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Sector Breakdown | In-Depth Analysis Report on the Healthcare Sector

💡 Core insight

The US healthcare sector (XLV ETF) offers both defensive characteristics and growth logic. Currently, the P/E ratio of the pharmaceutical sector relative to the S&P 500 is approximately 0.7, about 25% lower than its 10-year average,placing it at a valuation low near the 10-year bottom, with a substantial margin of safety.。

From a policy perspective, the Inflation Reduction Act (IRA) and Most Favored Nation (MFN) pricing models have exerted phased downward pressure on drug prices, butthe actual impact on leading multinational corporations (MNCs) amounts to only a minor disturbance to profit margins, in exchange for tariff exemptions and greater policy predictability.At the sector level, areas such as oncology (bispecific antibodies + ADCs), autoimmune diseases, and GLP-1 weight loss therapies continue to expand. The patent cliff is concentrated between 2026 and 2030,making companies with robust pipelines to replace lost revenue, such as Eli Lilly and Co, AstraZeneca, and AbbVie, likely to sustain their valuation premiums.。

At the individual stock level, $Eli Lilly and Co (LLY.US)$ The ramp-up in GLP-1 sales volume combined with pipeline execution, $Johnson & Johnson (JNJ.US)$ along with diversified business operations, provides defensive stability. $AbbVie (ABBV.US)$ Skyrizi and Rinvoq have fully filled the gap left by Humira. $AstraZeneca (AZN.US)$ The core oncology pipeline is showing strong growth momentum.The current period presents an optimal window for allocating to the US healthcare sector.

1. Overview of the XLV ETF

Constituents: XLV covers pharmaceuticals (approximately one-third weighting), medical devices, health insurance, and biotechnology,with Eli Lilly and Co accounting for a 16% weighting,making it the holding with the highest certainty of growth. During major market downturns, XLV has historically experienced smaller declines and recovered more quickly, demonstrating typical defensive characteristics.

The core logic for currently choosing to allocate to XLV:

– Capital flows between the healthcare and technology sectors are negatively correlated;against the backdrop of highly crowded AI trades, capital is flowing into defensive sectors; positioning in the pharmaceutical sector is only at the 13.8th percentile, indicating extremely low crowding;

– In a rising interest rate environment, healthcare companies maintain restrained capital expenditure, ample cash reserves, and low financing needs., making it a more attractive allocation target;

– Core heavyweight stocks beat earnings expectations: UnitedHealth reported Q2 revenue of $112 billion and adjusted EPS of $6.38,beating estimates by 30.4%; Johnson & Johnson reported Q2 revenue of $25.31 billion and EPS of $2.90, with both companies raising their full-year guidance.

Healthcare vs. S&P 500 Index Performance

Source: Bloomberg, compiled by Futu Securities

II. Recent US Pharmaceutical Policies

🔶IRA Policy

The IRA grants the government negotiation power over high-expenditure mature drugs under Medicare. Trigger conditions: small-molecule drugs must have been approved for 9 years, biologics for 13 years, and there must be no generic competitors (orphan drugs are exempt). The scope of negotiations will expand on a rolling basis:

– Effective in 2026: 10 drugs; Effective in 2027: 15 drugs;

– Effective in 2028: 15 drugs（The market is pricing this in）；

– 2027–2029: 20 drugs per year, with continued expansion.

The first batch of 10 products saw price cuts of 38%–79%,averaging approximately 62%, but these cuts are based on list prices, not the actual net price reductions for pharmaceutical companies. Representative impact:Keytruda and Opdivo were deferred under the OBBBA, giving Merck & Co about a one-year buffer, but Keytruda still faces a patent cliff in 2028;Eli Lilly and Co (Trulicity + Verzenio, totaling $6.3 billion in Medicare spending) and Novartis (Cosentyx + Kisqali, totaling $3.9 billion) are facing pressure on both fronts. Eli Lilly's pipeline covers weight loss, Alzheimer's, and cardiovascular diseases,with high growth certainty。

IRA Drugs Taking Effect in 2028 / Eligibility Criteria

Source: Compiled by Futu Securities

🔶Most Favored Nation (MFN) Policy

In May 2025, Trump signed an executive order anchoring US drug prices to the lowest prices among OECD member countries. As of June 2026, agreements have been reached with 17 major pharmaceutical companies,covering approximately 86% of the US branded drug market.Key price reductions:

– Johnson & Johnson: Stelara ~66%, Xarelto ~62%;

– Eli Lilly and Co: Jardiance ~66%, Zepbound/Mounjaro ~68%;

– Novo-Nordisk A/S: Ozempic/Wegovy ~71%.

