Innovative drugs have increased in value, but differentiation is the real truth

Ask AI · Profitability improvement quality varies, will industry segmentation intensify?

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Produced by | Miaotou APP

Author | Zhang Beibei

Editor | Ding Ping

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Today (April 1), the innovative drug sector exploded across the board.

By the close, Rongchang Biotech, Yasheng Pharmaceuticals, Junshi Biosciences, and others rose over 10%, with Novo Nordisk, China Biological Products, BeiGene, Innovent Biologics, and several innovative drug ETFs also gaining more than 5%, indicating a clear increase in sector attention.

So, why has the innovative drug sector suddenly become so strong? Is this round of market rally sustainable?

From the current situation, this rally is certainly driven by short-term events; but if we simply see it as emotional recovery, we might underestimate the underlying changes behind the sector — China’s innovative drugs are simultaneously validating two things: first, overseas licensing capabilities; second, profit realization ability. See below for details.

Why did it rise today? Short-term positive catalysts

Recently, positive policies for innovative drugs have been gradually implemented, and the surge in the sector is the result of concentrated catalysts.

The most direct catalyst is the unexpected rebound in BD transactions.

The market was originally worried that after frequent BD transactions in 2025 and record-high transaction volumes, China’s innovative drugs might see a cooling of overseas licensing, making large deals less likely. But data from the first quarter of this year shattered that expectation: the total value of external licensing deals for innovative drugs has exceeded $60 billion, nearly half of the total for 2025, and 1.6 times that of the same period last year.

More importantly, large deals are still continuing to land.

For example, CSPC Group and AstraZeneca collaborated on 8 projects totaling $18.5 billion; Rongchang Biotech and AbbVie partnered on RC148 bispecifics with a total of $5.6 billion; Cinda Biologics and Lilly reached multiple project collaborations totaling over $8.8 billion.

Foreign pharmaceutical companies’ substantial investments in Chinese innovative drug assets reflect recognition of China’s drug R&D strength.

(Note from Miaotou: BD transactions refer to licensing, cooperation, and other arrangements where pharmaceutical companies authorize overseas multinationals to develop or commercialize their self-developed new drugs, receiving an upfront payment, and later milestone payments and sales royalties — an important indicator of the internationalization value realization of China’s innovative drugs.)

Meanwhile, the AACR annual meeting in mid-April is approaching, also giving the market a short-term expectation.

From April 17 to 22, the American Association for Cancer Research (AACR) annual meeting will be held in San Diego. This year, over 100 Chinese pharmaceutical companies are expected to participate, showcasing more than 250 innovative drugs across fields like nuclear medicine, ADCs, cell therapy, mRNA, etc.

For the innovative drug sector, AACR has never been just an academic conference but also a potential valuation catalyst. If clinical data exceeds expectations, it often quickly reflects in stock prices.

Long-term fundamental change: valuation logic for innovative drugs is evolving

But if we only focus on short-term catalysts, we might underestimate the essence of this rally. What’s more worth noting is that the underlying valuation logic of innovative drugs is changing.

On one hand, the frequent landing of BD deals validates China’s innovative drugs’ international pricing capability.

In recent years, one of the biggest doubts about Chinese innovative drug companies was: “Their R&D looks lively, but can the value be realized?” Now, with dense BD deals landing, the core answer is: these pipelines are not just storytelling tools for domestic capital markets but are real assets that global pharma companies are willing to price and pay high upfront and milestone payments for.

On the other hand, significant improvement in performance begins to validate the commercialization and revenue realization capability of these companies.

According to disclosed 2025 annual reports, many companies’ profits have improved significantly. For example, Junshi Biosciences achieved an annual net profit of about 648 million yuan, a 30-fold increase; Sanyou Pharmaceuticals reported a net profit attributable to shareholders of 8.48B yuan, up 305.78%; China Biological Products’ adjusted net profit attributable to shareholders was 4.54 billion yuan, up 31.4%; Hengrui Medicine achieved a net profit of 7.71B yuan, up 21.69%, among others.

Some innovative drug companies are also beginning to turn losses into profits or reduce losses. For example, BeiGene’s net profit in 2025 was $287 million, compared to a loss of $645 million last year; Cinda Biologics’ net profit was 814 million yuan, reversing a loss of 95 million yuan last year; Rongchang Biotech’s net profit was 710 million yuan, turning around from a loss of 1.47B yuan; Innovent’s net profit was 642 million yuan, compared to a loss of 441 million yuan last year.

This indicates that some companies are moving from the “R&D investment phase” into the “innovation harvest phase,” with revenue and licensing income beginning to appear on financial statements, prompting the market to reassess the sector’s profitability outlook.

