FY26E innovative drug growth forecast lowered to 23%, while global pipeline and platform progress continue to support Hengrui's medium-term outlook

Overview

The report focuses on Hengrui Pharmaceuticals' 2Q26 operating performance, innovative drug growth expectations, licensing income, global clinical pipeline, and valuation updates. J.P. Morgan views the recent sales slowdown as a modest recalibration of the growth hurdle rather than a change in the medium-term trajectory; while lowering its FY26/27E revenue and profit forecasts, it maintains Overweight ratings on both the A-shares and H-shares.

Core views

During the 2Q26 earnings call, management was relatively cautious about near-term commercialization performance but notably more confident about the pipeline, technology platforms, and business development. Management did not reiterate the 30% FY26E innovative drug sales growth target proposed at the beginning of the year, instead reaffirming “sustained high growth” during 2026-28 and noting that the A-share employee stock ownership plan set a target of approximately 25% innovative drug sales growth for 2026-27. Accordingly, J.P. Morgan lowered its FY26E innovative drug sales growth forecast from 31% to 23%, viewing this as a modest recalibration of the near-term growth hurdle rather than a change in the medium-term growth trajectory. The 2Q26 sales shortfall primarily arose from near-term commercialization pressure on the innovative oncology drug portfolio. Pyrotinib faced more intense competition, hetrombopag was affected by price cuts following volume-based procurement of competing products, and apatinib and long-acting PEG-G-CSF saw price cuts during NRDL renewals; sales of newly NRDL-listed dalpiciclib and adebrelimab were not yet sufficient to offset these pressures. The report believes this reflects first-generation innovative drugs simultaneously facing NRDL repricing and late-lifecycle competition, while newer products such as HER2 ADCs remain in the early stages of sales ramp-up. Management also noted tighter industry compliance regulation in 2Q26. Potential improvement drivers include the expected 2H26 approval of hetrombopag for chemotherapy-induced thrombocytopenia and improved access to newly NRDL-listed drugs at key hospitals, which may help innovative drug sales recover in 2H26. The licensing business provides a partial buffer to near-term performance. Of the Rmb1.42bn in licensing income recognized in 1H26, Rmb1.18bn came from GSK. The BMS transaction includes a US$600mn upfront payment and a US$175mn first-anniversary payment, with the related income to be recognized based on percentage of completion beginning in 3Q26. Management stated that FY26E licensing income should not be lower than the FY25 level, and J.P. Morgan therefore raised its licensing income assumption to align with management guidance. The report considers global pipeline development the core source of confidence in growth beyond 2026. The company guides for approvals of more than 40 indications in 2027-28, most from non-oncology drugs. A global Ph3 trial of hetrombopag for chemotherapy-induced thrombocytopenia has begun recruitment; the long-acting IL-23p19/IL-36R bispecific drug SHR-1139 is scheduled to begin a global Ph3 trial in psoriasis, with its Ph2 data expected to be presented at the EADV meeting in 2H26; and the IFNAR1/TACI fusion protein SHR-2173 is being prepared for a global Ph3 trial in primary membranous nephropathy, while the expanded Ph2 trial has enrolled US patients, with some clinical data expected in 1H27. Global Ph2 trials of a miR124 inhibitor for ulcerative colitis and a DPP1 inhibitor for COPD are also scheduled to begin in 2H26. Global late-stage clinical development by three US partners is also progressing. Kailera initiated a Ph3 trial of HRS9531 for obesity at the end of 2025; Braveheart Bio may initiate a Ph3 trial of the myosin inhibitor HRS-1893 for hypertrophic cardiomyopathy in 2H26; and IDEAYA may initiate Ph3 trials of the DLL3 ADC SHR-4849 for small-cell lung cancer and neuroendocrine cancer before the end of 2026. In early-stage R&D, management said platforms including PROTAC, RIPTAC, and RDC have progressed from technological proof of concept to clinical validation in humans, with the R&D model shifting from “platform building” to “platform output,” providing a validation foundation for subsequent project generation and external collaborations. The model update reflects a slower ramp-up of innovative oncology drugs than previously assumed, as well as a longer duration of NRDL renewal price cuts and competitive pressure on first-generation innovative drugs. J.P. Morgan lowered its FY26/27E revenue forecasts by 3.3% and 6.0%, respectively, to Rmb33,369mn and Rmb38,122mn; generic drug assumptions were largely unchanged, with FY26E sales expected to decline by approximately 16%. To accommodate the launch of more global Ph2/3 trials in 2H26 and a broader early-stage R&D portfolio, the report raised its R&D expense forecast; it also increased projected licensing income and fair-value gains arising from the potential appreciation of the Braveheart stake. Following these adjustments, FY26/27E net profit forecasts were lowered by 2.3% and 4.6%, respectively, while FY27E adjusted EPS was reduced from Rmb1.59 to Rmb1.52. The financial model continues to show growth reaccelerating after 2026. Revenue rises from Rmb31,629mn in FY25A to Rmb33,369mn in FY26E, Rmb38,122mn in FY27E, and Rmb45,082mn in FY28E, corresponding to year-over-year growth of 13.0%, 5.5%, 14.2%, and 18.3%. Adjusted net profit is expected to increase from Rmb7,413mn in FY25A to Rmb8,584mn in FY26E, Rmb10,079mn in FY27E, and Rmb12,092mn in FY28E; net margins are expected to rise from 23.4% to 25.7%, 26.4%, and 26.8%. Adjusted FCFF is Rmb8,232mn, Rmb7,534mn, Rmb9,041mn, and Rmb10,813mn, respectively, indicating a return to growth following a temporary decline in FY26E. On valuation, the Dec-27 A-share target price was lowered from Rmb68 to Rmb65, while the H-share target was lowered from HK$68 to HK$65, with Overweight ratings maintained in both markets. The A-share DCF projects free cash flow through 2033 and applies a 4.0% terminal growth rate and 9.2% WACC; the H-share DCF likewise projects through 2033 but applies a 3% terminal growth rate and 9.6% WACC. The report believes Hengrui has a strong domestic R&D portfolio, sales capabilities, and sustained global business development potential. For the H-shares, the current valuation does not fully reflect an improving earnings trajectory, expanding pipeline value, and long-term business development income; if potential fiscal stimulus sustains broader market momentum, the H-shares may also benefit from market beta.