The essence of the MFN policy is a combined strategy of "trading drug price concessions for manufacturing reshoring." For leading multinational corporations (MNCs) that have already signed agreements, the actual impact is close to a minor disturbance in profit margins, exchanged for tariff exemptions and policy predictability.Three implementation models: GENEROUS (Medicaid, 2026–2030), GLOBE (Medicare Part B, starting October 2026), GUARD (Medicare Part D, starting 2027).

Impact Pathways of MFN Policy

3. Hot Investment Themes

3.1 Patent Cliff

This round of patent expirations is concentrated between 2026 and 2030,involving nearly USD 200 billion in revenue, exceeding the scale of the previous cycle.The叠加 (superposition) of IRA and MFN policies has led to significant price cuts for certain drugs even before their patents expire, further accelerating the "front-loading of the cliff." Currently, US biotech valuations are at low levels, with multinational corporations (MNCs) acquiring assets at premiums of 50%–100%, focusing on GLP-1, immunology/inflammation, and oncology/ADC sectors.Eli Lilly and Co, AstraZeneca, and AbbVie enjoy significant valuation premiums due to their strong cash positions and rapidly ramping-up replacement pipelines.

Blockbuster Drugs Facing Patent Cliffs

Competitive Landscape Comparison (Source: Compiled by Futu Securities)

3.2 Oncology Sector

Oncology is an expanding market continuously redefined by new therapies: approximately 20.78 million new cases were diagnosed globally in 2023,Projected to increase by 60.7% in 2050 compared to 2024；The anti-tumor drug market is expected to reach $452.5 billion by 2030 (CAGR 10.2%), rising to $702.7 billion by 2035。

We are now entering the post-Keytruda era, with core trends shifting from monotherapy dominance to bispecific antibodies + ADCs, and combinations of "bispecific antibodies + ADCs." The PD-(L)1/VEGF bispecific antibody segment is projected to approach nearly $10 billion starting in 2025growing to $52 billion by 2035 (CAGR 20%), representing key assets:

– Ivonescimab/AK112 (Akeso-Summit): OS HR=0.66, mOS 27.9 vs 23.7 months;

– BNT327/PM8002 (Promiscus-BioNTech/BMS): Deal size approximately $11.1 billion;

– MK-2010 (Lixin-Merck): Included as a core component of the post-Keytruda era combination therapies;

– SSGJ-707 (3SBio-Pfizer): $1.25 billion upfront payment + $4.8 billion in milestones.

Overview of oncology bispecific antibody products

Source: Public information

Regarding ADCs:The market is projected to exceed $16.5 billion in 2025 and approach $66.2 billion by 2030 (CAGR of approximately 30.1%).Platforms are expanding to targets such as HER2, TROP2, B7-H3, and DLL3. Volume growth from monotherapies, combined with expansion into frontline markets through IO combinations, is driving adoption. MNC Tiering:

– Tier 1: AstraZeneca, Pfizer, Roche (with mature commercialized products);

– Tier 2: Merck & Co, BMS, AbbVie, Gilead (filling gaps through M&A);

– Tier 3: Novartis, Sanofi, Amgen, where the ADC portfolio gap is most pronounced, making them the most likely to continue pursuing M&A.

Future blockbuster products may not be single ADCs or bispecific antibodies, but rather combination therapy systems built around major indications in first-line treatment.

