China’s biotechnology enters Phase 2.0: from “selling shovels” to “controlling pricing power”

Overview

This report is a follow-up to Morgan Stanley’s “Dawn of Innovation” series and divides the globalization of China’s biotechnology sector into two phases. The first phase (1.0), dubbed “Globalization Validation,” saw Chinese pharmaceutical companies demonstrate, through extensive out-licensing activities, that their assets can seamlessly integrate into the global innovation ecosystem. The second phase (2.0), or “Value Capture,” hinges on a key thesis: rather than fixating solely on deal sizes, investors should identify which companies are best positioned to retain a greater share of the economic value generated in the course of globalization. The report highlights that China’s biotech industry is shifting from a “wholesale” model of innovation export to a more tailored approach—negotiating terms that leverage its unique strengths and capturing greater control over the value chain. At this juncture, the report argues that improving fundamentals—such as cash flow, earnings inflection points, and regulatory convergence—underpin the feasibility of this transition. It further introduces a two-dimensional stock-picking framework based on “risk‑taking capacity” and “asset scarcity,” explicitly recommending four core investment targets.

Core views

The core thesis of the research report is that Chinese biotech assets have demonstrated global relevance, yet “being needed” does not equate to “being profitable.” The previous round of sector revaluation was driven by the volume of out-licensing deals; the next phase will hinge on improvements in value‑retention capabilities. The underlying logic: Most out‑licensing transactions by Chinese pharmaceutical companies occur at early stages—only about 25% are in late‑stage or commercialization phases, compared with roughly 50% in U.S. biotech M&A deals. This implies that multinational pharma firms shoulder the vast majority of development, regulatory, CMC, and commercialization risks. Such a risk‑allocation framework reasonably explains the current valuation discount of approximately 51% for Chinese licensing deals relative to M&A transactions. To narrow this gap, Chinese firms must either assume greater risk themselves or hold assets that others cannot easily bypass—what we term “risk‑bearing capacity” and “asset scarcity.” The report backs this view with quantitative evidence: the industry’s median cash runway has extended significantly from 2.6 years in fiscal 2023 to 4.9 years by fiscal 2025, and the share of profitable companies is projected to surge from under 10% to 68% by fiscal 2028. More importantly, out‑licensing revenue now accounts for roughly 70% of total industry funding. These trends suggest that some leading companies are less eager to sell off assets at fire‑sale prices, giving them stronger negotiating leverage to pursue co‑development arrangements, profit‑sharing models, or even the establishment of NewCo entities, thereby preserving more long‑term value. The key takeaway is that NewCo structures and co‑development partnerships represent two pathways to break through the traditional limits of licensing. According to the report’s estimates, when risks, dilution, and obligations are kept under control, these frameworks can boost retained net present value (NPV) by approximately 35–41%. The analysis highlights two benchmark cases: Gilead/Ouro/Keymed’s NewCo model, which unlocks multi‑tiered value realization, and Innovent/Takeda’s co‑co arrangement, which secures a 40% profit‑sharing share in the U.S. market. However, the report also cautions that neither structure comes without trade‑offs. A NewCo may entail equity dilution and governance challenges, while a co‑co partnership requires bearing additional development and execution costs. What constitutes value creation for Company A may translate into value destruction for Company B; ultimately, success depends on each firm’s unique risk‑bearing capacity and asset scarcity.

