China’s Innovative Medicine Sector is Booming: Why 2025 Could Be a Goldmine for Investors

Get ready, because the innovative medicine sector is not just warming up – it’s on fire, and smart money is taking notice.

If you’re watching the markets, you’ve seen the signals.

On May 23, Hong Kong-listed pharmaceutical stocks absolutely rocketed.

We’re talking serious gains:

• Zhaoyan Xinyao (昭衍新药): Popped over 16% at one point.
• Taige Yiyao (泰格医药): Climbed more than 12%.
• Luye Zhiyao (绿叶制药): Surged over 11%.

And it wasn’t just Hong Kong.

The A-share innovative medicine scene saw its own fireworks.

Haichen Yaoye (海辰药业) hit the 20cm limit up – a massive move.

Zhongsheng Yaoye (众生药业) also maxed out its daily limit.

This isn’t just a blip on the radar.

After a cooldown period from its peak in early 2021, the pharmaceutical sector, especially innovative medicine, is showing strong vital signs.

Since the start of this year, the industry’s been getting hit after hit of good news.

The CSI Hong Kong Innovative Medicine Index? It’s up over 37%.

That’s a testament to recovering market sentiment and a stream of positive developments.

We talked to public fund managers, and the consensus is clear:

The fundamentals in the pharmaceutical sector are steadily getting stronger.

More importantly, innovative medicine is hitting a crucial phase where all that intense R&D is finally turning into real, tangible results.

The forecast? This trend isn’t just a flash in the pan; it’s expected to be the main investment theme for pharma in 2025.

Some fund managers are even calling 2025 the kickoff year for an innovative medicine investment cycle that could last three years or even longer.

So, what’s behind this surge? Let’s dive in.

Multiple Catalysts Converging: The Bull Case for Innovative Medicine Strengthens

Fund managers point to a perfect storm of factors: solid fundamentals, attractive valuations, and supportive policy tailwinds.

This combination is making innovative medicine the standout leader in the healthcare sector this year.

From R&D Grind to Market Gold

Shan Lin (单林), fund manager of Yongying Pharmaceutical Innovation Smart Selection Fund, puts it this way:

This innovative medicine rally is the natural next step in China’s pharmaceutical evolution.

Think about it: innovative drug R&D is a marathon, not a sprint.

It demands long cycles and hefty investment.

In the early days, countless R&D projects fueled massive growth for CXO (Contract Research/Manufacturing Organization) companies.

This led to a bull market in the CXO sector from 2018 to 2021.

Now, after 5-10 years of groundwork, we’re seeing the payoff.

As more innovative drugs launch, get included in national medical insurance (医保, Yibao), and start racking up sales, the innovative medicine sector is set for a boom.

This isn’t just about exciting clinical trial news anymore; it’s about real financial growth showing up on the books.

Policy Power-Ups: Fueling the Innovation Engine

Zheng Ning (郑宁), fund manager of BOC Innovative Healthcare Fund, highlights the crucial role of government policy.

Recent national policies encouraging innovative medicine have been a game-changer.

These policies have:

• Sped up the review and approval process for innovative drugs.
• Cleared the path for commercialization and wider adoption.
• Enabled profits to be reinvested into further R&D – a virtuous cycle.

On top of that, optimized centralized procurement (集采, Jicai) policies this year are giving traditional pharmaceutical companies a bit more breathing room on profits.

This allows them to invest more boldly in their own innovative drug pipelines.

Right now, among all pharma sub-sectors, innovative medicine boasts the strongest fundamentals.

Biotech companies are seeing high revenue growth, and as they scale, their expenses are becoming more efficient, leading to improved profitability – many are turning profitable.

Going Global: China’s Pharma Innovation Hits the World Stage

“Look at this current market uptrend,” Zheng Ning adds.

“Two things stand out:”

1. Some domestic innovative drugs are starting to achieve significant sales overseas, especially in the United States.
2. In global innovative drug BD (Business Development) transactions, the share of Chinese innovative drugs has leaped from single digits in 2022 to 30% in 2024.

