China's pharmaceutical industry is undergoing a transformation that is reshaping its role in global drug development. Once known primarily for manufacturing widely used medicines, Chinese companies are increasingly developing innovative treatments that some of the world's largest pharmaceutical groups are paying to license. For equity investors, this shift is creating opportunities beyond names linked to artificial intelligence that have dominated the China investment narrative.
China accounted for approximately 40% of assets licensed by major global pharmaceutical companies in 2025, up from approximately 30% the prior year, according to IQVIA1. This growing share of global licensing activity highlights how quickly China's position in pharmaceutical innovation is changing.
Wenchang Ma, China and Asia Equity Co-Portfolio Manager: “China is no longer simply a manufacturer of generic medicines. Its growing ability to develop innovative treatments with global commercial potential represents a fundamental shift in the country's pharmaceutical industry. For long-term investors, the opportunity lies in identifying businesses whose scientific capabilities and competitive advantages are evolving faster than market perceptions.”
China's pharmaceutical industry has progressed from generic medicines and lower value manufacturing towards developing differentiated treatments and, increasingly, its own intellectual property. This transition has been supported by rising research and development (R&D) investment and the development of domestic scientific expertise.
The government's latest pharmaceutical five-year plan adds further impetus to this shift, targeting a global share of at least 25% of first-in-class drugs by 2030. The ambition reflects China's intention to move further towards breakthrough innovation, although achieving it will depend on the quality and clinical success of the drugs being developed.2
Joanna Yang, China Equity Co- Portfolio Manager: “China has spent years building its scientific capabilities. Researchers and executives with experience at leading multinational pharmaceutical companies have returned to the market, bringing expertise in drug discovery and clinical development. Combined with sustained investment in research, this has helped China move beyond replicating existing treatments towards developing increasingly innovative medicines.”
China also benefits from a comparatively cost effective development environment. Lower labour and clinical trial costs, alongside a large pool of scientific talent and patients, can make it less expensive to advance drug candidates through development. Meanwhile, growing expertise in drug discovery and increasingly sophisticated manufacturing capabilities have helped establish a more integrated pharmaceutical ecosystem.
China's competitive advantage also lies in its ability to improve and combine existing drug mechanisms, using its strengths in molecular engineering to develop potentially more effective treatments. This is particularly relevant in areas such as antibody-drug conjugates and multi-specific medicines, where scientific innovation can build on established therapeutic approaches.
China is also emerging as a key manufacturer of newer drug modalities, particularly in oncology and metabolic diseases. Its ability to offer a broad range of contract research and manufacturing services has helped Chinese companies capture a growing share of outsourced work from global pharmaceutical groups.
The opportunity extends beyond drug developers. China's contract research and manufacturing organisations provide research, development and manufacturing services to global pharmaceutical companies, benefitting from the country’s scientific expertise and cost advantages.
One of the clearest signs of China's changing role is the growth in licensing deals involving Chinese developed drugs. The country’s emergence as a source of pharmaceutical innovation coincides with a significant challenge for the global industry, as major pharmaceutical companies face patent expirations on blockbuster medicines and increasing pressure to replenish their drug pipelines.
Multinational pharmaceutical companies are increasingly looking to China for promising assets, providing a route for domestic biotech businesses to monetise their research beyond the home market.
Licensing agreements can generate substantial upfront payments, followed by milestones as drugs progress through development and, potentially, royalties on future sales. Chinese innovative-drug out-licensing was worth around US$110 billion across 81 deals in the first half of 2026, roughly 80% of the full-year 2025 total.3
“Developing new treatments is expensive and carries significant clinical risk, making external innovation increasingly attractive. Licensing agreements provide a pathway for Chinese biotech companies to translate scientific innovation into commercial value, while allowing global pharmaceutical companies to access promising treatments without bearing the full cost and risk of developing new medicines internally,” said Ma.
China's growing research capabilities and comparatively low development costs may make it an attractive source of new assets. Its scientific talent, clinical trial infrastructure and manufacturing expertise can support the development process, while global licensing agreements offer companies opportunities to access international markets to aid their activity.
As competition increases and drug sales may come under pressure earlier in a product's lifecycle, global pharmaceutical companies face a growing need to replenish their pipelines and sustain the pace of innovation. Chinese biotech businesses may be well positioned to benefit, provided they can continue to produce differentiated assets that meet global clinical and commercial standards.
Regulatory policy remains another factor to watch. In September 2026, Reuters reported that the US was considering rules likely to preserve American pharmaceutical companies' ability to license most drugs from Chinese companies, subject to exceptions. The reported proposals were still being developed, however, so the regulatory environment remains an important consideration for cross-border deals.4
Yang: “The combination of growing innovation in China and global pharma's need for replacement products could support further licensing activity. However, the commercial opportunity for individual companies will depend on the quality and differentiation of their assets, the terms of licensing agreements and their ability to translate research into successful, treatments that can be manufactured at scale and brought to market effectively.”
China's biotech industry illustrates a broader opportunity within the country's equity market, identifying businesses whose capabilities are evolving faster than market perceptions. Healthcare remains a relatively small component of China's equity market, despite the growing international reach of its pharmaceutical industry. A substantial pipeline of biotech companies seeking to list in Hong Kong also reflects the expanding opportunity set for investors. However, identifying the potential winners requires looking beyond the growth of the sector itself to assess the quality of individual businesses and their ability to commercialise their innovation.
For long term investors, the focus is on companies where sustained investment, scientific expertise and global commercial relationships have the potential to create durable competitive advantages.
If successful licensing deals generate upfront payments and milestones that can be reinvested in research, they may help create a virtuous cycle: more funding for drug discovery, more candidates progressing through development and a larger pool of potential assets for global licensing or domestic commercialisation. This could strengthen China's position in global drug development over time, although the benefits will depend on continued R&D productivity and companies' ability to turn promising trials into successful medicines.
Ma concluded: “As China's pharmaceutical industry moves up the value chain, selected businesses may be increasingly well positioned to capture value from innovation beyond their domestic market. The challenge is to identify those companies with genuinely differentiated capabilities and the potential to translate scientific progress into sustainable shareholder returns.”
1. Biopharma M&A: Outlook for 2026 | IQVIA
2. Fierce Biotech – China targets 25% share of global first-in-class drugs in new 5-year plan
3. China innovative drug out-licensing deal value reaches new high in first half of 2026, says CCTV
4. Reuters – US weighs allowing most pharma licensing deals with China