Southwest: CXO industry focuses on the growth potential of new molecules and the transmission of domestic recovery in sentiment.

Southwest released a research report stating that the CXO sector continues to be monitored for: 1) The continuous injection of growth momentum into R, D, and M outsourcing from new molecules such as global market peptides, conjugate drugs, oligonucleotides; 2) Reversal and sector sentiment improvement after the clearance of geopolitical risk uncertainties; 3) The transmission of the recovery of the domestic market sentiment and the demand for innovative drug research (from preclinical toxicity and safety evaluation to clinical CRO and other sub-sectors); 4) Drug research empowered by AI. Southwest's main points are as follows: Review of the trend of the sector in 2024-2025 In the first half of 2024, the CXO sector continued to decline under the influence of factors such as the catalyzation of the US Biological Security Act incident and the adjustment of performance growth expectations of various enterprises; In September 2024, a policy-driven bull market appeared in the domestic stock market, with the clearance of short-term geopolitical risks, and the stock prices of the CXO sector rose synchronously; In March 2025, some top-listed CXO companies exceeded their order data expectations, injecting valuations into the secondary market; In April 2025, frequent changes in tariff policies by the Trump administration caused short-term disturbances in the stock market; In the second and third quarters of 2025, with the clearing of short-term disturbances, the structural bull market of downstream innovative drugs in the (domestic market), the realization and upward revision of periodic reports by some top companies, the stock prices of the sector further rose. In the fourth quarter, uncertainties increased with the 2026 US National Defense Authorization Act and the 1260H list, leading to a market style adjustment and a drop in stock prices of some enterprises. At the year-end, changes in prices + impressive domestic data led to a substantial increase in the stock prices of some domestic demand stocks. Macro Dimension: The financing environment for medical and biological businesses is expected to continue to improve during the interest rate cut cycle of the Federal Reserve, with gradually releases of geopolitical uncertainties 1) Monetary policy: After a 25 basis point rate cut on December 10, the target range for the federal funds rate is 3.50%-3.75%, and the median predictions of Fed officials for 2026/2027/2028/future are 3.25%-3.50%, 3.0%-3.25%, 3.0%-3.25%, and 3.0%, respectively, which are basically consistent with the previous ones. Overall, in the interest rate cut period, the financing environment for medical and biological businesses is improving, and the demand for drug outsourcing services benefits. 2) Gradual release of geopolitical uncertainties: The American 2026 fiscal year National Defense Authorization Act has been promulgated, and with the future updates and adjustments of the 1260H list referenced by SEC851, the geopolitical uncertainties of top CXO companies will be further released. From the current direct impact scope and actual impact landing period of NDAASEC851, the impact is limited. Industry Dimension: Accelerated recovery of demand in the domestic market, global economic recovery The demand for CXO comes from the research activities of downstream pharmaceutical companies and the funding supporting their research. 1) Domestic: The number of new drug IND contracts undertaken by CDE steadily increased in 2025, with 395/410/526/509 items in Q1/Q2/Q3/Q4 respectively. At the same time, the total amount of investment and financing in the field of Chinese medical and health in 2025 was 93.54 billion yuan (up 83.7% year-on-year), with 626 investment and financing events (up 26.7% year-on-year), and the future demand for CXO in the domestic market is expected to recover. 2) Overseas: The total amount of investment and financing in the global medical and health industry in 2025 was 591.19 billion yuan (down 20.9% year-on-year); there were 2185 investment and financing events throughout the year (down 16.7% year-on-year), and the year-on-year decline gradually narrowed quarter by quarter, with fluctuations in quarterly/monthly data in 2025 showing signs of recovery. In 2025, a total of 4297 new clinical trials were initiated in North America and Europe (excluding phase IV), of which 1801 were phase I or early exploratory trials and 2496 were phase II-III clinical trials, reaching a historical high in 2021. Relevant targets: WuXi AppTec, Pharmaron Beijing, Asymchem Laboratories, WUXI BIO, Hangzhou Tigermed Consulting, XTALPI, INSILICO, Joinn Laboratories, Porton Pharma Solutions, etc. Risk warning: Risks such as lower-than-expected demand for drug outsourcing, geopolitical and macroeconomic risks.