Jiangsu Hengrui's 2Q26 growth slowed, but innovative drugs, BD revenue, and a catalyst-rich pipeline could take over as growth drivers after 2H26

Overview

The report summarizes Jiangsu Hengrui's 2Q26 earnings call. Although weakness in mature oncology drugs weighed on the quarter, management expects innovative drug sales and BD revenue to improve in 2H26. Morgan Stanley also reviews key clinical and filing milestones over the next year across oncology, immunology, metabolic, and cardiovascular indications, while maintaining its Overweight rating and HK$92.00 price target.

Core views

The primary reason for the 2Q26 operating slowdown was declining sales of mature oncology drugs, rather than a fundamental change in the growth thesis for innovative drugs. Management believes innovative drug sales will accelerate in 2H26 as policy impacts gradually ease and more products gain hospital access. The report therefore distinguishes the quarter's weakness from the subsequent growth trajectory: near-term pressure is concentrated in established traditional products, while the subsequent recovery depends on innovative drug volume growth and progress in market access. BD and investment gains are important variables affecting the timing of profit and revenue in 2H26. Hengrui recently received a US$600 million upfront payment from the BMS transaction and will begin recognizing part of the revenue in 2H26; management expects full-year FY26 BD revenue to increase year over year. Kailera generated an Rmb820 million fair-value gain in 2Q, while the fair-value gain following BraveHeart's recent Nasdaq listing is expected to be recognized in 3Q, based on a cost basis of Rmb240 million. These items could cause quarterly profit to be materially affected by transaction-recognition timing and fair-value changes and should be assessed separately from the performance of the core pharmaceutical business. The company continues to maintain ambitious R&D output targets: more than 10 drug or indication approvals, approximately 20 NDA filings, approximately 25 Phase III readouts, and approximately 20 new molecular entities entering clinical development annually. In AI-assisted drug discovery, the company stated that its new-target discovery capabilities have expanded from zero to one, with RIPTAC, CD3-CD2, AOC, and DAC candidates all progressing into clinical development. This pace of R&D underpins the report's assessment of future product supply and BD potential. Near-term milestones are most concentrated in oncology. HER3 ADC SHR-A2009 will disclose details at ESMO from its Phase III study in first-line EGFR-mutant non-small cell lung cancer in China. Its BLA has already been accepted, and the report lists 2028 as the expected approval date. The company is also advancing multiple combination trials in earlier lines of therapy, including a Phase III study in first-line EGFR-mutant non-small cell lung cancer. DLL3 ADC SHR-4849, partnered with IDEAYA, is expected to report global Phase I/II data in small cell lung cancer and neuroendocrine carcinoma in 2H26. In immunology, the IL-23p19/IL-36 program SHR-1139 will present Phase II psoriasis data at EADV and is expected to initiate Phase III trials in 2H26. The IFNAR1-TACI program HRS-2173 is expected to begin Phase II enrollment in the US in 2H26. These data and clinical advances will test the company's ability to expand its innovative drug footprint beyond oncology. The metabolic portfolio spans injectable, oral, and multi-target products. The GLP-1/GIP program ribupatide is targeting approval in China in 1H27 as planned. Its overseas high-dose Phase IIb data are being advanced by Kailera and are expected in mid-2027, followed by global Phase III results expected in 2028. Oral ribupatide is scheduled to enter global Phase III trials in 1H27. The oral small-molecule GLP-1 program HRS-7535 is expected to report global Phase II data in 2027, while its China NDA is being prepared. The GLP-1/GIP/GGG injectable HRS-4729 has entered Phase II trials in China and Phase I trials overseas. The cardiovascular portfolio also has multiple milestones. The myosin program HRS-1893 is expected to initiate a global Phase III trial in obstructive hypertrophic cardiomyopathy in 2H26 and a global Phase III trial in non-obstructive hypertrophic cardiomyopathy in 1H27. These developments will trigger milestone payments to Hengrui. A China NDA for the obstructive indication could be submitted in 1H27, while a China Phase III trial for the non-obstructive indication is also scheduled to begin in 1H27. The Lp(a) program partnered with MRK will present Phase II data at ESC and enter Phase III in 2H26. Phase I data for the Lp(a) and ApoC3 siRNA candidates are expected to be presented at AHA in November and ESC in August, respectively. Financial forecasts show that Morgan Stanley expects net revenue to increase from Rmb31.6294 billion in 2025 to Rmb35.0698 billion in 2026, Rmb40.9889 billion in 2027, and Rmb48.5472 billion in 2028. ModelWare net profit is expected to rise over the same period from Rmb7.7111 billion to Rmb8.8743 billion, Rmb10.2630 billion, and Rmb12.5210 billion. Its EPS forecasts are Rmb1.16, Rmb1.34, Rmb1.55, and Rmb1.89, below the corresponding consensus estimates of Rmb1.32, Rmb1.41, Rmb1.65, and Rmb1.98. Forecast P/E declines from 54.8x in 2025 to 35.1x in 2026, 30.4x in 2027, and 24.9x in 2028. The valuation is primarily based on DCF, assuming a WACC of 8.2%, a cost of equity of 8.1%, a terminal growth rate of 3.5%, and an RMB/HKD conversion rate of 1.13x. The base and bear cases do not apply an A-share premium relative to H-shares, while the bull case applies a 10% A-H premium. The report also uses SOTP as a cross-check: generic drugs are valued at 10x 2025 expected P/E, consistent with Chinese pharmaceutical peers that have greater exposure to generic or traditional drugs; the domestic potential of innovative drugs is valued at 3.0x to 3.5x peak sales, within the range of leading Chinese biotechnology companies' expected 2030 P/S multiples.

