Innovative drug sector surges over 25% in Q3, driven by policy and earnings

A three-month rally in China's A-share and Hong Kong-listed innovative drug stocks has triggered a new wave of capital market activity, as policy tailwinds and improving fundamentals converge.

A Strong Three-Month Rally

The structural rally in innovative drug stocks began in July and August, carrying strong momentum into September.

In July, the National Securities Hong Kong Stock Connect Innovative Drug Index rose 14.31% in a single month, while the A-share Wind Innovative Drug Index (886015) surged 17.57% over the same period. By August, the rally accelerated, with several mainstream innovative drug ETFs posting single-day gains exceeding 5%. Over the two-month period, the A-share innovative drug sector recorded cumulative gains of over 25%, while the Hong Kong-listed innovative drug sector rose more than 30%.

In September, both core indices continued their upward trajectory with increased trading volume, signaling a clear trend of medium- to long-term capital inflows.

The rally is fundamentally driven by two core variables:

1. Policy bottoming out: Industry policy pessimism has been fully repaired.
2. Fundamental improvements: Listed drug companies are seeing substantive, large-scale improvements in their fundamentals.

Policy Tailwinds

In 2026, China's innovative drug regulatory framework and payment system underwent systematic optimization. The 2026 edition of the National Essential Drug List established, for the first time, a常态化 selection mechanism for innovative drugs. More than a dozen重磅 innovative drugs targeting oncology, chronic diseases, and autoimmune conditions were successfully included, opening up sales channels to grassroots medical institutions.

Meanwhile, the centralized drug procurement (集采) rules were continuously optimized, explicitly exempting patented innovative drugs from procurement requirements. This addressed a widespread market concern: that new drugs would face significant price cuts immediately upon launch, making it difficult to recoup R&D investment.

Fundamental Improvements

Leading innovative drug companies have become magnets for institutional capital, backed by strong earnings performance.

In the first half of 2026, 百济神州 (688235.SH / 06160.HK) reported operating revenue of RMB 22.22 billion, up 26.8% year-on-year, with net profit attributable to shareholders surging 627.1%. Its stock rose over 20% in July–August.

Over the same period, 恒瑞医药 (600276.SH / 01276.HK) generated RMB 8.809 billion in innovative drug revenue, up 16.38% year-on-year, with innovative drugs accounting for over 60% of total revenue for the first time. Its stock gained over 10% in July–August.

Beyond the sector leaders, 信达生物 (01801.HK) and 康方生物 (01093.HK) both reported revenue growth exceeding 40% year-on-year, driving share price gains. 荣昌生物 (688331.SH / 09995.HK) and 君实生物 (688180.SH / 01877.HK) returned to profitability, contributing to a recovery in their stock performance.

Three Emerging Tracks

As investors assess the innovative drug rally, structural characteristics within the sector have become increasingly apparent. The market has moved beyond broad-based, thematic speculation. Only companies with technological moats, commercial certainty, and global monetization capabilities are attracting capital.

The sector can be divided into three tiers:

Tier 1: ADC and Bispecific/Multispecific Antibodies

This is the absolute main track of the current rally. After years of technological iteration, China's ADC and bispecific antibody platforms, manufacturing processes, and clinical development progress have reached the global first tier. Chinese companies have moved beyond following overseas R&D paths and have become core assets for multinational pharmaceutical companies seeking mergers, acquisitions, and partnerships.

Key beneficiaries include 百利天恒 (688506.SH), 科伦药业 (002422.SZ), 科伦博泰 (688458.SH), and 康方生物 (09926.HK).

• 百利天恒's core asset is an EGFR×HER3 bispecific ADC drug. It previously signed a licensing deal with Bristol-Myers Squibb (BMS) worth up to US$8.4 billion. In 2026, multiple clinical data readouts for this project were released, and the company received milestone payments.
• 科伦药业 and 科伦博泰 (the "Kelan" group) have the most sustained ADC out-licensing track record and the richest pipeline in China, having completed two major overseas rights sales.
• 康方生物, a leader in the domestic bispecific antibody space, sold related assets to Summit Therapeutics in a deal worth up to US$5 billion. In 2026, data from related projects were released and received partner approval.

