The U.S. sentenced WuXi AppTec to probation

Golden Horn Finance

2024-05-15 16:56Posted in Guangdong financial field creators

原创首发 | 金角财经（ID: F-Jinjiao)

Author | Zelda

The U.S. sentenced WuXi AppTec to eight years of probation.

On May 10, the U.S. Congress issued a revised version of the Biosecurity Act, extending the exemption for existing contracts/products of companies covered by the Act until January 1, 2032.

However, the United States did not let go at a critical moment, and it was by no means well-intentioned. Industry insiders believe that the main reason is that foreign CXOs are currently unable to digest the volume of Chinese CXOs, and it is not realistic to decouple immediately; The amendments are waiting for the completion of CXO capacity expansion outside of China, which will still take several years.

This means that although WuXi AppTec has been given a cushion, there is no decisive change in the final outcome.

In 2023, WuXi AppTec's overseas revenue accounted for 81.73% from 74.67% in 2021, of which the US business accounted for 64.78%.

With the countdown to the ban, WuXi AppTec not only needs to slowly shift its focus back to China, but also needs to make difficult choices:

Whether to continue to roll up the price of service volumes, or to completely transform the pharmaceutical industry "Huawei", both roads are not easy to take.

"Here Comes the Wolf"

Earlier this year, members of the U.S. Senate and House of Representatives co-sponsored a bipartisan piece of legislation aimed at stopping foreign adversaries from stealing sensitive U.S. genetic data and personal health information. The bill would prohibit all commercial operations of biotech companies owned or controlled by foreign adversaries from threatening national security and from obtaining U.S. taxpayer funds through federal contracts, grants, and loans.

The motion mentions that China seeks to dominate the biotechnology sector, and that companies such as BGI and WuXi AppTec have ties to the Chinese military and pose data security risks. It is believed that it is necessary to prevent U.S. taxpayers' funds from flowing to biotechnology companies of foreign adversaries with ties to the Chinese military, and to prevent U.S. taxpayers from purchasing biotechnology equipment from foreign adversaries to prevent the leakage of U.S. genomic data.

Gallagher, one of the sponsors of the motion and chairman of the "Special Committee on U.S.-China Strategic Competition," has always taken a tough stance on China. In 2023, it called for an investigation into Ford's cooperation with CATL, demanded that the U.S. Treasury Department implement a review policy on investment in China, and urged the U.S. to impose comprehensive technology and financial sanctions on SMIC and Huawei.

As soon as the news came out, "WuXi Department" plummeted. WuXi AppTec's A-shares closed down, and Hong Kong stocks closed down 16.43%; WuXi Biologics closed down 18.17%, falling nearly 30% at one point during the session; WuXi XDC closed down 20%.

That night, WuXi AppTec issued a "clarification announcement" in an attempt to reassure the market, insisting that "WuXi AppTec's business development will not pose a risk to the security of any country." ”

But the situation became more severe.

On March 6, the much-watched Biosecurity Act was voted through by the U.S. Senate Homeland Security and Governmental Affairs Committee. While the bill has been amended to include an exemption from existing contracts entered into prior to the entry into force of the proposed legislation, the bill still includes WuXi AppTec as one of the "biotech companies of concern."

On March 14, the U.S. Biotechnology Innovation Organization (BIO) said it would terminate WuXi AppTec's membership, and its official website publicly stated that it would take several steps to "reaffirm the organization's position on national security."

It is worth noting that this is not the first time that WuXi has been rumored to have been sanctioned by the United States this year.

On December 15, 2021, WuXi AppTec suddenly plummeted in the afternoon, and the U.S. Department of Commerce expected more than two dozen Chinese companies to be added to the Entity List, including some companies involved in biotechnology.

In February 2022, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced that 33 Chinese entities had been added to the "Unverified List", and WuXi Biologics' two entities in Wuxi and Shanghai appeared on the list, causing WuXi Biologics stocks to plummet.

Subsequently, some analysts pointed out that the "Unverified List" is not the same as the "Entity List", and the "Unverified List" is relatively relaxed, and WuXi Biologics also responded that the inclusion in the "Unverified List" has no material impact on the company's business.

However, "the wolf is coming" shouted too much, and the wolf really came.

Since the Biden administration took office, the number of China-related bills in the U.S. Congress has risen rapidly, and the focus of competition between China and the United States has swept almost every field, from chip technology to electric vehicles.

In such a grim international situation, the recent bill against WuXi AppTec may no longer be a "wolf", but a real threat.

8 years of "probation"

On May 10, the U.S. Congress issued a revised version of the Biosecurity Act, extending the waiver of existing contracts/products of the companies involved until January 1, 2032, that is, requiring U.S. companies to end their cooperation with companies covered by the Act by 2032.

This means that WuXi AppTec has an eight-year grace period to adjust its business structure.

"We are encouraged by the 2032 deadline for the new draft, and we believe that the eight-year deadline will give WuXi time to achieve a soft landing." Morgan Stanley analysts Sean Wu and Daisy Cheng wrote in a note sent to clients.

There are different voices in the market as to why the United States wants to leave WuXi AppTec a breath at such a critical time, with some analysts saying that WuXi Department's lobbying work has played a role, and some industry insiders believe that the main reason is that foreign CXOs are currently unable to digest the volume of Chinese CXOs, and decoupling cannot be carried out immediately.

A senior scientist in charge of R&D at a CRO company believes that WuXi's lobbying efforts will not play a big role, and that the US amendment to the Act is waiting for the completion of CXO capacity expansion outside of China, which will take several years.

