Understand the industrial chain with "One Page": Innovative drugs, License-out BD enters the global market

Today, we'll continue the "Understand an entire industrial chain on one page" series.

The protagonist of this issue is innovative drugs, and we'll use AlphaEngine to interpret it.

(1) Core conclusion: Investment logic of innovative drugs

In 2025, after a deep adjustment, the Chinese innovative drug industry has reached a new starting point for recovery with the "resonance of three periods" of policy, industry, and capital.

On the policy front, the 2025 "Government Work Report" clearly supported innovative drugs for the first time. Subsequently, policies such as the "Several Measures to Support the High - quality Development of Innovative Drugs" and the commercial medical insurance catalog for innovative drugs were intensively implemented, clearing development obstacles across the entire chain from top - level design to the payment link.

*Note: Policy review of innovative drugs from 2015 - 2025, Tianfeng Securities

On the industrial front, the internationalization process has accelerated, and the License - out model has become the key path for value realization. In the first three quarters of 2025, the upfront payments for overseas licensing transactions reached 5.7 billion US dollars, exceeding the whole of 2024, and the global share increased to 23.4%, marking a significant improvement in the global value - chain position of Chinese innovative drug assets.

*Note: Number of domestic and overseas license - outs of innovative drugs, Tianfeng Securities

On the capital front, after a deep adjustment from 2022 - 2024, the industry's valuation has returned to rationality. The fundamentals of enterprises have continuously improved. The product sales revenue of 17 commercialized innovative drug enterprises in the first half of 2025 increased by 30% year - on - year. Leading enterprises such as Innovent Biologics have achieved profitability, and the industry has entered a stage of value re - evaluation.

In 2025, the core investment logic should focus on innovative drug enterprises that can break through the ceiling of the domestic market and have the ability to price assets globally.

(2) Scale and characteristics of the innovative drug industry

Innovative drugs (Innovative Drug) are a concept relative to generic drugs (Generic Drug), referring to brand - new drugs with independent intellectual property patents and approved for the first time globally.

They obtain a monopoly position in the market and high profits through a 20 - year patent protection period. However, after the patent expires, they often face a "patent cliff" with a sharp decline in price due to the influx of generic drugs.

According to different degrees of innovation, innovative drugs can be divided into several categories:

First - in - class (FIC), which is globally innovative and acts on a new target and mechanism; Best - in - class (BIC), which has better efficacy than existing drugs; Me - better, which is more effective than the original drug; and Me - too, which modifies the structure of the original drug to avoid patents.

According to different raw materials, innovative drugs can be divided into chemical drugs, biological drugs, and traditional Chinese medicine.

Among them, biological drugs have the highest technological barriers, and their production process itself constitutes the core barrier ("the process is the product"), while the synthesis path of chemical drugs is relatively easy to replicate.

The R & D of innovative drugs has the typical "Three highs and one long" characteristics, namely high investment, high risk, high return, and long cycle, and generally follows the "Thirty - rule": the average R & D cycle is as long as 10 years, the R & D investment exceeds 1 billion US dollars, and the probability of successful listing is less than 10%.

This rule is fully confirmed in industry practice. For example, the core product "Zanubrutinib" of BeiGene took 8 years from R & D to approval for listing, with a cumulative investment of over one billion RMB, which is a typical representative of the high - investment and long - cycle R & D model of domestic innovative drug enterprises.

High risk is not only reflected in the high failure rate of clinical trials but also in the huge commercial losses caused by the withdrawal of products from the market due to unforeseen safety issues after listing.

However, once successful, blockbuster drugs will bring long - term and substantial returns to enterprises with their clinical value and patent barriers.

The global innovative drug market is growing steadily at a faster pace than the overall pharmaceutical market, and cutting - edge tracks such as ADC and GLP - 1 show explosive potential.

Although the Chinese market started late, with a large unmet clinical demand, strong policy support, and rapidly improving R & D capabilities, it is moving from a deep adjustment period to a comprehensive recovery stage, showing great growth potential and global competitiveness.

In 2024, the global innovative drug market reached 782.6 billion US dollars, accounting for 51.3% of the global pharmaceutical market. It is expected to reach 1,119 billion US dollars in 2029, with a compound annual growth rate (CAGR) of 7.4%, higher than the 6.4% of the overall pharmaceutical market.

*Note: Global market size of innovative drugs and generic drugs, J.P.Morgan

*Note: Growth rate of the global innovative drug and generic drug market, J.P.Morgan

(3) Structure of the innovative drug industrial chain and R & D and listing process

The innovative drug industrial chain can be clearly divided into three major links: upstream (raw materials and support), mid - stream (R & D and production), and downstream (circulation and payment), which together form a complete value chain from scientific discovery to market application.

*Note: Chart drawn by FinGPT Agent, the same below

Upstream: Raw materials and support link.

This link provides basic materials and technical support for the R & D and production of innovative drugs.

It mainly includes chemical raw materials for drugs and raw materials for biological drugs (such as cell lines, culture media, bioreactors, etc.), as well as pharmaceutical excipients and medical packaging materials that affect drug stability and delivery efficiency.

Mid - stream: R & D and production link.

This is the core value - creating link in the industrial chain, including drug discovery, pre - clinical research, clinical trials, and final commercial production.

