Looking at the annual report of A-shares innovative drugs: Overseas performance is realized, and R&D investment continues to grow

Ask AI · How can going global with innovative drugs become a growth point for pharmaceutical companies?

Recently, A-share biotech and pharmaceutical companies have completed the disclosure of annual reports and first-quarter reports.

In the past 2025 year, favorable external licensing transactions boosted the long-overdue rise of the innovative drug sector, and this benefit is now being reflected in financial performance, with many pharmaceutical companies achieving net profit growth due to payments received from external licensing transactions.

Meanwhile, R&D investment scale continues to increase, but some leading companies have begun to recognize impairment provisions for capitalized R&D expenses, eroding profits.

Is “normalization” of overseas licensing income happening?

Guojin Securities (600109.SH), based on data from 132 sample companies selected according to Shenwan industry classification, indicates that, in 2025, the overall revenue of the pharmaceutical sector remained flat compared to last year, with net profit attributable to parent increasing by 8% year-on-year. In the first quarter of 2026, the growth rates of revenue and net profit attributable to parent were 2% and 29%, respectively.

Guojin Securities points out that this profit growth is mainly driven by factors such as innovative drug license-out (overseas licensing) and operational efficiency improvements.

For example, Sanyou Biopharma (688336.SH) recognized external licensing income of 3.11B yuan in 2025, far exceeding its drug sales revenue, which was only 4.2B yuan for the whole year.

Sanyou Biopharma mentioned in its annual report that, for the global licensing agreement with Pfizer regarding SSGJ-707 (a PD-1/VEGF bispecific antibody), payments including upfront payments, milestone payments, and royalties are allocated proportionally: Sanyou Biopharma accounts for 30%, and Shenyang Sanyou accounts for 70%. By the end of 2025, the company received about 2.8 billion yuan from Pfizer for licensing fees related to the 707 project, significantly boosting its current performance.

Hengrui Medicine (600276.SH) had external licensing income of 3.39B yuan in 2025, accounting for about 10.7% of revenue. Hengrui has already positioned this part of the business as a “normal business,” making it an important component of its revenue.

However, the contribution of external licensing transactions to performance remains lacking in sustainability for many companies, Baili Tianheng (688506.SH) is one example.

Baili Tianheng recognized intellectual property income of 2.12B yuan in 2025, contributing over 80% to revenue, mainly from a collaboration with global multinational BMS on BL-B01D1 (EGFR×HER3 bispecific ADC).

Thanks to the upfront payment from this external licensing, Baili Tianheng turned a loss in 2024. By 2025, this licensing income had actually decreased year-on-year, and the company reported a loss again in 2025.

The annual report shows that the main reason for the revenue decline in 2025 was that the intellectual property income recognized from BMS’s upfront payment in the previous year was greater than the milestone income recognized during the reporting period, leading to decreases in revenue and net profit compared to the previous year.

Kelun Pharmaceutical (002422.SZ)’s subsidiary Kelun Botai Biotech saw a significant increase in sales of innovative drugs in 2025, but due to decreases in licensing and milestone income and increased R&D expenses, profits declined year-on-year.

Kelun Botai Biotech previously reached an external licensing agreement with Merck & Co. By the end of 2025, Kelun Botai Biotech had received a total of $729 million from Merck under the agreement, with $96.8164 million received in 2025.

However, the reduction in this external licensing income for Kelun Pharmaceutical had a relatively smaller impact on overall performance, as the company’s core business also includes infusion and non-infusion formulations, which contributed nearly 90% of its revenue in 2025.

Currently, the total external licensing amount for domestic innovative drugs is still on the rise. According to a recent report by Huayuan Securities, in the first three months of 2026, China’s external licensing (BD) transaction total exceeded $60 billion, nearly half of the total $135.7 billion in 2025, indicating a continued strengthening of the industry fundamentals.

Less than half of pharmaceutical companies have capitalized R&D expenses

From the financial data of pharmaceutical companies, R&D investment still remains on an upward trend. Most of these R&D expenses are expense-based R&D costs.

According to industry auditors, the R&D process for a drug generally involves an early exploratory research phase and a later development phase. The early stage has high uncertainty, and most expenses are expensed directly, impacting profits.

Once R&D enters the late clinical phase with high probability of success, the costs are no longer directly expensed but are recorded as “assets,” i.e., development expenditures. After the drug is successfully marketed, these costs are gradually amortized. In this case, current R&D expenses do not affect profits, easing performance pressure. Therefore, the proportion of R&D expenses capitalized can sometimes be used as a tool for profit management.

Regarding expense-based R&D costs, Guojin Securities’ report states that, among sample companies in the pharmaceutical sector, R&D expenses increased by 5% year-on-year in 2025, with a slight increase in the first quarter of 2026.

