China Pharma 1H26 Preview: The Globalization/BD Theme Is Stronger Than Short-Term Domestic Policy Disruptions

Overview

This report is Morgan Stanley's 1H26 earnings preview for the China pharmaceutical sector, focusing on innovative-drug sales trends, BD deal execution and revenue recognition, the short-term disruption from new domestic sales representative rules, changes in expense ratios, clinical readouts, and 2H26 catalysts. The core conclusion is that sector valuations remain supported by strong BD prospects and innovative-drug resilience, while domestic policy disruptions are manageable and largely short term.

Core views

The report believes the globalization and BD business model of Chinese pharma companies is entering the harvest period: execution of announced deals has been smooth, potential new BD can still provide external validation and funding sources, and innovative-drug sales are better able than generic drugs to withstand regulatory disruptions. Hengrui Pharma benefits from a diversified innovative-drug portfolio, continued out-licensing, and expense control, and is reiterated as the H-share Top Pick; Hansoh is expected to complete at least one new BD deal in 2026; CSPC, 3SBio, Kelun, Fosun/Henlius, CMS, and Nanjing Leads Biolabs all have various pipeline or BD catalysts.

Analysis framework

The report uses a combination of earnings preview, company-by-company KPI tracking, BD revenue recognition assumptions, pipeline catalyst review, and valuation frameworks. For Hengrui Pharma, Morgan Stanley uses DCF as the basis for the target price and SOTP as a cross-check; for other companies, it focuses on comparing innovative-drug sales, generic/VBP pressure, BD revenue, expense ratios, and the potential impact of clinical/regulatory events on consensus EPS over the next 12 months.

Methodology notes

• Valuation methodsDCF

  discounted cash flow valuation

  The report uses DCF valuation for Hengrui Pharma, with key assumptions including WACC of 8.2%, a terminal growth rate of 3.5%, and an RMB/HKD conversion of 1.13x, while maintaining base-case target prices of HK$92 for the H shares and Rmb81 for the A shares.

• valuation_cross_checkSOTP

  sum-of-the-parts valuation

  The report uses SOTP to cross-check Hengrui's valuation, with generics benchmarked at 2025e 10x P/E and domestic innovative-drug potential benchmarked at 3.0-3.5x P/peak sales, and notes that global upside may not yet be fully reflected.

• earnings_previewKPI surprise framework

  tracking key KPIs and consensus EPS impact

  The report lists the KPIs to watch, potential KPI surprises, and the impact on consensus EPS over the next 12 months for each company, to judge the directional impact of 1H26 earnings, BD revenue, and pipeline events on market expectations.

Asset mapping & comparison

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

• Jiangsu Hengrui Pharmaceuticals (1276.HK / 600276.SS)

  core recommendation and Top Pick

  Strengths

  Diversified innovative-drug portfolio, with the full-year target of 30%+ growth in innovative-drug sales maintained; BD revenue and execution of deals with BMS, GSK, and others support profits; expense-ratio control improves operating leverage; the globalization model provides long-term upside.

  Weaknesses

  Generic-drug sales are affected by new sales representative rules and pressure on products outside VBP, and the report cuts its 2026-2028 revenue and net profit forecasts.

  Comparison

  Compared with companies with higher exposure to mature generics, Hengrui's rising share of innovative-drug and BD revenue makes it better able to withstand short-term policy disruptions.

  Risks

  Innovative-drug sales ramping up below expectations, limited out-licensing income, greater-than-expected impact from generic-drug VBP and policy changes, and pipeline PoS below expectations.

• Hansoh Pharmaceutical Group Co Ltd (3692.HK)

  key Overweight name

  Strengths

  1H26 product sales are expected to grow by low double digits, and recognized BD revenue from executed deals is expected to maintain low-double-digit growth; the company is confident of at least one new BD deal in 2026; pipeline catalysts are abundant, including GSK-related B7H3 ADC, B7H4 ADC, and GLP-1/GIP.

  Weaknesses

  R&D expenses are expected to rise about 30% in 2026, and new BD is not yet included in financial guidance and still faces execution uncertainty.

  Comparison

  Compared with companies more clearly dragged by generics, Hansoh relies more on innovative drugs, BD, and pipeline readouts to maintain valuation elasticity.

  Risks

  Failure to complete new BD, clinical readouts below expectations, and expense growth pressuring margins.

• Sino Biopharmaceutical (1177.HK)

  name to track for BD and innovative drugs/biosimilars

  Strengths

  1H26 revenue is expected to grow about 10%, including Sanofi's US$135mn upfront payment; the innovative-drug portfolio is less affected by the new sales representative policy; Trelegy and Anoro are expected to start contributing from 4Q26.

  Weaknesses

  Generic-drug sales may slow, and non-recurring factors such as historical dividends affect YoY comparability.

  Comparison

  Its near-term growth is more supported by BD upfront payments and product mix changes than by purely domestic drug sales.

  Risks

  Generic-drug policy pressure, the pace of BD revenue recognition, and the progress of CTTQ equity transfer and commercialization of new products.