Enterprises complete the development and manufacturing of new drugs through independent R & D or external cooperation (such as CXO).

Downstream: Circulation and payment link.

Innovative drugs reach terminal institutions such as hospitals and pharmacies through circulation channels such as distributors and logistics providers.

Payers include the national medical insurance, commercial insurance, and out - of - pocket payments by patients, jointly forming a diversified payment system.

In recent years, policies such as the "Two - invoice system" and centralized procurement have significantly increased the concentration of the circulation industry.

The R & D of innovative drugs is a long - cycle process, and it needs to go through the following key steps from drug discovery to approval for listing.

Drug discovery and pre - clinical research: It includes target discovery, compound screening and optimization, and finally determines the pre - clinical candidate compound (PCC).

After completing pre - clinical (animal/in vitro) research, pharmaceutical enterprises need to package existing pharmaceutical, pharmacodynamic, toxicological, and quality control data and submit them to national drug regulatory agencies (such as NMPA in China and FDA in the US) to apply for a "pass" to conduct clinical trials on humans.

Only after obtaining the IND approval (Investigational New Drug) can the Phase I and subsequent clinical trials be officially launched.

Clinical trials (Phase I - III): After obtaining the clinical trial approval (IND), pharmaceutical enterprises need to conduct Phase I (preliminary safety), Phase II (efficacy exploration), and Phase III (large - scale confirmation) trials in sequence to evaluate the safety and efficacy of drugs in humans.

Approval and post - marketing monitoring: After completing Phase III clinical trials, a new drug application (NDA/BLA) is submitted to the regulatory agency.

NDA (New Drug Application) and BLA (Biologics License Application) are like the "IDs" for new drugs and are the last hurdle before listing. NDA is for chemical drugs, and BLA is for biological drugs.

After a drug is approved for listing, Phase IV clinical trials still need to be conducted to continuously monitor the long - term safety and efficacy of the drug in a large - scale population.

(4) Business model transformation and profit sources of Chinese innovative drug enterprises

The business model of Chinese innovative drug enterprises is undergoing a profound transformation, upgrading from a single model mainly relying on domestic market sales in the past to a "Domestic sales + Overseas licensing (License - out BD)" dual - engine international strategy.

This change marks that the industry has entered a new stage where both product strength and business model innovation are emphasized. The realization of enterprise value is no longer limited to the domestic market but is recognized globally through international data and transactions.

The profit sources of innovative drug enterprises are becoming increasingly diversified:

The first is domestic medical insurance sales. This is the basic market for pharmaceutical enterprises. In 2023, the medical insurance fund's expenditure on innovative drugs reached 90 billion RMB, and it has maintained a high - speed compound growth since 2019.

The second is BD licensing income. Overseas licensing (License - out) has become the core growth engine and a key "blood - making" source.

What is License - out? Simply put, it is to "rent" a new drug that has not been launched, or is even in the clinical trial stage, to a multinational pharmaceutical enterprise more familiar with the overseas market at one time and receive rent and dividends in advance.

From 2018 - 2021, primary and secondary financing were the main sources of funds for innovative drugs.

Among them, the secondary market financing amount on the A - share market reached a peak in 2021, exceeding 80 billion RMB, and the secondary market on the Hong Kong Stock Exchange reached a peak of over 110 billion RMB in 2020.

In the past 3 years, BD transactions have become an important source of income for innovative drug enterprises.

In the first half of 2025, the upfront payment for BD transactions reached 24.1 billion RMB, accounting for 28% of the total financing of Chinese mainland enterprises during the same period.

*Note: BD financing situation of innovative drug enterprises (Unit: 100 million RMB), Tianfeng Securities

Overseas License - out has become an important way for Chinese innovative drug companies to supplement cash flow.

The third is overseas market sales. Some leading enterprises have successfully launched products overseas and achieved direct commercialization, opening up a vast international market.

For example, the sales revenue of BeiGene's core product "Zanubrutinib" in the US market has exceeded 8.5 billion RMB.

Considering that the scale of the US innovative drug market (about 420 billion US dollars) is more than 8 times that of China, the growth potential of the overseas market is huge.

Thanks to the low - cost engineer dividend, faster patient recruitment speed, and continuously accelerating drug review process, the efficiency of Chinese pharmaceutical enterprises in the pre - clinical research stage is 1 - 2 times that of their overseas counterparts, and the time can be saved by 30% - 50%. As a result, the R & D return rate of Chinese pharmaceutical enterprises exceeds 20%, far higher than the 3.2% of large overseas pharmaceutical enterprises.

(5) Accelerated global commercialization, and the BD model becomes the core engine

The underlying logic of the business model of Chinese innovative drugs has fundamentally changed, shifting from relying on domestic market sales in the past to realizing the value of R & D pipelines globally through the BD (Business Development) transaction model of overseas licensing (License - out).

This change marks that the industry has entered a new stage driven by both "product innovation" and "business model innovation". Enterprises are no longer just drug manufacturers but important technology exporters in the global innovation value chain. Their core competitiveness lies in the global licensing ability of "high - value molecules".

The explosive growth of BD transaction volume is the most direct manifestation of the business model transformation.

From 2020 to August 2025, the total amount of BD transactions participated in by Chinese mainland innovative drug enterprises soared