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After a prolonged period of adjustment, the pharmaceutical and biotechnology sector has recently regained investors' attention due to its frequent warming-up. On August 12th, the pharmaceutical sector (CITIC) led the A-share market with a single-day increase of 1.31%, and pharmaceutical ETF products, which are more sensitive to market trends, all rose, with more than half of the products seeing a single-day increase of over 1%.

The reporter noticed that the sector had quietly heated up in July of this year, with a cumulative increase of 5.52% over the past 10 trading days. A quarter of the constituent stocks rose by more than 10%, but several of these stocks were favored by speculative capital. Looking at a longer timeframe, the pharmaceutical and biotechnology sector has experienced several instances of "one step forward, three steps back" in recent years, and investor sentiment remains cautious.

In the view of industry insiders, the relatively good performance of the pharmaceutical sector recently is due to a rebound following an overshoot in the market. In addition, the weakening of US economic data and the increased expectation of a Federal Reserve rate cut have also contributed to the rebound of the Hong Kong stock market's innovative drug sector, which is more sensitive to overseas liquidity, and this has had a certain mapping effect on the A-share market. However, it is suggested that the profitability improvement of the pharmaceutical sector should still be observed going forward.

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The pharmaceutical sector warms up again

On August 12th, among the top twenty concept sector gains, the In Vitro Diagnostics Index, Traditional Chinese Medicine Selection Index, Biotechnology Index, and Innovative Drug Index, and other pharmaceutical-related sub-tracks occupied 18 seats, with single-day gains all exceeding 1%. In terms of individual stocks, 17 stocks such as Kepu Biosciences (300639.SZ), Xiangxue Pharmaceuticals (300147.SZ), Guangshengtang (300436.SZ), and Lanwei Medical (301060.SZ) increased by more than 10%.

With the strong pull of the sector and individual stocks, among the top 30 single-day gainers in the ETF market, nearly two-thirds were pharmaceutical ETFs, mostly tracking directions such as traditional Chinese medicine, vaccines, medical devices, and innovative drugs. Among them, four ETFs tracking the China Securities Traditional Chinese Medicine Index led the way, all with gains exceeding 2%. The best performer was the Penghua China Securities Traditional Chinese Medicine ETF, leading the ETF market with a single-day gain of 2.75%.

Overall, according to First Financial statistics, 53 ETF products (including stock ETFs and cross-border ETFs) with "medical" or "pharmaceutical" in their index names all rose, with more than half of the products seeing a single-day increase of over 1%.

In terms of news, the World Health Organization warned at a press conference in Geneva that data from more than 80 countries show that the number of people infected with the main pathogen of COVID-19, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), has been increasing recently.

The reporter noticed that the rise of this round of the pharmaceutical sector began at the end of July, with the pharmaceutical sector (CITIC) seeing a cumulative increase of 5.52% over the past 10 trading days. Among the 472 constituent stocks of the pharmaceutical sector, 120 stocks increased by more than 10% during the period, accounting for a quarter of the total sector.

Among them, there were 23 stocks with an increase of more than 20%. For example, Xiangxue Pharmaceuticals has seen a cumulative increase of over 220% in the past 10 trading days. The company has issued three announcements of unusual stock price movements during this period, pointing out that "there may be irrational speculation and the risk of a significant drop in stock prices after a substantial increase."According to statistics, Xiangxue Pharmaceutical has made it to the Dragon and Tiger List five times during this period, indicating obvious speculation by retail investors. In addition, Duorui Pharmaceutical, Ruizhi Pharmaceutical, Shuotaishen, and other stocks that rose by more than 40% during the same period also made it to the list multiple times. According to First Financial Daily statistics, there were 37 stocks that made it to the Dragon and Tiger List during this interval, with Hehua Shares having the most appearances, reaching six times.

At the same time, the performance of the aforementioned pharmaceutical-related thematic ETFs is also "far ahead". Data shows that as of August 12th, almost all 27 ETF products with an interval increase of more than 5% were dominated by products in this related track. Specifically, the increases of the four ETFs tracking the China Securities Traditional Chinese Medicine Index all exceeded 7%, followed by several innovative drug direction ETFs, such as Huitianfu National Certification Hong Kong Stock Connect Innovative Drug ETF, which rose by 6.61% during the period.

On the other hand, some funds have recently quietly flowed into this track. Wind data shows that as of August 9th, in the past month, 22 pharmaceutical ETFs have seen net inflows of funds, with products such as Bosera Hang Seng Medical and Health Care ETF, Yinhua China Securities Innovation Medicine Industry ETF, Huitianfu China Securities Traditional Chinese Medicine ETF, GF Hong Kong Innovation Medicine ETF, and Penghua China Securities Traditional Chinese Medicine ETF "attracting funds" of more than 100 million yuan.

Is it a "feint"?

In fact, during the recent three-year correction period, the pharmaceutical sector has had several brief "upturns", but the downward trend has not been reversed. The recent rise has left many investors holding pharmaceutical funds physically and mentally exhausted. Individual investor Zhang Si (a pseudonym) told First Financial Daily that he has recently increased his position in actively managed funds that are heavily invested in pharmaceuticals.