Additionally, top-level policy support is reinforcing this expectation.

This year’s two sessions’ government report first included biomedicine as a “new pillar industry,” not just a wording adjustment but a signal of industry status elevation. Policies supporting approval, payment, and the entire chain will influence cash flow expectations and valuation space for innovative drug companies.

For example, advancing the commercial insurance catalog for innovative drugs essentially alleviates the payment difficulties for high-priced innovative drugs; local support for frontier areas like cell and gene therapies helps strengthen market expectations for industry chain layout. Guangdong Province issued a document on March 26, explicitly proposing to implement an industrial innovation project to support the development of frontier fields like cell and gene therapy.

Market differentiation, key depends on the quality of profit improvement

However, whether this rally can evolve into a sustained trend depends critically on the sustainability of corporate profitability improvement, which points to the core differentiation within the sector in the future.

Currently, profit improvements mainly come from two channels: one is the continued volume growth of core products; the other is the one-time recognition of upfront payments from BD deals. The valuation logic for these two is quite different. The former indicates mature commercialization capabilities, with more sustainable revenue and cash flow; the latter is closer to one-time realization, which can boost performance temporarily but also entails higher volatility.

(1) Product revenue-driven: Indicates mature commercialization, with revenue and cash flow more sustainable. For example, BeiGene’s total revenue in 2025 was $5.34B, with product revenue of $5.28B, accounting for 99%; Cinda Biologics’ total revenue was 13.04B yuan, with product revenue of 11.9B yuan, accounting for 91%, being the core pillar of its first full-year profit.

(2) External licensing revenue-driven: Closer to one-time realization, capable of temporarily boosting performance but with greater volatility. For example, Rongchang Biotech, Hengrui Medicine, Quansheng Biotech, etc., turned losses into profits or saw significant profit increases in 2025 largely due to multiple BD deals recognized in a concentrated manner.

(Note from Miaotou: ① Rongchang Biotech: In 2025, the company achieved a breakthrough in licensing revenue, including a cooperation with Santen Pharmaceutical for RC28, receiving a 250 million yuan upfront payment, and licensing Taltirelin to Vor Biopharma, which brought significant licensing income (including a $45 million upfront payment and fair value gains from warrants of $80 million), playing a key role in turning losses into profits;

② Hengrui Medicine: In 2025, total revenue was $158 million (about 1.11 billion yuan), with molecular licensing fees of $141 million, up 375%, mainly from collaborations with multinational pharma and overseas licensing of innovative products;

③ Quansheng Biotech: In 2025, turned profitable, with licensing deals being key. Its only listed product, QX001S (Ustekinumab biosimilar), achieved nearly 300 million yuan in domestic sales in its first full year. The licensing income from the QX030N (IL-23p19/TL1A bispecific) licensed via the NewCo model with Caldera Therapeutics contributed 622.5 million yuan. )

Therefore, future sector differentiation is likely to revolve around this point.

Those companies that have already formed a “R&D–clinical–licensing–commercialization” closed loop are more likely to be revalued continuously; for others relying mainly on single BD upfront payments and with weaker product revenue support, high growth may not be sustained.

From this perspective, the current innovative drug rally is better described as a “re-pricing based on realization capacity,” rather than a “full-scale return.”

Of course, under optimistic expectations, risks cannot be ignored.

First, BD deals are not guaranteed success upon signing; subsequent R&D progress, clinical results, and cooperation execution all involve uncertainties. For example, on March 5, Merck announced the termination of its global licensing cooperation with Hengrui for PARP1 inhibitor HRS-1167, serving as a reminder.

Second, BD income is inherently volatile. Upfront payments can quickly improve current financial performance, but if no new large deals follow, the company’s revenue and profit in subsequent years may decline sharply.

Therefore, the key to observing the future of the innovative drug sector is not just the number and size of BD deals, but also analyzing the source structure of profits, distinguishing between product revenue and licensing income, and further assessing whether profitability can be sustained.

In conclusion

The recent rise in the innovative drug sector appears to be driven by emotional and event resonance on the surface, but underlying it is the market’s renewed assessment of China’s innovative drug value realization capability.

Whether the sector can continue to strengthen depends on whether more companies can truly turn BD, product sales, and clinical progress into sustainable profitability.

From this perspective, the valuation of innovative drugs may have already begun to reset, but this will not be a broad, indiscriminate rally — more likely a structured revaluation centered on realization capacity and differentiation.

Disclaimer: The content of this article is for reference only. The information or opinions expressed herein do not constitute any investment advice. Please make cautious investment decisions.