China’s growing role in life sciences R&D

In this episode of Eureka!, McKinsey’s podcast on innovation in life sciences, host Alex Devereson, a senior partner in McKinsey’s London office, speaks with Fangning Zhang, a partner at McKinsey and leader in the firm’s life sciences practice in Greater China. They discuss how China has evolved from a commercial market into an increasingly important engine for pharmaceutical innovation, where AI and lab automation are already reshaping the R&D landscape, and what global pharma leaders need to do to build a genuine China strategy. An edited version of their conversation follows.

China’s shift from commercial market to innovation engine

Alex Devereson: Historically, China was thought of as a market, a commercial market. Increasingly, it’s one of the most important engines for innovation in our industry. What’s changed most meaningfully over the years to make that the case, and where do you see China’s greatest value going forward? Is it in novel biology, in speeding up discovery, or in clinical development?

Fangning Zhang: Over the past decade to a decade and a half, there’s been a coherent, consistent effort to develop an innovation-conducive ecosystem in China. That’s not only about regulatory reform, making sure the regulatory environment helps facilitate innovation. It’s also about talent, including overseas returnees who trained for years in the Western world, plus locally cultivated talent graduating from Chinese universities and graduate schools, which together now contribute a significant share of the talent bench. It’s also about building capabilities across the value chain end to end. That means research, but increasingly early development, late development, and manufacturing, so companies can drive a product from idea all the way to commercialization, both in China and, increasingly, on the global stage.

Fangning Zhang: If you ask what China is already contributing to pharma R&D, two things stand out. First, China is generating a large volume of innovative pipeline. Today, more than 30 percent of the industry’s innovative pipeline comes from China. Second, these innovations are becoming globally relevant, evidenced by the volume of licensing deals multinational companies are signing, and by Western investors increasingly forming new companies and other arrangements to tap into that pipeline.

Fangning Zhang: What’s less noted is how Chinese companies and innovators are doing R&D. We still face the “ten and ten” challenge across our industry. That means ten years, less than a 10 percent success rate, and often $2 billion to $3 billion per FDA-approved medicine. Many Chinese companies simply can’t afford to wait ten years for that investment to play out, so there’s an intense focus on speed and cost efficiency throughout the R&D cycle. As a result, we’re seeing significant acceleration in discovery and early development, at least for established mechanisms of action, and Chinese innovators can often deliver IND candidates at a fraction of the cost. Similar trends are playing out in early development.

A broad and increasingly competitive company landscape

Alex Devereson: You spoke about a coherent, concerted effort. The other thing I’ve reflected on is just how, in a positive way, competitive it is between all those companies. Where does that come from? What fosters it?

Fangning Zhang: In China it’s not tens of biotech companies, or hundreds. It’s thousands of biotech companies. Often, because they haven’t yet systematically developed new biology capability, they tend to focus on a subset of mechanisms of action that have the biggest near-term value. That causes a degree of herding, which I think is still one of the biggest challenges in the system today. For any company that wants a chance to succeed, they have to optimize for speed and for building a data package that’s meaningful and credible, as cost-effectively as possible. That intense focus on delivery and execution comes partly out of good intent, but also out of the pure necessity to survive before you can thrive.

Alex Devereson: So an ecosystem that creates the conditions, and a competitive set that pushes each other to be faster and more cost-effective.

Fangning Zhang: That’s right. One thing worth adding is that this engineering-based, or engineering-enabled, innovation pattern isn’t unique to our industry in China. Leaders across several sectors, especially engineering-led ones like electric vehicles, batteries, and other heavy industries, have noticed similar patterns. Our industry has historically been science-driven, and that’s still true. But when you look at next-generation modalities, things like ADCs, multispecifics, and cell and gene therapies, a lot of the work is really engineering to optimize the outcome. That’s where, over the past five to ten years, Chinese innovators have been able to demonstrate they can create globally relevant opportunities.

When will China crack new biology?

Alex Devereson: Let’s talk about that, because one of the things that excites me most is what it would take, and when we’ll see genuinely new biological problems being cracked in China. Surely, it’s a “when” question, not an “if” question.

Fangning Zhang: Nobody has a crystal ball, but we can try. If you look at the numbers, they’re still not that impressive. Five-plus years ago, there was a single first-in-class molecule in the pipeline out of roughly a million. Today it’s around 40 to 50. That’s still not a huge number, but it is significant growth off a very limited base.

Fangning Zhang: Upstream, when we look at research publications, Chinese institutions have shown clear growth over the past five years, which speaks to a growing depth of talent, increasingly Western-trained researchers who are willing to come back to China. We’re also seeing the latest round of central policy, such as the 15th Five-Year Plan, include a clear commitment across sectors, including life sciences and pharma, to strengthen basic research.

