The biotech sector, quiet for three years, has suddenly sprung to life.

Since June 18th, the CSI Science & Technology Innovation Pharmaceuticals Index (950161.CSI) has posted five consecutive days of gains, with capital continuously flowing back into the sector at its lows and a bullish sentiment steadily heating up. The rally intensified on June 29th, with the index surging significantly on high volume, gaining over 10% in its strongest single-day performance of this phase.

Three years of gloom, erupting in a single moment. What is driving this rally, and how long can it last? The answer begins with a recent announcement from the National Healthcare Security Administration.

Systematic Reforms:

The "tightening spell" of centralized procurement is finally loosening.

A notice from the National Healthcare Security Administration on June 29th showed that 557 drugs passed the preliminary formal review for the national reimbursement drug list (NRDL), and 54 drugs passed the preliminary review for the commercial health insurance innovative drug directory.

This is not merely a routine list adjustment; it signifies a fundamental shift in the entire policy framework.

The core pain point that previously constrained innovative drug valuations was clear: pharmaceutical companies invest billions in developing a new drug, only to worry about it being quickly included in centralized procurement post-launch, leading to significant price cuts and making it difficult to recoup high R&D costs, which deterred capital from assigning high valuations to innovative drugs. This round of NRDL adjustments introduces multiple systematic reforms to address this anxiety at its root.

First, the access cycle for innovative drugs into the NRDL has been substantially shortened. The 2026 adjustment marks the first implementation of a "pre-application" mechanism. Previously, drugs needed to obtain full marketing approval before applying, causing many new drugs to miss the annual application window, typically taking 1 to 2 years from approval to NRDL inclusion. The new rules allow drugs that have completed technical review by June 10th but not yet received final approval to apply in advance, with companies only needing to submit the registration materials by July 3rd. Industry estimates suggest this mechanism directly shortens the NRDL access cycle for innovative drugs by nearly a year, accelerating commercialization and shortening the payback period for companies.

Second, a dual-payment system of "NRDL + commercial insurance" has officially taken shape, providing a new pathway for high-priced innovative drugs. The 54 varieties passing the preliminary commercial insurance review include core pipelines from several listed pharmaceutical companies, covering high-value areas like oncology, metabolism, and autoimmune diseases. The policy clarifies that drugs included in the commercial insurance directory can apply for the NRDL, forming a new model of "commercial insurance first, NRDL follows." The inaugural 2025 commercial insurance innovative drug directory already includes 19 drugs. Cutting-edge therapies like million-dollar CAR-T and ADC drugs, which previously struggled with NRDL access due to high price thresholds, can now first enter the market via commercial medical insurance without requiring immediate, drastic price cuts, thereby raising the payment ceiling for innovative drugs.

Third, long-term price-locking rules stabilize profit expectations, and pressure from centralized procurement continues to ease. The new rules propose that exclusively negotiated drugs continuously listed in the NRDL for 8 years can be transferred to the regular directory, providing long-term, stable price protection for innovative drugs. Combined with the full exemption of patent-protected innovative drugs from centralized procurement, this completely breaks the market panic of "new drugs facing steep price cuts immediately after launch," allowing companies to plan long-term R&D and commercialization strategies with stability.

Overall, with the parallel dual-directory channels, accelerated access, expanded payment options, and price protection creating multiple synergistic benefits, the certainty across the entire chain from R&D and access to sales for innovative drugs has significantly increased. Market concerns over "difficult commercialization for new drugs and hard-to-recoup R&D costs" are steadily being repaired, opening a window for valuation recovery for innovative drugs with high clinical value.

Valuation and Performance Bottoms Align, Presenting a Window for Biotech Allocation

If the policy bottom is the catalyst, then valuations and institutional positioning at historical extremes provide ample upward momentum for the sector's rebound.

As of June 29, 2026, the trailing twelve-month price-to-earnings ratio of the CSI Science & Technology Innovation Pharmaceuticals Index is at the 43rd percentile of its historical range over the past decade, indicating a reasonably low to moderate valuation with ample room for upward revision.

From an institutional allocation perspective, public fund holdings in the healthcare sector have retreated from highs, dropping to 3.2% in Q1 2026, hitting the lowest level in nearly a decade, placing institutional positioning almost in a state of "empty holdings."

This extremely low allocation structure suggests that valuation bubbles in the healthcare sector have largely been cleared. Once market sentiment recovers and favorable policies continue to be released, capital inflows could drive a strong sector recovery.

Simultaneously, a fundamental reversal is underway. According to Galaxy Securities, the total value of innovative drug business development (BD) transactions in Q1 2026 reached $61.4 billion, already surpassing the full-year 2024 total and approaching half of the 2025 level. This indicates that China's innovative drug sector is gradually gaining global transaction value for its pipelines.

