Innovative drug fundamentals remain resilient, while policy tightening may accelerate industry divergence

Overview

The report previews 2Q26 and 1H26 earnings for China's pharmaceutical and biotechnology sector and assesses the potential impact of the new round of pharmaceutical anti-corruption campaign that began in May 2026 and the Measures for the Administration of Medical Representatives implemented from August 1. The report concludes that 2Q26 results will broadly continue to validate existing investment theses: expansion in innovative drug sales, overseas licensing revenue, and product mix improvement support revenue and profit, while reduced promotional activities can lower selling expenses. Policy impact may be more evident in 3Q26 and 2H26, and the hit to generic drug companies reliant on promotion is greater than to innovative drug companies relying on clinical value, guideline access, and indication expansion.

Core views

The sector re-rating stems not only from fundamentals but also benefits from its relatively low correlation with the technology and semiconductor sectors. The industry is shifting from primarily relying on pipeline valuation to placing greater emphasis on commercialization revenue, profitability, and operating leverage. In the short term, anti-corruption measures and new medical representative rules may suppress hospital visits, academic conferences, and promotional activities, but the impact on prescription demand has a lag, so 2Q26 revenue pressure is relatively mild, while lower selling expenses may be reflected more quickly. In the medium to long term, tighter regulation benefits leaders with strong compliance systems, differentiated products, and innovation-driven business models, and widens the competitive gap between them and traditional sales-driven companies.

Analysis framework

The report combines company management feedback, 2Q26 and 1H26 operating data, product sales and licensing revenue forecasts, changes in selling and administrative expenses, market consensus revision trends, and discounted cash flow valuations for individual stocks to construct revenue and profit scenarios under policy impact. The analysis focuses on distinguishing the different effects of policy on promotion-driven revenue and clinical value-driven revenue, and evaluates operating leverage by adjusting FY26 to FY27 revenue, profit, and expense assumptions.

Methodology notes

• Policy impact analysisCompliance adjustment scenario analysis

  Incorporates the impact of the anti-corruption campaign and new medical representative rules on promotional activities, prescription demand, and selling expenses into forecasts in phases.

  Reduced promotional activities may first lower selling expenses in 2Q26, while revenue pressure is more likely to emerge in 3Q26 and 2H26 due to the lag in prescription transmission.

• Earnings forecastsBottom-up model revision

  Revises revenue and profit company by company based on product mix, innovative drug sales, generic drug exposure, licensing revenue, and expense ratios.

  Forecasts for companies with higher shares of innovative drugs and overseas licensing are relatively stable or revised upward, while revenue assumptions for companies with higher reliance on generics and promotion become more conservative.

• Valuation methodsDiscounted cash flow method

  Estimates target prices based on future free cash flow, weighted average cost of capital, and perpetual growth rate.

  Innovent Biologics uses a 3.0% perpetual growth rate and 10.6% weighted average cost of capital; Kelun Biotech uses a 3.0% perpetual growth rate and 9.1% weighted average cost of capital.

• Expectation gap analysisConsensus revision comparison

  Compares JPMorgan forecasts with market consensus and observes the extent of market forecast adjustments after the anti-corruption campaign.

  Market consensus for most covered companies has changed little since May, while the report adopts more conservative FY26 revenue assumptions for multiple companies, indicating potential downside revision risk for 2H26 expectations.

Asset mapping & comparison

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

• China innovative drug and biotechnology sector

  Primary beneficiary and affected asset of policy and industry themes

  Strengths

  Growth in global licensing transactions, continued validation of clinical data, expansion of innovative drug sales, and low correlation with the technology sector jointly support re-rating.

  Weaknesses

  Expectations have risen after the sector's notable rally, and most market consensus forecasts have not yet fully reflected potential policy impact.

  Comparison

  Differentiated innovative drug companies are more resilient than companies reliant on generics and intensive promotion.

  Risks

  3Q26 sales activity recovery slower than expected, further tightening of policy implementation, and clinical or licensing progress falling short of expectations.

• Innovent Biologics (1801.HK)

  Overweight maintained, target price raised from HK$113 to HK$117

  Strengths

  The commercialized product portfolio continues to expand, PD-1 sales are mainly driven by indication expansion and clinical value, PCSK9 and GLP-1 products provide diversified growth, and policy impact is limited.

