China's 15th Five-Year Plan for pharma industry boosts drug stocks; Citi says policy favors innovation, CROs

On September 23, pharmaceutical stocks rallied sharply, with sectors such as CRO, biological products, and recombinant proteins showing strong activity. Multiple stocks, including OPM Biosciences, Yishang Technology, Sino Biological, and Peprotech, surged by over 10%.

Policy Support from the 15th Five-Year Plan

China's Ministry of Industry and Information Technology, along with other government departments, recently released the 15th Five-Year Plan for the Development of the Pharmaceutical Industry. According to a research report from Citi, the core objective of the plan is to shift China's pharmaceutical industry from scale-driven growth to innovation-driven, quality-oriented development. It explicitly sets a goal of ranking among the world's leading pharmaceutical powers by 2030.

The plan covers key technology areas including innovative drugs, innovative medical devices, AI-driven drug discovery, and CDMO/CRO services, indicating broad policy support across the entire value chain.

Citi believes the policy direction is favorable for:

• Domestic innovative drug and biotech companies
• AI-driven drug discovery (AIDD) firms
• CRO/CDMO service providers
• High-end medical device and in vitro diagnostics (IVD) equipment manufacturers
• Innovative traditional Chinese medicine enterprises

Structural Opportunities in the Pharmaceutical Sector

Notably, fund holdings data as of the end of the second quarter show that the pharmaceutical sector has not yet become a consensus direction for increased allocation by public funds. Institutions believe that innovative drugs remain the most closely watched investment theme in the pharmaceutical sector. As industry trends such as overseas expansion of innovative drugs, business development (BD) transactions, and profitability improvements continue to materialize, the pharmaceutical sector—after undergoing valuation recovery—is expected to shift further toward fundamentals-driven growth.

In the short term, the pharmaceutical sector is likely to present mainly structural opportunities. China Europe Fund pointed out that current market capital remains heavily concentrated in technology sectors such as AI, and there is a certain seesaw effect between innovative drugs and AI in terms of capital flows. Overall, broad sector-level beta-driven rallies are difficult to achieve in the near term, making stock selection critical. Since innovative drug rallies require data catalysts or BD deal closures to drive momentum, the ideal window for a major beta rally is expected to be mid-term, specifically from early next year to the first half of the year.

AI-Driven Drug Discovery Gains Momentum

Looking at sub-sectors, AI-driven drug discovery continues to heat up. China Merchants Securities noted that three major events are converging to validate the global industry trend of AI in drug development:

• Sustained capital investment upstream
• General-purpose large models entering drug R&D scenarios midstream
• The need for high-quality wet-lab validation downstream

AI computing power and wet-lab validation are expected to jointly form the infrastructure for AI-driven drug discovery.

Long-Term Outlook for China's Innovative Drug Sector

Hwabao Fund stated that, overall, the opportunities for China's innovative drug development remain deeply compelling. Strong policy support is clearly evident, while domestic innovative drugs are progressing from "me-better" to "best-in-class" (BIC) and striving for "first-in-class" (FIC), marking a significant leap in China's pharmaceutical industry capabilities. Furthermore, the value of overseas BD licensing deals by Chinese pharmaceutical companies has surged year after year, opening up a trillion-yuan market for innovative drug exports. At the same time, a large number of biotech companies are approaching or breaking even, signaling that a cycle of performance realization may be about to begin.