A confusing phenomenon is spreading in the field of pharmaceutical investment: in the first half of 2026, the overseas transaction amount of China's innovative drug BD reached nearly 100 billion US dollars, and the total down payment for external authorization was about 5 billion US dollars. These two indicators have reached 70% of last year's total. The industry repeatedly sets prices with real gold and silver, but the secondary market remains almost indifferent, and the liquidity discount of the innovative drug sector in Hong Kong stocks has not fundamentally improved.

Extending our focus to the ten-year dimension, China's innovative drugs have undergone a complete cycle of rotation. From the embryonic stage of policy breaking in 2015, to the outbreak of capital flood in 2019, and to the deep winter of foam receding in 2023, each cycle switch is reshaping the industry's valuation logic. In 2025, the Hong Kong stock market rebounded briefly, but then fell back again, seemingly pushing the industry to a new starting point.

In contrast to historical experience, the current divergence in pricing between the first and second levels is emerging as an independent logical curve. The primary market is moving towards value return and structural reshaping, while the pricing of the secondary market is still hovering at historical lows. Industrial capital and the pricing of the same type of asset in the secondary market are moving in completely opposite directions.

What kind of window does this persistent temperature difference create for investment driven by in-depth research? How will innovative drugs in China be priced? At a special session of the "First Global Conference on New Drugs for Major Countries" hosted by Tongyi in July, this topic became the focus of discussion among investors in the primary and secondary markets.

01. From secondary emotions to value anchoring

The investment logic of innovative drugs is naturally closer to venture capital rather than the valuation framework of traditional manufacturing industries. Investors usually intervene in Phase II and III clinical stages to assess the value potential of products based on clinical data. By the time the product is truly approved for market and begins to contribute revenue, the stock price is often already at a temporary high point.

Therefore, using traditional PE or PB frameworks to measure innovative pharmaceutical companies that have not yet generated cash flow is inevitably prone to a pricing mismatch of being seen as losing money during the R&D period and seeing a peak after going public. The consequences of this mismatch are further amplified by the macro environment in the Hong Kong stock market.

As an emerging market, the valuation of Hong Kong's innovative pharmaceutical sector is highly sensitive to US dollar liquidity. In the context of high US bond interest rates, growth assets lacking current cash flow naturally face discount pressure. However, even so, the trend of the pharmaceutical sector still shows unexpected resilience - with a slight improvement in liquidity, elasticity is quickly released.

According to a Morgan Stanley research report, the average return on investment (IRR) for drug development in China is 8.5%, which is 2.4 times higher than the 3.6% pure domestic R&D in the United States, through the model of conducting clinical phases I/II in China and half of clinical phases III globally. As a comparison, Deloitte data shows that the median IRR for late stage pipelines of top global pharmaceutical companies in 2025 is 4.0%. In a high interest rate environment, only projects with higher expected returns can continue to attract the attention and investment of industrial capital.

More noteworthy are the changes in the transaction structure itself. According to data from 2025, the proportion of clinical phase I and previous projects in overseas transactions has reached 68%. This means that global pharmaceutical companies are not only paying for China's mid to late stage pipelines, but also for the early research and development capabilities and technology platforms of Chinese pharmaceutical companies.

The marginal improvement in macro liquidity has recently driven a rebound in the sector, with a value progression from "buying pipelines" to "buying revenue" and then to "buying technology platforms", providing more diverse participation paths for investors with different risk preferences.

02. Evolution of Investment Framework

When the pricing logic begins to loosen, the framework for investment screening must also be adjusted synchronously. Prospective layout players in the primary market are more concerned about the possibility of source innovation, with peptides, small nucleic acids, and small molecule drugs with new targets listed as key directions.

Engineering innovation represented by ADC is essentially an extension of the logic of generic drugs. Changing a few amino acid sequences can be called innovative drugs, and although the efficiency advantage is significant, the real barrier lies in whether new targets and mechanisms of action can be discovered. The rise of a new generation of scientists and the global synchronization of laboratory hardware conditions have provided the possibility for this source innovation.

The evolution of quantitative screening is equally profound, and early rough attempts have been replaced by multidimensional standardized scoring systems.

