The innovative drug sector has experienced a significant collective surge, with 20 stocks hitting their daily limit-up. How should investors choose among the related Exchange-Traded Funds (ETFs)?

Innovative Drug Sector Makes a Strong Return

Today, the long-dormant innovative drug sector witnessed a substantial rally. Let's first define what constitutes an innovative drug: it refers to a pharmaceutical with independent intellectual property rights, featuring a novel structure, new target, or new mechanism of action, and possessing clinical value. The innovative drug industry in China is entering a phase of rapid development. In 2025, the total number of clinical trials in China surpassed 5,000 for the first time, reaching a record high. Among these, new drug clinical trials accounted for 2,997, or 57.5%, representing an 18% year-on-year increase. Bioequivalence trials numbered 2,218, comprising 42.5%. In the first five months of 2026, Investigational New Drug (IND) applications for Class 1 innovative drugs surged by 30% year-on-year. Innovative drugs are becoming the most certain long-term growth avenue within China's pharmaceutical industry.

In recent years, the innovative drug sector has received a series of policy supports. Starting from the 2024 Government Work Report, which for the first time included "innovative drugs" as a key area within emerging industries, to the State Council's issuance of the "Implementation Plan for Whole-Chain Support of Innovative Drug Development," and further to the explicit proposal at the Third Plenary Session of the 20th Central Committee to improve mechanisms supporting the development of innovative drugs and medical devices, policies are now safeguarding the high-quality development of this sector. In July 2025, the National Healthcare Security Administration and the National Health Commission issued the "Several Measures to Support the High-Quality Development of Innovative Drugs," clearly stating policy preferences for including innovative drugs in the national reimbursement drug list and improving the negotiation and renewal rules to support their development.

These policies have brought about three major positive impacts: first, corporate profits are expected to recover; second, research and development (R&D) investment is anticipated to increase; and third, the market is likely to reprice the long-term potential of innovative drugs, potentially leading to an upward shift in the sector's valuation center. Looking globally, the innovative capabilities of Chinese pharmaceutical companies are gaining international recognition, with an increasing number of multinational pharmaceutical firms actively purchasing Chinese technology and products.

There are several reasons for this global "shopping spree" for Chinese innovative drugs, including relatively high R&D efficiency, faster clinical development speed, significant cost advantages, outstanding cost-performance ratios, and the benefits of a talent and engineering dividend. China also boasts rich clinical resources, a large patient base, and relatively fast clinical trial enrollment. However, the essence of innovative drug development is high-risk, high-investment, long-cycle, and low-success-rate endeavor. The journey from the laboratory to market is fraught with uncertainty, often described as a "nine deaths, one life" scenario. Data indicates that the final success rate for innovative drug R&D may be less than 5%, which is the most challenging aspect of this field.

On June 29th, the National Healthcare Security Administration announced the preliminary review list and key information for drugs entering the 2026 reimbursement directory. Among them, 557 drugs and 54 drugs passed the preliminary formal review for the basic medical insurance drug list and the commercial insurance innovative drug list, respectively. A relevant official stated, "A majority of the declared varieties are new drugs, with 343 being new generic name drugs approved within the last five years. This reflects the vigorous development of China's pharmaceutical industry, the continuous increase in new drug approvals, and the high level of attention and active participation from pharmaceutical companies in the drug directory adjustment process."

The capital market responded swiftly. Today, the pharmaceutical sectors in both the A-share and Hong Kong markets experienced a long-awaited sharp rise, with the innovative drug segment leading the gains. The Contract Research Organization (CRO) concept sector surged by 8%, and over 20 individual stocks hit their daily limit-up.

In the A-share market, stocks such as Bairun Medical, Wanbang Pharmaceutical, Guangsheng Tang, and Staidson all recorded 20% limit-up gains. Stocks including Haisco, PharmaCore (likely referring to a company like Asymchem or similar), Kelun Pharmaceutical, Shuanglu Pharmaceutical, Yatai Pharmaceutical, Xinhua Pharmaceutical, Taiji Group, Kangyuan Pharmaceutical, and Tailong Pharmaceutical also reached their limit-up.

Among leading companies, BeiGene rose over 10%, WuXi AppTec gained over 6%, and Jiangsu Hengrui Medicine increased over 8%.

Guojin Securities noted that the fundamentals of China's innovative drug sector continue to improve while valuations remain at a bottom range, enhancing its allocation value. As the global competitiveness of domestic innovative drug companies' clinical pipelines strengthens, coupled with accelerated policy support from medical insurance and commercial insurance favoring innovative drugs, several innovative drug firms are expected to enter a sustained period of performance realization.

Bohai Securities pointed out that recently, several listed pharmaceutical companies have initiated share buybacks, boosting market confidence and signaling undervaluation. The firm is optimistic about the sector's bottoming and recovery opportunities. Simultaneously, it maintains a long-term positive view on the development trend of domestic innovative drugs.

Key Differences Among Innovative Drug-Related ETFs

The innovative drug industry offers vast long-term potential, but due to its inherent characteristics, investing in it carries high risk. For investors, selecting companies with strong technological barriers, rich product pipelines, and healthy cash flows is crucial for navigating market cycles. Currently, leading companies in China with rich pipelines, strong commercialization capabilities, and high certainty include Jiangsu Hengrui Medicine and BeiGene. High-growth elasticity companies with strong innovation capabilities and accelerating Business Development (BD) for overseas expansion include Innovent Biologics, Akeso, and RemeGen. Companies benefiting from innovative drug R&D with significant earnings elasticity include CRO leader WuXi AppTec and leading domestic CDMO (Contract Development and Manufacturing Organization) company Asymchem (or similar).

Regarding indices, let's examine the best-performing ETFs today and the characteristics of their respective underlying indices.

For example, the ChinaAMC SSE STAR Market Innovation Pharma ETF tracks the SSE STAR Market Innovation Pharma Index (950161). Its constituent stocks cover 30 companies, limited to innovative drug firms listed on the Shanghai Stock Exchange's STAR Market. It focuses on high-growth, high-R&D Biotech targets. The sector distribution is primarily in chemical pharmaceuticals, biological products, and medical R&D outsourcing, including companies like BeiGene, RemeGen, as well as chemical preparation companies like Allist Pharmaceuticals, Baili Tianheng, and Zhejiang ZJ Pharmaceutical.

The Huatai-PineBridge CSI SSE-SZSE-HK Innovation Pharma Industry ETF closely tracks the CSI Shanghai-Shenzhen-Hong Kong Innovation Pharma Industry Index (931409). Its stock selection universe is broader, covering the Shanghai, Shenzhen, and Hong Kong markets, providing wider coverage to capture leading companies in both A-shares and H-shares. Its top weightings include WuXi AppTec, BeiGene, Jiangsu Hengrui Medicine, Innovent Biologics, and WuXi Biologics.

The GF Fund CSI Innovation Pharma Industry ETF tracks the CSI Innovation Pharma Industry Index (931152). It covers the complete innovative drug industry chain, with a relatively high weight in the CXO (Contract X Organization) sector. It includes not only WuXi AppTec and Asymchem but also established pharmaceutical companies like Jiangsu Hengrui Medicine and Fosun Pharma.

Each of these three indices has multiple ETF products tracking them. The specific details of each ETF are available for investors to review.