Huadong Medicine: Dense catalysts in the metabolism and oncology pipelines in 2026, but rating remains Underweight

Overview

This report is Morgan Stanley's company research update on Huadong Medicine following its 2025 and 1Q26 results. The core conclusion is that revenue was broadly in line with expectations, and rapid growth in innovative drug sales is offsetting weakness in medical aesthetics, but changes in business mix and high operating expenses are suppressing profit performance. In 2026, the company has dense clinical, filing, and data disclosure milestones in the two major innovative drug areas of metabolism and oncology, making it a key observation year for the investment narrative.

Core views

Morgan Stanley maintains an Underweight rating on Huadong Medicine while acknowledging numerous catalysts in 2026. In the metabolism pipeline, HDM1002 oral GLP-1 is expected to read out China phase 3 data in obesity and T2D and could become one of the earlier domestically developed oral GLP-1 products to launch after Hengrui; HDM1005 GLP-1/GIP injectable plans to file an NDA in 2027 and is considering a head-to-head study against Lilly's tirzepatide; DR10624 plans to read out phase 2 MASH data in 3Q26 and advance a global phase 3 MRCT in SHTG. In the oncology pipeline, ROR1 ADC, HPK-1 PROTAC, PD-L1/VEGF/TGF, and multiple ADC combination therapies form the next set of highlights. Main pressures come from pricing and volume-control risk in generic drugs, uncertainty in medical aesthetics product performance, high selling expenses, and the difficulty of commercial execution for innovative drugs.

Analysis framework

The report combines earnings comparison, pipeline catalyst review, and SOTP valuation. On earnings, it focuses on revenue, adjusted net profit, the share of innovative drug sales, expense ratios, and medical aesthetics business performance; on the pipeline side, it lists key clinical readouts and NDA milestones across metabolism, oncology, immunology, and animal health; on valuation, it uses a sum-of-the-parts approach, assigning different valuation multiples to generic drugs, launched innovative drugs, in-house innovative drugs, industrial microbiology, international medical aesthetics, domestic medical aesthetics, and distribution business.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  Morgan Stanley uses SOTP to derive its base-case value: generic drugs at 7x P/E, launched innovative drugs at 2x peak sales, in-house innovative drugs at 3x peak sales with global opportunity considered, industrial microbiology at 30x, international medical aesthetics at 7x P/E, domestic medical aesthetics at 20x, and distribution business at 8x.

• Financial forecastingMorgan Stanley ModelWare

  Modeled financial forecasting

  Unless otherwise stated, the key financial metrics in the report are based on Morgan Stanley ModelWare; data marked as consensus use the Refinitiv Estimates consensus methodology.

• Rating systemMorgan Stanley stock rating

  Relative rating

  Underweight means that over the next 12-18 months, the risk-adjusted total return is expected to be below the average level of the analyst's industry coverage universe; this rating is not a traditional sell rating.

Asset mapping & comparison

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

• Huadong Medicine Co Ltd（000963.SZ）

  Research subject

  Strengths

  Innovative drug sales grew more than 60%, metabolism and oncology pipelines have dense catalysts in 2026, and management maintains the target for innovative drugs to contribute 50% by 2030.

  Weaknesses

  2025 adjusted net profit came in below expectations, the medical aesthetics business is weak, expense pressure is high, and generic drugs still face volume-based procurement pricing and volume-control risk.

  Comparison

  The report mentions that HDM1002 may become one of the earlier domestically developed oral GLP-1 products to launch after Hengrui; HDM1005 is considering a head-to-head study against Lilly's tirzepatide to achieve differentiation.

  Risks

  Clinical readouts below expectations, delayed NDA filing, commercialization below expectations, de-rating in medical aesthetics, and further price cuts or volume controls in generic drugs.

• Metabolic disease pipeline

  Core growth and valuation catalyst

  Strengths

  HDM1002, HDM1005, DR10624, insulin degludec aspart, and animal health GLP-1/GIP products form a multi-layered portfolio.

