Active dealmaking and R&D progress are driving a re-rating of China's healthcare sector

Overview

This report covers the China healthcare H/A segment, with a focus on recent dealmaking, M&A, commercialization partnerships, and R&D progress at CSPC, Gushengtang, Innovent and Hengrui. Bank of America believes strong deal activity and sustained R&D advancement are driving a re-rating, but stock-level ratings depend on commercial execution, pressure on core marketed products, and pipeline progress.

Core views

The core views are: first, CSPC's collaboration with AstraZeneca brings an upfront payment and potential milestone proceeds, supporting an improved long-term sales view, but key marketed drugs remain under pressure, so Underperform is maintained; second, Gushengtang maintains Buy after expanding its offline hospital network in Beijing through acquisitions and strengthening potential synergies with online healthcare platforms; third, Innovent reached a commercialization agreement with Lilly for Verzenios in mainland China, expanded its commercial product set and increased revenue visibility, so Buy is maintained and the target price is raised; fourth, Hengrui's innovative pipeline continues to progress, and despite anti-corruption actions potentially affecting generics sales, Bank of America still expects 2026E sales growth for its innovative portfolio to reach up to 30%.

Analysis framework

The report analyzes each stock through an event-driven and fundamental valuation approach: it adjusts revenue and profit forecasts for cooperation agreements, acquisitions, commercialization licenses, and regulatory approval progress, and updates target prices through DCF modeling. For early-stage collaboration candidates, the report does not include their revenue contribution in short-term forecasts, instead reflecting primarily confirmed upfront proceeds and more clearly defined commercialization product revenue.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  Bank of America uses DCF models to derive target prices for CSPC, Gushengtang, Hengrui and Innovent, with key assumptions including WACC, risk-free rate, market risk premium, beta, cost of debt, and terminal growth rate.

• Earnings forecast adjustmentRevenue and net profit forecast revision

  Impact of events on financial forecasts

  The report incorporates CSPC's US$30mn upfront payment into forecasts and raised 2027E revenue and net profit; for Innovent, it included abemaciclib revenue contribution from the second half of 2026 onward and raised 2026/27/28E revenue forecasts.

• Risk analysisUpside and downside risks to target price

  Target price risk scenarios

  The report separately lists upside and downside risks to each company's target price, including new product performance, clinical progress, VBP and NRDL repricing, competition, approval delays, the consumption environment, and overseas expansion.

Asset mapping & comparison

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

• CSPC Pharmaceutical

  Cooperating with AstraZeneca on two renal disease target PCC candidates and advancing a Phase III study of SYS6010 in NSCLC.

  Strengths

  Received a US$30mn upfront payment and has potential for substantial milestone proceeds; SYS6010 development plans have expanded.

  Weaknesses

  Sales of key marketed products remain under pressure, and collaboration candidates remain at pre-clinical stage.

  Comparison

  Compared with other report companies, although CSPC's target price was raised, its rating remains Underperform.

  Risks

  VBP and NRDL price-reduction pressure, R&D failure of new drugs, and core drug sales below expectations.

• Gushengtang

  Expanded offline medical network through acquisitions of Shahe Hospital and Beijing Hongyang Hospital.

  Strengths

  Stronger Beijing footprint, and acquired assets are expected to create synergies with existing institutions and online platforms.

  Weaknesses

  Depends on M&A integration, specialist recruitment, and the consumption environment.

  Comparison

  The report keeps Buy and a HK$32.60 target price, and unlike CSPC and Innovent it did not revise the target price.

  Risks

  Regulatory oversight of traditional Chinese medicine and healthcare services, increased competition, failure to recruit specialists, data protection risk, and a weak consumption environment.

• Hengrui Medicine

  Multiple innovative drugs are being advanced, with the SHR-A1811 third-indication launch filing accepted and included for priority review.

  Strengths

  Strong growth potential in its innovative drug portfolio, with multiple candidates approved to enter clinical trials.

  Weaknesses

  A new round of anti-corruption actions may affect generic-drug sales, especially in lower-tier cities.

