China Galaxy Securities: Bullish on 2026 Healthcare Industry Investment Opportunities, Recommends Attention to Innovative Drugs, Innovative Medical Devices, and Healthcare AI Sectors

China Galaxy Securities releases research report stating that the 14th Five-Year Plan is expected to continue promoting the development of the biopharmaceutical industry. They are optimistic about investment opportunities in the pharmaceutical sector by 2026. After recent fluctuations and adjustments, valuations have fallen to relatively low levels and are expected to restart an upward trend. Investment strategies should focus on biotech hard technology and niche track alpha, with recommendations on innovative drugs (BIC and FIC pipelines leaders), innovative medical devices (imaging, high-value consumables, consumer devices, etc.), medical AI, and paying attention to the recovery of pharmaceutical consumption and independent third-party ICL.

China Galaxy Securities’ main points are as follows:

The “14th Five-Year Plan” first listed biopharmaceuticals as a new pillar industry, emphasizing continuous R&D innovation.

Key focus areas of the “14th Five-Year Plan” include the industrialization of innovative pharmaceutical products, technological breakthroughs in pharmaceutical manufacturing, vaccine and shortage drug supply assurance, product quality upgrades, and green, low-carbon pharmaceutical industry initiatives. The results are remarkable: the number of approved innovative drugs in China increased from 11 in 2015 to 92 in 2024. In 2024, 22 domestically produced drugs and 17 domestically produced biologics were approved, with domestic innovative drugs accounting for 42%. The “15th Five-Year Plan” proposes improving the coordinated development and governance mechanisms of healthcare, medical insurance, and pharmaceuticals, marking the first time biopharmaceuticals are listed as a national “new pillar industry,” further elevating its strategic position.

Healthcare sector: shifting from “system construction” to “strengthening fundamentals and coordinated governance.”

The “15th Five-Year Plan” is a critical period for China’s healthcare development, signifying a fundamental shift from growth-driven “system construction” to a focus on quality and internal development “strengthening fundamentals and coordinated governance.” This shift is driven by two core factors: first, the upgrade of the “Three Medicals” reform from departmental reforms to systemic coordinated governance, exemplified by the Sanming model; second, the transformation of service models from “disease-centered” to “health-centered.”

Medical insurance: upgrading from “basic universal coverage” to “multi-dimensional optimization and provincial-level coordination.”

Provincial-level coordination of medical insurance funds is accelerating, improving the efficiency of fund utilization and potentially opening new investment opportunities in pharmaceuticals. Provincial coordination aims to resolve structural conflicts within the insurance system, activate existing funds, and promote expenditure growth. Currently, China’s medical insurance funds face structural issues, with some regions experiencing decreased spending and insufficient coverage. The provincial coordination system breaks down administrative barriers between cities, directing surplus funds from economically developed, younger-population cities to those with weaker economic bases, aging populations, or fund deficits, achieving “filling gaps with surpluses and shared risks.” Promoting cross-province pooling of individual accounts is expected to revitalize reserve funds, effectively address structural imbalances in revenue and expenditure, and reverse the slowdown in expenditure growth.

Pharmaceutical industry: transitioning from “generic and innovative combination” to “original innovation and high-quality development.”

The government supports this through comprehensive policies covering R&D, review, payment, and internationalization. On one hand, the number of approved Class 1 new drugs domestically has reached a new high, with increased overseas BD transactions and upfront payments, indicating enhanced global competitiveness. On the other hand, upstream life sciences and high-end medical devices are accelerating domestic substitution to solve “bottleneck” issues. Traditional Chinese medicine inheritance and innovation are being deepened, with strict re-evaluation to reshape market patterns. AI technology is being fully integrated into R&D, diagnostics, and service scenarios, ultimately building a modern, autonomous, and globally influential pharmaceutical industry system, accelerating China’s transition from a “big pharmaceutical country” to a “powerful pharmaceutical nation.”

Risk warnings: 1. Increased macroeconomic pressure may limit growth in healthcare consumption; 2. Policies on innovative drug reimbursement and payment may fall short of expectations; 3. Geopolitical risks may lead to global order shifts; 4. Centralized procurement or price reductions may exceed market expectations.