SBP Pharma reported in-line 1H25 results with 10.7% YoY revenue growth driven by strong innovative/biosimilar drugs (+27.2%) and recovering generics. Net profit from continuing operations surged 140% YoY helped by dividend income and change in financial assets.
　　Management maintains double-digit 2025 growth guidance, anticipating a stronger 2H boosted by an US$300m MSD milestone payment and potential BD deals. With nearly 20 innovative drug approvals expected by 2027 and key data readouts at major conferences (ESMO/ERS), SBP's innovative contribution is projected to rise from 50% (2025) to 60% (2027) of revenue. Post-results, incorporating the MSD payment and higher R&D expenses, our DCF model yields a TP of HK$8.7 on a lower WACC (WACC:9.4%, terminal growth rate:2.0%). Maintain BUY.
　　Key Factors for Rating
　　1H25 results in line with expectation: Revenue grew 10.7% YoY to RMB17.6bn, in line with our expectation, driven by strong performance in innovative and biosimilar drugs (+27.2% YoY to RMB7.8bn), alongside positive growth in generic drugs. Gross margin improved 0.4ppt to 82.5% and SG&A expensed optimized by 0.2ppt to 42.9%, nevertheless offset by increased R&D cost ratio (+1.9ppts YoY to 18.1%), leading to a 9% YoY decline in the medicine segment's results. Net profit from continuing operations surged 140% YoY to RMB3.39bn thanks to improved operating efficiency, RMB1.5bn in dividend income, and fair value changes of financial assets, etc. Management maintained its guidance for double-digit growth in both top-line and bottom-line for 2025, and expects a stronger second half year, supported by US$300m milestone payment from MSD following LaNova acquisition and potential significant near-term BD collaboration.
　　Furthermore, SBP expressed interest in pursuing additional acquisition and license- in projects, leveraging its substantial cash reserves (~RMB20bn).
　　Key data readout/NDA approval in 2025-26: SBP expects nearly 20 innovative product approvals in 2025-27, with over half being potential blockbusters (peak sales exceeding RMB2bn). Innovative drugs are expected to contribute 50%, 55% and 60% of SBP’s total revenue by YE25, YE26, and YE27, per management. Key drugs to be approved in 2025-26 are TQB3616 (CDK2/4/6 inhibitor) in the corner with peak sales of RMB2bn, zongertinib (HER2 inhibitor) in YE25 with peak sales of RMB1.5bn, M701 (CD3/EpCAM BsAb), and PL-5. Key data readouts are TQB3616 (CDK2/4/6 inhibitor) in 1L HR+/HER2- BC (phase III) at 2025 ESMO, TQB2102 (HER2 BsAb ADC) in HER2+ BC (phase Ib) at 2025 ESMO, M701 (CD3/EpCAM BsAb) in malignant pleural effusion (phase Ib/II), LM-108 (CCR8) in 1L GC AND 1L PDAC (phase II) in2026, LM-302 (Claudin 18.2 ADC) in 3L GC (phase III) in 2026 TQC3721 (PDE3/4 inhibitor) in COPD at 2025 ERS, TQC2731 (TSLP) in asthma at 2025 ERS.
　　Products have BD potential are PDE3/4 inhibitor, HER2 bsAb ADC, CDK2/4/6, FGF21, and JAK/ROCK inhibitor.
　　Key Risks for Rating
　　(i) Slower-than-expected ramp-up of generic pipeline drugs; (ii) intensified competition on core products; and (iii) price cut due to GPO on key generic drugs.
　　Valuation
　　Post results, we fine-tuned our drugs sales in 2025-27, incorporated milestone payment of US$300m from MSD, and significantly increased R&D expenses forecasts. We have decreased our risk free rate and market risk premium assumptions to 3.3% and 6.7%, rolled over our DCF model, and derived TP of HK$8.7. Maintain BUY rating.