Fangning Zhang: I’d anticipate that if these policy intentions play out, they’ll bring better incentives for researchers and what we’d call “patient capital,” meaning longer-horizon investment. And if China can continue to attract global-caliber talent, and it doesn’t have to be Chinese talent, then in a few years I think you’ll see a very different momentum.

China’s growing role in global R&D

Alex Devereson: That’s ultimately what our industry needs, and what patients need. If anyone can break the back of that herding problem with novel biology, that’s the single biggest contribution China could make. How should leaders think about China in the context of what is nominally a global R&D engine, but has historically been concentrated in a handful of key hubs? Is this a China story, or does it reflect a broader shift toward a more distributed innovation model globally?

Fangning Zhang: Each company has its own context, its own priorities, and its own beliefs, so it’s hard for me to prescribe a universal strategy for every leader. That said, if you look at the numbers, including how much licensing-deal activity has accelerated over the past 18 months, and especially the past 12, deals have moved beyond single-asset transactions. We’re now seeing deals that include ten-plus assets in a single package. Increasingly, multinational companies are willing to leverage Chinese innovators’ research and early-development capabilities, meaning speed and cost efficiency, to drive multiple assets toward IND or post-Phase I before taking over global development themselves.

Fangning Zhang: So there’s significant momentum here. The question ultimately comes down to this: In the context of your global innovation or R&D strategy, what role do you see China playing today versus in five or ten years? When you’re strategizing for that five-to-ten-year horizon, you need to calibrate to the evolving pace of the ecosystem. What you see today—the scale across therapeutic areas and modalities, the speed, and cost-effectiveness—will likely continue. But there are also new areas emerging, such as some new biology, lab automation combined with AI-driven drug discovery, and modality innovation such as dual-payload ADCs. Make sure your strategy is calibrated to that evolution.

Rewiring the operating model for a China-speed world

Alex Devereson: That’s about where the ecosystem is going, not just where it is, which is, of course, the poisoned chalice of doing this interview. It may be out of date by the time it’s released. I want to come to AI and automation in a second, but you framed the “what” question: what China’s contribution will be. I also want to ask the “how” question. How does a Western-headquartered company adapt its global R&D operating model to a much more material China footprint? What are the success blueprints we’re seeing?

Fangning Zhang: That’s a very important question for any company with a deep commitment to leveraging China as part of its global R&D strategy, and it takes real effort, both at headquarters and in China, likely over multiple years, with intense, focused effort to build it out.

Fangning Zhang: What gives me confidence is that this has been done in similar settings before. Look at late-stage development. Five to seven years ago, China often joined global registration studies late, if at all. Sometimes it was a China-only study, and China was almost an afterthought for many executives in late-stage development. Fast forward to today, and across multinational companies, especially the leading ones, one head of R&D recently noted that for their company, China now joins essentially all global market studies. In some areas, China is already leading global studies, particularly in therapeutic areas or diseases where China has higher prevalence. That gives me confidence this can be done, building a China organization that’s fully integrated into the global one.

Fangning Zhang: What’s different is that it requires more than one or two leaders who understand China and have conviction. You need to mobilize and educate your organization across the value chain to move from commitment to action. You also need to strike the right balance between what role global colleagues play and how much decision-making you empower the local organization to make, while investing in a strong local team with the right leadership and the right connectivity to the ecosystem. You don’t want to over-control from headquarters, but you also don’t want to let the China organization run wild. Striking that balance, in your own organizational context, without slowing down your pace of operation, that’s the art and the science each company has to work out for itself.

Alex Devereson: That’s exactly the tension I’ve run into with clients. It’s hard to square, in the same conversation, the idea that this interview will be out of date tomorrow with the idea that it takes leaders one to two years to rewire their R&D engines. What’s the “China speed” version of that rewiring?

Fangning Zhang: There are successful Western biotech companies that have done it. One example is Candid Therapeutics. It’s Western-funded and Western-founder-initiated, and the company sourced assets from China into a newco. When it came to early clinical signal-seeking, the CEO, after consulting with the US FDA, decided the faster route to a signal was to run it in China. In a matter of 18 months, or at least under two years, they built a lean China team, roughly 15 to 20 people, and tested more than ten indications in immunology. As a result, they generated enough clinical evidence that the company was recently acquired by a European pharma company for several billion dollars.

Fangning Zhang: So this can be done for a biotech. You could argue a biotech can move faster and more nimbly. But the challenge, and the encouragement I’d offer global pharma leaders, is this: To what extent can we incorporate some of that agile operating mechanism, similar to what Candid did, so we combine the best of Western expertise in global development with China’s operating speed and clinical signal-seeking opportunities?

Alex Devereson: And even though a biotech has that intrinsic advantage in agility, a large pharma company should, in theory, already have much of that infrastructure and be able to move faster still.