Analysis framework

The report first uses management's earnings-call commentary to explain the reasons for the 2Q26 slowdown and the recovery path for sales and BD revenue in 2H26. It then reviews the clinical, regulatory filing, and partnership milestones across the oncology, immunology, metabolic, and cardiovascular pipelines. Finally, it combines ModelWare earnings forecasts with a DCF-based primary valuation and cross-checks the result using SOTP and peer multiples.

Methodology notes

• Valuation methodologyDCF discounted cash flow

  DCF valuation

  The report discounts the company's future cash flows to present value using an 8.2% WACC, an 8.1% cost of equity, a 3.5% terminal growth rate, and an RMB/HKD conversion rate of 1.13x, while differentiating A-H premium assumptions across the base, bear, and bull cases.

• Valuation methodologySOTP sum-of-the-parts valuation

  SOTP cross-check

  The report values generic drugs and innovative drug potential separately: generic drugs are valued at 10x 2025 expected P/E, while the domestic potential of innovative drugs is valued at 3.0x to 3.5x peak sales, with the results compared against the valuation ranges of Chinese pharmaceutical and biotechnology peers.

Asset mapping & comparison

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

• Jiangsu Hengrui (1276.HK)

  The report believes the company will benefit from accelerating innovative drug sales in 2H26, year-over-year growth in BD revenue, and progress across multiple pipelines.

  Strengths

  The company has ambitious annual R&D output targets spanning oncology, immunology, metabolic, and cardiovascular indications and has expanded its AI-assisted new-target discovery capabilities.

  Weaknesses

  2Q26 was affected by declining sales of mature oncology drugs, while some traditional drugs continue to face pressure from policy measures and volume-based procurement.

  Comparison

  In the SOTP valuation, generic drugs are valued at 10x 2025 expected P/E, consistent with Chinese pharmaceutical peers that have greater exposure to traditional drugs; innovative drugs are valued at 3.0x to 3.5x peak sales, within the range of leading Chinese biotechnology companies.

  Risks

  The impact of volume-based procurement on loversol, sevoflurane, and butorphanol could exceed expectations, while pipeline development could also suffer material setbacks and fall short of market expectations.

