A-share markets closed broadly higher today, with the Shanghai Composite Index up 1.02%, the Shenzhen Component Index gaining 1.42%, the ChiNext Index rising 1.35%, and the STAR 50 Index surging 3.35%. Total trading volume reached 2.66 trillion yuan, an increase of 135.6 billion yuan from yesterday, with over 2,800 stocks advancing. The innovative drug sector rallied 5%, while the CRO concept saw a wave of limit-up stocks. Baihua Pharmaceutical (V) hit its fourth consecutive daily limit-up, Asymchem achieved its second limit-up in four days, and Joinn Laboratories, Harbin Pharmaceutical, Hisun Pharmaceutical, and GemPharmatech all saw collective limit-up moves. This is not a case of just a few stocks rising; the entire sector is erupting.

Earlier, during the prolonged decline of innovative drug stocks, the idea was shared that the sector would eventually take off. However, today's gains exceeded expectations. Previous rallies were tentative, lasting one or two days with modest gains, only to pull back, as if testing market reactions. Today is different—it is a comprehensive, volume-driven, and theme-based breakout.

Today's rise differs from previous ones in three key ways. First, earlier rallies were driven by policy news, whereas this rally is powered by both earnings and capital inflows. The CRO concept was the most explosive direction today, with companies like Asymchem, Joinn Laboratories, and WuXi AppTec—all engaged in pharmaceutical R&D outsourcing—seeing their performance directly reflect the vibrancy of global innovative drug R&D. The wave of limit-up stocks in the CRO sector indicates that global orders for innovative drug R&D are accelerating into China, a solid earnings logic, not mere concept speculation. Second, previous rallies were led by a few individual stocks, but today the entire sector is moving in coordination. Baihua Pharmaceutical's four consecutive limit-ups make it a leader, but the supporting cast is strong, from innovative drugs to CROs to medical devices, with the entire healthcare sector in motion. Sector-wide coordination suggests that capital is not betting on a single stock but is positioning across the entire industry. Third, earlier gains occurred on shrinking volume, while today's rise is on expanding volume. The 2.66 trillion yuan in turnover, exceeding yesterday by 135.6 billion yuan, indicates that funds are actively entering, not just engaging in existing stock speculation, but bringing in incremental capital.

These three changes together suggest that the rally in the innovative drug sector has shifted from tentative to confirmed, and it is highly likely that a real breakout is underway. However, short-term movements are impossible to predict precisely. As a value investor, the approach is to persistently allocate to promising sectors when they are undervalued.

The underlying logic of the innovative drug sector has been discussed many times before. Over the past four to five years, it has declined thoroughly, with all negative factors priced in and valuations hitting rock bottom. Today, let's examine from another angle why the rise in innovative drug stocks is not a rebound but a reversal. Many think a 5% gain in innovative drugs is just a technical bounce, similar to the tech stock rebound earlier, which will fall back after rising. I believe these are entirely different. The tech stock rebound was capital-driven; when tech stocks rose, there was no improvement in fundamentals, only emotional release. After the surge, profit-taking emerged, and they fell back. On July 31, the tech sector violently rebounded, only to decline on August 1, 2, and 3—a classic rebound. In contrast, the rise in innovative drugs is fundamental-driven. Policy has shifted from cost control to encouraging innovation, a strategic-level change. The essential drug list has, for the first time, included innovative drugs, overseas licensing has grown rapidly, with first-quarter domestic innovative drug overseas licensing totals exceeding $60 billion, and CRO orders are accelerating into China. These are not short-term news stimuli but a fundamental improvement in industry fundamentals.

More critically, the valuation of the innovative drug sector remains at historical lows. After declining so much over the past four to five years, the CSI Innovative Drug Industry Index saw a maximum drawdown of 58%, and the Hang Seng Innovative Drug Index experienced a maximum drawdown of over 70%. Although today's 5% gain sounds significant, in the context of historical ranges, it only moves from extremely undervalued to undervalued, still far from fair valuation, with ample room for growth.

