CITIC Securities Healthcare 2025 Annual Report and Q1 2026 Summary: Innovation Sector Performance Concentrated in Realization, Internal and External Resonance Driving Industry Transformation Begins

CNBC Finance APP has learned that CITIC Securities issued a research report stating: "In the first year of the ‘14th Five-Year Plan’ start, the pharmaceutical industry was listed for the first time as a new emerging pillar industry at the national level. Following this, industry incremental reform policies such as price mechanism optimization reforms (centralized procurement optimization), support for high pricing of innovative drugs and devices, and promotion of commercial medical insurance development, combined with internal and external catalytic factors such as the domestic pharmaceutical industry’s concentrated realization in innovation, have driven the industry to see performance recovery and reversal starting in Q1 2026, especially in emerging sectors like innovative drugs and innovative devices. From a macro perspective, the operation of medical insurance funds and the pharmaceutical industry remains steady, with healthcare reform entering a period of intensive implementation. Domestic pharmaceutical policies are gradually tilting toward supporting innovation, while commercial insurance and long-term care insurance are beginning to be implemented this year, bringing high certainty to industry payment increments.

From market and valuation perspectives, since 2025, the pharmaceutical sector has begun to bottom out and rebound, but the heavy holdings of pharmaceutical funds remain at historically low levels.

Catalytic internal and external factors in the healthcare industry are expected to trigger a new wave after Q1, with the most prominent innovation continuing to exceed expectations. Starting from May, with the release of major product data at international medical conferences such as ASCO and ESMO, China’s pharmaceutical innovation products’ international competitiveness will further manifest. Meanwhile, major policy reforms are gradually returning to a clinical value and demand-oriented market pricing system, bringing a stable and sustained environment for the domestic pharmaceutical market and a long-term growth trend, providing high certainty for industry alpha and beta.

It is recommended to focus on investment opportunities in the healthcare industry after the first quarter report, and increase layout in leading innovative pharmaceuticals and medical devices.

LLY -2.72% 1177 -0.55% 600276 -1.64% 600436 -0.01% 1801 -1.21% 3692 -3.82% 20960.00%

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LLY -2.72% 1177 -0.55% 600276 -1.64% 600436 -0.01% 1801 -1.21% 3692 -3.82% 20960.00%

Analysis of LLY

CITIC Securities’ main viewpoints are as follows:

Pharma: Innovation transformation becomes the core driver of revenue and profitability improvement.

In 2025, the sector’s revenue and net profit growth rates (excluding non-recurring items) are +2.77% and +5.76%; in Q1 2026, revenue and net profit growth rates are +4.74% and +5.10%. Leading pharma businesses are rapidly shifting from traditional pharmaceuticals to innovative drugs, with volume increases of innovative drugs gradually becoming the core growth driver. Companies with a high proportion of innovative drugs show positive growth trends, while traditional businesses like generics with high proportions face pressure on revenue and profits:

• Hengrui Medicine’s 2025 revenue and net profit growth are 13.0% and 21.7%, with innovative drug revenue accounting for 51.7%;
• Hansoh Pharma’s 2025 revenue growth is 22.6%, net profit growth 27.1%, with innovative drugs making up 82.2%;
• Chia Tai-Tianqing’s 2025 revenue growth is 16.5%, net profit growth 86.2%;
• China Biological Pharmaceutical’s 2025 revenue growth is 10.3%, with the proportion of innovative drugs rising to 47.8%.

R&D investment continues to increase, supporting accelerated innovation transformation. In 2025, the pharma sector’s R&D expense ratio is 13.47%, up 4.55 percentage points from 2024; in Q1 2026, it is 13.03%, up 4.11 percentage points from Q1 2025. The high growth in R&D expenses under a high revenue base reflects an ongoing acceleration of the sector’s overall innovation trend. As leading pharma pipelines, which are transforming rapidly, approach harvest periods, it is expected that by 2026, multiple blockbuster pipeline drugs will report Phase III data and receive indications approvals, further increasing the proportion of innovative business in the sector. Risks from generic drug centralized procurement price reductions are gradually being absorbed, and BD out-licensing and royalty income are expected to enter a stable income phase starting this year, further boosting the performance of top pharma companies.

Biotech/Biopharma: Many companies are reaching profitability inflection points, domestic commercialization and globalization are core growth drivers.

