It is recommended that investors focus on pharmaceutical companies that have previously expanded overseas through business development or innovative drug companies with mature technology platforms that can continuously produce innovative pipelines and have business development potential.
According to Zhitong Finance APP, Sinolink released a research report stating a firm bullish outlook on China's innovative pharmaceutical companies being able to navigate the current tariff cycle. It is advised that investors pay close attention to pharmaceutical companies that have previously gone overseas through business development, or innovative drug companies with mature technology platforms that can continue to produce innovative pipelines and possess business development potential, such as Jiangsu Hengrui Pharmaceuticals (600276.SH), Kelun Bohai (06990), AKESO (09926), HANSOH PHARMA (03692), INNOVENT BIO (01801), and INNOCARE (09969), among others.
Sinolink's main viewpoints are as follows:
The potential tariff threats from the USA have little impact on China's innovative drugs.
Originally, global pharmaceutical trade had nearly zero tariffs. According to the WTO website, the 1994 Agreement on Trade in Pharmaceutical Products eliminated tariffs and other duties on a large number of pharmaceuticals and the substances used to produce these commodities, permanently binding them at tax-exempt levels. Canada, the EU, Japan, Macau (China), Norway, Swiss Franc, the United Kingdom, and the USA are among those that have joined this agreement. On April 2, 2025, at 4:00 PM Eastern Time, President Trump signed an executive order to implement a comprehensive new reciprocal tariff policy (excluding pharmaceuticals). According to the 'Federal Register' released by the US government on April 14, 2025, the Trump administration is initiating a '232 investigation' into the imports of pharmaceuticals and semiconductors, a move widely seen as a prelude to imposing tariffs on prescription drugs. Although tariffs have not been fully implemented, uncertainty still exists. Overall, in various segments of pharmaceuticals, this bank expects tariff fluctuations to have a minimal impact on the innovative drug sector, and remains bullish on the overseas expansion process of innovative pharmaceutical companies listed on the A-shares and Hong Kong Stock Exchange.
From a Chinese perspective, directly addressing the potential impact of US-specific pharmaceutical tariffs on China's innovative drug sector, this bank believes that the potential impact on Chinese innovative pharmaceutical companies is minimal due to two core logic points benefiting from the current round of USA's imposed tariffs on pharmaceuticals.
According to data from China's customs, China has a small export exposure for western traditional medicines (including innovative drugs), with an export scale of approximately 1.16 billion USD to the USA; at the same time, the export market for Western pharmaceutical formulations from China is highly diversified, with exports to the USA only accounting for 16.55% of China's total pharmaceutical formulation exports. Therefore, if related policies are implemented, the potential impact on China's innovative drug sector is expected to be limited.
Most of China's innovative drugs go overseas through business development (BD), which essentially involves the trading of intellectual property and does not involve the manufacturing or export of specific pharmaceuticals. From the perspective of the BD agreement's conclusion phase, the essence of the BD model is profit sharing between domestic and foreign pharmaceutical companies; furthermore, according to the General Agreement on Trade in Services (GATS), related revenues (initial payments + milestone payments) are categorized under service trade revenues in the current account, which is unrelated to the trade deficits in goods that the USA is currently focused on. In the execution phase of BD, this bank has detailed the potential manufacturing arrangements that may arise between domestic innovative pharmaceutical companies and foreign multinational pharmaceutical companies. Regardless of clinical medicines (relatively small-scale production) or later commercial medicines (relatively large-scale production), this bank believes that domestic innovative pharmaceutical companies can achieve immunity from potential tariffs during the BD execution phase.
From the USA's perspective, analyzing the potential pharmaceutical special tariffs on China's Innovative Drugs sector is important. The potential tariffs mentioned by Trump on April 8 would be special tariffs on pharmaceuticals, which are more targeted compared to the previous round of 'reciprocal tariffs'. Therefore, analyzing the counterparty and objectives of the special tariffs on pharmaceuticals is key.
① The trade deficit in finished pharmaceuticals between the USA and Europe is expected to become a focus for the USA. The primary targets of potential pharmaceutical special tariffs will be the European Union, which indirectly reflects that the impact of these special tariffs on China is expected to be limited. According to statistics from the US Census Bureau, in 2024, the USA's imports of pharmaceuticals and drugs will reach 234 billion USD. Leading exporters to the USA include Ireland (approximately 66 billion USD, accounting for 28.1% of total imports), followed by Swiss Franc (approximately 19 billion USD, accounting for 8.2%) and Germany (approximately 17 billion USD, accounting for 7.4%) and other European countries.
② The ultimate goals of the potential pharmaceutical special tariffs threatened by Trump are mainly twofold: ① to force pharmaceutical companies to move their production capacity to the USA; ② to alleviate the relatively high drug prices in the USA. However, it is believed that achieving these two objectives through potential pharmaceutical special tariffs is difficult. Therefore, this will also affect the future implementation of these potential tariffs to some extent.
