Southwest: Risk elimination + dual-wheel drive CXO is expected to start the upturn cycle of prosperity.

Southwest issued a research report stating that in the first quarter of 2026, the CXO sector has cleared risks, performance differentiation, and double-drive, and the sector is expected to enter a new round of prosperity. Continued focus on: 1) The continuous influx of new molecules such as global market peptides and coupling agents into D, M, R outsourcing for growth momentum, as well as potential opportunities in future downstream market changes; 2) Reversal and improvement of sector sentiment after the uncertainty of geopolitical risks is cleared; 3) Domestic market recovery, overseas market prosperity, and the transmission of demand for outsourcing of innovative drug research and development; 4) AI-empowered drug research. Southwest's main points are as follows: Review of the sector trend In the first half of 2024, the CXO sector continued to decline under the influence of the catalysis of the US Biological Security Act and adjustments to the growth expectations of various enterprises; In September 2024, a policy-driven bull market appeared in the domestic stock market, with short-term clearing of geopolitical risks, and the stock prices of CXO sector rose simultaneously; In March 2025, some top-listed companies in the CXO sector had order data exceeding expectations, injecting market valuations; In April 2025, the frequent changes in Trump administration tariffs caused short-term disruptions in the stock market; In the second and third quarters of 2025, with the clearing of short-term disruptions, a structural bull market in downstream innovative drugs in the domestic market, and the fulfillment and upward adjustment of some top companies' quarterly reports, stock prices in the sector further increased. In the fourth quarter, uncertainties in the US 2026 National Defense Authorization Act and 1260H list escalated, leading to market style adjustments and some companies' stock prices falling. At the end of the year, price changes + impressive domestic data led to a significant rise in the stock prices of some consumer stocks. In the first quarter of 2026, the CXO sector cleared risks, performance differentiation, and double-drive: US policy uncertainties eased, geopolitical pressures diminished, and valuation recovery momentum was enough; Leading companies (e.g. WuXi PharmaTech) and CDMO had high growth, clinical CRO stabilized, and a structural market trend was significant; Overseas research and development rebound + domestic innovative drug market recovery resonance, full orders locked in for 2026-2027 growth, the sector is expected to enter a new round of prosperity. Macro perspective: Under the Fed rate cut cycle, the pharmaceutical and biotechnology investment and financing environment is expected to continue to improve, with gradual release of geopolitical uncertainties 1) Monetary policy: The latest Federal Reserve interest rate forecast for 2026/2027/2028/future running target on March 18th is 3.4%/3.1%/3.1%/3.1%, which is basically consistent with the previous one. Overall, the investment and financing environment for pharmaceutical and biotechnology industry is getting better under the Fed rate cut cycle, benefiting from the demand for outsourcing services of pharmaceutical enterprises. 2) Gradual release of geopolitical uncertainties: The US 2026 fiscal year National Defense Authorization Act has been issued, and with the future updates and adjustments of the 1260H list referenced by SEC851, the geopolitical risks uncertainties for top CXO companies will be further released. From the current scope of direct impact and the actual impact landing cycle of NDAASEC851, the impact is limited. Industry perspective: Domestic demand accelerates recovery, global prosperity returns The demand for CXO comes from the research activities of downstream pharmaceutical companies and the funds supporting their research. 1) Domestic: The number of new drug IND undertaken by CDE has steadily increased over the past year, with 395/410/526/509/570 items in 25Q1/Q2/Q3/Q4/26Q1 respectively. At the same time, in Q1 of 2026, the total amount of medical and health sector investment and financing in China was 33.863 billion yuan (an increase of 81.5% year-on-year), with 132 investment and financing events (a decrease of 5.7% year-on-year), and the future demand for CXO in the domestic market is expected to continue to recover. 2) Overseas: In Q1 of 2026, the total amount of investment and financing in the global medical and health industry was 170.894 billion yuan (an increase of 15.2% year-on-year); There were a total of 534 investment and financing events globally (a decrease of 5.3% year-on-year), showing active performance in the global investment and financing market. As of 2025, there were a total of 4297 new clinical trials in North America and Europe (excluding phase IV), with 1801 being I-phase or early exploratory trials, and 2496 being II-III phase clinical trials, reaching a historical high in 2021. Related 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 demand for innovative drug outsourcing falling short of expectations and geopolitical and macro risks.