  Weaknesses

  Valuation is relatively high, FY26 free cash flow forecasts are under pressure, and short-term business development revenue may still fluctuate.

  Comparison

  Compared with most peers, management feedback indicates that commercial activities have been less affected by anti-corruption measures, and the FY26 product sales forecast is raised by 11%.

  Risks

  Price cuts for PD-1 and other innovative drugs, poor pipeline data, intensified competition from global pharmaceutical companies, and the impact of centralized procurement for biosimilars.

• Kelun Biotech (6990.HK)

  Overweight and HK$648 target price maintained

  Strengths

  sac-TMT enters its first full medical insurance year, commercial execution is strong, the ADC platform has been recognized by Merck, and it has global clinical and milestone payment potential.

  Weaknesses

  Continued expansion of the commercial team keeps the selling expense ratio at a relatively high level in the near term, and long-term ADC profit sharing has not yet been incorporated into the model.

  Comparison

  It is one of the covered companies least affected by recent policy disruptions, with the FY26 revenue forecast raised by 8.25%.

  Risks

  Clinical failure, regulatory and geopolitical risks, competing therapies performing better than expected, intellectual property disputes, and revenue or cost deviating from forecasts.

• Jiangsu Hengrui Medicine - A

  Overweight maintained, target price Rmb68

  Strengths

  Innovative drug sales are expected to maintain growth of no less than 30%, and product mix improvement and lower selling expenses are favorable for margins.

  Weaknesses

  Generic drug exposure is relatively large, investment in non-centralized-procurement generics is being actively reduced, and policy disruptions may make related revenue weaker than previously expected.

  Comparison

  Among covered companies, it bears a larger absolute revenue drag, but innovative drug growth can partially offset it.

  Risks

  Generic drug sales decline more than expected, the anti-corruption impact is prolonged, and innovative drug growth fails to meet model assumptions.

• Shanghai Junshi Biosciences - A (688180.SS) and H-shares

  A-shares maintained at underweight, target price raised to Rmb28; H-shares maintained at neutral, target price raised to HK$21

  Strengths

  toripalimab sales growth is strong, the JS005 licensing upfront payment supports 1H26 profitability, and newly included JS207 and JS212 add long-term pipeline value.

  Weaknesses

  Promotional activities have been at a low level since May 2026, and 2H26 product sales may be affected by policy.

  Comparison

  Revenue forecasts are lowered, but business development revenue and lower selling expenses significantly narrow the loss forecast.

  Risks

  Continued policy implementation suppressing commercial activities, delays in new pipeline approval or clinical progress, and product sales falling short of expectations.

• Hansoh Pharmaceutical - H

  Overweight maintained, target price HK$45

  Strengths

  Innovative drug-driven defensive earnings structure, generic drug revenue accounts for less than 20%, and management maintains FY26 double-digit revenue growth guidance.

  Weaknesses

  R&D investment will increase due to the launch of more than nine phase III clinical trials, partially offsetting the decline in selling expenses.

  Comparison

  Compared with large traditional pharmaceutical companies, its reliance on generics and newly launched in-hospital products is lower, and the expected policy impact is smaller.

  Risks

  R&D expenses higher than expected, slowing innovative drug growth, and centralized procurement impact exceeding management guidance.

• Akeso

  Overweight maintained, target price lowered to HK$145

  Strengths

  Still has innovative pipeline and long-term licensing value, and the forecast cut is not due to anti-corruption impact.

  Weaknesses

  Assumptions for AK112 non-US sales, the probability of success in US second-line squamous non-small cell lung cancer, milestone revenue, and other product sales have all been lowered.

  Comparison

  Unlike revisions for other companies that mainly target policy impact, Akeso's downgrade stems from previously optimistic sales and licensing assumptions.

  Risks

  AK112 development and commercialization falling short of expectations, delays in milestone revenue, and rising selling expense ratio.

