Guotai Haitong: Bullish on the development of China's innovative pharmaceutical industry based on the high prosperity of the industry, strong performance of listed companies' fundamentals, and low valuation.

Guotai Haitong released a research report stating that based on the high prosperity of the innovative drug industry, strong fundamentals of listed companies, and current low valuation, it is optimistic about the development of China's innovative drug industry and is bullish on the following directions: 1) core recommendations for undervalued weighted stocks; 2) recommending biotech companies with BD potential in 2026; 3) bispecific antibodies industry trend is emerging. Guotai Haitong's main points are as follows: Sector oversold, cost performance prominent. The innovative drug index has fallen back to the position before the last round of the start of the innovative drug market (May 2025), with cost performance prominent. Listed companies have successively initiated buybacks and holdings, demonstrating confidence. Since June, many listed companies have intensively launched buyback or holding actions, expressing support for the companies with genuine gold and silver, including Jiangsu Hengrui Pharmaceuticals, AKESO, 3SBIO, Sichuan Biokin Pharmaceutical, Innovent Biologics, etc. In the past 26 years, there have been more and higher quality BD transactions, and the industry trend is hot. From the beginning of the year to the present, Chinese innovative drug companies have achieved a total of 88 outbound authorizations, received a total of $5 billion in down payments, and a total amount of $94.4 billion, with significant year-on-year growth in the three data, and the down payment and total amount have reached 70% of the total for the full year of 2025. In addition, as of June 9, 2026, Chinese innovative drug companies and leading cross-MNCs have completed a total of 27 transactions, received a total of $4.3 billion, and a total amount of $78.5 billion, with all three data showing accelerated growth compared to 25 years ago, and accounting for 39%, 56%, and 75% of all MNC transactions during the same period, respectively. Late-stage BD assets in the pipeline are gradually revealing global Phase III results, and global sales are about to begin. According to the summary, it is estimated that in 2026, there will be 8 innovative drugs that have BD read out global Phase III results, among which SKB BIO & Merck's TROP2 ADC SKB264 and Innovent Biologics & BNTX's HER2 ADC DB1303 have obtained positive results; AKESO & SMMT's PD1*VEGF bispecific AK112 is expected to read out the heavyweight results of 1L sqNSCLC in 2H26; In addition, in 2026, it is estimated that more than 10 innovative drugs that have BD will plan to start or add global Phase III clinical trials, and domestic innovative drugs will soon experience a dense overseas realization. The Chinese innovative drug market is rapidly expanding, and leading pharmaceutical companies are growing strongly. Benefiting from policy support and the intensive wave of domestic innovative drug listings, the total revenue of the innovative drug business of China's leading listed companies in 2025 was approximately 167.9 billion yuan, yoy+29%, accounting for only about 10% of the total drug expenditure in China, and the sales revenue of innovative drugs for leading listed companies reached a growth rate of 20-60%, with strong performance dynamics. In 2026, China's innovative drug companies are still maintaining strong growth, with good performance of leading pharmaceutical companies in the first quarter of 2026, and compared to 25, some companies have significantly benefited from the confirmation of BD, Guotai Haitong believes that due to the strong endogenous growth of the innovative drug business and continuous BD confirmation, the performance of leading pharmaceutical companies in 2026 is expected to continue to maintain good growth. Political risks, global pharmaceutical policy change risks, product market progress risks, product iteration risks, and risks of foreign cooperation progress not meeting expectations.