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Securities Times reporter Chen Shuyu

Since July, the innovative drug sector of Hong Kong stocks has been active repeatedly, and related ETFs have performed well. Huatai CITIC Securities Hong Kong Stock Connect Innovative Drug ETF, Yinhua CITIC Securities Hong Kong Stock Connect Innovative Drug ETF, GF CSI Hong Kong Innovative Drug ETF and Tianhong Hang Seng Shanghai-Shenzhen-Hong Kong Innovative Drug Select 50 ETF have all risen by more than 10%, ranking among the top in the market's funds.

Many public funds stated that favorable policies and an improved financing environment have further highlighted the investment value of the innovative drug industry, and it is expected to usher in opportunities for layout.

An important reason for the recent outstanding performance of the Hong Kong stock innovative drug sector is the continuous implementation of favorable policies. Yinhua Fund believes that from a policy perspective, the policy support attitude for innovative drugs has gradually become clear since 2024, and favorable policies have been continuously implemented. At the central level, the term "innovative drugs" entered the government work report for the first time in March this year, and the State Council Executive Meeting in July reviewed and approved the "Implementation Plan for Supporting the Development of Innovative Drugs in the Whole Chain"; at the local level, following Beijing, Guangzhou, and Zhuhai, on July 30, the General Office of the Shanghai Municipal People's Government issued the "Several Opinions on Supporting the Innovation and Development of the Whole Chain of the Biopharmaceutical Industry".

Zhang Jintao, fund manager of Huabao Fund, said that in terms of performance, the 2024 semi-annual reports of listed companies have been disclosed one after another. As of August 12, a total of 34 listed companies in the pharmaceutical and biological industry disclosed their 2024 semi-annual reports, of which 22 companies had a year-on-year increase in net profit attributable to their parent companies. The overall performance of innovative drug companies has shown a clear upward trend, and the sales of core products of some pharmaceutical companies have been strong, which may lead the pharmaceutical and biological industry to a turning point.

On the other hand, as expectations of a rate cut by the Federal Reserve continue to rise, innovative drugs, as a relatively resilient sector, are expected to see a valuation boost.

Wells Fargo Fund believes that under the expectation of interest rate cuts, Hong Kong-listed pharmaceutical stocks are expected to take the lead in the rise. Innovative drugs in the pharmaceutical sector require a lot of R&D expenditures, so it is a sector with strong growth and high elasticity, and is also highly sensitive to interest rates. If the Federal Reserve enters a rate cut cycle, it will inevitably reduce the financing costs of innovative drug companies, and corporate profitability may improve. Compared with A-share pharmaceutical companies, Hong Kong-listed pharmaceutical companies have higher "innovation" content and greater elasticity. From history, it can be seen that the Hang Seng Healthcare Index is negatively correlated with the US federal benchmark interest rate. Since the Federal Reserve entered the interest rate cut cycle in 2019, the Hang Seng Healthcare Index has experienced a wave of rapid increases, from 3248.54 points to 8158.55 points, an increase of more than 1.5 times.

Guotai Fund said that there is a great correlation between the prosperity of the innovative drug industry chain and investment and financing. According to Crunchbase data, in the first half of 2024, the global and US innovative drug VC and PE investment and financing amounts decreased by 2.35% and increased by 15.51% year-on-year, respectively, which was 27.73 and 54.88 percentage points better than the same period last year. In July, the global and US innovative drug VC and PE investment and financing amounts increased by 13.81% and 11.22% year-on-year, respectively, showing an upward trend.

In addition, the July non-farm payrolls data in the United States was significantly lower than expected, and the expectation of the Federal Reserve's interest rate cut has clearly increased, which is beneficial to the continued increase in global pharmaceutical investment and financing activities. The semi-annual report of the leading domestic CXO companies also reflects the recovery trend of new overseas orders. In terms of going overseas, domestic companies have many competitive products in emerging technology fields such as ADC, bispecific antibodies, mRNA and gene therapy. They are gradually embracing overseas markets through patent licensing and other forms, which is expected to open up growth space.

In the past two months, investment in the pharmaceutical sector of the Hong Kong stock market has increased significantly. Many fund managers have expressed optimism about sub-sectors such as innovative drugs and consumer healthcare. From a medium- to long-term perspective, many fund companies believe that the entire pharmaceutical industry still has great growth certainty and the current valuation is at a historical low, worthy of continued attention.

Ye Zhennan, manager of the Medical Fund of Southern Fund, said that in terms of the selection of products in the Hong Kong stock market's medical sector, the directions with relative advantages in Hong Kong stock market's medical assets include leading innovative pharmaceutical companies, traditional pharmaceutical companies with attractive dividends and cost-effective valuations, as well as specialty medical services and consumer medical care.

As for the entire pharmaceutical and biological sector, Dongxing Fund believes that from 2022 to 2023, the performance of the pharmaceutical and biological sector will continue to be under pressure due to the triple impact of centralized procurement, epidemic situation, and rectification. As more and more companies overcome the impact of centralized procurement, digest the high base, and the industry rectification becomes normalized, the revenue growth rate of the pharmaceutical and biological sector is expected to bottom out and rebound in 2024. Considering the stability and certainty of the performance growth of the pharmaceutical and biological sector, many high-quality companies in the industry are in a suitable layout range, with relatively small downside risks and upside potential.

From a medium- to long-term perspective, the pharmaceutical and biological industry has greater growth certainty from an industry perspective. First, there is a large room for the proportion of domestic medical expenses to GDP to rise. In 2022, my country's total medical and health expenses accounted for about 7% of GDP, while this proportion in developed countries in Europe and the United States is generally above 10%, with the United States exceeding 16%. As China's per capita GDP increases year by year, domestic medical expenses will increase significantly in both proportion and absolute amount.

Ping An Fund's Medical Fund Manager Zhou Sicong believes that at present, the valuation of the pharmaceutical sector has returned to the bottom level of absolute and relative valuation, and the level of institutional holdings has also returned to a low level. He is optimistic about the entire broad innovative pharmaceutical industry, such as chemical drugs, biological drugs, generic drugs, innovative Chinese medicines, CXO, raw materials and other industry investment opportunities, as well as individual stock investment opportunities in innovative medical devices and equipment.