BOCOM INTL: The pharmaceutical industry continues to show a stable and positive trend, with a preference for stock selection returning to fundamentals.

BOCOM INTL released a research report stating that the pharmaceutical industry is expected to undergo a key turning point in 2025. In 2026, the bank believes that the sector will continue on a stable and positive trend, but the core factors influencing market performance (policy, fundamentals, overseas investment and financing environment, capital flow, etc.) may show differentiation. Looking ahead at sector performance and stock selection logic, the bank predicts that in 2026: 1) the sector itself is undervalued and catalysts are expected to continue to drive the uptrend, while the realization of value in innovative research and development is expected to further push the overall valuation higher; 2) after certain sub-sectors/stocks lead the way, subsequent stock selection may return to fundamentals and valuation, focusing on stocks that have differences in fundamental expectations and are currently undervalued. Key points from BOCOM INTL are as follows: Innovative drugs/prescription drugs: Short-term focus on overseas transactions and performance, innovation iteration drives long-term value realization. In 2026, the bank continues to favor the layout of innovative drugs in the pharmaceutical industry, with key short-term catalysts including BD/overseas clinical data progress, inclusion in medical insurance/commercial insurance, reaching the break-even point, etc. For prescription drug companies with a fast pace of innovation transformation, the impact of group purchases will decrease, new flagship products entering the market in large quantities along with gradual normalization of licensing cooperation income, Hong Kong-listed leading companies' revenue and net profit growth rates are expected to stabilize in double digits. Key recommendations: 1) 3SBIO, Deqi Medicine, BEONE MEDICINES (US stock): rich catalysts, limited future impacts from group purchases/group purchase renewals, valuations still do not reflect the value of core flagship products; 2) SIMCERE PHARMA, HUTCHMED, Legend Biotech: significantly undervalued, clear long-term growth logic. CXO: Focus on industry consolidation trend after bottom reversal. Fast-paced performance growth is expected to be maintained, but under the long-term trend of tightening drug-related regulations in the US and increasing difficulty in new drug research and development, industry consolidation has just begun, and leading players in high-growth sectors have higher long-term certainty. Private hospitals: Opt for high-quality targets in private hospitals. With cost control pressures easing and outdated capacity being eliminated, private medical institutions are expected to return to a faster growth trajectory. We recommend high-quality targets with clear short-term performance rebound expectations and clear long-term expansion paths, such as GUSHENGTANG and HYGEIA HEALTH.