In 2025, the sector’s revenue growth is approximately 27.8%, maintaining rapid growth. The rapid increase in revenue is driven by new drug launches, indication expansions, and BD licensing. Many biotech/biopharma companies are reaching profitability:

• BeiGene achieved GAAP profit in 2025, with net profit of 2.02B yuan;
• Innovent, Rongchang, and Junshi have successfully turned profitable, with several unprofitable innovative drug companies narrowing losses.

Fast volume growth of innovative products, with BIC/FIC value, underpinned by domestic insurance coverage and global commercialization, is the core growth driver: key blockbuster products and new indications are included in insurance to boost volume, global commercialization capabilities are continuously strengthening, and FIC/BIC products are validating market demand and value. Operational improvements are optimizing cost structures, and increased cash reserves support ongoing R&D investment. By the end of 2025, the biotech sector’s average cash reserves increased by 54.74% YoY, R&D expenses grew 22.50% YoY, and with rapid revenue growth, R&D expense ratio decreased from 47.34% in 2024 to 32.45%, reflecting the sustained improvement in the cash-generating ability of domestic biotech firms. The milestone revenues from product commercialization and BD licensing are rapidly improving cash flow, further supporting R&D. More biotech companies are expected to achieve positive R&D-to-commercialization/profit cycles, with many innovative drug companies likely to reach profitability in 2026.

Going global with innovative drugs: China’s innovative drugs’ global value continues to be validated, expected to enter a data-intensive catalysis period in 2026.

Since 2026, China’s innovative drug licensing-out transaction amounts have exceeded expectations, confirming the rising value of Chinese pipelines:

• In Q1 2026, license-out upfront payments reached $3.85 billion (up 1066.7% from Q1 2024, up 229.1% from Q1 2025), with total transaction value reaching $52.53 billion (up 449.1% from Q1 2024, up 43.8% from Q1 2025);
• Based on full-year 2025 data, in Q1 2026, transaction volume, upfront payments, and total value accounted for 26.7%, 49.7%, and 37.9% of 2025 totals, respectively.

Looking ahead to 2026, with major international conferences approaching—such as ASCO, WCLC, ESMO in oncology, and ADA, ENDO, ACR, ASH in metabolism, autoimmunity, etc.—the quantity and quality of Chinese innovative drug reports at these events are expected to reach new highs:

• 94 original research presentations at ASCO, WCLC, ESMO, a 29% increase from 73 in 2025 and 68% from 56 in 2024;
• For the first time, Chinese research entered the Plenary Session (Kangfang Biotech’s Evorzi monoclonal antibody HARMONi-6 trial).

These key data release points at international academic conferences are catalysts for pipeline validation and value enhancement. In summary, the global value of China’s innovative drug industry is increasingly prominent, entering a data-intensive catalysis phase. Recommendations:

1. Leading innovative drug companies are likely to see performance releases;
2. Major pipeline data are about to be announced, providing strong catalysts;
3. Pipelines with global potential are expected to accelerate internationalization and realization.

Medical Devices: Innovation and globalization are the two main themes; focus on high consumption and equipment.

In 2025, the medical device sector’s revenue and net profit growth rates were -0.51% and -17.29%, respectively, affected by industry anti-corruption, centralized procurement, and delayed medical procurement funds, with overall growth below the national economic average. Looking ahead, innovation and overseas expansion are expected to remain the two main development themes:

• IVD & ICL: Centralized procurement effects are emerging, with performance likely bottoming out in 2026; leading companies will continue to increase market share post-procurement.
• High-value consumables: steady revenue growth, overseas volume expansion, and gradually improving profitability.
• Low-value consumables: post-pandemic inventory reduction is good, with a gradual upward cycle; stable performance but high overseas sales ratio, watch for FX gains/losses.
• Medical equipment & upstream: equipment upgrade policies support steady industry development, but high inventory levels require time to digest, and net profit margins are affected by centralized procurement.

Essential generic drugs/in-hospital preparations: performance is rapidly recovering.

In 2025, driven by normalized anti-corruption measures and the essential nature of medication, the sector’s revenue and profit grew rapidly:

• Revenue and net profit YoY growth: 10.32% and 37.69%;
• R&D expense ratio remains high, supporting valuation uplift under innovation transformation. In 2025, infusion demand declined slightly; the large infusion sector’s revenue growth was 1.20%, with net profit and non-recurring net profit declines of -17.79% and -19.90%, mainly due to market demand slowdown in H2, high base effects, price reductions from volume-based procurement, and market competition changes. In 2026, with the implementation of the strictest anti-corruption policies, leading companies are expected to gain more market share through early marketing compliance reforms.

