Southwest Securities: K-type pharmaceutical differentiation, focusing on the three major directions of technology, overseas travel, and dividends

The Zhitong Finance App learned that Southwest Securities released a research report saying that in the first half of 2026, the pharmaceutical and biological sector fell 8.4%, outperforming the Shanghai and Shenzhen 300 Index by 13.7pp, but at the end of June, with the approval of the world's first dual-antibody ADC and the initial review of the Medical+Commercial Insurance Dual Catalogue, the market has rebounded steadily. The bank believes that BD overseas will continue to accelerate in the second half of the year (86 BD items in 2026H1, down payment of 5.68 billion US dollars +77.6% year over year, total amount of US$97.62 billion +40.0% year over year), combined with catalytic technology themes such as AI medical treatment, brain-computer interface, etc., and the allocation value of traditional Chinese medicine dividends, the pharmaceutical sector was K-shaped in the second half of the year, and is optimistic about the three major directions of technology themes, overseas travel, and dividends.

The main views of Southwest Securities are as follows:

Market review for the first half of the year: Pharmaceuticals outperformed the market and rebounded steadily at the end of June under policy catalysts

Since 2026 (as of July 9), the pharmaceutical biotechnology sector has declined by 8.4%, outperforming the Shanghai and Shenzhen 300 Index by 13.7pp, ranking 14th in Shenwan's Tier 1 industry. The A-share Pharmaceutical Biotech Index and the Innovative Pharmaceutical Index outperformed the market by 13.7pp/6.8pp; the performance of the Hong Kong Stock Pharmaceutical and Hang Seng Index was similar, and the Hong Kong Stock Innovative Drug Index still outperformed the Hang Seng Index by 7.6pp. In terms of policy, the '26 government work report first defined biomedicine as an emerging pillar industry, cultivating future industries such as brain-computer interfaces; “Certain Opinions on Improving the Drug Price Formation Mechanism” first publicly proposed the possibility of “setting high prices in markets other than health insurance”; at the end of June, the world's first dual anti-drug ADC was approved, and the first review of the medical insurance+commercial insurance dual catalogue was implemented, and the pharmaceutical sector market rebounded steadily. As of July 9, 2026, the Pharmaceutical Biology Index PE (TTM) was 28.25 times, below the 50th percentile (30 times) of the past 10 years. Judging from the performance of individual stocks, there were 5 companies (accounting for 1.0%) with an absolute increase of more than 100% in the Shenwan Pharmaceutical Industry: Linuo Pharmaceutical, Hualan Shares, Haitai Xinguang, Minova, and Baiao Seto.

Technology theme: AI+ medical and brain-computer interface has entered a new stage of application implementation

The five national departments jointly issued the “Implementation Opinions on Promoting and Standardizing the Development of “Artificial Intelligence+Healthcare” applications in November 2025. The 2026 government work report defined biomedicine as an emerging pillar industry for the first time, and clearly proposed cultivating future industries such as brain-computer interfaces. Several provinces have successively introduced brain-computer interface charging standards, and Zhejiang and Hubei have included some projects in medical insurance; China's first invasive brain-computer interface product has been approved for sale. The bank recommended continuing to focus on six key application directions: 1) AI health management; 2) AI medical informatization CDSS assists clinical decision-making; 3) AI medical imaging assisted diagnosis; 4) AI integration with surgical robots; 5) AI gene sequencing; and 6) AI pharmaceuticals.

Going overseas: BD is being realized at an accelerated pace, and popularity continues in the direction of double antibodies and small nucleic acids

The number, down payment and total amount of China Innovative Pharmaceutical BD overseas projects increased significantly in 2026H1. The number of BDs going overseas has reached 86, the down payment is US$5.68 billion (+77.6%), and the total amount is US$97.62 billion (+40.0%). The number of transactions, down payment, and total amount of transactions reached 57%/72%/69% for the full year of 2025, respectively. BD payment milestones have been achieved one after another. Since '26, Quanxin Biotech, Xiansheng Pharmaceutical, and Baili Tianheng have all triggered milestones. Overseas travel hotspots still focus on tumor immunity (ADC, dual antibodies, multiple antibodies, etc.), metabolism (GLP-1R, GLP-1/GIP dual targets, etc.), and small nucleic acid (siRNA); the transaction model coexists in multiple models from traditional license-out to co-CO (joint development/commercialization) and platform-level strategic cooperation. Looking ahead to the second half of the year, focus on the catalysing of major R&D data such as WCLC 2026 (September) and ESMO 2026 (October); the commercial insurance innovative drug catalogue is basically in parallel with the basic catalogue, and there is plenty of room for payment and commercialization of high-value innovative drugs. In addition, we need to focus on the progress of the BINSA/COINS Act.

Dividend theme: The adjustment of the basic drug catalogue brings new opportunities for traditional Chinese medicine, focusing on undervalued and high-dividend assets

The overall cash flow of traditional Chinese medicine companies is relatively sufficient, and some state-owned enterprises have responded positively to policies to increase shareholder returns, and are more willing to pay dividends. The bank selected all targets in Shenwan's traditional Chinese medicine sector. The arithmetic average dividend rate from launch until 2025 was 49.2%, and the median was 43.9%, maintaining a high overall dividend level. It is recommended to focus on three main lines: 1) traditional Chinese medicine brands with independent pricing rights and high barriers; 2) leading traditional Chinese medicine leaders that benefit from state-owned enterprise reform, asset structure optimization, and are expected to release new varieties; 3) after 8 years, a new round of basic drug catalogues were released, and 50 new categories of proprietary Chinese medicine drugs were added. Some types of traditional Chinese medicine are expected to benefit from this basic drug catalogue adjustment to achieve in-hospital dosage.

Risk Alerts

Risk of going overseas falling short of expectations; risk of developing and commercializing pharmaceutical products falling short of expectations; risk of policy uncertainty in the pharmaceutical industry; risk of performance falling short of expectations, etc.