China’s pharmaceutical industry is undergoing a transformation that is changing 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 is creating opportunities beyond the companies 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 advancing.
From generics to global innovation
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.
Talent has been another driver. Researchers and executives with experience at leading multinational pharmaceutical companies have returned to the market, bringing expertise in drug discovery and clinical development. 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 20302.
Advancing drug candidates through clinical trials tends to be significantly less expensive in China because of lower labour and operational costs, and the large pool of patients.
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.
Alongside the growth of its pharma innovation sector, China’s contract research, development and manufacturing services is capturing a growing share of outsourced work from global pharmaceutical groups, similarly benefitting from the country’s scientific expertise and cost advantages. China is emerging as a key manufacturer of newer drug modalities, particularly in oncology and metabolic diseases.
The global patent cliff is accelerating demand for Chinese innovation
China’s emergence as a source of pharmaceutical innovation coincides with a significant challenge for the global industry: major pharmaceutical companies face patent expirations on blockbuster medicines and increasing pressure to replenish their drug pipelines. Consequently, multinational pharmaceutical companies are increasingly looking to China for promising drug candidates.
For Chinese drug developers, 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
The combination of growing innovation in China and global pharma’s need for new products could support further licensing activity overall. However, the commercial opportunity for individual companies will depend on the terms of their licensing agreements and their ability to turn research into successful treatments that can be manufactured at scale and brought to market effectively.
Regulatory policy remains a factor to watch. US policymakers have tightened rules on the procurement of biotech products and services from certain countries. It has been reported that Washington is considering rules to preserve US pharmaceutical companies’ ability to license most drugs from Chinese companies4, but the regulatory environment remains uncertain.
What this means for China equity investors
China’s transition from drug manufacturer to innovator has the potential to create a flywheel effect. Successful licensing deals generate money that can be reinvested in research, potentially leading to more candidates progressing through development and a larger pool of assets for global licensing or domestic commercialisation. This could strengthen China’s position in global drug development over time, although this will depend on continued R&D productivity.
But while the growth and evolution of China’s healthcare sector provides a supportive backdrop for investors, identifying the potential winners requires assessing the quality of individual businesses and their ability to commercialise their innovations. For long-term investors, 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