Although the extension of the immunity to 8 years later has provided a buffer for WuXi AppTec, it may not have a decisive change in the final outcome.

This is because, although WuXi AppTec will not be affected until the new law comes into effect, as long as WuXi AppTec has signed a contract with the US customer, there is still a question mark over whether the US customer is willing to continue to sign a long-term contract with WuXi AppTec in such a severe geopolitical environment.

In fact, before the U.S. Senate passed the bill, many U.S. pharmaceutical companies issued statements saying that WuXi AppTec was important to them, but after the Senate passed the bill on the grounds that it "may pose a national security crisis to the United States", these pharmaceutical companies were silent.

There are even those who are anxious to contradict it, such as Lawrence Livermore National Laboratory, which was accused by the U.S. Department of Energy of having cooperated with WuXi AppTec, which immediately said after the bill was passed that it did not have any orders or cooperation with WuXi AppTec and its affiliates.

This means that under the "national security" hat of the United States, although these American companies still want to do business with WuXi AppTec, they can only reluctantly shut up and stand aside.

Daiwa Capital Markets analysts said that while the delay in the bill was welcomed by the market because it should help with a smooth transition, it also showed that restrictions were moving forward – generally to the detriment of Chinese contract R&D and manufacturing companies.

These concerns are also being quickly reflected in the capital markets. WuXi AppTec soared 15% in Hong Kong stocks after the amendment was announced, but quickly gave up gains after that.

Determination to transform

In addition to the countdown to the ban, WuXi AppTec is also experiencing the pains of the "post-pandemic" period.

In 2023, WuXi AppTec's revenue growth rate will decline off a cliff due to the decrease in order revenue from new crown commercialization projects and the high base compared with the benchmark.

Last year, WuXi AppTec's revenue increased by 2.5% year-on-year to RMB40.341 billion, excluding new crown commercialization projects, revenue increased by 25.6% year-on-year. Net profit attributable to the parent company increased by 9% year-on-year to 9.607 billion yuan.

Looking forward to 2022, WuXi AppTec's revenue and net profit attributable to the parent company will grow by 71.84% and 72.91% year-on-year, respectively. Looking ahead this year, WuXi AppTec's performance guidance for 2024 is also more cautious, and it is expected that the revenue in 2024 will reach 38.3 billion yuan to 40.5 billion yuan, which is an increase range of -5.06% to 0.39% compared with 2023.

In terms of regions, orders from Europe and the United States are still the main source of revenue growth, and the growth rate of overseas business is faster than that of China.

In 2023, WuXi AppTec's revenue from U.S. customers was RMB26.13 billion, up 42% year-on-year after excluding specific commercial manufacturing projects. revenue from European customers was 4.7 billion yuan, a year-on-year increase of 12%; Revenue from Chinese customers was 7.37 billion yuan, a year-on-year increase of 1%. The proportion of overseas revenue increased from 74.67% in 2021 to 81.73%, of which the US business accounted for 64.78%.

In the short term, WuXi AppTec will not be able to get rid of its dependence on overseas business, and whether it can successfully survive the pains of the "post-epidemic" period in the next eight years is very important for WuXi AppTec.

Rebecca Liang, senior research analyst for China pharmaceutical and biotechnology at Bernstein, expressed optimism that eight years is enough time to develop non-US businesses overseas, establish local operations, and build a data use firewall that can alleviate national security concerns. "Most of the downside risks can be mitigated."

For WuXi AppTec, the most prudent strategy may be to expand its domestic business, after all, Huawei's experience is ahead, and "strategic retreat" is the only way to hold the fundamentals.

If it really wants to move its business focus from Europe and the United States back to China, WuXi AppTec has two options.

One is to continue to play the "service" role of innovative drugs. Although this is WuXi AppTec's housekeeping skill, it may not go smoothly in China. Because WuXi AppTec has a price advantage in the face of American customers, but the domestic price is more volatile, which greatly reduces WuXi AppTec's advantage. In addition, even if WuXi AppTec can also exchange price for volume, the business pain in the "post-epidemic" period will only become more intense.

There is also a more imaginative option, which is to shift from service to innovation, from Foxconn in the pharmaceutical industry to Huawei in the pharmaceutical industry.

The logic of this assumption is that although WuXi AppTec is often compared to Foxconn, the two are fundamentally different. WuXi AppTec not only outsources, but also invests in a number of biopharmaceutical companies, and even wholly-owned or controlled enterprises, which have their own innovation pipelines.

In fact, it is precisely because WuXi AppTec has begun to rise in innovation that European and American countries have begun to be intolerable. Some U.S. lawmakers believe that the over-reliance of U.S. pharmaceutical companies on China's supply chain is a threat, and the rapid catch-up of China's biotechnology with the United States is also a threat.

Whether to continue to gnaw at the old roots or impact the "Huawei" of the pharmaceutical industry depends on WuXi AppTec's determination in the remaining 8 years.

Resources:

Caixin, "Draft U.S. Revised Biotechnology Act May Provide Respite for Chinese Pharmaceutical Companies Like WuXi AppTec"

Caixin "U.S. Proposal to Restrict the Stock Prices of Specific Biologics Companies from Diving in WuXi and BGI"

Caixin "WuXi AppTec's Peptide Business Contribution Increases, 2024 Performance Guidance Becomes More Cautious"

Zhigu Trend "Huawei, another high-tech field in China, is going to be forced out by the United States?" 》

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