Key data

• Stock ratingOverweightIndustry View is Attractive
• Price targetHK$92.00Current price target in the report
• BMS transaction upfront paymentUS$600mnReceived, with part of the revenue to be recognized beginning in 2H26
• Kailera fair-value gainRmb820mnRecognized in 2Q
• BraveHeart cost basisRmb240mnThe fair-value gain following its listing is expected to be booked in 3Q
• Annual R&D output targets10+ approvals, approximately 20 NDAs, approximately 25 Phase III readouts, and approximately 20 NMEs entering clinical developmentAnnual targets maintained by the company
• Net revenue forecastsRmb31,629.4mn / Rmb35,069.8mn / Rmb40,988.9mn / Rmb48,547.2mnCorresponding to 2025, 2026e, 2027e, and 2028e, respectively
• ModelWare net profit forecastsRmb7,711.1mn / Rmb8,874.3mn / Rmb10,263.0mn / Rmb12,521.0mnCorresponding to 2025, 2026e, 2027e, and 2028e, respectively
• Morgan Stanley EPS forecastsRmb1.16 / Rmb1.34 / Rmb1.55 / Rmb1.89Corresponding to 2025, 2026e, 2027e, and 2028e, respectively
• Consensus EPS forecastsRmb1.32 / Rmb1.41 / Rmb1.65 / Rmb1.98Corresponding to 2025, 2026e, 2027e, and 2028e, respectively
• Forecast P/E54.8x / 35.1x / 30.4x / 24.9xCorresponding to 2025, 2026e, 2027e, and 2028e, respectively
• Core DCF assumptionsWACC 8.2%, CoE 8.1%, terminal growth rate 3.5%, RMB/HKD 1.13xKey valuation parameters in the report
• SOTP generic drug valuation10x 2025e P/EConsistent with Chinese pharmaceutical peers that have greater exposure to traditional drugs
• SOTP innovative drug valuation3.0-3.5x P/peak salesWithin the 2030e P/S range of leading Chinese biotechnology companies

Impact & implications

The report believes the 2Q26 slowdown mainly reflects pressure on mature oncology drugs and the timing of policy impacts and market access, while performance drivers after 2H26 will gradually shift toward innovative drug volume growth, revenue recognition from the BMS transaction, investment fair-value gains, and clinical and regulatory milestones across multiple therapeutic areas. Robust R&D output supports long-term product supply and external partnership opportunities, although quarterly profit may be affected by the timing of BD revenue recognition and fair-value changes.

Risks

• Out-licensing transactions and partnership revenue above expectations could represent an upside scenario.
• Earlier-than-expected innovative drug approvals could represent an upside scenario.
• Faster-than-expected drug sales growth could represent an upside scenario.
• The impact of volume-based procurement on loversol, sevoflurane, and butorphanol could be more severe than expected.
• Material setbacks in the R&D pipeline could cause results to fall short of market expectations.

What to watch

• Watch whether easing policy impacts and progress in hospital access can accelerate innovative drug sales in 2H26.
• Watch the pace of revenue recognition for the BMS transaction's upfront payment beginning in 2H26 and the year-over-year change in FY26 BD revenue.
• Watch the recognition in 3Q of the fair-value gain following BraveHeart's listing.
• Watch for SHR-A2009's Phase III details in first-line EGFR-mutant non-small cell lung cancer to be presented at ESMO.
• Watch for global Phase I/II data for SHR-4849 in small cell lung cancer and neuroendocrine carcinoma in 2H26.
• Watch SHR-1139's Phase II data at EADV and the initiation of Phase III trials in 2H26.
• Watch ribupatide's China approval in 1H27, overseas Phase IIb data, and progress of the oral formulation into global Phase III trials.
• Watch the clinical, regulatory filing, and milestone events for HRS-1893, the Lp(a) program, and ApoC3 siRNA from 2H26 to 1H27.