Zhongtai: The pharmaceutical sector's Q3 performance is expected to stabilize, and we recommend focusing on high-certainty and high-quality assets.

Zhongtai released a research report stating that after the National Day holiday, the market continued the pre-holiday trend, with the overall market still dominated by the technology sector. Funds flowed out of the medical sector, leading to relative volatility. However, the main logic of the innovative trend remains unchanged, with trends such as new target research and development, clinical data implementation, and cross-border BD continuing. It is recommended to buy on dips in key data catalysts, potential blockbuster BD transaction expectations, and high-quality targets with outstanding global potential. In addition, considering the long-term complexity of the Sino-US game, it is advisable to actively select undervalued, well-structured, and fundamental domestic sectors for appropriate allocation in light of Q3 performance expectations. Key points from Zhongtai: Short-term adjustments provide a layout window to focus on innovation and domestic market reversal. Amidst the National Day holiday, the market continued with the pre-holiday trend, with the overall market still dominated by the technology sector. Funds flowed out of the medical sector, leading to relative volatility. Zhongtai believes that the short-term adjustment is partly due to partial profit-taking from previous gains with limited catalysts. On the other hand, the escalation of Sino-US trade frictions has fueled risk aversion, prompting some funds to temporarily withdraw from high-risk, overseas-related sectors. However, the main logic of the innovative trend remains unchanged, with trends such as new target research and development, clinical data implementation, and cross-border BD continuing. It is recommended to buy on dips in key data catalysts, potential blockbuster BD transaction expectations, and high-quality targets with outstanding global potential. In addition, considering the long-term complexity of the Sino-US game, it is advisable to actively select undervalued, well-structured, and fundamentally stable domestic sectors for appropriate allocation. Sector Q3 performance differentiation, focusing on high-certainty high-quality targets. Based on grassroots research combined with historical company financial performance, Zhongtai expects the overall performance of the medical sector in Q3 2025 to continue to differentiate. Some high-quality leaders in the innovative drug sector are expected to maintain rapid growth due to product pipeline optimization and internationalization progress. The CRO/CDMO industry is expected to gradually stabilize its performance after a short-term adjustment, benefiting from the recovery of global orders and operational efficiency improvements. The medical device sector has shown steady overall performance, with certain segments such as imaging devices experiencing a recovery trend. External factors such as DRG/DIP promotion may temporarily put pressure on the diagnostics sector. Due to policy and industry cycles, some traditional Chinese medicine and medical service companies still face short-term growth pressures. Overall, Zhongtai believes that the medical sector's Q3 performance is expected to gradually stabilize, and recommends focusing on high-certainty, well-performing, reasonably valued high-quality targets. Focus on PD1 agonists for self-immunity, with potential for better efficacy/side effect balance with specific cytotoxic T cells. Since the release of phase 2b clinical data for Anaptysbio's Rosnilimab in the treatment of RA, the company's market value has increased by over 140%. Attention is now on the release of phase 2 clinical data for UC treatment by the end of the year. Excellent efficacy, high safety, and long dosing intervals provide compliance advantages. Domestically, Changchun High-Tech Industry's GS120 is making the fastest progress, with differentiated molecular design bringing about a dual mechanism of PD1 activation and cytotoxic T cell action. Clinical trials have been conducted in four indications. Jiangsu Hengrui Pharmaceuticals publicly released its PD1 agonist patent in September. Focus on Changchun High-Tech Industry (000661.SZ), Jiangsu Hengrui Pharmaceuticals (01276,600276.SH), AnaptysBio (ANAB.US). Weekly Market Dynamics Since the beginning of 2025, the pharmaceutical sector has seen a return of 21.87%, outperforming the Shanghai and Shenzhen 300 index by 4.54 percentage points. This week, the Shanghai and Shenzhen 300 index fell by 0.51%, while the pharmaceutical and biotechnology sector fell by 1.20%, ranking 25th out of 31 primary sub-industries. This week, there was a differentiation in the performance of the pharmaceutical sub-sectors, with traditional Chinese medicine and pharmaceutical commerce rising, while other sectors fell. Traditional Chinese medicine rose by 1.51%, pharmaceutical commerce rose by 0.64%, medical equipment fell by 0.14%, biological products fell by 0.55%, pharmaceuticals fell by 2.23%, and medical services fell by 3.37%. Based on 2025 earnings forecast valuation, the current PE ratio of the pharmaceutical sector is 27.0 times, while the PE ratio for all A-shares (excluding financial sectors) is approximately 23.3 times, giving the pharmaceutical sector a premium of 16.0% relative to all A-shares (excluding financial sectors). Calculated according to the TTM valuation method, the current PE ratio for the pharmaceutical sector is 30.9 times, lower than the historical average level of 34.9 times, with a premium of 24.4% relative to all A-shares (excluding financial sectors). Risks include policy disturbance, drug quality issues, and the risk of information lag or delays in updates in the research reports that use publicly available data.