• CSPC Pharmaceutical Group (1093.HK)

  name for BD execution and milestone catalysts

  Strengths

  It has received an approximately US$1.2bn upfront payment from AZN, while about US$180mn from 2025 deals has not yet been recognized; multiple INDs and projects such as GLP-1/GIP and amylin may trigger milestones in 2026.

  Weaknesses

  Established-drug sales are still affected by policy, and staged recognition of BD revenue is constrained by contract terms.

  Comparison

  Its investment thesis depends more on execution of signed BD contracts and the speed of revenue recognition.

  Risks

  Delayed milestone triggers, BD revenue recognition below expectations, and clinical readouts for EGFR ADC and KN026 below expectations.

• 3SBio (1530.HK)

  target price cut but still has BD and readout catalysts

  Strengths

  Global trials for SSGJ-707/PF'4404 are advancing, with about US$90mn of BD revenue assumed for 1H26; cost savings help maintain resilience in underlying profits.

  Weaknesses

  1H26 product sales are expected to be weak, mainly due to the maturation of core products and regulatory disruption; the target price is cut from HK$34.00 to HK$30.50.

  Comparison

  Compared with Hengrui and Hansoh, 3SBio's near-term fundamentals are more affected by pressure from mature products, but BD and clinical progress still provide catalysts.

  Risks

  Continued weak product sales, SSGJ-707 data or global trial progress below expectations, and insufficient new BD potential.

• Fosun Pharmaceutical / Henlius (2196.HK)

  name to track for globalization of innovative drugs and biosimilars

  Strengths

  Fosun still has a chance to meet the full-year ESOP-implied innovative-drug sales and profit targets; Henlius revenue is expected to grow about 10% in 2026, and Serplulimab and HLX43 have catalysts in U.S. filings and trial initiations.

  Weaknesses

  2Q26 may be affected by regulatory disruption, and VBP pressure on biosimilars needs to be offset by overseas volume expansion and BD revenue.

  Comparison

  Henlius's global biosimilar and PD-1 pathway is the key differentiator versus purely domestically commercialized pharma companies.

  Risks

  Delayed US BLA filing, slow overseas commercialization ramp-up, and biosimilar VBP impact greater than expected.

• Huadong Medicine Co Ltd (000963.SZ)

  name with both innovative-drug upside and VBP pressure

  Strengths

  Innovative-drug sales slowed only mildly in 2Q and are expected to grow 50%+ for full-year 2026; oral GLP-1 NDA is expected to be submitted in 4Q26, and phase II MASH readout is expected at AASLD 2026.

  Weaknesses

  Aesthetics business is expected to decline by double digits, and full-year net profit may lag revenue growth; the impact of the 12th round of VBP needs to be gradually absorbed in 4Q26-2027.

  Comparison

  Its innovative-drug growth is faster, but pressure from traditional businesses and VBP makes earnings elasticity more complex.

  Risks

  Slow VBP absorption, GLP-1 and MASH readouts below expectations, and continued decline in the aesthetics business.

• Sichuan Kelun Pharmaceutical Co Ltd (002422.SZ)

  name for sac-TMT globalization and subsidiary pipeline

  Strengths

  IV infusion product sales are stabilizing and profit has returned to positive growth; Kelun Biotech is advancing clinical validation and domestic commercialization; Merck has initiated 17 global pivotal trials for sac-TMT.

  Weaknesses

  Chuanning's API business is still declining YoY from a high base.

  Comparison

  Kelun's upside comes more from sac-TMT global clinical advancement and regulatory filings than from its traditional infusion business.

  Risks

  Delayed sac-TMT US BLA, uncertainty over results from global pivotal trials, and slow recovery in the API business.

• China Medical System (0867.HK)

  name to track for innovative-drug ramp-up and dermatology portfolio

  Strengths

  1H26 revenue is expected to grow by low double digits, and full-year revenue growth may reach high double digits, supported by ramp-up of new drugs such as ruxolitinib; 2-3 new drugs are expected to receive NMPA approval in 2H26.

  Weaknesses

  Commercialization of new drugs and multiple pivotal trials for in-licensed drugs bring high SG&A and R&D, so 1H net profit is expected to lag revenue growth; the target price is slightly cut to HK$14.60.

  Comparison

  CMS is more commercialization- and in-licensing-driven, and profit elasticity depends on the pace of new-drug ramp-up and expense investment.

  Risks

  Delayed new-drug approvals, weaker-than-expected performance of the Dermavon dermatology portfolio, and the impact of spin-off progress and expense investment on earnings.

• Nanjing Leads Biolabs Co Ltd (9887.HK)

  name with clinical validation and BD elasticity

  Strengths

  Target price raised from HK$62.00 to HK$79.00; LBL-024 has entered a broad clinical validation phase, NSCLC data will be disclosed at WCLC 2026, and there will also be multi-indication data at ESMO 2026; LBL-034 will update durability and safety at ESMO.