Analysis framework

The report first assesses changes in management's attitude toward near-term sales and the medium-term R&D outlook based on the 2Q26 earnings call, then examines individually the effects of competition from legacy products, NRDL price cuts, new-product ramp-up, and hospital access on sales. It subsequently reviews the global clinical progress of internally developed and partnered programs by project and timeline, and accordingly adjusts forecasts for segment revenue, R&D expenses, licensing income, fair-value gains, and net profit. Finally, the report values the A-shares and H-shares using DCF analyses based on free cash flow projected through 2033 and derives target prices using the respective cost-of-capital and terminal-growth assumptions.

Methodology notes

• Valuation methodologyDCF discounted cash flow

  A-share and H-share DCF valuations

  The report discounts future free cash flow to present value and adds a terminal value beyond 2033; it uses a 4.0% terminal growth rate and 9.2% WACC for the A-shares and a 3% terminal growth rate and 9.6% WACC for the H-shares to derive respective Dec-27 target prices of Rmb65 and HK$65.

• Valuation methodologyFCFF/FCFE free cash flow

  Free cash flow forecast

  The report forecasts Hengrui's free cash flow through 2033 and provides adjusted FCFF for FY25A through FY28E as the core cash flow basis for the DCF valuation.

• Corporate fundamentals and financial framework

  Rolling adjustments to segment earnings forecasts

  The report separately revises assumptions for innovative drugs, generic drugs, licensing income, R&D expenses, and fair-value gains, then flows these changes through to revenue, net profit, and EPS forecasts to reflect the combined effects of slower commercialization and increased pipeline investment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hengrui A-shares (600276.SS)

  The report believes near-term commercialization of innovative oncology drugs is under pressure, but new-drug ramp-up, licensing income, and global pipeline advancement can support medium-term growth, and it maintains Overweight.

  Strengths

  A major Chinese pharmaceutical company with a strong R&D portfolio, commercialization capabilities, and domestic success potential for innovative programs such as ADCs.

  Weaknesses

  First-generation innovative drugs face NRDL price cuts and late-lifecycle competition, while newly approved products have not yet generated sufficient sales scale, leaving FY26E growth below prior expectations.

  Risks

  The PD-1 marketing application could be rejected by the FDA, or clinical data from ADC programs could fall below expectations.

• Hengrui H-shares (1276.HK)

  The report believes the H-share valuation does not fully reflect the improving earnings trajectory, expanding pipeline value, and long-term business development income, and it maintains Overweight.

  Strengths

  A strong Chinese R&D pipeline, sales capabilities, and sustained global business development potential, with possible benefits from broader market momentum.