Analysis framework

The research report unfolds along the logic of “from phenomenon to essence,” with its core analytical approach centered on a “value-chain ladder” model designed to elucidate and assess the degree of globalization and valuation potential of Chinese biotech companies. Step 1: Defining the Problem. The report gets straight to the point, noting that the market currently places excessive emphasis on the headline amounts of out-licensing deals, but this valuation lens has become blunt. The crux of the issue is not whether such transactions occur, but rather whether their structural design can genuinely reallocate cash‑flow ownership. Step 2: Establishing an Analytical Framework. The report employs two key variables—“risk allocation” and “scarcity premium”—to dissect valuation discounts. It also introduces a proprietary “SCORE framework,” which assigns multi‑dimensional scores to deal structures across five dimensions—economic interest share, control rights, operational efficiency, monetization pathways, and the quality of external stakeholders—to distinguish between “true upgrades” that genuinely enhance intrinsic value and superficially attractive yet ultimately hollow “paper gains.” Step 3: Proposing a Stock‑Selection Matrix. Companies are mapped onto a two‑dimensional matrix: the X‑axis represents “risk‑bearing capacity,” determined by cash reserves, licensing revenues, domestic commercial momentum, and global clinical expertise; the Y‑axis captures “asset scarcity,” reflecting FIC/BIC potential and global regulatory registrability. Only firms that score highly on both axes are identified as potential candidates for the “Value Retention Leaders” quadrant. Step 4: Case Validation and Target Selection. Drawing on numerous illustrative examples—such as Erasca/Joyo’s erosion of licensing value, Jemincare/RAPT’s undervaluation of assets, Hengrui’s NewCo IPO coupled with BMS’s multi‑faceted collaboration, and Hansoh’s sustained licensing income—the report conducts empirical analysis, ultimately pinpointing “repeatable monetizers” as its core investment targets. Finally, the framework is operationalized at the firm level through a detailed valuation methodology (including DCF parameter settings) and a comprehensive risk checklist, thereby closing the loop from macro‑industry narratives to micro‑investment decisions.

Methodology notes

• Valuation MethodologyDCF: Discounted Cash Flow

  The company is valued using the discounted cash flow (DCF) model, which estimates future free cash flows and discounts them back to the present value at the weighted average cost of capital (WACC), thereby deriving the firm’s intrinsic value.

  In this report, Morgan Stanley has assigned distinct WACCs—8.8%, 10.1%, 10%, and 9%—and terminal growth rates to Innovent Biologics, Keymed Biosciences, Yuyue Pharmaceutical, and BeOne, respectively, to derive their respective target prices. These metrics serve as the most direct quantitative measures of each company’s global expansion potential and its ability to sustain value creation.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  We decompose industry growth or corporate revenue into two dimensions: “volume” (transaction count and asset base) and “price” (transaction terms and retention‑value ratio) for analysis.

  The research report explicitly states that the first phase of globalization was primarily validated by “volume” (the number of outbound licensing deals), whereas the second phase—value capture—is driven by “price” (the extent to which economic benefits are retained in such transactions). The report’s central argument is that the market has shifted from being driven by “volume” to being increasingly driven by more nuanced “price” dynamics.

• Industry/Industrial Analysis FrameworkTransmission across the upstream, midstream, and downstream segments of the industrial chain

  Analyze the value distribution and bargaining power across different segments of the industry chain, spanning upstream early-stage R&D, midstream clinical development, and downstream commercialization.

  The research report constructs a “valuation ladder” (Domestic → Licensing → Co/Co → NewCo → M&A), vividly illustrating the disparities in net present value that Chinese biotech firms can capture at different stages along the global drug‑development value chain. The report contends that Chinese companies are evolving from mere providers of early‑stage assets (upstream) to development partners (midstream).

• Competition and Strategic FrameworkMoat / competitive advantage

  Assess the barriers that enable a company to sustain its competitive advantage, such as technological exclusivity, brand strength, and network effects.

  The research report identifies “asset scarcity” as one of the two primary criteria for stock selection. Here, “scarcity” refers to whether a candidate drug possesses first-in-class (FIC) or best-in-class (BIC) potential—this represents the most robust competitive moat that enables Chinese pharmaceutical companies to secure more favorable deal terms in global licensing negotiations.

• Cyclical and Economic Cycle FrameworkAnalysis of the Economic Turning Point

  Identifying and assessing the critical inflection points at which an industry transitions from a downtrend to an uptrend, or shifts from one growth driver to another.

  At the heart of the report lies an analysis of the industry’s “turning point in cyclical conditions.” The research note argues that China’s biotechnology sector is transitioning from a phase of “globalization validation” — primarily driven by trading volumes — to one of “value capture,” with economic returns taking center stage. It further identifies several catalysts—improving liquidity, the release of key clinical data, regulatory convergence, and the accelerating adoption of AI—to substantiate the imminent arrival of this inflection point.

• Macroeconomic frameworkRisk parity

  In asset allocation, weights are assigned based on each component’s contribution to the portfolio’s overall risk, a approach commonly employed in multi-asset strategies.

  In this research report, the concept of “risk” runs throughout. The report’s core mechanism is “Risk Allocation”: whoever assumes greater risks in development, regulatory approval, and commercialization should receive correspondingly higher returns. At its essence, this approach entails a value‑based analysis of risk–return trade‑offs, examining how Chinese pharmaceutical companies and multinational pharmaceutical firms allocate benefits based on their respective risk‑bearing capacities.

