On July 30, the CSI Hong Kong Stock Connect Innovative Drug Index underwent significant adjustments, excluding CXO (pharmaceutical outsourcing service) companies and increasing the frequency of index rebalancing. These revisions, which will take effect on August 12, 2025, are expected to further enhance the index's investment value and accurately reflect the latest trends in China's innovative drug industry.
Specifically, the selection criteria have been revised to include only Hong Kong Stock Connect-listed stocks whose main business involves innovative drug R&D and production (excluding pharmaceutical outsourcing services). Additionally, the regular rebalancing rules for constituent stocks have been changed to quarterly adjustments, implemented on the next trading day after the second Friday of March, June, September, and December each year.
Regarding this, Ma Jun, fund manager of Yinhua Fund's Hong Kong Stock Innovative Drug ETF and Innovative Drug ETF, believes that the exclusion of CXO companies from the CSI Hong Kong Stock Connect Innovative Drug Index and its focus on innovative drug manufacturers will sharpen its precision and increase its elasticity, making it a better indicator of the industry's leading players and reflecting the current trend of domestic innovative drug companies upgrading and "going global." She stated that innovative drug manufacturers, as companies engaged in the R&D, production, and sales of innovative drugs, benefit from business development (BD) during the R&D process and sales revenue after product launch, resulting in greater performance elasticity and stronger representation as industry pioneers. In recent years, a key driver of the valuation reshuffle in the domestic innovative drug sector has been the surge in licensing deals with overseas pharmaceutical companies, both in number and value, as the R&D capabilities of innovative drug manufacturers have strengthened.
Furthermore, Ma Jun noted that higher-frequency index rebalancing may better capture the transformation of the domestic innovative drug industry into one with international competitiveness, allowing for more timely reflection of the leading performance of high-quality innovative drug manufacturers in China. This could provide investors with a more flexible investment tool. "As a major representative of emerging industries, the domestic innovative drug sector is in a period of vigorous development, with the market landscape yet to be determined. Any high-quality innovative drug company may gain capital favor through product upgrades, thereby boosting its market capitalization."
Looking ahead, in the short term, the positive fundamentals of the innovative drug industry's prosperity are also spreading. Generic-to-innovative drug companies may also see a revaluation logic. Recently, large BD deals by leading generic-to-innovative companies have made the market realize that China's innovative drugs have not only achieved breakthroughs in areas like ADC, PD-(L)1 Plus, and weight-loss drugs but also have significant potential for global expansion in other fields. At the same time, centralized procurement of generic drugs has begun to "counter internal competition" by balancing quality and price. Against this backdrop, generic-to-innovative companies with strong performance and BD deals but relatively low valuations are expected to see value recovery. Meanwhile, CXO companies in the industrial chain are also benefiting from the upward trend, with leading companies reporting better-than-expected performance and revising up their full-year forecasts. (References: The Paper, "Behind the $10 Billion Out-Licensing Deal: How Domestic Innovative Drugs Keep Advancing?" July 29, 2025; Wanlian Securities, "Mid-Term Strategy 2025: BD Catalyzes Revaluation of Innovative Drug Assets," July 15, 2025.)
In the long term, the investment value of innovative drugs may be supported by industry prosperity. After a decade of accumulation, China's innovative drug sector has gained recognition for its R&D capabilities, which is now a market consensus. Since 2025, the value of innovative drug BD deals has nearly matched the total for 2024, indicating that the R&D strength of domestic innovative drugs is no longer limited to sporadic breakthroughs but has taken on an "all-around breakout" momentum. Current collaborations in innovative drugs are just beginning, and as industry prosperity gradually materializes, the long-term investment value of innovative drugs is promising. (References: Time Finance, "China's Innovative Drugs Go Global with a 'Boom': $66 Billion in Six Months, with Pfizer and Merck Shopping," July 25, 2025; 21st Century Business Herald, "The 'Showdown' at ASCO: Chinese Innovative Drug Companies Launch All-Around Offensive," May 30, 2025; Panorama Network, "The Rise of the Innovative Drug Sector: What Opportunities Lie Ahead?" July 29, 2025.)
It is worth noting that the innovative drug sector has been rising continuously, with related ETFs attracting significant capital attention. Yinhua Fund offers a rich array of innovative drug investment tools, including the Innovative Drug ETF, which represents the overall performance of the industry, and the Hong Kong Stock Innovative Drug ETF, which represents the pioneering performance of the sector. On July 29, 2025, the trading volume of Yinhua Fund's Innovative Drug ETF (159992) exceeded 707 million yuan, while the Hong Kong Stock Innovative Drug ETF (159567) reached 2.73 billion yuan, reflecting active market sentiment. (Data source: Wind, as of July 29, 2025.)
As industry prosperity gradually unfolds, the innovative drug sector may continue to demonstrate upward investment potential. Investors with higher risk tolerance and demand for elasticity can leverage the Hong Kong Stock Innovative Drug ETF (159567) and its feeder funds (Class A: 023929; Class C: 023930) or the Innovative Drug ETF (159992) and its feeder funds (Class A: 012781; Class C: 012782) to seize industry opportunities.