  Weaknesses

  Shares the same near-term commercialization and R&D execution pressures as the A-shares while being more exposed to H-share market sentiment.

  Risks

  In addition to PD-1 and ADC clinical risks, risks include deterioration in H-share market sentiment.

Key data

• FY26E innovative drug sales growth23%Previously forecast at 31%; management did not reiterate the 30% growth target set at the beginning of the year
• Employee stock ownership plan target for innovative drug salesApproximately 25%Applicable to 2026-27
• FY26/27E revenue forecast adjustments-3.3%/-6.0%Mainly reflecting a slower ramp-up of innovative oncology drugs
• FY26/27E net profit forecast adjustments-2.3%/-4.6%Net impact after incorporating adjustments to R&D expenses, licensing income, and fair-value gains
• FY27E adjusted EPSRmb1.52Previously Rmb1.59, lowered by 4.6%
• FY26E generic drug sales assumptionApproximately 16% declineThe report states that the related assumption is largely unchanged
• 1H26 licensing incomeRmb1.42bnOf which Rmb1.18bn came from GSK
• BMS transaction paymentsUS$600mn upfront payment and US$175mn first-anniversary paymentRelated income to be recognized based on percentage of completion from 3Q26
• Indications expected to be approved in 2027-28More than 40Company guidance indicates that most approvals will come from non-oncology drugs
• FY25A/FY26E/FY27E/FY28E revenueRmb31,629mn/Rmb33,369mn/Rmb38,122mn/Rmb45,082mnCorresponding year-over-year growth of 13.0%/5.5%/14.2%/18.3%
• FY25A/FY26E/FY27E/FY28E adjusted net profitRmb7,413mn/Rmb8,584mn/Rmb10,079mn/Rmb12,092mnNet margins of 23.4%/25.7%/26.4%/26.8%, respectively
• A-share price and target priceRmb47.74/Rmb65.00Price as of August 21, 2026; Dec-27 target price, previously Rmb68.00 (Dec-26)
• H-share price and target priceHK$48.20/HK$65.00Price as of August 21, 2026; Dec-27 target price, previously HK$68.00 (Dec-26)
• A-share DCF parametersTerminal growth rate 4.0%, WACC 9.2%Free cash flow projected through 2033
• H-share DCF parametersTerminal growth rate 3%, WACC 9.6%Free cash flow projected through 2033

Impact & implications

The report believes NRDL repricing, competition from legacy products, and the incomplete handoff to new-drug sales growth will weigh on FY26E growth, but this is more akin to a near-term adjustment in pace. Recognition of licensing income, improved access for newly NRDL-listed drugs, and a new indication for hetrombopag may support 2H26 performance, while global late-stage clinical development, the wave of approvals in 2027-28, and clinical validation of technology platforms will determine whether medium-term growth materializes. The forecast reductions led to modestly lower target prices but were insufficient to change the Overweight view on the A-shares and H-shares.

Risks

• The PD-1 marketing application could be rejected by the FDA, creating downside risk to the rating and target price.
• Clinical data from ADC programs could fall below the report's expectations.
• Deterioration in H-share market sentiment could weigh on H-share performance.
• Stronger-than-expected sales growth and earnings could create upside deviations from the report's forecasts.
• Improvement in H-share market sentiment could constitute an upside driver for the H-shares.

What to watch

• Monitor whether the chemotherapy-induced thrombocytopenia indication for hetrombopag can be approved in 2H26 and restore product growth.
• Monitor improved access to newly NRDL-listed drugs at key hospitals and their sales ramp-up in 2H26.
• Monitor the recognition progress of income from the BMS transaction beginning in 3Q26 and whether FY26E licensing income can remain no lower than FY25.
• Monitor SHR-1139 Ph2 data to be presented at the EADV meeting in 2H26 and the initiation of its global Ph3 trial.
• Monitor preparations for the global Ph3 trial of SHR-2173, US patient enrollment, and clinical data in 1H27.
• Monitor the initiation of global Ph2 trials for the miR124 inhibitor and DPP1 inhibitor in 2H26.
• Monitor whether Braveheart Bio and IDEAYA can advance the relevant Ph3 trials as planned in 2H26 or before the end of 2026.
• Monitor the delivery of guidance for approvals of more than 40 indications in 2027-28 and the proportion contributed by non-oncology products.
• Monitor progress in translating the PROTAC, RIPTAC, and RDC platforms from clinical validation in humans into project output and business development results.