• Company Fundamentals and Financial FrameworkROIC–WACC spread

  Value is created only when a company’s return on invested capital (ROIC) exceeds its weighted average cost of capital (WACC), with the excess representing the value added.

  In analyzing the Hansoh Pharmaceutical case, the report notes that its traditional licensing model enables partners to more efficiently monetize global value, ultimately delivering higher return on invested capital (ROIC) for both Hansoh and its collaborators. Moreover, predictable milestone revenues have helped the company command a higher valuation multiple.

• OthersOthers

  SCORE Transaction Evaluation Framework (Share of Economics, Control Retained, Obligation Efficiency, Route to Monetization, External Backers)

  This is an analytical framework pioneered by Morgan Stanley in this report, designed to assess the quality of various transaction structures—such as licensing, co‑co arrangements, NewCo models, and mergers and acquisitions. It assigns scores across five dimensions: economic interest share, control rights, liability burdens, monetization pathways, and external support, with the aim of looking beyond the surface of a transaction structure to identify deals that genuinely enhance a company’s intrinsic value. This framework serves as the core tool underpinning the report’s stock‑selection rationale.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Keymed (2162.HK)

  Core example. The research report deems it the quintessential exemplar of the NewCo model, having achieved value realization that far exceeds mere licensing—progressing through multiple, incremental stages—via its in-house R&D engine and a series of successful NewCo spin-offs, including Ouro, Belenos, and Timberlyne.

  Strengths

  It boasts a proprietary internal antibody R&D pipeline spanning both immunology and oncology; its NewCo model has proven replicable, attracting high‑quality external capital and serving as a bridge for its assets to pursue M&A opportunities.

  Comparison

  Unlike the co‑co model with Innovent Biologics, Keymed represents an “offshore monetization” pathway that involves establishing an overseas entity to ultimately culminate in an asset‑acquisition‑based exit.

  Risks

  In the later stages, NewCo’s valuation uplift hinges on clinical progress and the M&A landscape; if its management team and external investors lack the requisite capabilities, value could erode at both the financing and operational levels.

• Innovent (1801.HK)

  A quintessential example. The research report views it as a benchmark for the co-development/co-commercialization (co‑co) model; through its collaboration with Takeda, it has not only retained the right to license out but has also become deeply involved in the global value‑creation and distribution process.

  Strengths

  It boasts a robust domestic commercialization platform, an imminent earnings inflection point, and an extensive global pipeline; its deal with Takeda stands as one of the cleanest “value retention plus influence retention” cases in the public domain.

  Comparison

  Compared with Keymed’s NewCo model, Cinda adopts a different approach: it directly collaborates with global partners within its existing corporate structure, sharing risks and profits while maintaining a higher degree of operational involvement.

  Risks

  The co‑development model entails bearing a substantial portion of the overseas R&D costs and the associated risk of failure; the realization of profit sharing hinges on the commercial success of the drug in international markets.

• Abbisko (2256.HK)

  Supporting evidence for license‑value capture. The research report argues that the company’s core value lies in its robust deal‑term negotiation capabilities under a traditional licensing model, with its flagship product pimicotinib—through its collaboration with Merck KGaA—demonstrating a high‑quality licensing economics.

  Strengths

  The company boasts strong capabilities in small-molecule drug development, with pimicotinib poised for commercialization; its asset value has been validated through a deal with Merck, underscoring its robust position in negotiations.

  Comparison

  Unlike the novel transaction structures employed by Keymed and Cinda, HeYu’s value proposition relies more straightforwardly on the robust terms typically found in traditional licensing agreements—higher upfront payments and double-digit royalty rates—thereby demonstrating an alternative approach to value capture.

  Risks

  Its value creation hinges primarily on clinical and commercial catalysts driving its pipeline; valuation upside is more contingent on asset quality and the successful execution of these catalysts than on a structural, global‑scale model upgrade.

• BeOne Medicines (ONC.O)

  Supporting rationale: As a fully integrated, China‑based global developer with an independent product pipeline, BeiGene’s business model epitomizes the ultimate form of value retention—maintaining 100% ownership.

