Morgan Stanley Fund stated in a report that, based on historical data, there is a clear negative correlation between the innovative drug index and the Federal Reserve interest rate. If the Federal Reserve cuts interest rates, risk appetite will increase, and innovative drugs with higher growth potential may receive more favor from risk capital in the short to medium term, providing some upward momentum. Apart from A-share innovative drugs, Hong Kong stocks' innovative drugs are also worth paying attention to. According to market access policies, the Hong Kong Stock Exchange allows bio-tech companies that meet certain conditions but are not yet profitable to go public. Therefore, many innovative drug companies, new biopharmaceutical companies, and other biotech companies have completed their IPOs in Hong Kong, making Hong Kong stocks' innovative drug targets more diverse. How is the overall situation in the pharmaceutical sector? Since reaching a peak in 2021, the pharmaceutical sector has experienced three consecutive years of decline. The main reasons behind this include a decrease in residents' expected income affecting the consumption of medical sector, a slowdown in medical insurance income growth, policy constraints such as drug price comparisons and the implementation of DRG 2.0, and uncertainty brought by the US Congress's Biosecurity Law. However, from a fundamental perspective, the pharmaceutical sector has strong essential attributes. In the process of the aging population, the long-term growth potential of the medical industry still exists. Even though there is pressure on the medical insurance income side, measures such as delaying retirement and personal account reforms will benefit medical insurance income, and there is still room for improvement in the long term. At the same time, the growth rate of medical insurance payment remains above 10%, and the implementation of DRG 2.0 aims to improve the efficiency of medical insurance fund utilization and will not suppress medical demand. From a valuation perspective, after more than three years of adjustment, the pharmaceutical sector's valuation has become more prominent, making it more attractive. Wang Dapeng, Director of Research and Management at Morgan Stanley Fund, and manager of Morgan Stanley Healthcare Industry Hybrid and Morgan Stanley Shanghai-Hong Kong Shen Selected Fund, stated in his latest semi-annual report, "Although there has been a lot of adjustment in the pharmaceutical sector since the beginning of the year, we remain optimistic about the pharmaceutical sector in the future. Internally, the impact of anti-corruption on diagnosis and treatment continues to weaken, and it is expected that the sector will continue to recover on a month-on-month basis. In the long term, anti-corruption is expected to become normalized, which is beneficial for the competitiveness of high-quality leading companies; in terms of policies, the 2024 centralized procurement for quality and expanding coverage continues to be comprehensively promoted, and the market is expected to gradually digest this, while the policy continues to encourage innovation with a consistent tone, and local governments continue to introduce encouraging policies; externally, the gradual easing of US inflation is expected to start a rate-cut cycle within the year, which may relieve the pressure on pharmaceutical growth." Why is the Federal Reserve rate cut good for innovative drugs? The innovative drug industry is highly sensitive to changes in interest rates. Based on historical data, there is a clear negative correlation between the innovative drug index and the Federal Reserve interest rate, meaning that when the Federal Reserve cuts interest rates, innovative drugs usually perform well. Source: Wind, historical data is for reference only and does not represent future performance The reason behind this is that the innovative drug industry has a long R&D cycle, high investment, and high costs, and is heavily reliant on venture capital and external funding in the early stages. When the market raises interest rates, low-risk investment options are more attractive, and funds are less willing to take on larger risks to invest in innovative drugs and other high-research, high-growth equity assets. As interest rates stop rising or gradually lower, market risk appetite increases, and more funds flow back into the stock market, improving the financing situation for innovative drug companies and ensuring the continuous cash flow of the companies. In other words, the rate cut creates a favorable environment for innovative drug companies.