Innovative drugs: Upward or downward? BD deals surge, Morgan Stanley remains bullish, the sector is still in a correction period

In 2026, China’s innovative drugs continue to enjoy a high level of international expansion. In the past two days, Cifare, Frontier Biotech, and HeBo Medical have each completed three Business Development (BD) deals.

The NextPharma database shows that as of February 15 (during the Spring Festival holiday, no new transactions were added), China has recorded 39 license-out transactions for innovative drugs, with an initial payment of approximately $2.953 billion and a total value exceeding $49 billion.

According to the Daily Economic News, this amount has already surpassed one-third of the total for all of 2025, indicating that the global value of Chinese innovative drugs is rapidly being realized. Meanwhile, top international investment bank Morgan Stanley has recently released a report expressing a bullish outlook on China’s long-term pharmaceutical innovation capabilities, with industry differentiation and globalization as key themes.

Morgan Stanley Continues to Favor Chinese Innovative Drugs

In the report, the key term highlighted by Morgan Stanley is “catalysis.” It notes that, based on management statements, after the industry conference in January 2026, the enthusiasm for licensing and collaboration of domestic Chinese pharmaceutical assets remains high. Additionally, the execution of existing collaborations and the exercise of options by partners are critical for assessing asset quality and global value—2026 is expected to bring many catalytic factors.

The NextPharma database shows that in 2025, China’s BD total reached $135.7 billion, surpassing the United States for the first time. The momentum is even stronger in 2026, with transaction scale in the first 49 days already exceeding any single quarter of 2025, confirming global recognition of China’s innovative R&D.

Morgan Stanley specifically mentioned Hengrui Medicine. “Hengrui remains our top pick— we expect the company’s product sales growth to accelerate further in 2026, with continued positive momentum in new collaborations and milestone achievements,” the report states. It believes that globalization will remain a core investment theme, with breakthroughs in pipeline R&D and partners exercising options to unlock milestone payments being key highlights.

The report emphasizes that 2026 will be a year of intense catalytic activity for Hengrui Medicine, fully demonstrating the company’s ability to convert R&D scale into sustained growth and global value creation.

The progress of Kangtai Biological’s transformation into an innovative drug company was also highlighted by Morgan Stanley. At the end of January this year, Kangtai’s subsidiary, DermaMed Pharmaceuticals, received approval from China’s National Medical Products Administration for its innovative drug, Rucaparib Cream (for vitiligo), the first targeted drug for vitiligo in China.

Morgan Stanley believes this drug has the potential to become a blockbuster. Looking ahead, the company’s management plans to continue expanding its independent R&D pipeline and supplement its portfolio with licensed products, marking a new phase in its transformation and supporting mid-term growth targets.

Previously, Kangtai planned to spin off DermaMed Pharmaceuticals for listing in Hong Kong. “While some investors may see this as Kangtai divesting its ‘crown jewel,’ we believe that post-spin-off, Kangtai will continue to operate as a specialized pharmaceutical platform focused on other therapeutic areas,” Morgan Stanley states. The spin-off allows Kangtai to focus its strategic priorities while maintaining deep engagement in its core business areas. Since DermaMed is currently unprofitable, the separation should help increase Kangtai’s short-term profitability.

Beyond ongoing optimism for innovative drugs, Morgan Stanley also pointed out that companies heavily reliant on generic drugs and under pressure from centralized procurement policies still face short-term performance challenges. The industry has become distinctly segmented: companies dependent on generics or single products will find it hard to sustain, while those with continuous innovation and global capabilities are better positioned for high-quality growth.

The BD boom continues this year, but the sector’s overall market performance remains subdued

Despite record-breaking BD transactions, the innovative drug sector has been retreating from its peak last year. On the first trading day after the Spring Festival, Hong Kong’s innovative drug ETF fell 0.78%, showing a clear divergence between market sentiment and fundamentals.

When will the innovative drug sector rebound? Guojin Securities believes that the turning point for profitability is near, with intensive clinical data catalysts expected throughout the year. Coupled with smooth progress in overseas clinical trials for BD pipelines, the outlook for investment opportunities in innovative drugs is optimistic. The specific strategy includes focusing on core tracks, continuously monitoring investment opportunities in small nucleic acids, bispecific antibodies, ADCs, and related targets, and capitalizing on industry realization cycles; positioning during earnings forecast periods to identify stocks with unexpected performance; and paying attention to major clinical data releases at academic conferences.

Unlike the past two years, which focused on late-stage projects with high cost-performance ratios, this year’s BD transactions are more concentrated in early R&D stages. For example, AstraZeneca and CSPC’s multi-project collaboration, with a maximum total value of $18.5 billion, covers four projects in preclinical to Phase 1 stages, with four additional projects planned for future collaboration.

Roche’s Genentech and Novartis have also chosen to invest in preclinical research projects with Chinese companies. According to the NextPharma database, over 50% of the 39 recorded transactions involve preclinical projects.

A representative from Kangfang Biotech told reporters that Chinese innovative drugs are profoundly impacting the global ecosystem, and normalized BD collaborations mark the beginning of China’s global expansion. Kangfang firmly believes that China will produce a number of global pharmaceutical giants (MNCs).

Regarding development directions for 2026, the representative said that one goal is to expand global deployment and accelerate making Chinese innovation a global solution. Beyond speeding up global new drug R&D and clinical development, the company aims to further leverage and gather global resources, turning its breakthroughs from 0 to 1 into worldwide advantages. Additionally, they plan to enhance international perspective, leading global development with Chinese innovation, continuing to explore “unexplored areas” in new drug development, and constantly pushing the boundaries and limitations of existing therapies.