Summary of Key Points
Recently, the innovative drug sector has seen a surge followed by differentiation: Since August, the innovative drug index has rebounded by more than 13%, but it began to adjust last Friday. The momentum for the rebound came from the unexpectedly strong performance of leading CXO (Contract Research Organization) companies and the boom in overseas licensing (BD) transactions. However, with the release of mid-year reports, the market has shifted from focusing on rumors to examining actual financial results. Investors are now paying attention to the ability of companies to convert these gains into sustained profits, and only those that can continue to make money will stand out in the future.
I. The Two Main Drivers Behind the Rebound in Innovative Drugs: Outsourcing Companies' Profits and Booming Overseas Licensing
The rise in innovative drug prices was driven by two main factors:
1. Outstanding Performance of CXO Companies: CXO companies provide R&D and manufacturing services for pharmaceutical companies (such as WuXi AppTec and Zaiyan New Drug). In the first half of the year, these companies achieved impressive results—WuXi AppTec reported revenue of 28.9 billion yuan (up 39%) and net profit of 11.1 billion yuan (up 29%); Zaiyan New Drug even forecasted a net profit increase of up to 13 times! This indicates a strong global demand for R&D services, suggesting that the industry is in good health.
2. Surge in Overseas Licensing Transactions: Chinese pharmaceutical companies have sold the rights to sell their drugs overseas to foreign companies (known as BD transactions). There were 81 such transactions in the first half of the year, totaling approximately 110 billion US dollars, nearly 80% of last year's total. For example, Rongchang Bio went from a loss of 450 million yuan to a profit of 4.7 billion yuan due to licensing fees. These transactions have led the market to believe that Chinese innovative drugs are finally being recognized internationally, attracting more investment.
II. Signs of Differiation: Some Investors Are Taking Profit, Even Those with Good Performance Are Falling
After a period of growth, the sector has started to show signs of divergence:
1. Profit-taking by Investors: The scale of ETFs focused on innovative drugs decreased by 2.4 billion yuan in the past week (for example, the GF Hong Kong Innovative Drugs ETF lost 980 million yuan), indicating that investors who made profits are selling their positions.
2. Good Performance Does Not Necessarily Equal Rising Stock Prices: BeiGene's revenue increased by 27% and net profit by 600% in the first half of the year, but its stock price opened higher but then fell by 4% after the financial report was released. Zejing Pharmaceutical's profit increased by 9 times, yet its stock price dropped by 12%. Why? Because the market realized that some of these profits were one-time gains—such as Rongchang Bio's 470 million yuan from licensing fees, which are not a sustainable source of income and therefore not appealing to investors.
III. The Market's Focus Has Shifted: From Licensing to Actual Profit Generation
Previously, the focus was on whether there were BD transactions; now, investors are more concerned about whether these transactions can turn into sustained revenue:
- Xingye Securities notes that it is important to see if the licensed drugs can pass clinical trials and be sold overseas for profit (a process called "commercialization"). For example, key clinical data for previously licensed drugs will be released in September or October, which could affect future market trends.
- CICC emphasizes three key points: whether the drugs sell well domestically, whether BD transactions are sustainable, and whether significant drugs can actually be successfully launched overseas. In other words, the market no longer just listens to stories but wants to see concrete results.
IV. Institutional Attitudes: High Interest but Not All Funds Have Flowed In; Performance Still Needs Verification
Institutions are becoming more interested in innovative drugs, but they are cautious:
1. Surging Interest in Research: The pharmaceutical and biotech sector was surveyed 104 times last week (the highest in the industry), with BeiGene and Zejing Pharmaceutical being particularly popular targets. However, analysts say that increased research does not necessarily mean immediate investment, as AI and computing power still hold a large portion of active funds.
2. Fund Companies' Views: NuoAn Fund believes that current valuations are reasonable, but for a significant increase in the index, both "industry logic" and market cycles need to be in place. CXO companies need continuous performance evidence, while innovative drug companies need more BD progress and clinical data. Great Wall Fund warns that short-term trends will be volatile, and investors should focus on those with clear pipeline prospects and potential for significant profit growth, avoiding smaller companies that are still losing money.
V. Future Market Trends: Differiation Will Intensify; Only Companies That Can Really Make Money Will Succeed
In the future, the innovative drug sector will not experience a general rise; instead, only the strongest companies will thrive:
- Companies that can sustainably generate profits (such as leading CXO firms and those with drugs selling well both domestically and internationally) will continue to perform well.
- Smaller companies relying on one-time income or still incurring losses may be marginalized by the market.
Institutions suggest focusing on companies with clear pipeline prospects and potential for substantial profit growth over a six-month to one-year period, as only those that can truly generate profits are worth holding in the long term.
In summary, the innovative drug sector has moved from a phase of speculation based on expectations to one of verifying actual capabilities. The key will be whether companies can consistently earn money through outsourcing services or by selling drugs successfully both domestically and internationally. Ordinary investors should avoid companies that rely on attractive stories and instead focus on those with solid financial performance.