And that share continued to climb in the first quarter of 2025.

This isn’t just incremental progress; Zheng Ning believes it signifies a qualitative leap in the global competitiveness of China’s homegrown innovative drugs.

The “Year One” Buzz: A New Dawn for Chinese Pharma?

Zhou Sicong (周思聪), fund manager of 平安医药精选股票 (Ping’an Yiyao Jingxuan Gupiao), sees innovative medicine in a “dual upswing cycle.”

This is driven by both overseas market expansion and domestic medical insurance (Yibao) inclusion.

He’s calling 2025 “year one” for China’s innovative medicine industry in three key aspects:

• The first year of substantial revenue growth.
• The first year of profit breakthroughs.
• The first year of valuation increases.

The bottom line? The industry is gearing up for systematic investment opportunities.

Riding the “Tech Asset Bull Market”

Liang Furui (梁福睿), fund manager of Changcheng Yiyao Chanye Jingxuan (长城医药产业精选) Fund, echoes this optimism.

He notes that within the broader “tech asset bull market,” the case for innovative medicine is getting stronger and stronger.

Here’s why:

• Financial Inflection Point: Many biotech or biopharma companies kept up high revenue growth this year. They’re hitting quarterly or annual profitability in their financial reports. This signals a sector-wide turnaround from a numbers perspective.
• Stronger R&D and BD Outcomes: Innovative drug companies are delivering more impressive results this year. This includes key pipeline data readouts and successful overseas BD transactions compared to previous years.

2025: The Start of a Multi-Year Innovative Medicine Investment Cycle?

Fund managers acknowledge that innovative medicine can be a volatile sector.

Pullbacks and fluctuations? Totally normal.

However, they emphasize that innovative medicine is a category with solid fundamentals within the larger tech asset class.

Expect stock price performance this year to be smoother than in the volatile past.

Undervalued with Room to Grow?

Shan Lin believes innovative medicine currently has some of the best medium-term fundamentals and the clearest investment logic among all healthcare sub-sectors.

How about valuations?

Even using the common PS (Price-to-Sales) valuation metric, the entire sector looks relatively undervalued right now.

Looking ahead 2-3 years, as more new drug companies start showing profits on their balance sheets, the valuation system itself might shift.

Compared to the high growth expected in new drug performance, current valuations still offer great value for money.

“Innovative medicine stocks are among the assets that can truly be called tech stocks – they have performance, growth potential, and the ability to deliver,” Shan Lin states.

“The innovative medicine market today might be where the CXO market was in 2018-2019. This current rally has medium-term sustainability.”

Confidence in Sustained Rally

Zheng Ning is also bullish on the rally’s staying power, citing strong short-to-long term fundamentals and a still-attractive risk-return profile for innovative medicine.

What to Watch: Catalysts on the Horizon

Looking forward, Liang Furui suggests keeping an eye on several key factors:

• Mid-year and annual report performance: Are companies delivering on the numbers?
• Key pipeline data readouts: Breakthroughs in clinical trials can be huge.
• Progress of overseas BD transactions: More international deals signal global validation.

“Overall, major conferences in the second half of the year and upcoming medical insurance (Yibao) negotiations are expected to bring beta-style gains to the entire innovative medicine sector,” Liang Furui predicts.

“Combine that with the idiosyncratic alpha from individual stock performers, and the future for innovative medicine looks very promising.”

“A Light Skiff Past Ten Thousand Steep Mountains”

Zhou Sicong reflects on the journey:

“Despite all the twists and turns, innovative medicine investment has been one of the few consistent bright spots in pharmaceutical investing over the past few years.”

Now, he sees the industry entering a new phase:

• Increasing market attention.
• Changing shareholder structures.
• Value being actively discovered.

He poetically describes innovative medicine investment as “a light skiff that has passed ten thousand steep mountains.”

“China has undoubtedly become a strong nation in innovative medicine,” Zhou Sicong confidently states.

