There is an increasing global demand for medicinal plants. Nevertheless, the nature and scale of processing in national-level medicinal plant production networks, and how this can contribute to sustainable development, are poorly understood. This study (i) uncovers and explains the emergence of the Nepalese medicinal plant secondary processing sector, (ii) characterises the enterprises and identify the obstacles they face, (iii) quantifies the volumes and values of processed species and end markets, and (iv) discusses the potential to contribute to sustainable economic development. Empirical data were generated from key informant interviews and qualitative (n = 13) and quantitative (n = 79) semi-structured surveys of medicinal plant processing enterprises. In 2014–15, the sector purchased 3679 metric tonnes of air-dry raw materials (across 67 products) for USD 4.0 million, producing 494 tonnes of end-products valued at USD 11.2 million. The sector is characterised by small enterprises. Rising domestic demand drove the increase in the number of enterprises. Key business obstacles were export barriers, low access to technology, infrastructure and service barriers, labour challenges, socio-economic and political instability, and the inefficient bureaucracy. The actions required to change from being a supplier of raw materials and producer of lower-value domestic consumer products to integrating into the global economy as an exporter of higher-value products that are sustainably sourced are discussed.