CDMO acceleration and late-stage project advancement improve growth visibility; BofA raises Pharmaron's target prices

Overview

The report focuses on Pharmaron's first-half 2026 results, progress in CDMO projects, and subsequent growth visibility. BofA believes that CDMO acceleration, an increasing number of late-stage projects, global customer expansion, and oral GLP-1-related business support medium-term growth. It therefore raises its revenue forecasts and target prices for both share classes, while assigning different ratings to the H-shares and A-shares based on valuation differences.

Core views

In the first half of 2026, Pharmaron's revenue reached RMB 7.60bn, up 17.9% YoY, with growth across its major service platforms. Laboratory Services revenue was RMB 4.63bn, up 13.7% YoY; CDMO revenue surged 32.8% to RMB 1.88bn, mainly driven by large-scale manufacturing and project advancement; Clinical Development revenue was RMB 1.07bn, up 13.8% YoY. The report therefore views CDMO as the core driver of the current growth acceleration, while Laboratory Services and Clinical Development also maintained double-digit expansion. Profit growth lagged revenue growth, reflecting divergent gross margin performance across businesses. Gross profit increased 13.9% YoY to RMB 2.47bn in the first half, while the consolidated gross margin declined by 1.1 percentage points to 32.6%. Pressure in Laboratory Services and Clinical Services partially offset the contribution from a 2.7-percentage-point improvement in CDMO gross margin to 25.6%. Selling, administrative, and R&D expenses increased 18.5%, 17.2%, and 18.1% YoY, respectively, while the corresponding expense ratios remained stable at 2.2%, 13.1%, and 3.9%. Attributable net profit rose 7.0% YoY to RMB 750mn, with net margin declining by 1.0 percentage point to 9.9%. Non-IFRS adjusted net profit grew faster, rising 20.3% YoY to RMB 909mn. The size and maturity of the project pipeline are the primary basis for the report's assessment that growth visibility has improved. The CDMO pipeline expanded to 782 molecules or intermediates, of which 45 projects have entered process validation or commercialization and another 51 are in Phase III. The advancement of projects into later stages implies potentially longer service cycles and provides a foundation for subsequent large-scale manufacturing. The company also secured a commercial manufacturing partnership for an oral small-molecule GLP-1 receptor agonist filed by a multinational pharmaceutical company and passed the first pre-approval inspection for an innovative drug API project in China, indicating continued progress in its commercial delivery capabilities. Customer quality and cross-selling are also strengthening, with revenue from the world's top 20 pharmaceutical companies increasing 32.0% YoY. The report also notes that the company's backlog grew by more than 20% YoY, and management expects full-year 2026 revenue growth of 15%—20% based on order and business trends. Its Buy thesis also includes the absence of new developments in Biosecure-related legislation to date, leadership changes on the US House Homeland Security Committee that improve growth visibility, a recovery in the global biotech financing environment, and more projects entering later stages and extending business cycles. Based on growth in CDMO, Laboratory Services, and Clinical Development, as well as visibility from the global oral GLP-1 business, the report raises its 2026/2027/2028 revenue forecasts by 4%/8%/12%, respectively, and updates its margin assumptions in line with first-half trends. Despite the higher revenue forecasts, 2026 EPS was lowered from CNY 1.08 to CNY 1.01, while 2026 EBITDA was lowered from RMB 3,821.4mn to RMB 3,788.2mn. In contrast, 2027 and 2028 EPS were raised from CNY 1.22 and CNY 1.43 to CNY 1.26 and CNY 1.56, respectively, while EBITDA was raised from RMB 4,095.2mn and RMB 4,465.7mn to RMB 4,405.8mn and RMB 4,986.4mn, respectively. The updated forecasts show estimated sales of RMB 16,755mn, RMB 19,891mn, and RMB 23,484mn for 2026—2028, respectively, with adjusted net profit of RMB 1,772mn, RMB 2,216mn, and RMB 2,748mn. Over the same period, free cash flow is expected to increase from RMB 819mn to RMB 2,506mn and RMB 2,835mn, while net debt is projected to decline from RMB 5,336mn to RMB 3,336mn and RMB 1,056mn, illustrating the path toward improved cash flow and deleveraging in the report's model. The report uses DCF to raise the target prices for both share classes: the H-share target price increases from HKD 32.3 to HKD 38.4, while the A-share target price rises from CNY 28.4 to CNY 33.8. Common DCF assumptions include an 11.7% weighted average cost of capital, a 3.0% terminal growth rate, 5% debt and 95% equity financing, a 4% risk-free rate, a 7% equity risk premium, a 4.9% after-tax cost of debt, an 18% long-term effective tax rate, a 12.1% cost of equity, and a beta of 1.15. The rating divergence is primarily driven by valuation: the H-shares retain a Buy rating, while the A-shares retain an Underperform rating due to their expensive valuation. Based on the report's forecasts, the H-shares trade at 2026—2028 P/E ratios of 28.86x, 23.08x, and 18.61x, compared with 50.61x, 40.46x, and 32.63x for the A-shares over the same period.