  Weaknesses

  The company's investment thesis is highly dependent on clinical validation, BD progress, and the path to profitability, while commercialization visibility is still being formed.

  Comparison

  Compared with large pharma companies that already have a base of sales and profits, Nanjing Leads Biolabs has higher elasticity driven by clinical readouts.

  Risks

  LBL-024 or LBL-034 data below expectations, BD discussions failing to convert into deals, delayed path to profitability, and regulatory approval uncertainty.

Key data

• Report date2026-07-21The report cover shows July 21, 2026 08:00AM GMT.
• Industry viewChina Healthcare / Asia Pacific / Industry View AttractiveThe report maintains an Attractive view on the China healthcare industry.
• Hengrui Pharma H-share target priceHK$92.00The target price is unchanged, and Hengrui H shares are reiterated as the Top Pick.
• Hengrui Pharma A-share target priceRmb81.00The base-case target price is unchanged.
• Hengrui Pharma DCF assumptionsWACC 8.2%; terminal growth 3.5%The report says the DCF assumptions are unchanged.
• Hengrui Pharma 2026E revenueRmb35,069,850千The table shows 2026E total revenue of 35,069,850, with revenue up 10.9% YoY.
• Hengrui Pharma 2026E diluted EPSRmb1.34The financial summary table shows 2026E diluted EPS of Rmb1.34.
• 3SBio target price revisionHK$34.00 down to HK$30.50The report table shows the target price cut.
• Nanjing Leads Biolabs target price revisionHK$62.00 up to HK$79.00The report table shows the target price increase.
• China Medical System target price revisionHK$15.20 down to HK$14.60The report table shows the target price was slightly lowered.
• Hengrui innovative-drug sales guidance30%+ innovative-drug sales growth in 2026The report expects a temporary slowdown in 2Q innovative-drug sales versus 1Q, but the full-year 30%+ growth target remains.
• Hengrui generic-drug sales assumption10%+ decline in generic-drug sales in 2026The report believes generics outside the VBP scope face more obvious policy headwinds.
• Hansoh new BD expectationAt least one new BD deal in 2026The report says this expectation has not yet been included in financial guidance.
• CSPC received BD upfront paymentapproximately US$1.2bn from AZNThe report says CSPC received the AZN upfront payment in 2Q.
• 3SBio 1H26 BD revenue assumptionapproximately US$90mnThe report assumes revenue recognition driven by the progress of SSGJ-707/PF'4404 global trials.
• Sanofi upfront paymentUS$135mnIn its Sino Biopharmaceutical preview, the report includes the Sanofi upfront payment in its 1H26 revenue growth assumption.

Impact & implications

For investors, short-term domestic policy disruptions may cause pressure on 2Q sales cadence and generic-drug revenue, but the report places greater emphasis on support for valuations from innovative drugs, BD revenue recognition, and global transactions. If BD execution, clinical readouts, and regulatory filings continue smoothly, the sector's valuations may gain external validation; if generic/VBP pressure intensifies, BD revenue recognition is delayed, or key pipelines fail, upside to earnings and valuations will be constrained.

Risks

• The impact of new domestic sales representative rules and VBP is greater than expected, putting further pressure on sales of generic and mature products.
• There is uncertainty around the timing of BD upfront payments, milestones, and revenue recognition, which could cause quarterly profit volatility.
• Key clinical readouts, BLA/NDA filings, or NMPA approvals may be delayed or come in below expectations.
• Commercialization expenses for new drugs, R&D investment, or SG&A may be higher than expected, pressuring margins.
• Deterioration in geopolitics or the cross-border cooperation environment may affect Chinese biopharma out-licensing and MNC willingness to cooperate.
• The decline in mature-product lifecycles, base effects, and centralized procurement policies may lead to lower-than-expected revenue growth for some companies.

What to watch

• Whether Hengrui Pharma's innovative-drug sales can maintain 30%+ growth in 2026, and the pace of BD revenue recognition from BMS, GSK, and others.
• Whether Hansoh can complete at least one new BD deal in 2026, and progress in data for GSK-related B7H3 ADC, B7H4 ADC, and GLP-1/GIP.
• The status of INDs and milestone triggers related to CSPC's deals with AZN, Madrigal, and others.
• 3SBio SSGJ-707/PF'4404 global trials and potential data at ESMO.
• Fosun/Henlius's HLX43 U.S. phase III trial, Serplulimab U.S. BLA filing, and overseas ramp-up of biosimilars.
• Huadong Medicine's oral GLP-1 4Q26 NDA filing and AASLD 2026 phase II MASH readout.
• Kelun sac-TMT's US BLA submission in 2L+ EC and progress in Merck's 17 global pivotal trials.
• CMS 2H26 NMPA approvals for new drugs, indications for ruxolitinib cream, and performance of the Dermavon dermatology portfolio.
• Nanjing Leads Biolabs LBL-024 data at WCLC/ESMO 2026, LBL-034 ESMO update, and progress in BD discussions.