Zhongtai: The structural profitability recovery in the pharmaceutical industry continues, focusing in September on verifying main lines and expanding prosperity.

Zhongtai released a research report stating that in the first half of 2026, the cumulative revenue of listed pharmaceutical companies increased by 2.2% year-on-year, total profit grew by 9.3%, and net profit attributable to parent company increased by 18.8% after deducting non-recurring items; in Q2 2026, revenue grew by 1.9% year-on-year, and net profit attributable to parent company after deducting non-recurring items increased by 25.2%. The pharmaceutical sector has passed the stage of significant fundamental pressure and is showing a gradual recovery trend. Starting from Q3 2025, revenue has maintained positive growth for four consecutive quarters, and non-recurring profit has seen significant improvement for two consecutive quarters. In terms of revenue and profit, the currently strong fundamentals mainly come from medical services, medical devices, and chemical preparations. In September, the focus will be on the commercialization of innovative drugs/BD and leading CXO companies, while also paying attention to thematic trends driven by event catalysts, as well as certain undervalued sectors with gradually stabilizing performance and relatively limited previous increases, such as medical devices, pharmacies, and raw pharmaceutical materials. Zhongtai's main viewpoints are as follows: August Market Review The verification of mid-term reports has driven sector recovery, with AI4S and mRNA-related concepts becoming active. In August 2026, the pharmaceutical and biotech industry rose by 2.81%, while the Shanghai and Shenzhen 300 index returned 0.80%, with the pharmaceutical sector outperforming the Shanghai and Shenzhen 300 by approximately 2.01 percentage points, ranking 18th among 31 sub-industries. This month, medical services, biological products, medical devices, pharmaceutical commerce, chemical pharmaceuticals, and traditional Chinese medicine increased by 13.37%, 3.24%, 2.63%, 0.77%, -0.68%, and -3.57%, respectively. August saw a noticeable round of relative earnings recovery in pharmaceuticals, fundamentally driven by "mid-report verification + industrial catalysts + low configuration recovery." At the beginning of the month, market risk appetite rebounded, with growth style spreading, compounded by leading CXO companies raising their full-year guidance, and WuXi AppTec receiving a preliminary injunction against the 1260H list, mitigating risks and leading to rapid revaluation of the innovative drug industry chain. From mid to late August, as mid-report disclosures and profit-taking occurred, the sector shifted towards differentiation, but CXO companies with unexpected orders, innovative drugs with good commercialization performance, vaccines, raw pharmaceuticals, and parts of upstream research still received funding recognition. There were three main catalysts for the month: first, mid-reports, orders, and full-year guidance from CXO and upstream research exceeded expectations, while good performance from Twist and early drug development results released by Anthropic generated momentum for AI4S; second, the commercialization of innovative drugs ramped up (BeiGene's Q2 revenue increased by 30% year-on-year and raised guidance, etc.), and BD activities were active; third, the Phase III study of personalized tumor vaccines by Moderna and Merck reaching main endpoints catalyzed mRNA themes. On August 31, following Jackson Hole, the Federal Reserve's hawkish stance raised interest rate expectations for September, creating disruptions in global growth asset valuations, combined with profit-takings at the month's end and reduced congestion in strong sectors, leading to a correction in the pharmaceutical sector. Overall, in August, the pharmaceutical sector with medium-high prosperity and high elasticity expanded first; entering September, the catalytic effects of mid-reports began to fade, focusing on industrial data, the continuity of orders, and low-position rotation. We are optimistic about: the main line of innovative drugs and the industrial chain: fundamentally, innovative drugs and their industrial chain remain sub-industries in the pharmaceutical sector with the clearest industrial trends and future growth potential, but after previous significant increases, the driving force for the market will gradually switch from valuation repair to orders, clinical data, and commercialization; thematic rotation opportunities during earnings vacuums; directions of improvement in operation of low-valued sectors such as equipment, pharmacies, and raw pharmaceuticals: focus on varieties with marginal improvement in fundamentals and relatively limited prior increases. September Layout Ideas September is likely to demonstrate main line oscillation + internal diffusion. While closely monitoring the commercialization of innovative drugs/BD and leading CXO companies, we should also pay attention to thematic trends driven by event catalysts, as well as some undervalued sectors with gradually stabilizing performance and limited increases previously, such as medical devices, pharmacies, and raw pharmaceuticals. 1. Innovative Drugs: In recent years, Chinese innovative drug companies have continually made breakthroughs in fields such as ADC, dual antibodies, and autoimmune disorders, with multiple assets entering critical global clinical stages. With MNCs advancing clinical development of Chinese assets and adjusting their business strategies, the subsequent positioning of relevant pipelines is gradually becoming clearer. Attention should be paid to the follow-up progress of Phase III clinical development for BD varieties and the opportunities for co-use with MNC internal pipelines, as well as the accumulation of clinical data and overseas submission progress for BD varieties that possess rarity and compatibility with MNC pipelines. Additionally, with the upcoming ESMO and WCLC catalysis windows, it is important to monitor data releases of quality assets. The second half of the year marks an intensive period for international oncology conferences, with significant meetings such as ESMO and WCLC expected to serve as core catalysis windows for the innovative drug sector, while ordinary titles are being released in succession, and preliminary clinical results in abstracts and LBA titles are due for publication soon. Recommended focus areas include: ADC, results from large-sample clinical studies of second-generation IO targeting major cancers such as NSCLC; innovative assets in ADC areas with breakthrough potential around new targets, new toxins, and new conjugation technologies; and POC data from ADC combined with second-generation IO in early clinical studies, which fit MNC strategies against "patent cliffs"; and pan-RAS, which has proven drug potential and a good competitive landscape. 