  Weaknesses

  Some projects are relatively late to market and need to prove competitiveness through head-to-head studies or differentiated data.

  Comparison

  HDM1002 is positioned as one of the earlier domestically developed oral GLP-1 products to launch; HDM1005 plans to benchmark Lilly tirzepatide.

  Risks

  There is uncertainty around phase 3 data, regulatory filings, initiation of global MRCTs, and subsequent commercialization.

• Oncology pipeline

  Mid- to long-term innovative drug optionality

  Strengths

  ROR1 ADC, PD-L1/VEGF/TGF, HPK-1 PROTAC, and multiple ADC combinations provide data disclosure windows in 2026.

  Weaknesses

  Many assets are still in early or early-mid clinical stages, and efficacy, safety, and indication selection still need validation.

  Comparison

  The report does not provide explicit peer valuation comparisons, but emphasizes expanding opportunities in NSCLC, CRC, lymphoma, and solid tumors through ADC combinations.

  Risks

  Poor phase 1 or phase 1b data, failure of combination treatment strategies, and intensifying competition.

Key data

• Stock ratingUnderweightThe industry view is Attractive.
• Target priceRmb42.00This implies 23% upside versus the April 23, 2026 closing price of Rmb34.09.
• 2025 revenue growth+4.1% YoYRevenue was broadly in line with Morgan Stanley expectations, with innovative drug growth offsetting weakness in medical aesthetics.
• 1Q26 revenue growth+4.2% YoY1Q26 revenue was also broadly in line with expectations.
• 2025 adjusted net profit growth-1.2% YoYBelow Morgan Stanley expectations, affected by unfavorable business mix changes and high operating expenses.
• 1Q26 adjusted net profit growth+11.7% YoYAffected by higher selling expenses.
• Innovative drug sales growth60%+Rapid growth in innovative drug sales was the main factor offsetting weakness in medical aesthetics.
• Innovative drug sales contribution target50% by 2030; about 20% in 1Q26Management reiterated the 2030 target, and the report notes that execution of in-house products requires prudence.
• 2026e EPSRmb2.17Morgan Stanley forecast; 2025e is Rmb2.09 and 2027e is Rmb2.16.
• Market capitalizationRmb59,795mnCurrent market capitalization disclosed in the report table.

Impact & implications

The report presents an investment implication of "rich catalysts but still high risk": if key metabolism and oncology pipelines deliver readouts, filings, and commercialization on schedule, the valuation weight of the company's innovative drugs may continue to rise; however, under the Underweight rating, Morgan Stanley still believes its risk-adjusted return is insufficient relative to peers, especially as investors need to observe whether innovative drugs can truly replace the uncertainties in the generic drug and medical aesthetics businesses.

Risks

• The main generic drug portfolio may face further price cuts or be subject to volume controls.
• Medical aesthetics products such as Ellanse may fail to gain meaningful market share in China.
• A-share medical aesthetics-related stocks may undergo sector-wide de-rating, suppressing valuation multiples.
• Clinical data, NDA filings, and commercialization progress for the innovative drug pipeline may fall short of expectations.
• Selling expenses and changes in business mix may continue to pressure margins.

What to watch

• China phase 3 readouts for HDM1002 oral GLP-1 in obesity and T2D, and progress on the NDA filing for the obesity indication in 4Q26.
• Phase 3 progress for HDM1005 GLP-1/GIP injectable, the 2027 NDA plan, and whether it will conduct a head-to-head study against Lilly tirzepatide.
• Phase 2 MASH readout for DR10624 in 3Q26, and initiation of the global phase 3 MRCT in SHTG.
• Phase 1b lymphoma update for ROR1 ADC in 2H26, and possible disclosure of FIM phase 1 solid tumor data at ESMO.
• Phase 1 monotherapy data for PD-L1/VEGF/TGF in NSCLC and "cold" CRC in 4Q26.
• Whether HDM3016 (QX005N, IL-4R) will present phase 3 results at EADV 2026.
• Whether the share of innovative drug sales can steadily rise from about 20% in 1Q26 to the 50% target by 2030.