Li Jiacun, Deputy Director of the Investment Management Department at China Merchants Fund and manager of the China Merchants Pharmaceutical Health Industry Stock Fund, recently shared his views on the sector's outlook.
On the topic of AI-driven drug development, major technology companies are committing substantial capital to this field. An internet giant's AI drug development spinoff, scheduled for separation in September 2026, has secured $290 million in angel funding at a post-investment valuation of $1.5 billion, with the parent company holding a 56% controlling stake. A leading overseas tech corporation has acquired an AI drug development startup for $400 million and signed a $100 million peptide order with a major biotechnology firm. A well-known search engine conglomerate's AI pharmaceutical laboratory has raised $2.1 billion in Series B financing, while a global semiconductor leader and a multinational pharmaceutical company have established a joint AI laboratory with an investment exceeding $1 billion over five years. The industry's momentum continues to build, with global AI drug development financing reaching $1.8 billion in the first quarter of 2026, nearly half of the total for all of 2025. For investors previously focused on AI hardware, this represents a significant downstream application—AI drug development relies heavily on GPU computing power, automated experimentation, and data infrastructure, providing a new outlet for computing power investments. However, it is important to note that AI drug development remains in its early stages, with most AI-designed drugs yet to reach clinical validation, and both technological approaches and commercialization models still carry uncertainty.
Regarding the net impact on the CXO sector, the near-term data flywheel logic of AI drug development directly stimulates demand for gene and protein synthesis, offering considerable upside potential. In the medium term, AI enhances research efficiency and intensifies competition among pharmaceutical companies, driving higher pipeline volumes and benefiting the entire backend CXO segment. In the long term, if AI models mature to the point of directly generating candidate drugs, they could potentially displace early-stage drug discovery activities, putting pressure on traditional biotechnology companies—though this scenario remains distant.
Turning to exports and market dynamics, China's innovative drug exports are growing rapidly. In the first half of 2026, License-out transactions totaled $99.7 billion (with upfront payments exceeding $6.45 billion), already surpassing the full-year figure for 2024, and Chinese companies accounted for eight of the top ten global deals. More significantly, the model is undergoing qualitative transformation, shifting from traditional License-out arrangements to Co-Co (co-development, co-commercialization) and NewCo structures. Chinese pharmaceutical companies are moving from selling early-stage assets to full-fledged industrial expansion, with valuation frameworks converging toward global innovative drug developers. Domestic policy is shifting to support true innovation, with dual-track medical insurance and commercial insurance payments, as well as tiered pricing mechanisms now in place. The 15th Five-Year Plan has designated innovative drugs as an emerging pillar industry. China's share of global First-in-class pipelines has risen from single digits to 45%, with expectations that over half of Biotech companies will achieve breakeven by 2027-2028, potentially opening the optimal investment window starting in 2028.
On innovative drug investment, these novel therapies represent the pharmaceutical industry's higher-technology and higher-growth segment, characterized by the demanding benchmark of "ten years of R&D and one billion dollars" per drug. Three key reasons make this area worthy of attention now. First, AI is accelerating the industry, compressing early-stage screening from one year to two weeks and shortening overall R&D cycles by approximately 40%. Second, Chinese pharmaceutical companies are beginning to generate revenue on a global scale, with exports reaching nearly $100 billion in the first half of 2026. Third, comprehensive national policy support is in place. However, innovative drugs constitute a high-risk, high-reward sector, making it more suitable for general investors to participate through index funds or pharmaceutical-themed funds, with a focus on the two main themes of "exports" and "AI."
On risk considerations related to trade frictions, the US Biosecure Act 2.0 was enacted with the FY2026 NDAA, but it is notably weakened compared to version 1.0. The scope has shifted from targeting specific companies to entities on a designated list, locks onto federal procurement, does not explicitly name Chinese companies, and includes a longer transition period. The actual impact is limited—major US clients of leading CXO firms have not staged large-scale withdrawals, and overseas orders remain intact. The core reason is that Chinese CXO quality and cost advantages are deeply embedded in global supply chains, making near-term substitution difficult. Overall, trade frictions function more as a "stress test," and Chinese CXO companies that can complete overseas capacity expansion and reduce exposure to sensitive business areas can still navigate through the cycle. In terms of sector performance, the Guozheng CXO Index has risen approximately 42% year-to-date in 2026 (data source: Wind, as of September 21, 2026), while the innovative drug index has remained roughly flat. Both segments show improving fundamentals, and the outlook favors beta opportunities in the CXO sector alongside valuation recovery for quality names in innovative drugs.
Risk disclaimer: Market investments carry risk, and caution is required. This material represents the fund manager's personal views and does not constitute investment advice, return promises, or endorsements of any sector, individual stock, or fund. MACD golden cross signals have formed, and these stocks are performing well.