3.3 Immunology Sector

Global Autoimmune Drug MarketExpected to rise to $176.7 billion by 2030With over 500 million patients, medication adherence is extremely high. Core indications:

– Atopic Dermatitis: ~$22.9 billion in 2026, projected to reach$46.2 billion by 2034(CAGR 9.2%);

– Psoriasis: ~$28.0 billion in 2026, projected to reach$47.0 billion by 2032(CAGR 9.0%);

– Rheumatoid Arthritis: ~$29.5 billion in 2026, ~$38.5 billion by 2032 (CAGR 4.5%);

– Inflammatory Bowel Disease: ~$24.5 billion in 2026, ~$27.7–30.8 billion by 2030.

Three key technological trends: oral small molecules (TYK2/BTK inhibitors), ultra-long-acting formulations (quarterly or semi-annual dosing), and bispecific/multispecific antibodies (blocking multiple immune axes).Sanofi and AbbVie maintain a duopoly lead, with Novartis following closely behind, supported by secukinumab (2025 sales: $6.67 billion).

Latest trends in the autoimmune disease sector

Source: Compiled by Futu Securities

3.4 Weight Loss Sector

The current GLP-1 market size is approximately $72 billion,projected to reach $180 billion over the next 10 years (CAGR of ~11%)Four key drivers: a massive obese population base combined with very low penetration rates; expansion of indications from diabetes/weight loss to cardiovascular disease/CKD/MASH; iteration of oral small molecules and next-generation pipelines; and geographic expansion (the US currently accounts for over 50% of global sales).

⚠️ Generic Drug Risks: Canada has already approved semaglutide generics in 2026; India has begun launching generics; semaglutide generics are expectedto enter the Chinese market in FY2027,creating additional competitive pressure on Novo-Nordisk A/S.

Clinical progress of weight-loss drug targets

Source: Compiled by Futu Securities

4. Company Shareout

🔶$Eli Lilly and Co (LLY.US)$

Q2 revenue reached $22.97 billion (+48% year-over-year), beating expectations of $20.59 billion; Non-GAAP EPS was $8.38 (+33%), significantly exceeding the expected $6.31. Full-year guidance raised to$85–87 billion, with adjusted EPS of $35.50–$36.50; full-year "operating margin" target raised to 49%–50.5%.

Core driver: Tirzepatide single-quarter sales$14.871 billion, with Mounjaro at RMB 9.943 billion (+91%) and Zepbound at RMB 4.928 billion (+46%); Kisunla and Ebglyss are driving growth in the non-metabolic pipelineYear-on-year growth of 121%。

Pipeline Progress:

◦ Retatrutide (triple agonist, injectable) Phase III trials completed,Planned filing in Q1 2027, with weight-loss efficacy approaching that of 'pharmacological bariatric surgery';

◦ Eloralintide (amylin agonist, half-life of 14–16 days, once-weekly dosing)Five Phase III trials have been initiated, offering better tolerability and expected to be used in combination with tirzepatide;

◦ Brenipatide (next-generation dual GIP/GLP-1 agonist)Has entered Phase III, expanding into indications such as alcohol use disorder, major depressive disorder, and CNS disorders;

◦ Jaypirca (pirtobrutinib): Received a positive opinion from the CHMP; currently advancing from later-line BTK inhibitor therapy to across-the-board treatment for CLL.

💡Eli Lilly and Co remains the most certain play in the weight-loss sector, with its current high valuation supported by the dual logic of a "GLP-1 super cycle + operating margin leverage."

Key watch items: pipeline progress of Retatrutide, ramp-up speed of prescriptions for the oral drug (Orforglipron), and the effectiveness of the price-for-volume strategy.

Progress on Eli Lilly and Co's R&D Pipeline and Capacity Expansion

Source: Compiled by Futu Securities

🔶$Eli Lilly and Co (LLY.US)$ vs $Novo-Nordisk A/S (NVO.US)$

Eli Lilly and Co's 2027 forward P/E is approximately 40x,enjoying a significant valuation premium relative to Novo-Nordisk A/S, primarily due to:

◦ Pricing pressure: Tirzepatide is expected to be exempt from mandatory IRA negotiations before 2035; Novo-Nordisk A/S's Ozempic has been included in the 2027 negotiations,facing an estimated 44% reduction in list price；

◦ Capacity: Eli Lilly and Co's TRx capacity at its two North Carolina plantsRose from approximately RMB 30 million to around RMB 90 million, with continued expansion across multiple regions, where scale advantages support gross margins;

◦ Pipeline: Eli Lilly and Co has a rich pipeline with smooth progress; Novo-Nordisk A/S is deeply reliant on a single product, with other businesses growing only 2.72%;

◦ Uncertainties in the oral market: If Novo-Nordisk A/S's Amycretin can deliver on the 22% weight loss data, the landscape of the oral market may see a partial reversal.