When evaluating a company's R&D thickness, the model no longer simply adds up the number of pipelines, but incorporates rhythm and efficiency as core considerations. How long does it take from IND to the first enrollment? How long did it take for Phase I to transition to Phase II and for Phase II to advance to Phase III? These progress data will be placed in the industry coordinate system of the same target for standardized comparison, and then combined with dynamic variables such as whether special review channels have been obtained and historical clinical conversion success rates, to comprehensively output judgments.

The assessment of moats focuses more on the true condition of the barriers, such as whether the targets are crowded, how many years of patents are left, and which countries and regions are covered by patent families. These indicators work together to filter out trailing assets that lack differentiation and identify companies that truly possess global patent barriers.

Quantitative processing at the level of commercial realization is equally crucial. The evaluation dimensions of the domestic market include the pace of mass production after the product is launched, the speed of hospital admission, and the coverage progress of the medical insurance catalog; In terms of global BD, the model assigns differentiated weights to down payments, milestone payments, sales revenue sharing, counterparty qualification ratings, and cashable cash ratios.

The assessment of financial stability is further extended to extreme scenarios. If external financing channels are temporarily closed, how long can the existing cash flow support the operation of the core pipeline? The model conducts stress tests on this time limit by adjusting the R&D consumption rate, the ratio of operating cash outflow to revenue, and the forward-looking factors of intangible asset amortization, in order to identify high-quality platforms that are both resilient and have the potential for rebound in the industry downturn.

03. Transfer of Price Rights

The adjustment of the secondary market is equally drastic, and this perspective focuses more on platform capabilities and commercial realization.

The unique in-house full chain capability of Chinese pharmaceutical companies, from drug discovery to clinical promotion and production, constitutes one of the core assets for pricing. This platform capability enables leading pharmaceutical companies to continuously output product pipelines and realize phased value realization through BD transactions. At the same time, traditional pharmaceutical companies are entering a commercial cash flow replenishment cycle, coupled with the continued friendly policies of medical insurance negotiations, and the profit path is gradually becoming clear.

Multiple investors have stated that from a quantitative investment perspective, the current pharmaceutical sector is showing a rare systemic undervaluation. Compared to the NASDAQ Biotech Index, the valuation discount of A-share pharmaceutical assets is extremely significant.

As of early July 2026, the overall P/E ratio of the pharmaceutical and biotech sector is about 30 times, below the historical percentile of 20% since 2010. Some investors have pointed out that the estimated PEG of some leading companies is below 1, which means that the market has almost completely ignored their growth attributes.

What is more signaling is the expression of quality factors. Due to high uncertainty, preclinical and stage assets are hardly valued in the valuation system, and even if they advance to stage III, the market's expected success rate is only maintained at around 70%. In other words, the value of a large number of early R&D pipelines is priced by the market at a deep discount.

Under the combination of factors, the current deep discount state of the market provides a significantly undervalued option for medium and long-term investors. However, the longer the extension, the greater the elasticity of subsequent options. One manifestation is that the holdings of the traditional Chinese medicine industry in public funds have been at historical lows for many years, but ETF funds have been experiencing continuous net inflows since June.

- Conclusion -

In the short term, fluctuations in macro liquidity will still bring about severe fluctuations in stock prices. The transmission of US bond interest rates and geopolitical factors to oil prices and CPI will also affect the pricing environment of emerging market assets in Hong Kong stocks.

But in the medium-term dimension, the flow of industrial capital is already clear enough - China has become the source of up to 80% of global BD transactions. When there is a systematic deviation between secondary market pricing and industrial capital pricing, the latter is often more forward-looking. Big pharmaceutical companies not only purchase individual products, but also the platform and continuous innovation capabilities of Chinese pharmaceutical companies.

There is a simple consensus in industrial investment: investing behind will never have value, the core is to be in the top three. This sentence applies to the selection of projects and also to the timing judgment of asset allocation.

The era of innovative drugs 3.0 may just be a new beginning, and the road of transition that China's innovative drug industry is experiencing is bound to be bumpy, but value is never absent, it just needs to wait for the right moment to be realized.