Zhongtai Securities: Strategically optimistic about the bulk drug sector

China Securities Research Report indicates a strategic positive outlook on the raw material drug sector: innovative drugs such as small nucleic acids, peptides, ADC toxins, and other hot tracks are continuously catalyzing the industry chain. Early clinical progress is promising (e.g., positive FIH data for ALK7 extrapancreatic fat reduction, Kanghong Pharmaceutical’s orderly advancement of the world’s first dual-toxin ADC clinical trial), and early market introduction is smooth (e.g., Ionis raising peak sales guidance due to better-than-expected sales), further strengthening the outlook. Key focus on companies with leading technology and capacity, and strong business certainty such as Lianhua Technology, Aoruit, Jiuzhou Pharmaceutical, Nuotai Biological, Tianyu Shares, Menovo, etc. Fundamental performance turning points. Most companies in the sector are currently at the bottom of existing business, with new business expected to gain momentum at the inflection point, capturing the rhythm of the turning point. Favorable prospects for Puluo Pharmaceutical, Staidly, Tonghe Pharmaceutical, Aoxiang Pharmaceutical, etc. Price improvement expectations. The raw material drug/intermediate industry has undergone 4-5 years of price declines and industry clearing; with rising prices of bulk commodities and upstream chemicals, a price recovery is expected. Most API products are at historical lows, with extremely limited profit margins, low downward probability, and a clear bottoming and stabilization trend.

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【Pharmaceuticals】Zhu Jiaqi: Strategic emphasis on the raw material drug sector, price recovery + new business growth; actively seize bottom opportunities in the pharmaceutical industry

January Market Recap: January started strong, with related thematic stocks performing well and industry rotation accelerating. The pharmaceutical and biological industry rose 3.1% in January, compared to 1.7% for the CSI 300, outperforming by about 1.49 percentage points, ranking 22nd among 31 sub-sectors. This month, medical services, medical devices, biopharmaceuticals, pharmaceutical commerce, traditional Chinese medicine, and chemical pharmaceuticals rose by 8.82%, 5.28%, 3.29%, 2.93%, 0.78%, and 0.14%, respectively. The sector experienced a rally followed by a correction, with the market at the start of the year showing spring-like momentum. The strong thematic performances included small nucleic acid industry chain, brain-computer interfaces, AI medical care, etc., with overall strong trends despite volatility: ①In innovative drugs, early January saw Arrowhead’s two lipid-reducing, muscle-preserving small nucleic acid pipelines release positive FIH data, reflecting strength in the small nucleic acid track; in January, two major BD deals were completed (Chongqing Biological’s $5.6 billion licensing of AbbVie’s VEGF bispecific RC148 for Greater China; CSPC’s $18.5 billion licensing of AstraZeneca’s sustained-release drug platform and peptide AI discovery platform for innovative long-acting peptides), coupled with expectations driven by JPM’s BD process, leading to some performance in related stocks. ②In devices, breakthroughs in brain-computer interfaces and AI medical industries led to strong performance of related A-share stocks, especially those with rapid commercialization or relevant concepts. ③Additionally, January’s annual report forecasts were gradually disclosed, with standout performance in the innovative drug supply chain, upstream life sciences, GLP-1 booming tracks, etc., offering good upside opportunities, such as BeiAoSiTu (expected 2025 net profit attributable to parent +384.26% to 443.88%), Chutian Technology (+151.92%-166.28%), WuXi AppTec (+102.65%), Baipu Saisite (+29.21%-53.43%), etc.

February Strategy: Currently, the pharmaceutical sector lacks a clear main investment line; the performance of innovative drugs is in a correction phase. We believe the sector’s opportunities will revolve around thematic opportunities, with brain-computer interfaces, AI medical care, small nucleic acids, etc., potentially repeating performance, awaiting further catalysts. Additionally, strategic emphasis should be placed on the raw material drug sector, which is at the bottom of the cycle. Driven by chemical price increases and the addition of new businesses such as small nucleic acids, peptides, ADCs, etc., a mid-term cyclical inflection point is expected to turn positive.

Strategic positive outlook on the raw material drug sector: Innovative drug tracks like small nucleic acids, peptides, ADC toxins, etc., continue to catalyze the industry chain. Early clinical progress is promising (e.g., positive FIH data for ALK7 extrapancreatic fat reduction, Kanghong’s orderly progress on the world’s first dual-toxin ADC), and early market entry is smooth (e.g., Ionis raising peak sales guidance due to better-than-expected sales), further reinforcing the outlook. Focus on companies with leading technology and capacity, and strong business certainty such as Lianhua Technology, Aoruit, Jiuzhou Pharmaceutical, Nuotai Biological, Tianyu Shares, Menovo, etc. Fundamental performance inflection points are approaching. Most companies are at the bottom of existing business, with new business expected to gain momentum at the inflection point, capturing the rhythm of the cycle. Favorable prospects for Puluo Pharmaceutical, Staidly, Tonghe Pharmaceutical, Aoxiang Pharmaceutical, etc. Price recovery expectations: The raw material drug/intermediate industry has undergone 4-5 years of price declines and industry clearing; with rising prices of bulk commodities and upstream chemicals, a price recovery is anticipated. Most API products are at historical lows, with limited profit margins, low downward risk, and a clear bottoming and stabilization trend.

