The innovative drug industry is defined by its "double ten" characteristics—a research and development cycle of roughly a decade and an investment of about one billion US dollars per molecule. During the R&D phase, most companies generate no revenue and no profit, rendering traditional PE and PS valuation methods ineffective at reflecting the intrinsic value of their pipelines. A risk-adjusted DCF/NPV discounting model serves as the core tool for assessing the true worth of innovative drug companies, with valuation fundamentally representing the sum of discounted future cash flows from the pipeline, augmented by the incremental value from BD out-licensing. For diversified enterprises, a sum-of-the-parts valuation is employed, applying PE to mature businesses and DCF to innovative pipelines, before consolidating to derive the company's overall value.

Sales peak projections require breaking down five key parameters: patient base, treatment cost, market share, penetration rate, and clinical success probability. For oncology drugs, the focus is on newly diagnosed patients, while chronic disease medications must incorporate awareness, treatment, and control rates for accurate adjustments. Out-licensed assets, benefiting from significantly higher overseas drug pricing, can substantially elevate the valuation ceiling of a single molecule. Currently, China's innovative drug sector is transitioning from R&D toward commercial realization, with BD out-licensing models diversifying—License-out, co-development, Newco, and independent overseas launches are running in parallel. This creates a valuation re-rating window for A-share platform-based pharmaceutical companies and sci-tech Biotech firms with blockbuster pipelines.

Key Targets and Core Logic

BeiGene (688235) stands as a benchmark for domestic companies pursuing independent overseas expansion, having built a comprehensive global R&D, clinical, and commercialization infrastructure. Its core product, Zanubrutinib, a Best-in-class BTK inhibitor, has demonstrated superior efficacy through head-to-head clinical trials and continues to expand its market share internationally, achieving a 55% share among newly diagnosed patients in the US, validating the commercial viability of China-developed innovative drugs on a global scale. The company's pipeline is robust, with oncology assets advancing to earlier treatment lines and multiple drugs filed concurrently in China and the US. From a valuation perspective, a full DCF model is suitable, with overseas drug prices approximately ten times higher than domestic ones, meaning international sales contributions significantly boost the pipeline's NPV; the market capitalization of leading innovative drug firms shows a strong correlation with DCF-derived results. With its platform value and a rich pipeline beyond marketed products, a mature platform warrants a moderate premium, and under the independent overseas model, full ownership of overseas pipeline rights ensures all cash flows are incorporated into the valuation.

Jiangsu Hengrui Pharmaceuticals (600276), a comprehensive leader in domestic innovative drugs, operates with a business structure comprising both generics and innovative drugs, making it an apt candidate for sum-of-the-parts valuation: PE for the generics segment and DCF for ADC and bispecific antibody pipelines. The company's in-house R&D platform is comprehensive, continuously generating high-quality molecules across ADC, bispecific antibodies, and PROTAC, with diverse BD out-licensing models including both License-out and Newco deals. Multiple assets have been licensed out, with milestones and sales royalties integrated into DCF cash flow projections. Given that partners are predominantly large multinational corporations (MNCs), project execution certainty is high. Leveraging its mature domestic commercial sales system, the company achieves rapid post-approval uptake, and its steady-state net margin has upside potential, allowing for reasonably optimistic margin assumptions in the DCF model. With a pipeline spanning major indications like oncology and metabolism, which correspond to larger patient pools, the sales peak potential is substantial, and clinical success probability parameters are poised for upward revisions as data matures.

Huadong Medicine (000963) presents a complex business layout covering generics, pharmaceutical distribution, medical aesthetics, and innovative drugs, serving as a typical example for sum-of-the-parts analysis. The generics segment receives a traditional PE multiple, pharmaceutical distribution is valued at a low PE, medical aesthetics commands a higher valuation premium, and all innovative drug pipelines are valued using DCF. The company's innovative pipeline targets both oncology and chronic disease, with chronic disease drug projections thoroughly accounting for prevalent patients and adjustments for awareness and treatment rates; leveraging China's vast chronic disease patient population, it can achieve high sales peaks through a volume-driven strategy. The company actively pursues BD collaborations and out-licensing, with some assets entering overseas markets through partnerships, and overseas royalty cash flows are included in the overall NPV. Medical aesthetics and generics provide stable current cash flows that offset innovative drug R&D investments, ensuring ample funding and fostering strong synergies across business segments.

RemeGen (688331)'s core asset, Disitamab Vedotin, has completed an overseas BD license, representing a classic License-out model. This overseas transaction brings upfront payments, milestones, and subsequent product sales royalties, requiring DCF calculations to discount future overseas royalties into the company's value. While License-out deals may offer limited royalty percentages, the partners' strong overseas commercialization capabilities increase the likelihood of pipeline advancement and mitigate clinical and overseas promotion risks. The company also holds assets in both ADC and autoimmune disease, encompassing both major oncology indications and chronic autoimmune conditions. When projecting sales peaks, the oncology pipeline focuses on newly diagnosed patients and target mutation rates, while the autoimmune chronic disease assets incorporate treatment penetration coefficients. With multiple pipeline candidates in late-stage clinical development, upcoming Phase II and III data readouts will elevate clinical success probability parameters, thereby enhancing the rNPV.

Sichuan Biokin Pharmaceutical (688506)'s core bispecific ADC asset has secured a major overseas licensing deal, with a transaction scale ranking among the industry's largest, positioning it as a representative of cutting-edge Chinese molecules going global. Adopting the License-out model, the high-price overseas market amplifies the value of future sales royalties. Valuation hinges on projecting future overseas sales peaks, then applying royalty percentages, clinical success rates, and discount rates to complete a risk-adjusted NPV calculation. The company's platform continues to generate next-generation bispecific ADC molecules, with an extensive early-stage pipeline. For these early assets, the DCF model applies a higher WACC discount rate to reflect the elevated risk profile. For pioneering First-in-class assets, baseline clinical success probability assumptions should be moderately lowered, making subsequent clinical data readouts the primary catalyst for upward valuation revisions.

Core Investment Approach for the Sector

Investing in innovative drugs requires looking beyond current profitability, focusing instead on two primary catalysts: clinical data readouts and BD collaboration milestones. Positive clinical data directly upgrades pipeline success probability parameters, while successful BD out-licensing opens overseas market potential, both driving up the molecule's DCF value. For mature platform-based companies, in addition to summing individual pipeline rNVPs, a platform premium for continuous new drug output must be added. For early-stage sci-tech Biotech firms, valuation is almost entirely determined by pipeline DCF. PS valuation can serve as a simple auxiliary tool to DCF; as a simplified proxy for forward PE, 3x PS roughly implies a 20% net margin and 15x forward PE, allowing for cross-validation with DCF results in practice. Regarding parameter judgment, oncology drugs should focus on treatment line and target expression rate, with earlier lines corresponding to larger patient pools; chronic disease drugs cannot directly use the total epidemiological patient population but must be adjusted through awareness, treatment, and control rates to derive the true treated population. Domestic pricing must factor in National Reimbursement Drug List (NRDL) negotiation price cuts, which are steep in initial rounds but narrow upon renewal, while overseas markets enjoy significantly higher prices, making out-licensed assets the most important incremental source of value for innovative drug valuations. Different BD models each have pros and cons: MNC licensing offers high certainty but lower royalty percentages, while Newco models provide higher royalty shares but require careful assessment of the partner's execution capability. All these variables need to be comprehensively considered within the discounted cash flow model.