China Securities Co.,Ltd.: In the first three quarters, the pharmaceutical industry entered an improvement cycle and is expected to embark on high-quality development.

China Securities Co.,Ltd. released a research report stating that in the first three quarters of 2026, the pharmaceutical industry achieved dual growth in overall revenue and non-recurring net profit attributable to parent companies, with revenue increasing 2.25% year-on-year and non-recurring net profit attributable to parent companies increasing 10.77% year-on-year, as the industry entered an improvement cycle. Chemical pharmaceuticals revenue decreased 0.76% year-on-year, gradually stabilizing, with profit-end repair leading the way as non-recurring net profit attributable to parent companies grew 0.15%. In Q3 2026, innovative drug companies' revenue saw substantial growth. CXO revenue increased 26.5% year-on-year, non-recurring net profit increased 59.8% year-on-year, with abundant orders in hand, AIDD demand gradually materializing, and an upward cycle established. API revenue declined 1.26% year-on-year, non-recurring net profit declined 10.7% year-on-year, with the decline narrowing in the first three quarters and improvement beginning to emerge. Pharmaceutical equipment and consumables revenue increased 9.19% year-on-year, non-recurring net profit increased 131.28% year-on-year, as industry competitive landscape optimization, overseas expansion, and cost reduction and efficiency enhancement drove substantial profit recovery. Scientific reagents revenue increased 15.9% year-on-year, non-recurring net profit increased 6.1% year-on-year, returning to growth with domestic substitution accelerating. Chemical pharmaceuticals revenue bottomed out with profit repair leading the way, as non-recurring net profit increased 0.15% year-on-year in the first three quarters. With innovation volume ramp-up, overseas expansion landing, orders transmitting to performance, and upstream domestic substitution improving, the industry is expected to embark on a high-quality development cycle, with leaders continuing to benefit. China Securities Co.,Ltd.'s main views are as follows: Performance review: In the first three quarters of 2026, both revenue and non-recurring net profit attributable to parent companies achieved growth. Overall, the biopharmaceutical sector performed well, with strong growth in sub-sectors such as low-value consumables, CRO/CMO, and home medical devices, while in vitro diagnostics and medical services saw rapid ranking improvements in growth. By sub-sector: 1) The chemical pharmaceuticals sector saw revenue bottom out with profit repair leading the way, and innovation transformation continued to advance, but significant divergence existed within the sectorsome leading companies achieved high performance growth driven by factors such as BD recognition, while traditional pharmaceutical companies remained under pressure from centralized procurement policies; 2) Innovative drug companies performed particularly well, with substantial revenue growth and turning losses into profits, with cash on hand and R&D investment both increasing. Despite stock price corrections, product licensing overseas amounts approached US$140 billion, with full-year figures expected to surpass 2025, continuously highlighting internationalization value, and numerous catalysts from Q4 2026 to 2027; 3) The pharmaceutical outsourcing industry established an upward cycle under the resonance of external and domestic demand, with orders continuing to grow, AI drug discovery's incremental contribution to CXO demand gradually materializing, industry revenue accelerating, non-recurring profit growing rapidly, operational efficiency continuously improving, and valuation attractiveness increasing; the API sector saw narrowing declines in the first three quarters with improvement beginning to emerge and profit quality recovering; 4) The pharmaceutical equipment and consumables sector saw steady revenue growth with profit-end repair continuing, and domestic substitution and overseas expansion continuing to advance; 5) The scientific reagents sector saw steady revenue growth, with domestic substitution and M&A integration trends continuing, and AI drug discovery expected to drive continuous expansion of the protein reagents industry. Overall, the pharmaceutical industry chain in Q3 2026 presented a favorable development trend of multi-sector recovery and innovation-driven growth, with promising future industry prospects. Looking ahead to 2027, China Securities Co.,Ltd. is optimistic about: Pharmaceutical sector: In recent years, China's innovative drug revenue has grown rapidly, with leading companies achieving scale profitability, and the industry developing rapidly under the triple drivers of technological breakthroughs, internationalization acceleration, and policy support. In terms of internationalization, from BD to organizational overseas expansion and strategic alliances. Since 2020, China's innovative drug license-out transactions have risen in both volume and price, with upfront payments and total package amounts expected to hit new highs in 2026. Driven by global Phase III clinical advancement, blockbuster data releases, and competitive landscape optimization, product global value and corporate valuations may undergo multiple rounds of re-rating. In terms of technological breakthroughs, small nucleic acids, IO multi-antibodies, ADCs, and GLP-1 weight loss are flourishing across multiple fronts. Small nucleic acid drugs have achieved multi-dimensional breakthroughs in commercial volume ramp-up, indication expansion, and extrahepatic delivery, with Chinese companies evolving in sync with global peers, and important clinical and approval milestones in the next 13 years; PD-1+ and other IO multi-antibodies have achieved breakthrough data in key indications, with subsequent clinical data readouts expected to further validate their breakthrough potential; the ADC field continues to produce potential BIC/FIC pipelines; the weight loss track is upgrading toward multi-target, long-acting, and oral formulations. On the policy front, medical insurance negotiations plus the commercial insurance innovative drug catalog are driving dual-engine growth, with innovative drug accessibility continuously improving. Medical insurance negotiation efficiency has significantly improved, with average price reductions of negotiated drugs stabilizing, maintaining a high pass rate for truly innovative products; in 2025, the "commercial insurance innovative drug catalog" was established for the first time, expected to expand the volume ramp-up space for innovative drugs. International competitiveness continues to improve, new technologies drive rapid industry development, and national policies encourage innovative drug development, with a positive outlook on related innovative drug and pharmaceutical companies. Recommendations: (1) innovative drug leaders with independent overseas expansion capabilities and global clinical and BD experience; (2) platform companies deeply engaged in frontier tracks such as ADCs, IO bispecifics, GLP-1, and small nucleic acids with differentiated pipeline portfolios; (3) truly innovative product companies with strong competitiveness that can still maintain profit enhancement through product upgrades and structural optimization under cost-control conditions. CXO sector: Overall overseas demand is steady, domestic demand is gradually recovering with stronger elasticity, and the CXO sector's growth space remains promising. The overseas investment and financing environment has entered quarter-to-quarter fluctuations, with CXO service demand further diverging across different stages and disease areas, while domestic investment and financing activities maintain an upward trend, and the CXO sector's growth trend remains promising. Market consensus has been initially reached on the impact of AI and other new technologies on long-term industry transformationthe early R&D stage (CRO) shows divergent trends, while the production stage (D, M) is generally favorable. In recent years, with the rapid development of next-generation biologics, ADCs, and peptide drugs, related CXO demand has increased rapidly, and sub-sectors such as bispecific/multi-specific antibodies, next-generation ADCs/XDCs, and small nucleic acids are also expected to enter new development stages. Long term, we are optimistic about the CXO sector's development potential and growth space. Upstream sector: Domestic market demand is gradually recovering, and industry chain domestic substitution remains the trend. The pharmaceutical industry chain currently exhibits characteristics of "profit repair, domestic substitution rate improvement, and internationalization" in parallel. Overall revenue of the pharmaceutical industry chain has stabilized, with gross margin and net margin continuing to recover. Leading companies have achieved profit-end improvement through product structure optimization, cost reduction and efficiency enhancement, and international channel layout. Overall, the industry benefits long term from domestic substitution (policy-driven, cost-effectiveness advantages) and demand recovery, reflecting the industry's overall gradual stabilization and position in a recovery channel. In the future, the industry will accelerate domestic substitution through M&A integration, and leading companies are expected to break through technological barriers and increase market share under policy dividends.