Domestic business inflection and BD optionality support a re-rating for CSPC Pharmaceutical Group

Overview

This report is Morgan Stanley's key post-1Q earnings call update on CSPC Pharmaceutical Group (1093.HK). The report believes the company's domestic finished-dose drug sales may have returned to positive growth, while execution of BD partnerships and potential new BD deals will unlock recurring licensing income, and innovative drugs plus new product ramp-up may create an earnings inflection in 2028/2029.

Core views

The core view is that legacy drugs remain affected by VBP, healthcare insurance cost controls, and generic competition, but the market may have already largely priced in these negatives; ramp-up in new product sales, pipeline progress in ADC/siRNA/in-vivo CAR-T, and partners such as AZN advancing existing BD assets will be the main drivers of re-rating. Morgan Stanley remains constructive on the company and maintains its Overweight rating.

Analysis framework

The report analyzes the company using 1Q26 operating data, earnings forecast revisions, risk-reward scenarios, and a DCF valuation framework. In the short term, the focus is on recovery in finished-dose drug sales, the pace of BD income recognition, and ASCO-related clinical catalysts; in the medium to long term, the key question is whether new drug sales can materially outweigh the drag from traditional generics and older products.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The report continues to use DCF valuation. In the target price section, it applies a 10.1% WACC, a 2.5% terminal growth rate, and a 1.14x HKD/RMB exchange rate to derive a new target price of HK$11.00.

• Scenario analysisRisk Reward

  Bull/base/bear scenarios

  The bull-case target price is HK$17.00, assuming recurring net profit growth above 20% during 2025-2028 and higher-than-expected BD income; the base-case target price is HK$11.00, assuming recurring net profit CAGR of about 15% during 2025-2028 and BD licensing income contributing more than Rmb2.5bn annually; the bear-case target price is HK$5.70, assuming faster declines in legacy products and generics, weaker-than-expected ramp-up in new products, and lower-than-expected BD income.

• Data sourceMorgan Stanley ModelWare

  Model and consensus estimate framework

  The report notes that unless otherwise specified, the relevant metrics are based on the Morgan Stanley ModelWare framework, and consensus estimate data are provided by Refinitiv Estimates.

Asset mapping & comparison

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

• CSPC Pharmaceutical Group (1093.HK)

  Core covered equity target

  Strengths

  Finished-dose drug sales have returned to positive growth, innovative drugs and new products are ramping up, and the BD asset pool is deep, with the company saying it has 40-50 assets with out-licensing potential.

  Weaknesses

  Legacy drugs are still affected by VBP, healthcare insurance cost controls, and generic competition, and there is volatility in the timing of licensing income recognition.

  Comparison

  Compared with traditional generics and older products, the market is more likely to refocus on new drugs, BD licensing, and platform R&D value.

  Risks

  Government price cuts, rapid ramp-up of NBP generics, BD setbacks, and pipeline failures or delays.

• BD licensing and partnership pipeline

  A key source of re-rating optionality

  Strengths

  Progress in projects such as AZN's long-acting platform, Lp(a) inhibitor, and Madrigal's oral GLP-1 may trigger milestone income; the company also says there is continued inbound BD interest.

  Weaknesses

  Deal timing, term quality, accounting recognition timing, and geopolitical news flow may all affect revenue realization.

  Comparison

  BD income can provide nonlinear upside during periods of pressure on traditional drugs, but it is less predictable than regular product sales.

  Risks

  Slower partner execution, new BD deals coming in below expectations, and delayed milestone recognition.

• Innovative drugs and new technology platforms

  Medium- to long-term growth driver

  Strengths

  B7H3 ADC, in-vivo CAR-T, PD-1/IL15, PCSK9 siRNA, and AI-driven drug discovery all provide potential catalysts.

  Weaknesses

  Some assets are still in early-stage clinical development or awaiting more mature data, and commercialization will still take time.

  Comparison

  Compared with older products, the innovative pipeline is more important for the post-2028/2029 earnings inflection and valuation upside.

  Risks

  Clinical data below expectations, regulatory delays, worsening competition, or rising R&D costs.

Key data

• Report date2026-05-28The title page shows May 28, 2026.
• RatingOverweightMorgan Stanley stated that it maintains OW.
• Target priceHK$11.00The DCF target price was raised from HK$10.4 to HK$11.00.
• 1Q26 total revenueRmb6.47bn, -7.8% YoYMainly due to lower licensing income recognition versus the prior-year period.
• 1Q26 finished-dose drug salesRmb5.1bn, +6% YoY5% above Morgan Stanley's expectations.
• 1Q26 licensing incomeRmb146mn vs 1Q25 Rmb718mnThe difference mainly comes from accounting recognition timing.
• 1Q26 finished-dose drug gross margin77.3% vs 75.9%Management indicated an improvement YoY.
• EPS forecast revision2026/2027/2028: +123%/-6%/-5%The upward revision in 2026 mainly comes from the latest AstraZeneca deal and recognition of previous upfront payments, while the downward revisions in 2027-2028 reflect earlier recognition of part of the BD income.
• Base-case BD income assumptionRmb2.5bn+ p.a.The base-case scenario assumes BD licensing income contributes more than Rmb2.5bn per year.
• Revenue geographic exposureMainland China 80-90%, North America 0-10%, Europe excluding the UK 0-10%From the disclosed global revenue exposure.

Impact & implications

The implication for investors is that market focus may shift from pressure on traditional drugs to new growth drivers: recovery in finished-dose drug sales, sustainability of BD income, out-licensing capability of the innovative pipeline, and expansion of the AI drug discovery platform. If these drivers continue to deliver, CSPC Pharmaceutical Group's valuation may be re-rated; if VBP, healthcare insurance cost controls, or pipeline/BD execution fall short of expectations, earnings and the target price still face downside risk.

Risks

• Pipeline failures or clinical/regulatory delays.
• Rising operating costs and increased R&D investment eroding profit margins.
• Further government price cuts, centralized procurement, or healthcare reimbursement controls.
• BD partnership progress or new deal execution falling short of expectations.
• NBP generics launching faster than expected and causing market share loss.
• Declining API prices or continued weakness in related businesses.
• Legacy products being affected by VBP and healthcare insurance review more than expected.

What to watch

• ASCO catalysts: release of the KNO26 first-line HER2+ breast cancer LBA, and more mature data from EGFR, NECTIN-4, and B7H3 ADC combinations.
• Clinical progress and milestone triggers for AZN's long-acting platform sYH2082, long-acting amylin candidate, and Lp(a) inhibitor.
• Whether FY26 finished-dose drug sales continue the 1Q positive growth trend, and the actual impact of the regulatory environment and new sales representative rules.
• The pace of BD income recognition in 2026 and whether there are new high-quality BD deals.
• Clinical progress of key assets such as B7H3 ADC, in-vivo CAR-T, PD-1/IL15, and PCSK9 siRNA.
• Whether new drug revenue in 2028/2029 can materially exceed the drag from traditional drugs and generics.