A recent research report from China Securities Co., Ltd. highlights that CXO serves as a vital conduit for specialized labor division within the innovative drug industry chain, functioning as essential infrastructure linking drug discovery with commercial production. The firm identifies three primary growth drivers: sustained high R&D expenditure by global pharmaceutical companies, an expanding pipeline of innovative drugs, and increased outsourcing penetration fueled by the development of complex modalities like ADCs, peptides, and oligonucleotides, alongside Chinese enterprises capturing global demand through talent and cost-efficiency advantages. As improving domestic and international demand gradually translates into orders and financial performance, the CXO sector is expected to enter a fresh phase of growth.
Where the Opportunity Lies
CRO and CDMO segments cover the entire spectrum of innovative drug R&D and manufacturing, leveraging technical expertise, platform resources, and economies of scale to help pharmaceutical firms enhance productivity, reduce development expenses, and minimize capital outlays for in-house facilities, thereby accelerating the translation of innovations into therapies. Sector expansion is propelled by three key elements: firstly, sustained high global R&D spending combined with a rebound in domestic innovative drug financing and increased out-licensing deals, providing financial backing for outsourcing needs; secondly, pipeline growth and the emergence of complex drugs such as ADCs, peptides, and oligonucleotides, which heighten reliance on specialized R&D and production platforms and boost outsourcing penetration; thirdly, Chinese companies, armed with talent, integrated supply chains, and cost-efficiency strengths, alongside upgraded technical capabilities and overseas production facilities, continue to absorb global demand. With demand improvements gradually flowing into orders and earnings, the CXO industry is set for renewed expansion.
Foundations for Long-Term Growth
Pharmaceutical R&D investment and outsourcing penetration rates serve as the core variables driving industry scale, with increasingly complex drug structures and the ongoing expansion of biotech pipelines further reinforcing the need for specialized external services. Clinical CROs center on talent and project management systems, while preclinical CROs and CDMOs depend more heavily on certifications, technological platforms, and capacity investments, with order growth and utilization rates dictating profitability flexibility. Chinese enterprises capitalize on an engineer dividend, comprehensive industrial chains, and cost efficiencies to fulfill global requirements, with leading platforms extending into multi-technical fields and integrated R&D-production models to bolster client loyalty and scale benefits.
Financing Recovery Spurs Demand Resurgence
Global innovative drug financing reached $20.177 billion in the first half of 2026, with domestic financing hitting $4.233 billion, equivalent to 82% of the full-year 2025 total, complemented by sustained high R&D expenditures from large pharmaceutical firms, resulting in improved funding availability both domestically and internationally. China's out-licensing activities are growing rapidly, with upfront payments emerging as a significant funding source, while IPO and primary market financing recoveries further enhance biotech R&D capabilities. As capital converts into R&D initiatives, clinical advancements, and production requirements, outsourcing orders are poised for sustained release; increases in domestic IND filings and new drug approvals, along with progress in bispecific/multispecific antibody and nucleic acid pipelines, contribute incremental growth across the value chain.
Navigating Policy Shifts and Structural Opportunities
Geopolitical policies and supply chain localization mandates continue to introduce uncertainties, though their actual impact hinges on capacity substitutability, delivery capabilities, and client switching costs; Chinese CXO firms are addressing these challenges by establishing overseas production sites to strengthen global service networks. Concurrently, the FDA's push for novel methodologies and streamlined reviews, coupled with accelerated domestic regulatory processes and improved medical insurance and commercial insurance reimbursement frameworks, are expected to enhance innovative drug development efficiency and commercial returns. The global patent cliff is fueling biosimilar development and prompting MNCs to augment pipelines through acquisitions, creating business prospects for outsourcing platforms with robust R&D, process development, and commercial manufacturing expertise.
Valuation Shifts from Recovery to Growth Trajectory
In the first half of 2026, sector companies recorded year-on-year revenue growth of 25.2% and adjusted net profit growth of 66.5%, with CRO orders steadily rising and CDMO demand remaining robust; leading firms are enhancing earnings visibility through strong backlogs and late-stage project accumulation. Improvements in capacity utilization, commercial scaling of complex drugs, and resumptions in capital expenditure collectively underpin future growth. Since 2026, as the sector's upward cycle becomes increasingly evident and individual company industrial trends re-enter new growth phases, using forward 1-2 year PEG as a primary horizontal valuation metric, the firm believes that companies with strong medium-to-long-term earnings growth and high certainty remain undervalued, presenting considerable upside potential.
Risk Factors
Risks include industry policy changes, R&D outcomes falling short of expectations, approval processes underperforming projections, and macroeconomic environment volatility.