  Strengths

  Leveraging China’s highly efficient, low-cost R&D engine to support global development, its blockbuster product, zanubrutinib (Brukinsa), has already achieved worldwide sales, with 2026 poised to be a pivotal year rich in catalysts.

  Comparison

  Unlike other companies, BeiGene does not rely on transactional structures to preserve value; rather, it is itself a fully integrated, global platform that spans the entire R&D-to-commercialization value chain.

  Risks

  It faces potential long-term pressure on drug prices stemming from the U.S. Inflation Reduction Act (IRA), while its hematologic oncology pipeline is confronted with competitive products.

Key data

• Proportion of China’s licensed transactions in the late-stage/commercialization phaseApproximately 25%In contrast to the roughly 50% share of late-stage deals in U.S. biotech M&A activity, this explains why China’s out-licensing transactions typically command substantial valuation discounts.
• Proportion of U.S. biotechnology M&A deals in the late-stage/commercialization phaseApproximately 50%A higher proportion implies that the buyer (the MNC) assumes less risk and is therefore willing to pay a higher valuation.
• The NewCo/co-development structure can enhance the incremental retained NPV.Approximately 35–41%Compared with a purely licensing model, more complex collaboration structures can significantly enhance the retained value of Chinese pharmaceutical companies when risks, equity dilution, and obligations are kept under control.
• The proportion of industry funding derived from external licensing.Approximately 70%License revenue has become the primary source of funding for China’s biotechnology sector, reducing its reliance on macroeconomic financing cycles.
• Change in Median Cash FlowExtended from 2.6 years (FY23) to 4.9 years (FY25)The significantly improved cash flow position gives the company the confidence to advance its assets to more advanced stages before seeking partnerships, thereby strengthening its negotiating stance.
• Change in the Proportion of Profitable CompaniesRising from below 10% (FY23) to 68% (FY28E)The substantial improvement in profitability will fundamentally alter the industry’s risk profile and valuation dynamics.

Impact & implications

The research report argues that this trend is having a structural impact on investment. Historically, Chinese biotech has been subject to a valuation discount—partly due to geopolitical factors, capital‑cycle dynamics, and market skepticism about the sustainability of external value realization. Going forward, companies that can demonstrate both risk‑taking capacity and asset scarcity should see their valuation discounts narrow. One‑off, large‑ticket deals will no longer be the market’s preferred play; platform‑based firms capable of recurring monetization are likely to command a premium. The report specifically cautions investors to be wary of historically hefty contracts signed during bull markets—such as those struck under some of the most favorable terms between 2015 and 2021—since these may not fully reflect a company’s sustainable bargaining power. For investors, the key is to distinguish between “headline deal value” and “true embedded value,” and to identify those players that can consistently translate asset quality into enduring economic returns through repeatable monetization.

Risks

• Sample Size Risk: The co‑co and NewCo models remain in their early stages, with too few successful cases to support broad generalizations.
• Structural Risks: A seemingly more complex transaction structure (NewCo/Co‑co) does not necessarily translate into a higher net present value; equity will be diluted, and it entails additional capital and execution burdens.
• Risk-Taking Risk: Assuming greater global development risks does not, in itself, generate value; it is only effective when the incremental economic benefits outweigh the additional costs.
• Asset scarcity risk: If an asset lacks genuine differentiation (FIC/BIC), even the most sophisticated transaction structure will fail to enhance returns.
• Realization Risk: Successful asset-level disposals do not automatically translate into a revaluation of the company’s overall value. If the economic benefits retained are too distant in time or subject to dilution, they will fail to translate into enhanced shareholder returns.
• Geopolitical and External Risks: Geopolitical tensions, U.S. market access restrictions, the CMC framework, and partners’ execution capabilities could all disrupt the pathway from deal structuring to actual monetization.

What to watch

• The forthcoming release of data from several pivotal global multi-center clinical trials (MRCTs) will serve as a “translation” test, assessing whether Chinese clinical data can transcend national borders.
• The trajectory of NewCo’s subsequent financing, repricing, or potential acquisition is pivotal in validating the credibility of its monetization pathway.
• Can leading companies (such as Keymed and Xinda) consistently execute high-quality, repeatable transactions, thereby reinforcing their platform value?
• Can AI—such as Insilico Medicine’s TNIK program—accelerate the development of more original assets with global differentiation potential, transitioning from “1 to N” to “0 to 1,” thereby enhancing asset scarcity?