On the development expenditure side, data from Tonghuashun iFinD shows that, at the end of 2025, the total development expenditure of biotech and pharmaceutical companies was 55.75B yuan, up 15% year-on-year.

Data shows that, as of the end of 2025, Fosun Pharma (600196.SH) had the largest balance of development expenditure, nearly 6 billion yuan; followed by Hengrui Medicine, China Resources Sanjiu (000999.SZ), and Zhifei Biological (300122.SZ), with balances of 4.88B yuan and 2.16B yuan, respectively.

However, companies tend to be cautious about capitalizing R&D expenses. According to Tonghuashun iFinD data, among 504 biotech and pharmaceutical companies in 2025, only 232 companies capitalized R&D expenses, accounting for less than half, and only 27 companies had a capitalization rate exceeding 50%.

Because of the potential profit management role of R&D expense capitalization, the market often observes changes in the capitalization rate to assess profit quality.

Data from Tonghuashun iFinD shows that, in 2025, the top companies in R&D expense capitalization rate included ST Jiaying (002198.SZ), *ST Shuangcheng (002693.SZ), Changsanjiaoyao (300255.SZ), Tonghua Dongbao (600867.SH), ST Bailing (002424.SZ), Zhongsheng Pharmaceutical (002317.SZ), North China Pharmaceutical (600812.SH), and Zitong Palace (920566.BJ), all exceeding 60%.

Among leading market cap companies, Hengrui Medicine’s R&D capitalization rate was 20.21% in 2025; Fosun Pharma was 32.13%; Yunnan Baiyao (000538.SZ) increased to 17.19% from 3.15% last year; Haisike (002653.SZ) and East China Pharmaceutical (000963.SZ) had rates of 25.86% and 30.43%, respectively, with decreases compared to last year.

BeiGene (688235.SH), Baili Tianheng (688506.SH), Rongchang Biotech (688331.SH) and others did not capitalize R&D expenses. “Companies that do not capitalize R&D expenses are more cautious in accounting treatment, resulting in more solid profit figures with less water content,” said an industry auditor.

Leading companies first recognize impairment of development expenditures, eroding profits

However, even for capitalized R&D expenses, impairment provisions can negatively impact profits in the same year.

According to industry auditors, impairment of development expenditures generally means that, when a company finds that the market environment for a drug in development has worsened or competition has intensified, it may choose to terminate R&D and recognize the capitalized costs as expenses, thus eroding current profits. It can also happen if a clinical trial fails, requiring the capitalized costs to be written off.

For example, *ST Kangle (920575.BJ) recognized nearly 177 million yuan in impairment losses on development expenditures in 2025, the highest among pharmaceutical companies that year. The company explained that, due to fierce competition in the HPV vaccine industry, its nine-valent HPV vaccine (male indication) had not yet completed phase III validation or received approval for market listing, and short-term improvement was unlikely. Based on cautious accounting principles, it recognized asset impairment provisions for part of the development costs.

Xinlitai (002294.SZ) recognized impairment provisions of 151 million yuan for three ongoing projects in 2025. The company explained that, for these projects, the efficacy did not meet expectations, the R&D cycle was long and in early clinical stages, future R&D investments were high with significant uncertainty or fierce competition, and expected future benefits did not meet expectations, leading to project termination.

In 2025, Xinlitai’s overall net profit attributable to parent was only 652 million yuan, with impairment significantly eroding profits.

Hengrui Medicine also recognized impairment of development expenditures for the first time in 2025, amounting to 68.97 million yuan. The annual report states that, based on project progress, management made impairment provisions accordingly.

Liaoning Chengda (600739.SH)’s controlled subsidiary Chengda Biotech (688739.SH) terminated the hib vaccine project due to strategic adjustments. The company stated that, since the project no longer had expected future economic benefits, it fully impaired the capitalized R&D costs of 80.66 million yuan.

Recently, in April, the “Several Opinions on Improving the Price Formation Mechanism for Drugs” was issued by the General Office of the State Council, signaling a positive policy environment for innovative drugs. Guoxin Securities pointed out that this document clearly distinguishes a three-tiered pricing framework, reflecting recognition and support for high-level innovative drugs.

Bohai Securities noted that, in the first three months of 2026, China’s external licensing transaction total for innovative drugs approached half of the full-year 2025 total, with an increased proportion of upfront payments, demonstrating growing international recognition of China’s R&D strength in innovative drugs and a strong trend toward going global. With the upcoming major academic conferences such as the ASCO annual meeting in May 2026, clinical pipeline data will be densely disclosed, catalyzing long-term industry development and maintaining a positive outlook for the innovative drug industry.