Key data

• Weekly gain of the Hang Seng Innovative Drug Index18.1%Performance in the week of June 29, the strongest weekly move year to date; the Hang Seng Index rose 3% over the same period.
• Growth rate of total 1H26 business development transaction valueUp 70% year over yearShows that Chinese innovative drug assets continue to gain global validation.
• Innovent Biologics 1H26 product revenueOver Rmb8.2bn, up approximately 55% year over year2Q26 product revenue exceeded Rmb4.3bn, up approximately 60% year over year.
• Innovent Biologics target priceHK$117Previously HK$113, overweight maintained; implies approximately 29.6% upside versus the share price of HK$90.30 on August 5, 2026.
• Expected FY26 innovative drug sales growth for HengruiNot less than 30%Innovative drug growth is expected to partially offset weakness in generics; the report model conservatively uses 30%.
• Hengrui FY26 net profit forecastApproximately Rmb9bnRevenue forecast is lowered, but improved product mix and lower selling expenses keep the net profit forecast broadly unchanged.
• Kelun Biotech FY26 revenue forecast adjustmentRaised by 8.25%Mainly reflects higher sac-TMT sales expectations and newly added ADC-related payments.
• Kelun Biotech target priceHK$648Overweight maintained; implies approximately 31.8% upside versus the share price of HK$491.80 on August 5, 2026.
• Junshi FY26 product sales forecast adjustmentLowered by 4%At the same time, due to increased business development revenue and lower selling expenses, the net loss forecast is narrowed by 54%.
• Junshi 2Q26 licensing upfront paymentRmb215mnFrom the JS005 licensing transaction with Fosun and recognized in 2Q26.
• Hansoh 1H26 net profit forecastRmb2.55bnFY26 revenue and net profit forecasts are unchanged, and generic drug revenue already accounts for less than 20%.
• Akeso FY26 revenue forecast adjustmentLowered by 11.4%Mainly due to lowered assumptions for AK112 and other products and licensing revenue, rather than concerns about anti-corruption impact.

Impact & implications

The direct results of policy tightening may be reduced promotional activities, lower selling expenses, and a concentration of revenue growth toward innovative drugs with clearer clinical value. Short-term profit performance may be better than would be inferred solely from revenue slowdown, but the pace of recovery in 3Q26 sales activities will determine whether 2H26 earnings forecasts still need adjustment. In capital markets, earnings delivery, product differentiation, and overseas licensing capabilities will be more important than pure pipeline valuation, and valuation and earnings divergence within the sector may continue to widen.

Risks

• The actual implementation intensity and duration of the anti-corruption campaign and new medical representative rules remain unclear.
• The lagged impact of reduced promotional activities on prescription demand may exceed expectations in 3Q26 or 2H26.
• Companies reliant on generics or intensive sales promotion may face more pronounced revenue declines.
• Innovative drug price cuts, expanded centralized procurement, or unfavorable medical insurance negotiation outcomes may compress revenue and margins.
• Clinical trial failures, approval delays, or safety issues may weaken pipeline value.
• Overseas licensing transactions, milestone payments, and business development revenue have timing and recognition uncertainties.
• Competition from global pharmaceutical companies, intellectual property disputes, and geopolitical frictions may affect cross-border collaboration.
• Valuations are high after the sector re-rating, and share price volatility may increase if earnings delivery falls short of expectations.

What to watch

• The pace of recovery in 3Q26 hospital visits, academic conferences, and commercial promotional activities.
• The specific enforcement approach for the Measures for the Administration of Medical Representatives after August 1 and company management feedback.
• Whether innovative drug sales can continue to grow based on clinical value, guideline access, and indication expansion.
• Whether declines in selling and administrative expenses can continue to translate into operating margin improvement.
• The offsetting effect between Hengrui's generic drug sales and innovative drug growth.
• Innovent's FY27 product sales target of approximately Rmb20bn and the contribution from abemaciclib starting in 2H26.
• Kelun Biotech's sac-TMT medical insurance ramp-up, global phase III clinical readouts, and milestone payments.
• Junshi's promotional recovery, toripalimab sales, and clinical progress of JS207 and JS212.
• Hansoh's double-digit revenue growth guidance and R&D investment from more than nine phase III clinical trials.
• Whether market consensus begins to lower 2H26 revenue or raise margin forecasts.