China: Capturing value in a major biotech innovation leader

Traditional Chinese medicine (TCM) dates back more than 2000 years, with Huangdi Neijing (The Yellow Emperor’s Classic of Medicine) said to be written around 2600 BC, and evidence of therapeutic puncturing possibly being an early form of acupuncture. However, many may not realise that today, China is continuing that early wave of innovation – Suzhou in the northwest, and Shanghai, are key biotechnology hubs for drug discovery, clinical development and biopharmaceutical innovation.

China’s biotechnology sector is no longer just a manufacturing hub or mainly domestic facing. Leading companies are increasingly competing in the global arena, with drug discoveries and biotech innovation that is now being monetised through licensing, partnerships and overseas commercialisation.

Biomedicine is among the six strategic and emerging pillar industries identified by China. The recently unveiled 15^th Five-year Plan (2026-30) for Pharmaceutical Industry Development outlined a roadmap to accelerate development in the sector. Among the key quantifiable goals are the aim to achieve operating revenue of pharmaceutical industrial enterprises above a designated size to exceed 3.5 trillion yuan by 2030, and a growth rate of more than 20% for innovative drugs.¹

Investors are acknowledging this strong growth area of the Chinese market. The Hang Seng Biotech Index has rallied by more than 130% since it bottomed in July 2024,² when in May, investor focus shifted towards AI and there were heightened geopolitical concerns. Many China biotech stocks now look well positioned to be on a long-term structural uptrend.

In our view, there are three key reasons for this:

1. China has moved from being primarily a consumer, fast follower of foreign drug innovation, and manufacturing hub, to becoming one of the largest sources of biotech innovation.
2. China is increasingly adept at retaining more of the value from innovation through various monetisation routes.
3. Biotech has been a strategic priority area for China for some years now, supported by policy initiatives, regulatory reform and funding.

From ‘fast-follower’ to global competitor in innovation

Historically, many Chinese biopharma companies followed a ‘fast-follow’ strategy. Instead of taking the full risk of discovering new drug, they focused on more quickly, developing and/or improving drugs that were similar to successful medicines developed elsewhere, and manufactured it at lower cost.

While this lowered development risk, it also created crowded pipelines and a lack of innovation. For example, Humira (developed by Abbott Laboratories at the time) was the first fully human monoclonal antibody approved by the US FDA, treating several chronic autoimmune diseases, making it a best-selling drug for years. In 2018, 25 Chinese developers were working on creating Humira biosimilars.³

Over the past decade, however, the research and development (R&D) model of China’s biotech industry has been transformed. Regulatory reform, greater access to capital and a deeper scientific talent pool has allowed leading companies to move beyond fast-follow development towards differentiated best-in-class (BIC) and, increasingly, first-in-class (FIC) assets designed for global development.

China has made enormous gains in phase I drug development and is increasingly competing with, and in some areas surpassing, the US in the volume and speed of early-stage clinical trials. Key regulatory reforms have made China much faster than it was a decade ago:

• China moved to an implied approval system where many clinical trial applications can proceed if regulators do not object within a defined review period.
• Innovative drugs may benefit from expedited review pathways.
• Large patient populations and concentrated hospital networks can accelerate recruitment.
• Development costs are often lower than in the US.

The rise of next-generation drug development in China

Accounting for a major share of the global clinical pipeline, China-originated assets represent around a third of all innovative drugs under active clinical development. In addition, innovation output has ramped significantly, with roughly half of the global new molecular entities (NMEs) entering clinical trials this year.

China’s drug development engine has built an exceptionally strong position in the global transition toward next-generation, high-complexity therapeutic platforms. There has been a shift to next-generation modalities. While traditional small molecules and monoclonal antibodies remain the largest pharmaceutical markets, newer modalities are growing much faster, such as Antibody-Drug Conjugates (ADCs) and bispecific/multi-specific antibodies.

Figure 2: China biotech’s growing potential
Source: Goldman Sachs analysis as at July 2026. BD = business development; A/H = China A shares/Hong-Kong listed; ADC = Antibody-Drug Conjugate; BsAb = Bispecific Antibody; RNAi = RNA Interference; PROTAC = Proteolysis-Targeting Chimera; RLT = Radioligand Therapy.

Why we believe China biotech is at an inflection point for investors

China spent the last decade building biotech capabilities; the investable inflection is happening now because global demand, funding diversification and stronger balance sheets, is finally allowing the winners to convert those capabilities into sustained profitability:

1. The global pharma patent cliff has created a pipeline replacement need: A wave of blockbuster drugs are due to lose exclusivity over the coming years, including some of the industry’s largest products. Drugs facing loss of exclusivity represent tens of billions of dollars of annual sales, increasing pressure on large pharma companies to replace future revenue through external innovation, licensing and mergers and acquisitions (M&A). As global pharma looks outside its own labs to refill pipelines, it is increasingly turning to the innovation capacity China has built over the past decade, creating a more structural buyer base for Chinese assets.
2. Licensing income is reshaping biotech funding models: While one of the sector’s key vulnerabilities post-COVID was its dependence on external capital to fund long-duration R&D, funding models are now more diversified. Licensing has emerged as a meaningful alternative source of capital. Outbound licensing upfronts and milestones (contractual payments paid by a global pharmaceutical to a biotech company when a drug candidate reaches predefined development, regulatory or commercial targets) now contribute approximately 70% of China’s biotech sector funding.⁴
3. Dramatic runway extension: Through aggressive operational downsizing, focus on high-margin core pipelines, and non-dilutive licensing inflows, corporate balance sheets have rebounded. The median cash runway ie. the length of time existing cash can support operations of listed Chinese biotechnology companies, has nearly doubled.⁵
4. The sector is increasingly focused on capturing a greater share of long-term economic value, rather than simply maximising deal activity: Better-capitalised innovators can increasingly use licensing, co-development, profit-sharing and NewCo (new company) structures or self-commercialisation, to retain greater participation in the monetisation/capture of an asset’s potential returns.

What criteria should investors look for when investing in China biotech?

We think the investment opportunity lies in companies that can deliver on two fronts: firstly, have differentiated pipelines with strong R&D and management execution, and sufficient financial capacity to carry development risk. Secondly, have reliable and consistent monetisation routes, rather than relying solely on traditional out-licensing to generate revenues.

Key risks facing China’s biotechnology sector

Despite the improving backdrop, China’s biotech industry faces a number of challenges as it becomes more global. Rising US-China tensions are unlikely to stop collaboration altogether, but they could make cross-border partnerships, clinical trials, manufacturing and approvals more complex and costly. Competition is another risk, with companies targeting the same areas. Companies with a broader pipeline, differentiated technologies and multiple growth drivers would seem better placed to withstand setbacks and generate more consistent long-term value.

Conclusion

China’s biotech industry has evolved from a fast follower to an increasingly important source of global drug innovation, and in particular, next-generation therapies. For investors, the most compelling opportunities are likely to be found in companies that combine differentiated innovation with the ability to retain and monetise a greater share of the value they create. In our view, these companies are well positioned to drive growth and returns in China’s biotech sector for many years to come.

IMPORTANT INFORMATION

There is no guarantee that past trends will continue, or forecasts will be realised.

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.