Sinolink: The "valuation expansion elasticity and space" of Hong Kong-listed innovative pharmaceuticals may be stronger than that of A-shares.

Sinolink released a research report stating that the "valuation expansion elasticity and space" of Hong Kong-listed innovative drugs may be stronger than that of A-share stocks. 1) A higher "research and development expense ratio" and "proportion of overseas income" indicate that the "innovation content" of the Hong Kong innovative drug industry is higher. At the same time, the overall net profit growth of the sector has been leading A-shares since 2023H1, and based on profit outlook forecasts, this comparative advantage is expected to continue. 2) The Hong Kong innovative drug industry is more sensitive to US bond interest rates and benefits more from the boost in valuation levels after overseas liquidity loosening. 3) The Hong Kong innovative drug industry also has a more cost-effective advantage in terms of valuation, combined with a better relative fundamental advantage, which also implies greater potential valuation elasticity. The main points are as follows: Q: What is the driving logic of innovative drugs from a strategic perspective? A: Short-term focus on gross margin recovery, long-term focus on revenue improvement, with three driving logics: 1) Under AI empowerment, shortened research and development cycles, cost reduction, efficiency improvement, etc., will boost the IRR level of innovative drug enterprises from the medium-term perspective, and the sector may usher in new growth logic; 2) Global pharmaceutical industry investment and financing activities are picking up, benefiting the financing cash flow improvement of innovative drug enterprises, during the significant upward phase of the industry investment and financing cycle, the performance of the innovative drug sector in the capital market is often outstanding; 3) Waiting for fiscal efforts, there is room for gross margin recovery for innovative drug enterprises. On the one hand, the release of industry policies represented by the "Category B Catalogue" is approaching, which may act as an important catalyst for the recovery of valuation and sentiment in the sector. On the other hand, "Social Security Investment" is one of the options for fiscal efforts, which can help alleviate medical insurance payment pressure, drive the continuous recovery of basic medical insurance expenditure growth rate, and the revenue growth rate of the innovative drug sector is expected to reach an inflection point, and gross margin is also expected to recover. Q: How do you view the valuation expansion elasticity and space of innovative drugs? A: The "valuation expansion elasticity and space" of Hong Kong-listed innovative drugs may be stronger than that of A-shares. 1) A higher "research and developme...tical Group, INNOCARE, Haichuang Pharmaceutical, Kaituo Pharmaceutical, Jingtai Technology.Q: What are the characteristics of the nuclear medicine track? From which perspectives should relevant targets be selected? A: The nuclear medicine industry chain has high barriers to entry and is still in its early stages. On one hand, due to factors such as radiological risks, nuclear medicines (radiopharmaceutical drugs) have been developing for a century without much excitement. Novartis' prostate cancer nuclear medicine Pluvicto has accelerated the development of these new molecules, leading to multinational pharmaceutical companies (MNCs) entering the nuclear medicine field. On the other hand, nuclear medicine is a high barrier blue ocean track with good competitive landscape. With the development of global alpha nuclide therapy drugs, the exploration of new targets like FAP, and the differentiation of therapeutic effects of nuclear medicine in new indications, there will be vast opportunities for therapeutic nuclear medicines. 1) From the perspective of the scarcity of upstream isotopes, the differentiation of nuclear medicine development in the midstream, the importance of nuclear medicine pharmacies highlighted by transportation restrictions in the downstream, and the positioning characteristics, domestic scarce targets with integrated advantages in the nuclear medicine industry chain include: Yantai Dongcheng Biochemicals, CIRC, GRAND PHARMA; 2) From the perspective of RDC opening up XDC (multiple conjugated drugs) with its excellent efficacy and the advantages of integrated treatment and diagnosis, potential scarce targets with a heavy RDC pipeline include: Jiangsu Hengrui Pharmaceuticals, BeiGene, etc. Q: Overseas ADC (antibody-drug conjugate) leader Daiichi Sankyo has achieved commercial success, what are the investment opportunities in China? A: Daiichi Sankyo's HER2 ADC drug trastuzumab deruxtecan (ENHERTU) has been approved for the treatment of breast cancer, gastric cancer, non-small cell lung cancer, and other indications in more than 60 countries worldwide. As of early 2025, it has been recommended in 19 NCCN guidelines. Commercially, since its first approval in 2019, trastuzumab deruxtecan has accumulated global sales of 1.1066 trillion yen (approximately 7.37 billion US dollars), with global sales expected to reach approximately 3.8 billion US dollars in 2024 (+50%), making it the best-selling ADC drug globally. In terms of investment opportunities in China, in recent years, Chinese ADC technology has caught up, and domestic ADC pharmaceutical companies have made breakthrough progress in drug development and external authorization. It is recommended to 1) focus on core targets and indications suitable for ADC drugs; 2) focus on leading companies in target development; 3) actively seize opportunities brought by clinical data readouts and external authorizations; 4) seize opportunities in the upstream of the industry chain in the outbreak of XDC innovation exploration and strong growth of CDRMO companies. Relevant targets: Jiangsu Hengrui Pharmaceuticals (600276.SH), BeiGene (06990), WUXI XDC (02268), HANSOH PHARMA (03692), INNOVENT BIO (01801), etc.