  Comparison

  Similar to Innovent, Hengrui's investment rationale is more focused on innovative pipeline and commercialization growth.

  Risks

  R&D setbacks, approval delays, slow commercial ramp of new products, VBP pricing risk, intensified competition for PD-1 and other drugs, and slow overseas expansion.

• Innovent

  Reached a mainland China commercialization agreement with Lilly for Verzenios, taking responsibility for importation, marketing, distribution, and promotion.

  Strengths

  A richer commercial product set, strong in-house R&D capabilities, and abemaciclib already included in NRDL with indications for early- and late-stage breast cancer.

  Weaknesses

  PD-1, biosimilars, and late-stage pipeline still face commercialization and clinical execution risks.

  Comparison

  Target price increased from HK$116.8 to HK$119.2 and Buy was maintained; it is the main beneficiary in this report directly lifted by commercialization agreements.

  Risks

  Lower-than-expected commercialization outcomes for PD-1 and biosimilars, setbacks in late-stage asset clinical development, and pricing pressure from competitor inclusion in NRDL.

Key data

• CSPC target priceHK$7.6, prior value HK$6.8Target price raised, rating retained as Underperform.
• CSPC 2027E forecast revisionRevenue raised 0.8%, net profit raised 2.0%Primarily reflects the US$30mn upfront payment from the CSPC-AstraZeneca collaboration.
• CSPC potential milestone paymentPotential up to US$540mn/US$1.2bn in development and sales milestone paymentsCollaboration candidates are still at pre-clinical stage, and related revenue contributions were not included in the report.
• Gushengtang target priceHK$32.60Rating maintained at Buy; acquired Shahe Hospital and Beijing Hongyang Hospital to expand the Beijing network.
• Innovent target priceHK$119.2, prior value HK$116.8DCF target price raised, rating retained as Buy.
• Innovent revenue forecast revision2026/27/28E revenue raised 3.3%/5.3%/4.7%Reflects revenue contribution from the mainland China commercialization agreement for Verzenios.
• Hengrui target priceRMB72.70Rating maintained at Buy; report expects its innovative portfolio 2026E sales growth to reach 30%.
• Hengrui R&D progressSHR-A1811 third-indication filing accepted by the NMPA and included in priority reviewIndication is 1L/2L HER2-low mBC, with multiple other innovative candidates approved for clinical trials.

Impact & implications

The report indicates that re-rating momentum in China's healthcare sector is shifting from broad valuation normalization to more concrete deal execution, commercial portfolio expansion, and innovative pipeline advancement. For portfolio construction, Innovent, Gushengtang and Hengrui are favored due to higher deal certainty and stronger commercialization capabilities, while CSPC, despite improved long-term expectations from collaboration and pipeline progress, remains constrained in the near term by continued pressure on sales of core marketed products.

Risks

• CSPC core marketed-drug sales remain under pressure, which could offset the positive impact of collaboration agreements and pipeline progress.
• VBP and NRDL repricing could compress price space for both new and mature products.
• Failures in innovative drug clinical trials, approval delays, or slow market ramping will affect DCF valuations and earnings forecasts.
• Healthcare services and traditional Chinese medicine service businesses face policy, regulatory, competition, talent recruitment, and data-protection risks.
• Anti-corruption actions may disrupt generic-drug sales, especially impacting distribution channels in lower-tier cities.
• Competition in PD-1, biosimilars, and breast cancer and other key treatment areas is intensifying, potentially leading to lower commercialization than expected.

What to watch

• Whether CSPC's collaboration candidates with AstraZeneca can progress smoothly from pre-clinical stages to subsequent development phases.
• Enrollment, data readout, and indication expansion pace for CSPC's SYS6010 Phase III study in NSCLC.
• Whether Gushengtang's hospital acquisitions deliver synergies with its existing offline network and online platforms.
• Commercialization execution and revenue contribution of Verzenios by Innovent starting in the second half of 2026.
• NMPA review progress and subsequent commercialization pace for Hengrui's SHR-A1811 third-indication filing.
• The impact of changes in VBP, NRDL, industry anti-corruption, and healthcare-service regulations on revenue and margins.