China's pharmaceutical sector is undergoing a structural revaluation.

Under the dual pressures of ongoing anti-corruption campaigns and medical insurance cost containment, domestic drugmakers saw clearly divergent performance in the first half of 2026, with covered companies' share prices declining by an average of about 19% year-to-date, far exceeding the roughly 2% drops in the CSI 300 and Hang Seng Index over the same period. HSBC Qianhai believes this pullback does not reflect a uniform deterioration in fundamentals, but rather that the proportion of innovative drugs is splitting the sector into two distinctly different growth trajectories.

According to ZhuiFeng Trading Desk, HSBC Qianhai stated in its latest research report that leading companies with a high proportion of innovative drugs are expected to achieve product revenue growth of 10% to 15% in 2027-2028, with innovative drug revenue growth exceeding 20%; other companies can only achieve mid-to-high single-digit growth and will need to rely on new products such as GLP-1 and ADC drugs launching after 2027 to support performance.

Meanwhile, the report identifies global Phase III clinical progress of overseas-licensed assets as the core driver of valuation in the next stage, with BD milestone revenue viewed as the second growth engine for 2027-2028.

Domestic Business Under Pressure, Growth Tiering Now Established

In the first half of 2026, the combined effect of domestic anti-corruption measures and medical insurance cost containment policies created a pronounced performance gap among drugmakers.

HSBC Qianhai noted that after multiple rounds of compliance rectification, leading pharmaceutical companies' marketing activities have largely adapted to stricter regulatory requirements, and the domestic market is expected to see a modest recovery in the second half of 2026, though the pace of recovery will be slow.

Based on this, the report divides covered companies' mid-term growth expectations into two tiers:

The first tier consists of leaders with a high proportion of innovative drugs, represented by Hengrui and Hansoh, which are expected to achieve product revenue growth of 10% to 15% in 2027-2028, with innovative drug revenue growth exceeding 20%, driven by the successive launches of GLP-1, ADC, and multiple autoimmune pipeline drugs.

Second-tier companies are expected to achieve only mid-to-high single-digit growth, with the timing of growth more dependent on new product ramp-ups after 2027.

This tiering means that the valuation logic within the sector has fundamentally shifted — marginal improvement in domestic sales is no longer a unified pricing anchor; the proportion of innovative drug revenue is the core variable that distinguishes high elasticity from low.

Global Phase III Progress Becomes New Valuation Pivot

HSBC Qianhai identifies global Phase III clinical progress of overseas-licensed assets as the most important indicator to track at the current stage, believing it will gradually replace domestic sales data as the primary driver of leading drugmakers' valuations.

Specifically, the report expects Hengrui to have 5 assets and Hansoh to have 3 assets entering global Phase III trials.

Among them, Hengrui's TSLP/GSK283 is planned to launch 6 Phase III trials between end-2026 and 2027, covering three indications: COPD, asthma, and chronic rhinosinusitis with nasal polyps; its myosin and GLP-1 combination assets will also enter Phase III, supported by large potential market space and positive early clinical data. Hansoh's B7H3 and B7H4 ADCs are planned to conduct more than 9 Phase III trials.

For CSPC, the report expects multiple out-licensed molecules with AstraZeneca to enter clinical stages in the near term, thereby triggering milestone payments; Sino Biopharmaceutical is expected to initiate more BD deals and Phase II trials. HSBC Qianhai expects Hengrui and Hansoh's BD revenue to maintain growth in 2027-2028 as milestone nodes are triggered, while CSPC and Sino Biopharmaceutical may see BD revenue growth moderate due to high base effects.

HSBC Qianhai expects CSPC to benefit from out-licensed pipelines and milestone revenue expectations, with relatively large upward revisions to earnings forecasts; Sino Biopharmaceutical's earnings improvement expectations remain strong; Livzon is under pressure due to higher dependence on domestic business and slower innovative drug transformation, while Fosun Pharma and Hengrui show little overall change.

HSBC Qianhai lists Hansoh as its top pick, mainly bullish on its domestic sales growth, BD revenue recognition, and subsequent catalysts from multiple projects entering global Phase III.

Verification Window and Key Risks

Whether the above tiering holds depends on whether subsequent performance can keep pace.

HSBC Qianhai believes the Q3 2026 earnings disclosure period (late October to November) and the January-February 2027 annual results preview are important time points to observe whether this tiering continues. At that time, the key focus will be whether the proportion of innovative drug revenue continues to rise, and whether BD licensing revenue and milestone revenue can be realized.

From a project-specific perspective, the global Phase III initiation and enrollment progress of Hengrui's TSLP/GSK283 and Hansoh's B7H3 and B7H4 ADCs, as well as whether CSPC's collaboration projects with AstraZeneca can successively trigger milestone payments after advancing to clinical stages, will directly affect the pace of BD revenue release.

However, if domestic medical insurance cost containment is further tightened, or if global Phase III progress of out-licensed projects falls short of expectations or even fails, the innovative drug revenue and BD revenue of relevant companies could be affected, and the valuation premium currently granted by the market to innovative drug businesses could also narrow accordingly.