Comparison of prescription volumes and market shares for semaglutide and tirzepatide

Source: IQVIA

🔶$Johnson & Johnson (JNJ.US)$

Q2 revenue reached USD 25.31 billion (+6.6%), with adjusted EPS at USD 2.90 (+4.7%). Full-year guidance raised toUSD 100.8–101.4 billion(potentially exceeding USD 100 billion for the first time in history), with adjusted EPS raised to USD 11.60–11.75; full-year free cash flow is approximately USD 21 billion, with annualized dividend payments of about USD 13 billion, resulting in a coverage ratio of 1.6x.

Pharmaceutical segment excluding StelaraAchieved double-digit growth of 12.4%; the Ottava robotic surgery platform received its first approval,with coverage expected to gradually expand following new indications after 2028.The oncology business targetsgrowing from approximately USD 25–27 billion to USD 50 billion by 2030.。

💡 Johnson & Johnson is one of the highest-quality stocks in the pharmaceutical sector, having successfully navigated the pressure from Stelara's patent expiration. Its diversified business structure provides stronger earnings stability.Dividends have increased for 64 consecutive years, with an average annualized growth rate of 5.7% over the past decade, highlighting its significant defensive attributes.

🔶$AbbVie (ABBV.US)$

Q2 net revenue was USD 16.99 billion (+10.2%), and Non-GAAP EPS was USD 3.65 (+22.9%). Full-year revenue guidance has been raised to approximately USD 67.6 billion. Skyrizi (USD 5.505 billion, +24.4%) and Rinvoq (RMB 2.525 billion, +24.5%) totaling over RMB 8 billion,fully offsetting the decline in Humira sales。

Major M&A: All-cash acquisition of Apogee Therapeutics for USD 10.9 billion, with core assets being the long-acting IL-13 monoclonal antibody APG777 (dosing frequencyonce every 3–6 months) and the long-acting TSLP monoclonal antibody APG333, targeting peak sales of over USD 10 billion.The breakeven point is approximately USD 5 billion; if targets are met, the return on investment will exceed 15%.

💡 AbbVie faces no near-term patent expiration risks, while new indications for Skyrizi and Rinvoq continue to enhance growth visibility; the current dividend yield is approximately 2.7%, offering both growth and defensive characteristics.

🔶$AstraZeneca (AZN.US)$

Q2 revenue reached $15.384 billion (+6%), with core EPS at $2.63 (+18%). Excluding the impact of patent expirations for Farxiga and Brilinta,organic growth reached 11%. The oncology segment contributed $7.325 billion in the quarter (+16%), with strong performance from the three key drivers: Enhertu (+32%), Imfinzi (+27%), and Tagrisso (+7%).

Pipeline highlights: The Phase III trial of CLDN18.2 ADC (AZD0901) combined with chemotherapy as first-line treatment met both primary endpoints for PFS and OS,reducing the risk of disease progression or death by 42%; oral small-molecule GLP-1 elecoglipron (maximum weight loss of 11.8% over 36 weeks) has entered the weight-loss sector layout.

⚠️ The ATTR pipeline drug (Wainua) failed to achieve statistical significance for its Phase III composite cardiovascular primary endpoint; pipeline risks warrant attention.

💡 AstraZeneca is one of the few pharmaceutical companies expected to maintain double-digit CAGR in EPS from 2027 to 2031, driven by robust growth in its core oncology pipeline, with a clear path toward its $80 billion revenue target by 2030.

To obtain the full research report, please contact your dedicated Relationship Manager (RM).

[Investment Advisory Information]

Sun Bihan, Licensed Representative, CE No.: BWS708

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