CRO: Innovation BD drives financing revival, domestic CRO industry is poised for a golden decade.

In 2025, CRO revenue growth was 13.00%, with net profit and non-recurring net profit growth of 87.50% and 30.15%. As global biopharma financing recovers, R&D demand worldwide is gradually rebounding. Coupled with China’s efficient CRO services, overall performance is expected to accelerate from Q1 2026:

• In 2025, driven by domestic innovation BD, the proportion of upfront payments in funding sources for Chinese innovative pharma companies increased, while equity financing decreased, indicating structural improvement.
• Looking ahead to 2026, domestic financing is expected to further recover, and the high early R&D demand from 2025 will gradually translate into clinical-stage CRO volume and stable recovery of clinical CROs.

CDMO: New molecular forms generate strong demand, orders and performance grow rapidly.

In 2025, CDMO revenue increased 9.35% YoY; net profit and non-recurring net profit increased 34.26% and 15.47%, respectively.

• Over recent years, geopolitical disruptions have not hindered the increasing market share of Chinese small-molecule CDMOs, with comparative advantages becoming more evident (Lilly announced plans to invest $3 billion over 10 years in China to expand capacity). Leading companies’ orders remain steady.
• Meanwhile, with rapid growth in downstream drug R&D and commercialization, performance of peptide and ADC-related CDMO businesses is outstanding. Long-term, new blockbuster drugs, molecules, and technologies will demand higher process development and testing capabilities, likely increasing outsourcing rates and demand.

Raw materials and intermediates: supply-demand still needs improvement; Middle East conflicts may push prices higher.

Affected by downstream centralized procurement price cuts, industry competition, and FX effects, raw material and intermediate sector revenue and net profit growth in 2025 and Q1 2026 are negative:

• Revenue growth: -1.27% and -0.19%;
• Net profit growth: -23.63% and -4.75%;
• Non-recurring net profit: -42.50% and -44.68%. Additionally, ongoing Middle East conflicts impact commodity prices; cost-driven raw material prices may rise. In the medium term, China’s energy supply remains relatively stable, and if conflicts persist or escalate, some orders may return to China, similar to pandemic-driven reshoring.

Life sciences upstream supply chain: gradual recovery, demand shifting from partial to comprehensive revival.

With the revival of biotech investment and financing, and some price competition easing, the sector is gradually warming. Looking to 2026:

• Domestic innovation drug BD (Business Development) boom is expected to further improve the investment environment;
• The continued recovery of the Hong Kong stock market and the restart of the new listing standards on the STAR Market support a shift from partial to full recovery of early R&D demand;
• Domestic companies accelerating overseas expansion are expected to continue capturing international market share;
• Long-term, government policies encouraging innovation and emphasizing supply chain independence support domestic firms’ growth opportunities.
• Many small-cap companies in sub-sectors exhibit strong beta attributes.

Blood products: performance under multiple factors pressure, supply-demand expected to balance later.

Impacted by medical insurance cost control, DRG/DIP payment reforms, expanded centralized procurement, and drug monitoring, short-term demand is under pressure; supply-side, according to company announcements, China’s plasma collection in 2025 grew 5.6%. As plasma collection growth slows and imported products’ approvals decrease YoY, industry supply-demand is expected to balance. Long-term, plasma is a scarce resource; China’s per capita usage of blood products remains low. With increasing indications for immunoglobulin and other plasma products, ongoing evidence-based medicine, clinical adoption, and aging population, the blood product market is expected to grow steadily.

Medical services: revenue and profits improve in tandem, bottoming out, with a recovery expected for the full year.

In Q1 2026, the overall medical services sector shows a mild recovery, with revenue, net profit, and non-recurring net profit growth of 5%, 11%, and 10%, respectively. The main reasons include:

• Continued implementation of consumption promotion policies boosting residents’ overall consumption sentiment;
• The resilience of medical operations becoming evident, with demand for diagnosis and treatment rising and supply structure optimizing, supporting sector recovery. Specifically, iterative upgrades in refractive surgery drive higher per-visit revenue; ophthalmology services outperformed expectations in Q1 2026, with revenue and net profit growth of +6.4% and +15.5%. The sector is expected to maintain rapid growth throughout the year, leading the consumer medical services segment.

Home-use devices: domestic channel adjustments continue, overseas markets expand rapidly.