Post-adjustment opportunities in innovative drugs: 1) Considering the capital capacity of large-cap stocks in rotation markets, focus on those with upward trending safety margins (good prospects in approved regions, steady MNC cooperation); 2) The “starry sea” of small nucleic acid technology is expected to be validated continuously with clinical data readouts. Given the extensive layout of leading companies across different disease areas, these drugs are likely to become indispensable modalities for MNCs in the future, with domestic companies’ static R&D progress and potential to surpass internationally in later stages; 3) Recently, core overseas markets have seen investments from domestic companies, benefiting from domestic engineering talent dividends, with potential rapid output of global BIC/FIC candidates: new toxins ADCs, bispecific ADCs, RDCs, TCEs, etc.

CRO/CDMO & upstream: January’s intensive performance forecasts are overall optimistic. Coupled with downstream innovative drug volume growth and approval expectations of major products, valuation is expected to continue rising.

AI+ in the pharmaceutical field: Policy support continues, industry is booming. In January, Neuralink announced latest progress; Shanghai officially issued the “Future Industry Cultivation Action Plan for Brain-Computer Interfaces (2025-2030),” which should be actively seized.

Logic of the raw material drug sector: Price bottom recovery expectations, contribution of new businesses to incremental profits → dual performance and valuation recovery, driving the sector’s bottoming momentum. 1) The probability of price warming further increases: chemical price increase expectations lead, with cost transmission and supply optimization resonating. Supply-side contraction sets the foundation for price hikes; global chemical industry expansion is nearing its end, with listed Chinese basic chemical companies showing significant declines in “construction in progress/fixed assets,” and new capacity greatly reduced. From Nov 1, 2025, to Jan 31, 2026, the domestic chemical index (CCPI) rose from 896 to 1123 points, a 25.3% increase, the largest quarterly rise since 2022. Among 100 core chemical products, 58 saw price increases, accounting for 58%; only 12 declined slightly (less than 8%), and 20 remained flat. Overall, “more rises than falls, general increase dominates,” with fine chemicals and basic raw materials leading, intermediates following. Cost pressures are expected to transmit through the industry chain to raw material drug companies. Integrated raw material drug leaders with intermediate supporting capacity have cost advantages, while small-capacity companies face forced reduction or exit due to cost pressures, further optimizing supply-demand structure. The chemical industry enters an upward cycle in 2026, providing strong support for raw material drug prices, especially bulk raw materials relying on basic chemicals, which have greater price elasticity. 2) The second growth curve is emerging, with incremental growth from small nucleic acids, GLP-1, ADCs, etc.: most companies have new products and CDMO businesses, and recent new therapies create industry chain opportunities. ①GLP-1: With multiple MNC blockbuster GLP-1 small molecules continuously launched, several new drugs are approaching commercialization, generating large global API and intermediate demand. ②Multiple slow disease small nucleic acid drugs: Leaders like Alnylam are entering harvest phases, with future high-end raw material demand expected to grow exponentially. Leading clients’ supply chain positioning becomes a core competitive advantage. ③ADC: ADC drugs consist of antibodies (large molecules), linkers, and toxins (payloads). Linkers and payloads are small molecules, highly compatible with intermediate and raw material technology reserves, representing the most direct entry path. As of June 2025, 19 ADC drugs have been approved globally, with hundreds more in preclinical/clinical development. ADC development requires integrated small and large molecule technologies, complex design, conjugation, evaluation, and processes, with high technical barriers. Most pharmaceutical companies cannot cover all links independently, with outsourcing rates exceeding 70%, much higher than the 30-40% for overall biologics. By 2030, the global ADC outsourcing market is expected to reach $11 billion. Through technological upgrades, platform development, and industry chain collaboration, the goal is to expand from raw material suppliers to ADC CDMO/CMO service providers.

Industry hotspots: (1) The 44th JPMorgan Healthcare Conference (JPM2026) as scheduled; (2) Neuralink announced latest progress; (3) Small nucleic acid data confirming fat reduction without weight loss again.

Market dynamics: In 2026, the pharmaceutical sector’s return is 3.14%, compared to 1.65% for the CSI 300, outperforming by about 1.49 percentage points. The industry rose 3.1% in January 2026, with the CSI 300 up 1.7%, outperforming by about 1.49 percentage points, ranking 22nd among 31 sub-sectors. Medical services, medical devices, biopharmaceuticals, pharmaceutical commerce, traditional Chinese medicine, and chemical pharmaceuticals rose by 8.82%, 5.28%, 3.29%, 2.93%, 0.78%, and 0.14%, respectively. Recently, thematic stocks related to the sector performed well, including small nucleic acid industry chain and brain-computer interfaces, with overall strong trends despite volatility. Based on 2026 earnings forecasts, the sector’s valuation is approximately 22.6x PE; the entire A-share market (excluding financials) has a PE of about 20.7x, with a premium of 9.1%. Using TTM valuation, the sector’s PE is 29.4x, below the historical average of 34.9x, with a premium of 9.6% over the entire A-share market (excluding financials).

Risk warnings: Policy disturbances, drug quality issues, and potential delays or outdated information in public data used in research reports.

(Source: People’s Financial News)