Since the technology sector cooled off in July, the innovative drug industry chain has taken the lead in market performance. The sector has risen considerably, with leading player Wuxi AppTec reaching a historic high. Related ETFs have also recently exhibited a smooth upward trend.

In the short term, innovative drugs are at a relatively high level, making chasing the rally unwise. Over the long term, the fundamental logic behind innovative drugs merits discussion. After all, we hold a portion of pharmaceutical stocks ourselves, and a rise in innovative drugs can also boost the entire pharmaceutical sector.

Why are many people now bullish on innovative drugs? Because the underlying logic is quite solid. The pharmaceutical industry has a concept called the "Double Ten Rule." A new drug typically costs over $1 billion and takes more than 10 years to go from initial R&D to final market launch. Even with significant investment and time, the probability of successful launch is less than 10%, with nearly 90% of projects failing during clinical trials.

This is akin to drilling for water—you might dig ten wells, nine of which are dry, but if just one hits water, it can cover all previous costs. It is precisely because of these high barriers, long cycles, and high failure rates that the moat of innovative drugs is so deep. No matter how advanced your technology or how much money you have, you cannot compress a 10-year clinical trial into two years. Time is something money cannot buy.

Moreover, regulatory and ethical approval for non-human primate experiments in Europe and the US is extremely stringent, forcing many projects to relocate to other countries, such as India. This is why India excels in generics. In contrast, China's approval process for related experiments is relatively smoother, prioritizing human welfare over animal testing.

More importantly, China has seen explosive growth in pharmaceutical talent. Every year, tens of thousands of overseas pharmaceutical researchers return to China, and domestic graduates in medical-related fields exceed 800,000, continuously injecting fresh talent into the industry. Talent is no longer the biggest shortcoming in the innovative drug sector.

Add to this the cost advantage. Data shows that R&D expenses in China at both preclinical and clinical stages are only 30% to 60% of those in developed countries. CRO companies typically quote prices 30% to 50% lower than their international counterparts, so the same budget allows for more experiments and projects domestically. Spending less while accomplishing more, without compromising speed—this is our competitive edge.

Currently, nearly all innovative drug companies are expanding overseas. The centralized procurement policy has driven domestic drug prices very low, which is a fact. Public hospitals dominate sales channels, making it genuinely difficult for pharmaceutical companies to earn substantial profits domestically. What is the solution? Go global.

In the first half of 2026, out-licensing transactions of Chinese innovative drugs surpassed $110 billion, securing eight of the top 10 global deals. This figure is roughly double the full-year total for 2024 and close to 73% of the full-year total for 2025. In the first quarter alone, total transaction value exceeded $60 billion, nearly half of the 2025 annual figure. Some institutions predict that China's total innovative drug BD transaction value in 2026 could exceed $150 billion.

Previously, it was "we buy others' drugs"; now it is "others buy our drugs." This shift has not been achieved through slogans but through concrete clinical data and commercialization capabilities. The industry is moving from "selling stories" to a new phase where pricing is based on real data.

Finally, the demand for medicine is perpetual. People can forgo new smartphones or buy fewer clothes, but they still need medication when sick. This demand will never disappear. As long as people fall ill, the pharmaceutical track will thrive, regardless of economic conditions or bull/bear markets.

Thus, we can see the innovative drug market growing year by year. In 2024, China's innovative drug market size reached 1.13 trillion yuan, growing to approximately 1.22 trillion yuan in 2025, and it is expected to exceed 1.3 trillion yuan in 2026. Domestic innovative drugs approved after 2015 recorded a market size of 40.8 billion yuan in 2025, a year-on-year increase of 29%.

Of course, innovative drugs face pressures as well. Centralized procurement is indeed driving down prices, limiting domestic profit margins. Although policy has clarified the principle of "innovation is exempt from centralized procurement, and centralized procurement excludes innovation," market concerns about the policy persist. Additionally, the valuation of innovative drugs is highly volatile and susceptible to market sentiment.

But these are short-term pressures, not problems with the long-term logic. In summary: the moat of innovative drugs lies in time—a 10-year R&D cycle, $1 billion investment, and a success rate below 10%. These are things money cannot buy. Domestically, we have advantages in the R&D environment, explosive talent growth, and significant cost efficiency.

The path of going global is widening, with domestic companies increasingly capturing overseas markets. And the fundamental demand for medicines will always exist. The pharmaceutical industry does not lack stories; it lacks patience. Unlike technology, which can hype five years of expectations in one year, its logic is slow, heavy, and requires time to materialize.

But precisely because it is slow, it is hard to disrupt. Because it is heavy, it is hard to replace. In the short term, there may be fluctuations. In the long term, the fundamental logic of this direction remains unchanged.

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