Hengrui Enters into $15.2 Billion Collaboration with BMS, Buy Rating Maintained

Overview

Nomura Securities publishes a quick review interpreting the strategic collaboration between Hengrui Pharmaceuticals and Bristol-Myers Squibb (BMS). The agreement involves 13 preclinical projects, with Hengrui receiving $600 million upfront and up to $15.2 billion in milestone payments, reaffirming the company's capability in globalizing innovative drugs. The firm maintains its Buy rating, believing the deal timely addresses market concerns about slowing deal flow.

Core views

Collaboration details show Hengrui licenses global rights (excluding Greater China) for 4 oncology/hematology projects and 5 co-development projects to BMS, while obtaining Greater China rights for 4 BMS immunology projects. Financial terms include $600 million upfront (recognized in stages), $175 million payments each in 2027-2028, and single-digit to double-digit sales royalties. Management indicates upfront payments will be recognized progressively from Q4 2026 based on project progress. From a market impact perspective, the report notes that the absence of new collaborations over the past 7 months had pressured the stock price. This deal reaffirms Hengrui's continuous deal-making ability and serves as a representative case of China's innovative drug globalization. The firm particularly commends the company's confidentiality before the deal announcement. Valuation-wise, the target price of HKD 87.49 is based on a DCF model (WACC 8.7%, perpetual growth rate 5.0%), with the current price of HKD 66.05 implying significant upside potential.

Analysis framework

Nomura adopts an event-driven analysis approach, focusing on the direct impact of collaboration terms on cash flows and R&D pipelines. By breaking down the upfront payment size (50% of FY25 R&D expenses) and milestone amounts, it quantifies the financial boost from the deal. Combined with market sentiment analysis, it treats deal flow continuity as a key valuation variable, explaining previous stock price weakness and the catalytic effect of this transaction.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  Evaluates intrinsic value by discounting future cash flows

  The report uses a DCF model to calculate the target price, setting WACC at 8.7% and perpetual growth rate at 5.0%. It incorporates milestone payments and sales royalties from the collaboration into cash flow projections, reflecting the deal's contribution to long-term value.

Key data

• Upfront Payment$600 millionEquivalent to 50% of Hengrui's FY2025 R&D expenses
• Maximum Milestone Payments$15.2 billionPotential phased payments, contingent on project progress
• Total Collaboration Projects134 Hengrui oncology projects +4 BMS immunology projects +5 co-development projects
• Sales RoyaltiesSingle-digit to double-digitTiered rates based on management guidance
• Target PriceHKD 87.49Based on DCF model, current price HKD 66.05

Impact & implications

The report views this collaboration as validation of Hengrui's innovative drug R&D capabilities and international BD strength, alleviating market concerns about deal flow sustainability. As a proxy for China's innovation out-licensing, the deal may enhance sector valuation premiums. Financially, the substantial upfront payment will significantly improve cash flow, supporting future R&D investments.

Risks

• Next-round volume-based procurement price cuts
• Narrowing valuation premium
• BD deals or clinical progress falling short of expectations

What to watch

• Clinical progress and milestone achievements of the 13 projects
• Recognition timeline of upfront payments in financial statements
• Subsequent BD deal frequency to verify deal flow continuity