Allocation began three years ago when the healthcare sector was most out of favor, and this reversal is a natural outcome. For those who have not yet positioned, two suggestions are offered. First, if you are unsure about individual stocks, use index funds to diversify risk. The individual stock risk in the innovative drug sector is very high; a single clinical trial failure can halve a stock's price. Baihua Pharmaceutical's four consecutive limit-ups look strong, but if you chased the purchase on the third limit-up day and it failed to close at the limit, falling back at the end, and then opened lower or declined on the fourth day, you could lose over ten percentage points in one day. Individual stocks in the innovative drug sector are suitable for professional investors to study, not for retail investors to gamble on. Using innovative drug index funds to diversify stock risk and capture the industry's average return is the most prudent approach. Second, do not chase rallies; allocate during pullbacks. Do not rush to chase when you see a rise. Even if it is a reversal, it will not happen overnight; there will be pullbacks. The strategy has always been to gradually allocate in undervalued areas, without chasing rallies or being impatient. Although the innovative drug sector has risen 5%, valuations are still low, and pullbacks present allocation opportunities.

One more reminder: the rise in the innovative drug sector will not be smooth sailing. Unlike the violent fluctuations of tech stocks, innovative drugs are more like a slow bull market—rising for two days, pulling back for one, advancing three steps and retreating one, but the direction is upward. This trend most tests patience. When it rises, you feel you didn't buy enough; when it pulls back, you wonder if you should sell. The advice is not to be disturbed by short-term fluctuations; see the big picture. If the direction is correct, the intermediate twists and turns are just noise. For those already holding innovative drug positions, simply hold steady. After persisting at the bottom for several years, it is time for the harvest season. Today's rise is just the beginning, not the end. The catalysts for the innovative drug sector are still accumulating—policy is intensifying, earnings are improving, overseas licensing is accelerating—these positives will not be fully digested by one day's gain.

There is a story of a Ming dynasty doctor named Li Shizhen. He discovered that the medical books of his time were full of errors, with many medicinal herbs' records contradicting each other, and some even mistaking poisons for cures. He decided to revise a pharmacopoeia, clarifying all herbs' properties, effects, origins, and uses. This decision took him 27 years to complete. For 27 years, he traveled across the country, collecting herbs and personally testing them. To verify efficacy, he repeatedly risked poisoning himself, nearly dying several times. He suffered three major illnesses, coughed up blood, and his family urged him to give up, but he refused. Others thought he was mad—a fine imperial physician, instead of enjoying official duties, went into deep mountains to taste hundreds of herbs. Peers mocked him, saying old books were sufficient and why bother. Some even said he was wasting his life, writing one book for 27 years when he could have treated more patients to earn money. For 27 years, alone, he traveled thousands of miles, tasted hundreds of herbs and thousands of prescriptions, recorded 1,892 medicinal herbs, and wrote 11,096 prescriptions, eventually completing the "Compendium of Materia Medica." This book was later translated into dozens of languages, influencing global medical development for four centuries. Darwin called it "the ancient Chinese encyclopedia," and British biologist Joseph Needham said it was "one of China's greatest contributions to world science." Twenty-seven years—neither too long nor too short. But in those 27 years, Li Shizhen did not waste a single day. Every herb collection, every test, every record was an accumulation. He was not waiting; he was preparing. When the accumulation reached a critical point, results naturally emerged.

The innovative drug sector is similar. Over the past four to five years, the entire sector has dropped 58% or even 70%. Many thought innovative drugs were hopeless, and that those who dollar-cost averaged at the bottom were wasting time and money. But the view is that every decline, every addition, every persistence over the past few years was not wasted but accumulated. Just as Li Shizhen's 27 years of accumulation eventually yielded the "Compendium of Materia Medica," the four to five years of accumulation in the innovative drug sector have finally yielded today's explosion. It is not that things suddenly improved; it is that good things were buried for too long and have finally been discovered. Many only saw the moment Li Shizhen wrote the "Compendium," not his 27 years of accumulation. Many only saw innovative drugs rise 5% today, not the years of silent positioning at the bottom. Li Shizhen's 27 years were not idle waiting; every step moved toward the goal. The years at the bottom for the innovative drug sector were not idle either; every decline accumulated the power for a rebound. The biggest profits in investing often come from persisting when others see no hope. Li Shizhen persisted for 27 years; we have waited three to four years. The time differs, but the principle is the same.

This article only conveys concepts and investment logic and does not constitute any investment advice. If the content involves individual stocks, it is by no means a recommendation. The stock market carries risks, and investment requires caution; please make independent judgments.