Market review: This week, the pharmaceutical and biological index fell 1.41%, outperforming the CSI 300 index by 0.88 percentage points, ranking 20th in the industry. Since the beginning of 2025, the pharmaceutical industry has risen by 2.52%, outperforming the CSI 300 Index by 2.92 percentage points, ranking 17th in the industry. This week, the valuation level of the pharmaceutical industry (PE-TTM) is 26.01 times, with a premium of 70.63% (-4.47pp) over all A-shares, 28.40% (-2.65pp) over all A-shares excluding banks, and 118.20% (-5.46pp) over the CSI 300. The relative best performing sub-sector this week was medical R&D outsourcing, up 0.8%, and the top three best-performing sectors since the beginning of the year were medical R&D outsourcing, hospitals, and APIs, with gains and losses of +13.3%, +9.2%, and +5.5%, respectively.

Annual reports and quarterly reports are coming, focusing on performance and valuation matching, and benefiting from policies to catalyze individual stocks. The development of traditional Chinese medicine industry, drug innovation and generic drugs ushered in policy support. 1) The General Office of the State Council issued the "Opinions on Improving the Quality of Traditional Chinese Medicine and Promoting the High-quality Development of the Traditional Chinese Medicine Industry", which requires building a well-known brand of traditional Chinese medicine, strengthening the research and development and innovation of traditional Chinese medicine, and strengthening the construction of the circulation and reserve system of traditional Chinese medicine; 2) The Food and Drug Administration publicly solicited the "Implementation Measures for Data Protection for Drug Trials" and the "Working Procedures for Data Protection for Drug Trials", and the new measures include generic drugs and improved new drugs in the scope of data protection, which is expected to promote the long-term and healthy development of the generic drug industry, and the CXO market may be further concentrated. The pharmaceutical sector has the attribute of "low valuation", superimposed on policy catalysis, and is optimistic about targets with low valuation and high performance matching.

In 2025, focusing on the background of new quality productivity and high-quality development, we are optimistic about the three main lines of pharmaceutical innovation + going overseas, thematic investment, and dividends. The

main line of innovation + going overseas - innovative drugs: on the policy side, the National Standing Committee of the People's Republic of China in July 2024 deliberated and approved the "Implementation Plan for Supporting the Development of Innovative Drugs in the Whole Chain". By the end of November 2024, the success rate of medical insurance negotiations for innovative drugs reached more than 90%, and the medical insurance emphasized the policy orientation of supporting "truly innovative" drugs. In November 2024, the National Health Insurance Administration issued a document mentioning that commercial insurance should be guided to support more inclusive of innovative drug consumption and devices, and the development space of commercial insurance on the payment side is worth paying attention to in the future.

On the R&D side, SKB264 and AK112 are equivalent to the excellent clinical data of lung cancer indications released at the WCLC/ASCO conference, and domestic innovation continues to appear; In terms of going overseas, in 2024, domestic new drugs will be authorized to go overseas, and hot spots such as second-generation IO, diet drugs, self-exempt TCE, ADC, new mechanisms, and new indications will be frequently released. Hengrui Pharmaceutical has realized the licensing of GLP-1 product portfolio in the NewCo model, with a total transaction amount of more than US$6 billion. Medical devices: With the start of the fifth batch of national procurement (cochlear implants, peripheral vascular stents) and key inter-provincial alliances, we will pay attention to domestic substitution under the rigid needs of normalized medical treatment, including independent and controllable innovative devices. The direction of equipment going overseas is still optimistic, but it is necessary to pay attention to the impact of subsequent geopolitics on the progress of enterprises going overseas. In addition, the trade-in policy on the performance of the medical equipment industry still needs to be observed.

The main line of thematic investment - drugs, focusing on the progress of clinical data such as domestic weight loss drugs; Devices pay attention to policies related to equipment updates, pay attention to tariff-related changes for low consumption, and pay attention to topics such as AI medical imaging and AI informatization, silver economy, and respiratory testing; In the direction of consumer medicine, pay attention to relevant policy stimulus; TCM focuses on the progress of the basic drug catalogue; CXOs are keeping an eye on developments related to the Biosecurity Act. In addition, pay attention to M&A and restructuring expectations.

Dividend main line - With the yield of 10-year Treasury bonds falling below 2%, dividend assets with long-term stable growth, good and sustainable cash flow, and high and continuous dividend ratio are still good defensive options, and have a certain seesaw effect with offensive allocation. The dividend sector includes high-dividend OTC stocks; Sectors related to the expected reform of state-owned enterprises are worth paying attention to.

Recommended combination: Hengrui Pharmaceutical (600276), Yifan Pharmaceutical (002019), Kangchen Pharmaceutical (603590), Huadong Pharmaceutical (000963), Nhwa Pharmaceutical (002262), Gan & Lee Pharmaceutical (603087), Jichuan Pharmaceutical (600566), Kelun Pharmaceutical (002422).

Hong Kong stock portfolio: Chi-Med (0013), Innovent Biologics (1801), Zai Lab (9688), Remegen Biologics (9995), Kelumbotai Biopharma-B (6990), Simcere Biopharma (2096), Akeso Biopharma (9926), Ascentage Pharma-B (6855), MicroPort Robotics-B (2252), AK Medical (1789).

Portfolio of the Science and Technology Innovation Board: First Pharma Holdings-U (688197), Sino Medical (688108), Xinmai Medical (688016), Shengxiang Biotech (688289), Zelgen Pharmaceutical-U (688266), Borui Pharmaceutical (688166).

Stable portfolio: Shanghai RAAS (002252), Betta Pharmaceuticals (300558), Shanghai Pharmaceutical (601607), New Industry (300832), Yunnan Baiyao (000538), Taiji Group (600129), Ma Yinglong (600993), Meihao Medical (301363), Changchun High-tech (000661).

Risk warning: the policy risk of the pharmaceutical industry exceeds expectations; the risk that R&D progress is not as expected; Risk of performance falling short of expectations.