Xiangcai Securities has published a research report indicating that domestic pharmaceutical companies are advancing through models such as Co-Co and NewCo, progressively retaining value within domestic entities. The firm believes that more globally-oriented pharmaceutical companies establishing "strongholds" will inevitably emerge, driving a systematic re-rating of the sector. It maintains a "Buy" rating for the pharmaceutical industry and recommends focusing on three key investment themes: (1) Biotech companies with specific innovative drug technology platforms, such as those in the small nucleic acid frontier; (2) comprehensive pharmaceutical companies; and (3) upstream innovative drug supply chain players, including CXO and research reagents.
A Clear Divergence Between U.S. and Chinese Pharmaceutical Stocks Highlights Value Retention as a Core Challenge
The performance gap between the XBI and A-share pharmaceutical sectors is striking. According to Wind data, the U.S. biotech index XBI rose approximately 35.4% throughout 2025 and has gained an additional 39.2% year-to-date as of August 19, 2026. In contrast, A-share pharmaceutical and biotech stocks increased only 11.9% in 2025 and have declined 0.9% so far in 2026, creating a stark divergence between the two markets.
The fundamental issue lies in the contrast between external and internal circulation. The firm argues that the rally in U.S. pharmaceutical stocks is underpinned by a financing-driven, fully integrated domestic cycle where the value loop remains local. Conversely, China's innovative drug sector relies primarily on an external cycle driven by BD (License-out) deals, with substantial intellectual property and global commercialization revenues flowing overseas. This model resembles "guerrilla warfare" rather than the "stronghold" strategy.
The shift in capital market pricing logic is also noteworthy. License-out upfront payments typically represent one-time cash inflows, but capital markets ultimately price in sustained cash flow and reinvestment capabilities. The pressure on A-share pharmaceuticals stems not from weak innovation capacity but from the fact that China's innovative drug successes have yet to systematically translate into a victory for the domestic pharmaceutical industry as a whole.
Innovative Drug Milestones: Rising Revenue Contributions and Evolving Overseas Expansion Models
Leading pharmaceutical companies have achieved qualitative changes in their revenue structures. As China's innovative drug industry flourishes, domestic firms have set new records in BD overseas expansion. Concurrently, the revenue composition of top companies has shifted significantly, with innovative drugs becoming a key growth driver. Based on annual reports and earnings presentations, Hengrui Medicine's innovative drug revenue accounted for 58.34% of its pharmaceutical sales in 2025. Hansoh Pharmaceutical reported that innovative drugs and collaborative products contributed 82.2% of revenue. Pure innovative drug companies such as BeiGene, Allist Pharmaceuticals, and Innovent Biologics have seen this proportion exceed 90%.
BeiGene stands out as a benchmark for overseas expansion. According to Wind data, BeiGene achieved total operating revenue of RMB 38.225 billion in 2025, a 40.46% increase, with net profit attributable to shareholders of RMB 1.461 billion, marking its first full-year profitability. Core product Zanubrutinib generated U.S. revenue of $2.831 billion in 2025, up 45%, with global commercialization rights retained within the company. This has shifted its valuation logic from a Biotech asset portfolio to a global Biopharma platform.
The overseas expansion model is evolving from License-out toward Co-Co and NewCo structures. According to PharmaCube and company announcements, Innovent Biologics entered into a $10.5 billion Co-Co collaboration with Pfizer in May 2026. Concurrently, Hengrui Medicine reached a $15.2 billion agreement with BMS covering 13 early-stage projects, retaining co-development and global commercialization options. Through a NewCo structure, Hengrui established Kailera with a 19.9% stake, transitioning from a front-end supplier to a global partner. Within the "guerrilla warfare versus stronghold" framework, Co-Co and NewCo models align more closely with the "stronghold" logic.
Academic standing has also improved markedly. Data from Yaozhi Network shows that Chinese scholars contributed 94 oral presentations at the 2026 ASCO annual meeting, with 13 studies from 12 Chinese innovative drug companies selected for LBA. Akeso secured a coveted slot in the plenary session.
Investment Outlook: Right-Side Momentum Builds, Favoring Innovation and Its Supply Chain
Although the pharmaceutical sector has shown recent strength, the pharmaceutical and biotech index remains significantly below its 2025 peak. The industry is gradually forming a right-side pattern, supported by interim CXO results. In small molecule innovation, opportunities exist in areas such as Pan-RAS inhibitors and small nucleic acid drugs. The CXO industry trend continues to improve, with demand recovering amid a favorable global innovative drug financing environment. Leading companies maintain robust order backlogs, with particularly strong growth momentum in biologics, preclinical safety evaluation, and core CDMO segments. The strong CXO performance reflects a global trend of improving industrial fundamentals as pharmaceutical financing warms. Chinese CXO companies, benefiting from an engineer dividend, are well-positioned to capture these industry tailwinds, and this momentum is expected to persist given the favorable global industrial outlook.
Risk Factors
Risks include stronger-than-expected medical insurance cost control measures, potential declines in pharmaceutical R&D investment, and geopolitical and supply chain uncertainties.