Currently, the innovative drug sector is experiencing a triple-bottom resonance of "policy bottom, valuation bottom, and performance bottom," highlighting its allocation value.

The Future of Innovative Drugs May Be Promising

Looking at the global development landscape for innovative drugs, China's innovative drug sector still possesses strong comparative advantages, which can be analyzed from both internal and external perspectives.

Internally: The "engineer dividend" is materializing.

The first pillar of confidence for China's innovative drugs comes from its deep manufacturing foundation. As a crucial link in the global pharmaceutical supply chain, China has accumulated a comprehensive industrial chain base in areas like raw material supply, equipment development, and production manufacturing. This advantage directly translates into cost competitiveness—Chinese companies can often advance the same pipeline at lower costs and faster speeds, providing tangible bargaining power in the global market.

Beyond the industrial base, the relay of capital market reforms has also been instrumental. The launch of Chapter 18A on the Hong Kong Stock Exchange in 2018 and the fifth standard on the STAR Market in 2019 provided unprofitable biotech companies with smooth financing channels for the first time. It was this "early-stage sustenance" that supported a large number of innovative drug companies through the most capital-intensive R&D phases.

What truly excites the market is the qualitative leap in R&D efficiency. Over the past decade, China has completed a long period of accumulation in industrial support, CXO services, capital backing, and talent reserves, now transitioning from "quantitative change" to "qualitative change." In cutting-edge fields like ADC and bispecific antibodies, Chinese pharmaceutical companies have already taken a leading global position; in high-end medical devices and innovative drug R&D, the gap with developed countries is visibly narrowing. More importantly, this accumulation is far from over—over the next five to ten years, China's voice in the global innovative drug landscape will only grow louder.

Another fundamental factor that cannot be ignored is domestic demand. A massive population base, a continuously deepening aging trend, and rising health awareness collectively support a substantial and still-growing domestic market. This serves as both a "training ground" for the commercialization of innovative drugs and provides rich clinical trial data support—stable domestic demand means a stable foundation.

Externally: The "patent cliff" opens a window for Chinese innovative drugs.

In the coming years, several multinational pharmaceutical giants will collectively face a "patent cliff"—core product patents expiring, generic drug entry, price pressure, and significant revenue gaps. To fill this gap, overseas giants must actively seek new pipeline assets to replenish their product lines.

Chinese innovative drugs are positioned right at this window. In recent years, a dense emergence of high-quality innovative drug projects in China has become increasingly convincing in terms of clinical data, target innovation, and commercialization potential. For multinational pharmaceutical companies, partnering with Chinese firms is not an "option" but a "necessity" to address the patent cliff. The continuous rise in BD transaction values proves this point—overseas buyers' willingness to vote with real money is, in itself, the most honest recognition of China's innovative drug R&D capabilities.

Regarding investment strategy, it may be time to shift from observation to buying on dips, focusing on key catalysts such as the readout of overseas clinical endpoints for core pipelines, the realization of milestone payments from overseas partnerships, and capital flow trends.

Final Thoughts: Policy Sets the Stage, Performance Takes the Lead

Returning to the initial question: How long can the rally last?

In the short term, the policy bottom is clear—the easing of centralized procurement pressure, the implementation of the commercial insurance directory, and significantly accelerated access have opened the first window for innovative drug valuation recovery. The dual support from the valuation and positioning bottoms means that even with short-term volatility, the sector's downside potential is relatively limited.

In the medium term, a fundamental inflection point is being confirmed. The surge in BD transaction values, the successive readouts of overseas clinical data, and the continuous receipt of partnership milestone payments are tangible performance drivers that will be the core force propelling the market from a "policy-driven rebound" to an "earnings-driven reversal." Sub-sectors like CXO and CRO have relatively strong mid-year earnings visibility, with demand from two major growth curves—peptide GLP-1 and ADC—continuing to drive growth. Leading domestic CDMO companies have provided guidance for a high compound annual growth rate of over 20% for the next 3-5 years.

For investors, after three long years of consolidation, the darkest period for the innovative drug sector is likely over. Regarding future strategy, it may be prudent to shift from observation to buying on dips, focusing on three key clues: data readouts from overseas clinical endpoints of core pipelines, the realization of milestone payments from overseas partnerships, and whether institutional capital gradually shifts from "underweight" to "replenishment."

The window for NRDL adjustments has just opened, and the narrative for innovative drugs is being rewritten. The three-year silence may have been the necessary preparation for this moment of resurgence.

Investors should be aware that funds and stocks mentioned carry inherent risks. Past performance is not indicative of future results. Investment decisions should be based on a thorough review of fund documents, including the fund prospectus and investment policy statement, and consideration of one's own risk tolerance. Sector-specific investments, such as in biotechnology or healthcare, can be volatile and are subject to regulatory, clinical trial, and market risks.