Risk note: The ADC and bispecific antibody tracks face significant homogeneity in热门 targets such as HER2 and Trop2, intensifying industry competition. The key focus is whether domestic companies can smoothly advance clinical trials and secure partnership payments.

Tier 2: GLP-1 Metabolic Chronic Diseases

This track is characterized by high certainty and stable growth. In 2026, multiple domestic GLP-1 pipelines have continued to release clinical data, and commercialization is accelerating. The logic of domestic substitution continues to strengthen.

Representative companies include 华东医药 (000963.SZ) and 恒瑞医药.

• 华东医药 has built a complete GLP-1 R&D pipeline, with multiple weight-loss and glucose-lowering products in late-stage clinical trials or commercialization preparation.
• 恒瑞医药 is focusing on long-acting GLP-1 innovative formulations. Its related metabolic pipeline has successfully advanced to Phase III clinical trials, with rapid commercialization expected, positioning it as a second growth curve after its oncology pipeline.

Tier 3: Frontier Innovation (siRNA, CGT, Nuclear Drugs)

Unlike the first two tiers, this track includes small interfering RNA (siRNA), cell and gene therapy (CGT), and nuclear drugs. It offers high elasticity but also high risk. These tracks have first-in-class (FIC) and best-in-class (BIC) potential,突破ing the technical limitations of traditional small molecules and monoclonal antibodies, and representing the next wave of innovative drug trends.

• 瑞博生物 (688509.SH), a leader in siRNA drugs, signed an overseas partnership worth up to US$4.4 billion in 2026.
• 中国生物制药 (01177.HK) quickly filled its siRNA technology gap by acquiring Hejiya Bio,完善ing its innovative pipeline matrix and transitioning from a traditional pharmaceutical company to a frontier innovator. Its stock price also rose.

Risk note: This tier is still in its early industrial stage. Most companies cannot achieve large-scale profitability in the short term, leading to high stock price volatility. Overall investment risk is significantly higher than for the first two tiers.

Capital Market Activity Driven by the Rally

Notably, unlike previous valuation recovery rallies, the current innovative drug rally reflects an upgrade in the industry ecosystem. Listed companies have moved beyond a single R&D model to form a closed-loop business model: "M&A to fill gaps, BD out-licensing for monetization, and financing to empower R&D."

中国生物制药 has been the most active M&A player, spending US$500 million to acquire Lixin Pharma, filling gaps in its bispecific antibody and ADC core technology platforms. It also spent RMB 1.2 billion to fully acquire Hejiya Bio, entering the high-quality siRNA track.

Other similar capital deployment cases include:

• 复星医药 (600196.SH / 00656.HK) invested RMB 414 million in Xingyao Kunze, deepening its focus on the liver disease innovative drug track.
• 康华生物 (300841.SZ) spent up to RMB 632 million to fully acquire Nameixin, entering the frontier mRNA vaccine field.

Alongside M&A, BD out-licensing has become a core monetization path for many companies. As of 2026, the scale of overseas licensing deals for domestic innovative drugs has surged, approaching the full-year level of 2025, with large-scale overseas partnerships密集兑现.

• 恒瑞医药 partnered with BMS, with 13 early-stage oncology pipeline assets potentially worth up to US$15.2 billion.
• 信达生物 partnered with Pfizer, licensing 12 early-stage oncology projects for a total potential value of US$10.5 billion.

Following the valuation recovery in innovative drugs, many listed companies have seen their financing windows reopen, particularly for small and medium-sized enterprises launching private placements.

• In August 2026, 广生堂 (300436.SZ) completed a RMB 723 million private placement, with all proceeds used for clinical advancement and industrialization of hepatitis B and oncology innovative drugs.
• 诺思兰德 (430047.BJ) disclosed a RMB 300 million private placement plan, specifically for gene therapy new drug clinical R&D and innovative drug production base construction.

Which tracks are you most optimistic about? Welcome to leave a comment and join the discussion. (Produced by Thinking Finance)