In Zhang Si's view, this is more like a helpless move to reduce the cost of losses. Because just looking at the situation in the past three years, it seems that there are new lows after new lows, such as the China Securities Medical Index, which once fell to 5588.5 points in July this year, a new low in nearly ten years. And more investors like Zhang Si, after expressing their feelings of "hope of returning to the original", can't help but doubt, is this time a real recovery or another "feint"?

"The recent performance of the pharmaceutical industry is relatively good, both due to the catalytic effect of events such as COVID-19, and the characteristics of low valuation and low allocation also provide potential upward drivers, and the macro environment is also stage-by-stage favorable for the performance of the pharmaceutical sector." Huatai Baorui Fund Research Department said to First Financial Daily.

Jinying Fund Equity Investment Department Fund Manager Ouyang Juan said in an interview with First Financial Daily that the recent performance of the pharmaceutical sector is relatively good, and the overshoot of the sector has brought about a rebound. Looking forward, we will continue to pay attention to the continuous performance of the pharmaceutical sector. This judgment is mainly based on three aspects of thinking.

First, on the drug side, the continuous recovery of in-hospital diagnosis and treatment, coupled with the low base number starting from the third quarter of 2023, the income growth rate of in-hospital assets is expected to accelerate marginally, and with the continuous implementation of innovative drug support policies, in the long term, the commercialization of innovative drugs with real clinical value is expected to be smoother, and high-quality innovative drug companies are also actively seeking overseas partners to license their products, and still enjoy a huge overseas market.

Second, on the medical device side, it is expected that in the second half of the year, new rounds of medical equipment procurement and updates will be carried out in various places, and orders may accelerate starting from the third quarter; in addition, the United States is expected to enter a rate-cutting cycle in September, which is expected to bring about a relaxation of global liquidity, and the investment and financing end of the global biopharmaceutical industry is expected to continue to improve.Huatai-PineBridge Fund Research Department further stated that, from the perspective of the profitability fundamentals of the pharmaceutical industry, the market was generally pessimistic about the pharmaceutical sector in the early period, believing that it would be difficult to improve even with a low base in the second half of the year. However, in reality, the pharmaceutical industry still has its own natural repair momentum, with marginal improvements in out-of-hospital consumption and sales of top innovative drug companies. Combined with the current low valuation of the pharmaceutical sector and the low institutional allocation, this provides a rebound foundation for the pharmaceutical sector.

However, they also warned that looking forward from the current point in time, it is still necessary to observe the profitability improvement of the pharmaceutical sector, where directions with sustainable profitability have better configuration value. "Overall, as overseas interest rate cuts approach and the profitability of the pharmaceutical sector gradually repairs, the configuration value of the pharmaceutical sector continues to increase, but stronger profitability elasticity still needs to be observed, which may be mainly characterized by structural market conditions."

Opportunities from Sub-segments

From the aforementioned products with leading gains, it can be seen that innovative drugs, especially innovative drugs in the Hong Kong stock market, have shown a stronger rebound. In this regard, Liu Jie, the fund manager of Guangfa China Securities Hong Kong Innovative Drug ETF, told Yicai that the medium and long-term investment value of Hong Kong innovative drugs has been recognized based on various favorable factors such as capital, policy, and demand.

Liu Jie analyzed that, on the one hand, as a high-interest-rate-sensitive sector, the innovative drug sector will directly benefit from the Federal Reserve's interest rate cuts. On the other hand, the policy level is also increasing its support for the innovative drug sector. In addition, the global demand for innovative drugs is also rapidly expanding.

Looking at the sales data of existing ADC (Antibody-Drug Conjugate) drugs, the global sales of ADC drugs listed on the market have grown from $1.6 billion in 2017 to nearly $8 billion in 2022, and for the first time in 2023, they have broken through the $10 billion mark, showing a rapid growth trend.

"The next three years are a key time point for the development of ADC drugs. Currently, there are at least 32 companies in China that have laid out the research and development of ADC drugs, involving 23 targets. As more drugs under research are approved and listed, the domestic sales market is expected to open up," said Liu Jie.

"The value of innovative drugs is still affected by certain cyclical factors," a pharmaceutical-themed fund manager from South China said in a conversation with Yicai, adding that he would "appropriately adjust some positions" in this track, mainly focusing on companies that are expected to see improved performance in the second half of this year or have global growth opportunities.

"Currently, the A-share market is not unilaterally rising. Sometimes, some small factors can also lead to increased market volatility. For example, if a company is optimistic in the long term, but if there are short-term benefits that lead to a significant increase in market value, I might reduce some positions," he said. In his view, under the current environment, some profit-taking operations will be carried out.

In addition, medical devices are also an important sub-segment that the aforementioned person is paying attention to. "If some companies fall to a very cheap price, I might also lay out in advance. The reason for choosing such companies is that they are expected to see improvements in bidding orders in the third and fourth quarters," the aforementioned pharmaceutical-themed fund manager said, adding that since bidding orders and other information have not yet appeared, they will temporarily focus on active attention.From the current vantage point, Ouyang Juan stated that she will continue to steadfastly focus on the long-term industrial growth opportunities of China's innovative drugs and medical devices. "Especially innovative products with global competitiveness, such assets can not only enjoy the vast population dividend market in China but also reap the rewards of high pricing and high profits in the American pharmaceutical market."