Wanlian Securities: optimistic about the valuation reassessment of domestic innovative drugs, focusing on emerging technologies such as brain-machine interface

Wanlian Securities released a research report stating that the overall valuation of the pharmaceutical sector has retraced significantly from its previous high and is currently at a historical median level. Overall, the pharmaceutical manufacturing sector is still in a period of transition pains. In the first half of 2026, the number and amount of domestic pharmaceutical companies' BD events set new records, and the total amount of outbound transactions for the whole year is expected to hit a new high, with the bank optimistic about the revaluation of domestic innovative drugs. In terms of medical devices, it is recommended to focus on emerging technologies such as brain-machine interfaces. Key points of Wanlian Securities: The performance of the pharmaceutical sector in the first half of 2026 was poor In the first half of 2026, the Shanghai pharmaceutical index fell by 10.26%, significantly underperforming the Shanghai and Shenzhen 300 index by 17.81 percentage points, ranking 16th out of 31 Shanghai-level industry sectors. From the perspective of sub-industry changes, only the healthcare services sector recorded positive growth after a rebound in June. The overall valuation of the sector has retraced significantly from its previous high and is currently at a historical median level. Production-side data is fluctuating at a low level, while the payment side is stable, and the industry's operations are stable From January to May 2026, the operating income of the pharmaceutical manufacturing industry fell by 1.50% year-on-year, and the total profit fell by 1.30% year-on-year. Overall, the pharmaceutical manufacturing sector is still in a period of transition pains. From the perspective of medical insurance revenue and expenditure data, the total balance of medical insurance funds for the period from January to May 2026 was in good shape, with a surplus of 372.086 billion yuan. Innovative drugs: BD amount and quantity hit a new high, Chinese innovative drugs stepping onto the world stage Whether it is in terms of policy support, research and development achievements, or commercialization progress, domestic innovative drugs continue to make efforts. The overall policy direction has shifted from focusing on cost control to actively encouraging high-quality original innovation, with the number of new drug reviews and approvals hitting new highs in the first half of 2026. At the same time, the number and amount of BD events of domestic pharmaceutical companies continued to set new records in the first half of 2026, with China Meheco Group's total outbound transaction amount reaching 99.7 billion US dollars, close to 73% of the total for the whole year in 2025, with the potential to set a new record for the year. In terms of innovative R&D quality, Chinese companies are showcasing their achievements at international academic conferences, demonstrating that their innovation in drug development has reached international standards, moving from followers to leaders. The bank is optimistic about the revaluation of domestic innovative drugs. CXO: AI improves drug development efficiency Since the first quarter of 2025, the CXO sector has achieved positive year-on-year growth in operating income and net profit attributable to mothers for five consecutive quarters, maintaining a growth rate of over 20%. At the same time, the market size is expected to grow steadily, with an industry CAGR of 18.3% expected from 2023 to 2030. The use of artificial intelligence technology in the drug development process can significantly reduce the time and cost required for drug development, and increase the success rate. Artificial intelligence is rapidly reshaping the entire pharmaceutical value chain, covering various stages from early research to commercial production and post-market monitoring. Medical devices: Focus on emerging technologies such as brain-machine interfaces Affected by factors such as DRG/DIP cost control and centralized procurement of high-value consumables, the overall performance of the medical device sector is still in the bottoming out stage, with the industry showing a situation where revenue is increasing but profitability is not. It is recommended to focus on emerging technologies such as brain-machine interfaces. The brain-machine interface industry is still in its infancy, with a significantly faster compound growth rate than the overall medical device sector, and various technology directions have yet to be determined, presenting opportunities for both domestic and foreign companies to take the lead. Risk factors: Risks of failure in innovative drug and device research and development, risks of BD progress for innovative drugs falling short of expectations, and risks of pricing of innovative drugs falling short of expectations.