China biotech has to swallow a bitter US pill

U.S. President Joe Biden coughs during a signing ceremony for the CHIPS and Science Act of 2022 on the South Lawn of the White House in Washington, U.S. August 9, 2022. REUTERS/Evelyn Hockstein

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HONG KONG, Sept 14 (Reuters Breakingviews) – China biotech’s American honeymoon is coming to an end. Cross-border mergers in the industry have experienced a boom despite intensification geopolitical tensions, but US President Joe Biden wants to reduce dependence on foreign manufacturers. While domestic capacity building will take years, a form of decoupling is now underway.

Modeled on John F. Kennedy’s “Moonshot” speech urging Americans to lead space exploration, Biden’s supreme command signed a “cancer moonshot” on Monday, urging local drugmakers to pioneer new treatments. The key to his initiative is to ensure that “biotechnologies invented in the United States of America are made in the United States of America”. According to White House data, over 70% of drug ingredient manufacturing sites registered with the US Food and Drug Administration are located outside of the country; 13% in the People’s Republic.

Investors promptly sold major Chinese stocks, including Hong Kong-listed WuXi Biologics (2269.HK), which fell 20%, or $7 billion in market value, in a single day. China’s top drug contract manufacturer, now valued at $28 billion, has benefited from offering manufacturing, research and development and other services to companies like Johnson & Johnson (JNJ.N), often at far lower costs than in the United States. American customers accounted for 54% of WuXi’s sales in the first half this year, up from 44% two years ago.

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The router looks a bit premature. Building local manufacturing and other infrastructure will take years. Biden hasn’t provided details yet, but analysts at Jefferies believe the replacement of Chinese manufacturing will come at a one-time cost of up to $18 billion for U.S. drugmakers, as well as additional labor costs of $12 billion per year would lead.

Still, the US biotech initiative could gain momentum as geopolitical tensions flare. Much like Washington’s $30 billion push to bolster domestic chip manufacturing, outsourcing drug manufacturing would create jobs, reduce supply chain risks and strategically keep Chinese competition at bay. With the right government incentives and subsidies, demand for WuXi’s services could gradually diminish over time.

Even after yesterday’s sell-off, shares of WuXi are trading at 33 times one-year forward forecast earnings, well above 28 times that of Swiss rival Lonza (LONN.S). With more bad news out of Washington, Chinese biotech companies have a bitter pill to swallow.

consequences @ywchen1 on twitter

CONTEXT NEWS

US President Joe Biden signed a new executive order on Sept. 12 to channel an unspecified amount of money into US research into bio-derived technologies, boost domestic bio-manufacturing and reduce reliance on foreign companies. The order “directs the federal government to ensure that biotechnology invented in the United States is manufactured in the United States,” Biden said.

Hong Kong shares of WuXi Biologics, a Chinese drug contract manufacturer, closed up 20% to HK$53.40 on September 13.

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Edited by Robyn Mak and Thomas Shum

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