The Next U.S.-China Battleground: Biotech --- Investors should be prepared for a rough ride

"The U.S.-China relationship has gotten so bad that the market assumes the worst whenever a whiff of escalating tensions wafts through the news. The latest victim: Chinese biotech companies.

Shares of Chinese biotech companies, especially those with large revenue exposure to the U.S., tumbled after President Biden signed an executive order Monday to boost domestic manufacturing in the biotech industry. Shares of Wuxi Biologics, which provides research and manufacturing services to many global pharmaceutical companies, lost 19% of their value this week. Shares in Chinese peer Pharmaron slid 8% in Hong Kong, while Hangzhou Tigermed shares have fallen 6%.

The executive order is relatively vague for now: It just kick-started a process wherein different departments make reports and come up with plans. But China looms large in the background. The order mentioned risks posed by foreign adversaries and strategic competitors in the biotechnology supply chain. U.S. lawmakers have long raised concerns about the reliance on China for drugs and medical supplies. The pandemic further intensified that worry.

China is a major manufacturer of active pharmaceutical ingredients (APIs), the key components in drugs. There is no readily available database tracking how much of these ingredients ultimately come from China. Complicated supply chains often obscure the picture: For example, China is a key supplier of APIs to India, which in turn is a major supplier of generic drugs to the U.S.

Increasingly, pharmaceutical companies are also outsourcing more research and development -- especially costly and uncertain drug discovery and preclinical trials -- to save costs. Biotech startups are also relying on Chinese companies' services to avoid big capital outlays. Wuxi Biologics is one of the beneficiaries of such a trend: Its revenue quadrupled from 2018 to 2021, partly boosted by the pandemic. Around half of its sales last year came from North America.

The immediate impact on Chinese biotech companies should be minimal. Reshoring the supply chain, even just a part of it, would take years even if everything goes right. There would also be increased costs for pharmaceutical companies that could impede the development of new drugs.

Still, the selloff -- before any official sanctions or policy details have been announced -- reflects the worry that something more ominous could be on the way. Chinese biotech companies also fell sharply last December when media reports suggested they could be on a U.S. sanctions list, although such sanctions didn't materialize.

The U.S. government in February added two subsidiaries of Wuxi Biologics to its "unverified list", which doesn't prevent American companies from doing business with them, but adds more procedures.

While a full decoupling is unlikely, at least in the near future, concerns over supply-chain resilience and safety will only grow. Investors in Chinese biotech -- and perhaps their U.S. clients too -- should be prepared for a rough ride." [1]

1. EXCHANGE --- Heard on the Street: The Next U.S.-China Battleground: Biotech --- Investors should be prepared for a rough ride
Wong, Jacky. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 17 Sep 2022: B.12.