China Galaxy Securities: The innovative drug industry chain is booming, commercialization and monetization of external licensing opens up room for growth

The Zhitong Finance App learned that after a sharp correction in the first half of the year, China Galaxy Securities released a research report saying that after a sharp correction in the first half of the year, valuations of both innovative drugs and non-innovative drugs fell back to historic lows. The second half of the year focused on medical insurance variables and clinical data implementation of innovative drugs. In investment ideas, it was recommended to focus on innovative drugs (BIC and FIC pipeline leaders), innovative drug industry chain (CXO, upstream life science), innovative devices going overseas (imaging, high-value consumables, consumer devices, etc.), medical AI, and the direction of medical AI ICL.

The main views of China Galaxy Securities are as follows:

The pharmaceutical industry has entered a recovery cycle, and the boom in the innovation chain coexists with the clean-up of the traditional sector

In the first half of 2026, the revenue of listed companies in the pharmaceutical industry increased by 3.3%, net profit to mother increased by 8.8%, and net profit after deducting non-net profit increased by 29.2%. The revenue side of the industry grew slightly in the first half of the year, and the profit side showed marginal improvement, mainly due to CXO and life science upstream R&D service orders exceeding expectations. Overseas BD authorized revenue for innovative drugs was confirmed one after another, new products were launched, and commercialized after medical insurance, contributing to major performance increases; in vitro diagnosis and commercial retail were marginally repaired at a low base last year; performance of traditional pharmaceuticals, traditional Chinese medicines, vaccines and blood products was still under pressure. The segmentation within the industry was remarkable. The industry's profit increased significantly faster than revenue in the first half of the year, mainly due to the increase in commercialization revenue of innovative drugs and external licensing revenue, and a sharp increase in the share of high-margin business. At the same time, CXO and scientific research services were booming. Order growth drove early capacity construction and full utilization of personnel reserves, diluted fixed costs, and promoted profit growth.

The profitability of the industry has been structurally restored, and the quality of operation is still in a low range

The average gross profit margin and net margin of the pharmaceutical industry in the first half of 2026 were 51.6% and 9.4%, respectively, with a strong product gross profit base; the sales expense ratio and R&D expense ratio for the first half of the year were 19.0% and 14.2%, respectively, reflecting the transformation of the industry from traditional sales drive to R&D drive, but high commercialization investment and R&D expenses still depress the profit conversion rate. In terms of operational quality, the industry's return on net assets in the first half of 2026 was 2.5%, down 0.5 pct from the same period last year; it was at an all-time low; the accounts receivable period was 116.6 days, and the number of inventory turnover days was 229.9 days, both extended from the same period last year, reflecting that hospital and dealer payments were still slow. Weak demand in traditional sectors caused channel inventory backlogs, and overall operating efficiency was low.

Commercialization of innovative drugs and monetization of external licensing opens up room for long-term growth

In the first half of 2026, many innovative drug companies commercialized their core products. Among them, sales of large single products of zebutinib, vometinib, and mastradiol peptides continued to exceed expectations; in the first half of the year, the total overseas transaction amount of China's innovative drug BD was nearly 100 billion US dollars, and down payments and milestone revenue were concentrated confirmed, significantly increasing the revenue and profit growth rate. The bank's representative innovative pharmaceutical companies selected from A/H shares respectively. The total revenue increased by 50.11% and 40.71% respectively in the first half of 2026. Many innovative drugs took the lead in achieving profits, and R&D investment continued to grow positively. From a medium- to long-term perspective, the innovative drug industry chain support policy will be further improved, the “emerging pillar industry” positioning will enhance room for imagination, and the popularity of BD going overseas will continue to rise. Multiple benefits will drive value restructuring for innovative drug companies and open up room for long-term growth.

Risk warning: the risk of insufficient growth in pharmaceutical consumption capacity due to increased macroeconomic pressure, the risk that policies such as medical insurance payments for innovative drugs fall short of expectations, the risk of global order transfers caused by geopolitics, and the risk of collection or fee reductions exceeding market expectations.