the Wind Innovative Drug Index (for the past 12 months) is at the 2.9th percentile in history, meaning it has only been this cheap three times out of the last 100 years, indicating high long-term investment value.
- Earnings Turning Point: More new drugs are expected to be approved between 2022 and 2025, and the industry is entering a phase of overall profitability. Innovative drug companies in both A-share and Hong Kong stock markets have reached a turning point where they are beginning to generate profits.
- Key Factors for Investment: The focus should not be on speculative concepts (such as “experimental monkeys”) but on companies with global capabilities, the ability to conduct clinical trials overseas, and the potential to sell drugs globally. Additionally, these companies need to have strong R&D capabilities and unique drug pipelines that differentiate them from their competitors.
V. Changes in Investment Logic: From Speculating on Events to Evaluating Performance
In the past, gains might have been driven by specific concepts (such as a shortage of experimental animals), but now the focus is on tangible results:
- International expansion and clinical data are crucial indicators for verifying the value of drugs and generating real profits.
- Companies with original capabilities, unique pipelines, and global clinical capabilities will continue to perform well.
- Those with similar pipelines and no core technologies will see their valuations decline.
In short, when investing in pharmaceuticals, it is essential to choose companies that can develop drugs not available elsewhere and have the ability to sell them globally. The era of speculation based on mere concepts is over.
Conclusion: The rebound in the pharmaceutical sector is not accidental; it is a result of capital rebalancing and improved fundamentals. Moving forward, investors should focus on companies with robust innovation and global reach. The innovative drug sector presents a good investment opportunity, but not all pharmaceutical stocks are expected to perform well.