In Q1 2026, revenue, net profit, and non-recurring net profit growth for home-use devices are +4%, -12%, and +7%, respectively, with relatively stable performance. As leading companies continue to integrate offline teams and diversify channels, the sector is expected to sustain recovery. Major listed companies are strategically expanding overseas markets; as overseas operations mature, financial indicators are expected to stabilize, with significant growth potential and profitability. Additionally, with the rollout of long-term care insurance in the second half, a new trillion-scale medical insurance payment increment may lead to a valuation re-rating of related sub-sectors.

Medical aesthetics: sector faces temporary pressure, full-year recovery expected.

Due to macroeconomic consumption weakness, the sector’s Q1 2026 revenue and net profit growth are -4.1% and -26.2%. As policies promoting consumption continue, residents’ overall sentiment is expected to improve, and the sector may recover in 2026, with faster growth resuming as macro consumption recovers.

Pharmaceutical retail: revenue under pressure, profit improvement, industry reversal underway.

In 2025, revenue, net profit, and non-recurring net profit growth are 1.72%, 27.91%, and 18.39%. In Q1 2026, growth rates are -0.14%, 8.76%, and 10.00%. Revenue faces pressure mainly due to stricter regulations, intensified competition, slower store openings, and increased closures since 2025; from Q2 2026, with normalized regulation and leading companies resuming expansion, performance is expected to improve quarter by quarter.

Internet healthcare: benefiting from multiple favorable factors, entering a harvest period.

In 2025, internet healthcare revenue grew 18.59%, with an accelerating trend in H2 2025, driven by in-hospital innovative drug demand spilling over to outpatient markets and online channels becoming key for new drug launches; benefiting from scale effects, gross margin reached 22.91% (+1.82 ppts YoY), sales expense ratio 7.39% (-0.28 ppts), admin expense ratio 3.01% (-1.83 ppts), net profit margin 5.32% (+2.35 ppts), with YoY growth in net profit and non-recurring net profit of 108.88% and 102.28%. As scale effects, AI applications, and commercial insurance develop synergistically, internet healthcare’s advantages in traffic and payment are increasingly prominent, with strong bargaining power.

AI healthcare: commercialization capability improves, accelerating reconstruction of a trillion-yuan medical market.

In 2025, AI healthcare revenue grew 27.66%, benefiting from industry development, with sustained high-speed growth; net profit growth was -61.88%, with significant narrowing of losses, driven by rising revenue and relatively rigid costs, leading to profit margin recovery. As commercialization capabilities improve, future revenue and profits are expected to maintain good growth. AI healthcare will accelerate the reconstruction of a trillion-yuan medical market, with 2026 likely to be a year of more certain commercialization. As more AI healthcare companies enter product realization and listing phases, overall funding stability will further strengthen, providing higher industry growth beta.

Traditional Chinese medicine health industry: non-state-owned enterprises’ profitability significantly improves, looking forward to the ‘14th Five-Year Plan’ grand chapter.

State-owned Chinese medicine companies face profit pressure; in 2025 and Q1 2026, revenue growth is -1.02% and 0.03%, net profit growth -2.46% and -11.25%. Non-state-owned Chinese medicine companies’ revenue growth is -9.91% and 1.10%, net profit growth 4.29% and 7.68%, with significant gross margin improvements and profitability enhancement.

Chinese medicine consumer products: sector faces temporary pressure, turning point expected.

Affected by macro consumption and terminal price controls on Pi Xiu Huang, the sector’s 2025 revenue, net profit, and non-recurring net profit growth are -6.08%, -16.84%, and -21.44%; in Q1 2026, these are -6.25%, -17.25%, and -17.84%. The end of Pi Xiu Huang’s inventory and price controls, along with the opening of Huanglong进口, are expected to improve gross margins and drive sector revenue and profit growth.

Biological vaccines: sector restructuring, optimistic for a turnaround.

In 2025 and Q1 2026, vaccine sector revenue declined 47.39% and 1.15%, with net profit declining 578.77% and narrowing losses. The overall decline is mainly due to decreased birth rates, inventory reduction of key products, and intensified competition among traditional vaccines. Focus on volume growth of key products and vaccine exports.

Risk factors:

Risks include intensified geopolitical tensions; macroeconomic recovery below expectations; excessive price reductions and procurement intensity in volume-based procurement; decline in biotech financing enthusiasm; higher-than-expected price cuts and procurement progress for high-value consumables; clinical R&D failures for innovative drugs; policy risks in healthcare services and insurance; medical accidents; industry policy changes below expectations; slower AI healthcare development; underperformance of commercial insurance policies and products; increased industry competition, among others.