China’s AI and automation ecosystem

Alex Devereson: Let’s return to a point you made about AI and automation. For every company, AI in R&D is one of the top topics. AI is, as we speak, revolutionizing every part of the R&D value chain. You and I have seen some of the automated labs across China that are extremely impressive. How does China’s broader AI and automation ecosystem position it for the future of AI-enabled R&D, and where might China be leading?

Fangning Zhang: I think this one is still nascent and a work in progress in China. Today, we see more than 100 AI-driven drug discovery companies already in China, and at least ten lab-automation-focused companies, at various scales. Some have already gone public and are striking multiple collaboration deals with big pharma companies. Others are still at a very early, MVP stage. When we talk to industry experts on the AI side, the general view is that China is still largely in catch-up mode. We haven’t yet seen areas where China is clearly leading globally or has had a genuine breakthrough.

Fangning Zhang: That said, what you have to weigh is the intensity and velocity with which Chinese companies can move. In lab automation specifically, there’s an element tied to supply-chain proximity in China. One lab automation CEO told us that within a two-hour radius, he has all his suppliers. That’s the kind of efficiency we’re talking about, and it’s a real opportunity. Another factor is that the hardest part of lab automation isn’t just providing your own solution. Within a lab workflow, you need to integrate other equipment and software from multiple vendors. Chinese companies are extremely willing to do that, and they can afford to, given a relatively affordable engineering cost base. So it’s not yet a broad wave. Not everyone is doing this, but some of the leading AI and lab-automation companies are stepping up and increasingly collaborating with multinationals to scale their impact.

Fangning Zhang: Over the next two to five years, I think the outlook comes down to a few things. How much continued capability progress can these companies make? Can they build a truly global presence, reaching and servicing customers globally, which is its own challenge? And how much does geopolitical uncertainty produce clear hurdles that affect how fast or slow this momentum plays out?

Navigating geopolitical uncertainty

Alex Devereson: Let’s come to geopolitical uncertainty. We’ve spoken a lot about the opportunity here, and we don’t want to be naive. It’s far from easy. What makes engaging with China difficult for multinational companies? How do leaders balance geopolitics, IP risk, regulatory considerations, and operational realities in an environment moving this fast?

Fangning Zhang: It’s a complex one. For many of the companies we work with, executives are first keen to understand what geopolitical actions or interventions are already in place. That homework needs to be done on both the US and Chinese sides. Second, it’s worth spending real time thinking through the range of scenarios that could play out, which require integrating input from different parts of your organization. Third, once you have those scenarios, think through how each would affect your strategic choices.

That said, the leaders who move with more conviction and decisiveness tend to be looking at a longer horizon. There are still tons of diseases without a pharmaceutical or therapeutic solution, and with AI and automation, we hopefully can meaningfully expand the range of diseases our industry can treat collectively. Many executives believe that addressing patient needs, whether through geographic reach, technological acceleration, or a combination, should be the North Star for the industry. Beyond that, companies that are strategizing well tend to be intentional about which moves are “no regret,” where they can act with speed and skill, versus areas where they’d rather wait and see until there’s more clarity. It varies by company, but the more decisive ones tend to look past near-term uncertainty toward that longer-term horizon.

What will separate the leaders

Alex Devereson: The opportunity for patients, to solve a problem the industry hasn’t been able to solve in 50-plus years, is significant enough that we collectively have to find a way to do this. Let’s go back to that crystal ball. And bear in mind we’re being recorded, so we’ll be able to look back in five years and see how right you were. What will distinguish the companies that get this right and successfully capture this value? And what decisions can leaders make today to prepare for that future?

Fangning Zhang: I’d say three things. First, have a clear ambition around China. Second, make sure your operating model and decision-making structure are wired to enable that ambition. Third, be willing to navigate and learn along the way.

Fangning Zhang: On the first point, even today, many companies still lack a clear ambition. That ambition needs to be clarified and aligned at the top of the house, and then cascaded down so leaders at every level are accountable for executing a China innovation strategy. On the second, rewiring requires leaders to invest time to understand China, to visit, to immerse themselves, while also being willing to challenge their current processes and decision-making structures, and being intentional about building local team capability. Companies have done this before for late-stage development, so there’s no excuse not to do it here. It takes commitment and persistence over a multi-year journey. On the third, there’s never 100 percent certainty in China, so you need to be willing to deal with ambiguity. That’s also a huge learning opportunity, not just for the local team in China, but for the organization globally. I’d encourage leaders to send their best talent to China, to help build it as one of the company’s future global hubs, if that’s the right path for their company.

Alex Devereson: I love that, and I’d add that there’s a degree of healthy impatience running through all three. It might take two years, but you have to keep learning and keep moving. And I love the gauntlet you’ve thrown down with “no excuse.” This is going to change things for pharma companies. It won’t be seamless. It will require difficult decisions. As always, Fangning, wonderful to talk to you about such a rich topic. We’ve barely scratched the surface, but thank you for the conversation.

Fangning Zhang: Thanks for having me.