2. CXO and Life Science Upstream: With the completion of mid-term report disclosures, the short-term catalytic effects of performance are gradually fading, and the market will pay more attention to new orders signed, conversion of outstanding orders, capacity utilization rates, and the feasibility of full-year guidance. Mid-reports show that the direction of industry recovery is becoming clearer, but the customer structure, business processes, and capacity cycles differ, leading to varied earnings elasticity in the future. We continue to favor leading CXO companies with a global client base, compliance delivery capability, and multi-technical platforms, as well as specialty CDMO and life sciences upstream enterprises benefiting from emerging demands for ADC, peptides, oligonucleotides, and cell therapies. 3. Thematic Rotation Opportunities: Pan-technology, brain-computer interfaces, AI+, etc. After entering an earnings vacuum period, directions such as brain-computer interfaces, AI healthcare, AI pharmaceuticals, and pan-medical technology may still see repeated activity. Some pharmaceutical companies have made phased progress in transitioning to technology businesses, and the IPO processes of brain technology companies like Strong Brain Technology and Borui Kang may also bring event catalysts. 4. Directions of Improvement in Equipment, Raw Pharmaceuticals, and Low-Valuation Operations: As hospital bidding gradually recovers, channel destocking nears completion, and overseas business continues to grow, the fundamentals of the medical device sector are showing marginal improvement. The raw pharmaceutical industry is gradually ending destocking, with marginal improvements in prices, orders, and capacity utilization for certain products, leading to a gradual release of profit elasticity. We recommend focusing on medical device companies with performance verification of improving fundamentals and relatively limited previous increases, as well as raw pharmaceutical enterprises with stabilized product prices, order recoveries, and integrated formulation or CDMO extension capabilities. Summary of the Sector's Mid-Term Reports for 2026 1) The CRO/CDMO segment within medical services performed notably (H1 revenue +23.0%, net profit +60.9%; Q2 revenue +27.7%, net profit +60.9%), with overseas demand remaining resilient, and domestic innovative drug financing and BD activity rebounding, leading to improvements in orders, capacity utilization, and operational leverage. ICL profits also performed well, primarily influenced by last year's concentration of impairment losses for COVID-related receivables and the narrowing of impairment losses this year or recoveries. 2) The recovery of medical device revenue is quite evident, with equipment benefiting from a low base from the previous year, alleviated destocking impact, and overseas expansion, while consumables benefitted from the recovery of low-value consumables and increased volume of innovative high-value consumables. 3) The profit growth of chemical preparations in H1 significantly outpaced revenue growth (H1 revenue +1.3%, net profit +18.6%), primarily driven by the release of innovative products, improvement in product structure, and enhanced sales efficiency. The chemical raw materials industry is showing marginal improvements (H1 revenue +4.6%, net profit +9.0%; Q2 revenue +11.8%, net profit +49.4%), with the gradual end of destocking, and marginal improvements in prices and orders leading to recoveries in capacity utilization and profitability. Although the apparent profit growth for biological products is relatively high, it is mainly influenced by significant BD transactions from REMEGEN and investment gains from Liaoning Cheng Da, while most vaccine and blood product companies still face operational pressures. Looking forward to the second half of 2026, continued confirmations of CXO orders, reduced marginal impacts from medical equipment destocking and stabilized bidding, and trends of new releases for innovative drugs and high-value consumables are expected to continue. Zhongtai Pharmaceuticals' key recommendations saw an average increase of 7.91% in August, outperforming the pharmaceutical industry by 5.09 percentage points, with Qingdao NovelBeam Technology rising by 37.33%, PharmaBlock Sciences by 23.00%, and WuXi AppTec by 20.52%, demonstrating impressive performance. Industry Highlight Focus (1) The National Healthcare Security Administration issued "Guidelines for Project Approval of Laboratory Medical Service Pricing (Trial)"; (2) Moderna/Mercks personalized mRNA melanoma vaccine Phase III initially reached preset endpoints, key validation for personalized neoantigen therapy; (3) The announcement from the Office of Joint Procurement for High-Value Medical Consumables regarding the release of "National Organization for Medical Consumables Centralized Procurement (7th Batch) Procurement Documents (GH-HD2026-2)." Market Dynamics In 2026, the pharmaceutical sector returned -3.57%, while the absolute return of the Shanghai and Shenzhen 300 was -0.10%, with the pharmaceutical sector underperforming the Shanghai and Shenzhen 300 by approximately 3.46 percentage points. In August 2026, the pharmaceutical and biotech industry rose by 4.5%, while the Shanghai and Shenzhen 300 indices returned 0.80%, with the pharmaceutical sector outperforming by about 2.01 percentage points, ranking 18th among 31 sub-industries. This month, medical services, biological products, medical devices, pharmaceutical commerce, chemical pharmaceuticals, and traditional Chinese medicine increased by 13.37%, 3.24%, 2.63%, 0.77%, -0.68%, and -3.57%, respectively. Based on the 2026 profit forecast valuation, the current pharmaceutical sector is valued at a PE of 26.5 times, while A-shares (excluding the financial sector) have an overall price-earnings ratio of about 20.8 times, implying a 27.3% premium of the pharmaceutical sector over all A-shares (excluding the financial sector). Using the TTM valuation method, the current pharmaceutical sector is valued at a PE of 28.5 times, below the historical average level (34.7 times), with a premium of 14.9% relative to all A-shares (excluding the financial sector). Risk Warning: Risks of policy disruptions, drug quality issues, and the possibility that public materials used in research reports may have outdated or unfulfilled information.