Analysis framework

The report first breaks down the revenue, gross margin, and expense performance of each business platform in the first half of 2026, then assesses the sustainability of growth based on the number and stages of CDMO projects, commercialization partnerships, customer mix, and order backlog. It subsequently updates its 2026—2028 revenue, EPS, EBITDA, cash flow, and debt forecasts based on management's full-year guidance and first-half margin trends. Finally, it uses DCF to calculate target prices for the H-shares and A-shares and assigns different ratings based on the valuation disparity between the two share classes.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  DCF Target Price Valuation

  The report discounts forecast-period cash flows and terminal value to present value to determine target prices of HKD 38.4 for the H-shares and CNY 33.8 for the A-shares. Key assumptions include an 11.7% weighted average cost of capital, a 3.0% terminal growth rate, and a beta of 1.15.

• Company Fundamentals and Financial Framework

  Earnings Forecasts Driven by Segment Trends and Project Stages

  The report separately examines the revenue and margins of Laboratory Services, CDMO, and Clinical Development, then adjusts its revenue and profit forecasts for the next three years based on projects advancing from clinical stages to validation and commercialization, customer growth, and order trends.

Asset mapping & comparison

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

• Pharmaron H-shares (3759.HK)

  The report believes that the CDMO upcycle, advancement of late-stage projects, and globalization opportunities support growth; it maintains Buy and raises the target price.

  Strengths

  Rapid CDMO growth, improving pipeline maturity, a 32.0% YoY increase in revenue from the world's top 20 pharmaceutical companies, and backlog growth of more than 20% YoY.

  Weaknesses

  Consolidated gross margin declined by 1.1 percentage points, while attributable net profit grew more slowly than revenue.

  Comparison

  The forecast 2026 P/E ratio is 28.86x, below the A-shares' 50.61x.

  Risks

  Tensions between China and the US, slower growth in the pharmaceutical and biotechnology industries, and adverse impacts from COVID-19.

• Pharmaron A-shares (300759.SZ)

  The report likewise recognizes the company's growth prospects and raises the target price, but maintains Underperform due to the expensive valuation.

  Strengths

  The same business platforms, CDMO pipeline, customer base, and global growth opportunities as the H-shares.

  Weaknesses

  The valuation is materially elevated; the report forecasts a 2026 P/E ratio of 50.61x.

  Comparison

  The A-shares' forecast 2026—2028 P/E ratios are 50.61x, 40.46x, and 32.63x, all higher than the H-shares' 28.86x, 23.08x, and 18.61x over the same period.

  Risks

  In addition to operational and geopolitical risks, the expensive valuation is the direct reason the report maintains its Underperform rating.

Key data

• First-half 2026 RevenueRMB 7.60bnUp 17.9% YoY
• Laboratory Services RevenueRMB 4.63bnUp 13.7% YoY in the first half of 2026
• CDMO RevenueRMB 1.88bnUp 32.8% YoY in the first half of 2026
• Clinical Development RevenueRMB 1.07bnUp 13.8% YoY in the first half of 2026
• Consolidated Gross Margin32.6%Down 1.1 percentage points YoY
• CDMO Gross Margin25.6%Up 2.7 percentage points YoY
• Attributable Net ProfitRMB 750mnUp 7.0% YoY, with a net margin of 9.9%
• Non-IFRS Adjusted Net ProfitRMB 909mnUp 20.3% YoY
• CDMO Project Pipeline782 molecules or intermediates45 at the process validation or commercial stage and 51 in Phase III
• Revenue from the World's Top 20 Pharmaceutical Companies+32.0% YoYReflects stronger contributions from key customers and enhanced cross-selling
• 2026 Revenue Growth Guidance15%—20%Management's full-year expectation based on order and business trends
• Revenue Forecast Revisions2026/2027/2028E raised by 4%/8%/12%, respectivelyPrimarily reflects growth in businesses such as CDMO and visibility from the oral GLP-1 business
• H-share Target Price38.40 HKDRaised from 32.30 HKD; Buy maintained
• A-share Target Price33.80 CNYRaised from 28.40 CNY; Underperform maintained

Impact & implications

The report believes that rapid CDMO growth, a higher proportion of late-stage projects, and revenue expansion among major pharmaceutical customers provide greater visibility into Pharmaron's future revenue growth. Improving free cash flow and declining net debt also support a gradual strengthening of its financial position. However, consolidated gross margin and net margin remained under pressure in the first half, and the A-shares trade at a materially higher valuation than the H-shares, resulting in different ratings for the two share classes despite identical fundamentals.

Risks

• Further tensions between China and the US could affect the company's cross-border business and growth expectations.
• Slower growth in the pharmaceutical and biotechnology industries could weaken project and order growth.
• COVID-19-related factors could adversely affect the business.
• The expensive A-share valuation could limit its relative attractiveness.

What to watch

• Monitor whether full-year 2026 revenue can achieve management's growth guidance of 15%—20%.
• Monitor the pace at which the 45 process validation or commercial projects and 51 Phase III projects advance to subsequent stages.
• Monitor progress in the commercial manufacturing partnership for the oral small-molecule GLP-1 receptor agonist and the innovative drug API project.
• Monitor subsequent changes in revenue from the world's top 20 pharmaceutical companies, customer numbers, and order backlog.
• Monitor margin pressure in Laboratory Services and Clinical Development, and whether improving CDMO gross margin can continue to offset that pressure.
• Monitor Biosecure-related policies and changes in China-US relations.
• Monitor whether the total number of projects, customer numbers, and business expansion exceed the report's expectations.