On June 29, the long-depressed pharmaceutical sector staged a remarkable comeback, with innovative drug stocks accessible through the Hong Kong Stock Connect leading the charge with a powerful rally throughout the trading day.

The HUABAO HANG SENG HONG KONG STOCK CONNECT INNOVATIVE DRUG SELECTION TRADING OPEN ENDED INDEX SECURITIES INVES (ETF 520880), which focuses exclusively on innovative drug R&D companies, surged as much as 8.99% during the session before closing up a substantial 7.94%, marking its largest single-day gain since listing.

Trading volume exploded to 8.61 billion yuan, a 139% increase from the previous day. Among its constituents, 13 stocks including the heavyweight IMMUNOTECH-B (06978) saw gains exceeding 10%.

This sudden surge from a bottoming area for Hong Kong Stock Connect innovative drug stocks raises key questions: what are the driving forces, and is this a short-term rebound or the start of a trend reversal?

Key Drivers Behind the Rally

First, earnings catalysts are approaching. With July on the horizon, mid-year financial reports are expected to serve as a significant catalyst. The innovative drug industry chain benefits from strong sector momentum and order trends, with the robust growth momentum from Q1 likely to continue.

Additionally, some innovative drug and medical device companies are anticipated to benefit from the continued market expansion of new products or rapid growth in overseas operations. Recent business development deals continue to materialize, following major collaborations in Q2, contributing to a positive industry trend.

Second, valuations are at historically low levels. The pharmaceutical sector remains in a bottoming phase, with valuations having retreated to historical lows, yet fundamentals remain solid with ample room for recovery. The approach of the quarter-end is also prompting a market style rebalancing that is aiding sector repair.

Third, positive signals from the US XBI index. The recent strength in the XBI index is attributed to several factors, including favorable FDA review policies for certain clinical trials, ongoing optimization of clinical protocols, an acceleration in mergers and acquisitions by multinational corporations, a temporary easing of geopolitical risks, and institutional portfolio rebalancing at quarter-end.

Fourth, share buybacks demonstrate confidence. As of June 26, a total of 166 A/H-share listed pharmaceutical companies have implemented share repurchases in 2026, with a cumulative amount reaching 13.345 billion yuan, primarily for equity incentives or share cancellations, signaling strong corporate confidence.

Fifth, ongoing policy support. The latest public notice from the National Healthcare Security Administration regarding drugs passing the preliminary formal review for the 2026 National Reimbursement Drug List and commercial health insurance innovative drug catalog marks the entry into a substantive phase for dual-catalog negotiations.

New mechanisms such as pre-application and 8-year price protection have also been implemented.

Outlook for the Innovative Drug Sector

In the short term, a rebound scenario appears more likely. Although both the innovative drug sector and the broader pharmaceutical market are at a bottom, with the industry trend pointing upwards and solid fundamentals, the absence of new major catalysts suggests the recent move may be driven by quarter-end market rebalancing.

From a medium-term perspective, innovative drug stocks at current levels possess significant potential for a rebound. The global competitiveness of China's innovative drug industry continues to strengthen. The overseas expansion thesis is entering a phase of tangible realization, with licensed products steadily progressing through overseas clinical trials and approval processes.

In the coming years, the sector is expected to see more domestically developed blockbuster drugs approved for sale overseas, with increased potential peak sales and success rates expanding the sector's valuation space.

Domestic policy remains supportive, with biopharmaceuticals designated as an "emerging pillar industry" in the Government Work Report, further elevating the strategic importance of the sector. Policies aimed at optimizing pricing mechanisms for innovative drugs also support high-quality industry development.

Currently, innovative drug assets are broadly undervalued, with vast overseas market potential. Many companies in the sector have the potential to double in market capitalization over the medium term.

Looking ahead to the second half of the year, catalysts such as major industry conferences, significant business development deals, quarterly earnings, and technological breakthroughs are expected to provide continued positive momentum.

Investment Vehicles to Capture the Opportunity

For pure exposure to innovative drugs, the HUABAO HANG SENG HONG KONG STOCK CONNECT INNOVATIVE DRUG SELECTION TRADING OPEN ENDED INDEX SECURITIES INVES (ETF 520880) offers a 100% focus on innovative drug R&D companies. Its top ten holdings account for over 70% of the portfolio, highlighting its concentration on sector leaders. The underlying assets are Hong Kong-listed stocks, offering high volatility and T+0 trading.

For investors seeking to reduce volatility, the in-market exclusive Pharmaceutical ETF offers a unique "75% innovative drugs + 25% traditional Chinese medicine" allocation, combining the high growth potential of innovative drugs with the high dividend characteristics of traditional Chinese medicine stocks.

Data is sourced from the Shanghai, Shenzhen, and Hong Kong stock exchanges, as well as relevant index companies.

Note: The mentioned ETFs do not charge a sales service fee. Brokerages may charge a commission not exceeding 0.5% for subscriptions or redemptions, which includes fees charged by exchanges and registration institutions. Detailed fund fee structures are available in the respective fund legal documents.

Risk Disclosure: The index constituents mentioned are for illustrative purposes only. Descriptions of individual stocks do not constitute investment advice in any form, nor do they represent the holdings or trading动向 of any fund managed by the asset manager. The risk rating for the Pharmaceutical ETF and its feeder funds is assessed as R3-Medium Risk, suitable for Balanced (C3) and above investors. The risk rating for the Hong Kong Stock Connect Innovative Drug ETF and its feeder funds is assessed as R4-Medium to High Risk, suitable for Aggressive (C4) and above investors. All information presented (including but not limited to stocks, commentary, forecasts, charts, indicators, theories, and any form of expression) is for reference only. Investors are responsible for their own investment decisions. Furthermore, any views, analysis, or forecasts herein do not constitute investment advice to readers, and no liability is accepted for any direct or indirect losses arising from the use of this content. The performance of other funds managed by the fund manager does not guarantee the performance of these funds. Past performance of a fund is not indicative of its future results. Fund investment carries risks.