“2025 is the first year of an investment cycle for innovative medicine lasting three years or more. We can sustainably look forward to long-term, large-scale investment opportunities in this industry.”

Investment Strategy: The “DeepSeek Moment” & Navigating A-Shares vs. Hong Kong Stocks

There’s a growing consensus among fund managers: the “DeepSeek Moment” for innovative medicine has arrived.

What’s a “DeepSeek Moment”? Think of it as a significant turning point or breakthrough, much like how DeepMind or ChatGPT revolutionized AI perception and capabilities.

It signals a fundamental shift and explosive potential.

Liang Furui believes China’s innovative medicine story is just getting started.

This year, Chinese innovative drug companies might see a major turnaround in their financials.

Beyond that? Expect explosive growth in both financial performance and R&D pipelines.

He’s very optimistic about the industry’s trajectory and future stock performance.

Market Focus: A-Shares vs. Hong Kong Stocks

When it comes to where to invest, Liang Furui offers a nuanced view:

• Hong Kong Stock Market:
  • More correlated with the broader macroeconomy.
  • Has a flexible shorting mechanism, which means innovative medicine company valuations there are often less bubbly.
  • Offers more high-quality assets to choose from.
  • The overall sector beta (market sensitivity) is stronger.
• A-Share Market:
  • Many companies here are transitioning from generic drugs to innovative drugs.
  • This transition phase can offer potentially greater upside in valuations if successful.

Stock Picking: Balancing Leaders and Emerging Players

How do the pros pick stocks in this dynamic environment?

Zheng Ning shares his approach:

“Industry leaders tend to have more stable performance. So, when expected returns are high, I’d prioritize allocating to these leaders.”

“However, if stock prices rise and expected returns decrease significantly, I’d have to sacrifice some certainty and look for second and third-tier stocks that offer a better risk-reward profile.”

His evaluation criteria are consistent across sectors and companies: a thorough comparison of risk and return.

This involves assessing the uncertainty of future free cash flow and the implied return under a DCF (Discounted Cash Flow) model.

“Our investment framework is consistent: returns come from discounting a company’s future free cash flow. We analyze risk and return comprehensively, and act bravely when risk appears to be expensively priced,” Zheng Ning explains.

The “Shou Zheng Chu Qi” (守正出奇) Strategy

Shan Lin adopts a strategy he calls “Shou Zheng Chu Qi” (守正出奇).

This translates roughly to “act conventionally while employing surprise attacks” or “maintain a balanced core while seeking unconventional opportunities.”

In innovative medicine, he focuses on assets with three key characteristics:

1. “Hard Tech”: Leading companies capable of independently entering and succeeding in demanding markets like the US.
2. “High Growth”: Companies with explosive product potential and those benefiting from policy advantages in the domestic Chinese market.
3. “Industrial Trend”: Companies positioned early in the industry value chain, demonstrating high R&D efficiency.

• “Hard Tech”: Leaders capable of succeeding in demanding markets like the US.
• “High Growth”: Companies with explosive product potential and domestic policy advantages.
• “Industrial Trend”: Companies early in the value chain with high R&D efficiency.

Breaking down his “Shou Zheng Chu Qi” approach:

• “Shou Zheng” (Conventional/Core) Assets:
  • Focus on medium-to-long-term industry dimensions.
  • Concentrate on identifying and resolving key industry contradictions.
  • Involves less frequent trading.
• “Chu Qi” (Unconventional/Surprise) Assets:
  • Viewed from a more medium-term perspective.
  • Best entry timing is often “on the left side” (before the major price uptrend begins).
  • Avoid excessive concentration in these picks.

In portfolio construction, Shan Lin always fully considers the risk-return ratio and dynamically weighs certainty against upside potential.

The resurgence in China’s innovative medicine sector presents a compelling narrative for investors, tech enthusiasts, and founders alike, marking a pivotal moment for the industry’s future growth.

References

• 暴涨37%！超级赛道，大爆发！ – 中国基金报