(Bloomberg) -- Chinese biotechnology firms are seeing the wildest swings in months as investors struggle to assess the impact of a US push to block the Asian nation from developing capabilities in fields ranging from health to technology.
What’s happening?
The US House of Representatives on Sept. 9 passed the so-called Biosecure Act that would blacklist Chinese biotech companies and their US subsidiaries from accessing federally-funded contracts. American lawmakers backing the legislation argue that Chinese companies with ties to Beijing could engineer bioweapons or otherwise capitalize on biological data sourced from other countries.
How soon will this new law kick in?
The proposed legislation still needs Senate approval before it can be signed into law by the president. It’s likely that this won’t get passed until after the US presidential election, and Bloomberg Intelligence sees a 70% chance of the bill’s passage by the end of this year.
Which Chinese companies have the most at stake?
To start with, five Chinese biotech firms have been identified by the US as entities that need to be blocked from federal contracts. They are BGI, MGI Tech Co. and MGI’s US unit Complete Genomics Inc., WuXi AppTec Co. and WuXi Biologics Cayman Inc.
While small compared to global pharmaceutical giants in the US, these Chinese companies play a crucial role in drug development and research, and have been contracted by big pharma to help develop and produce blockbuster medicines.
BGI is China’s leading genomics research and genetic sequencing services provider. Its related entity, MGI Tech, makes gene sequencing equipment.
MGI Tech operates its US gene sequencer business through its unit Complete Genomics, a California-based sequencing company that BGI acquired in 2013. MGI is one of the few companies globally capable of developing and mass-producing clinical-grade gene sequencers.
WuXi Apptec had 62% of its revenue from the US, while sister company WuXi Biologics had 58% of sales from North America in the first half. Both companies have collaborations with the world’s top 20 pharmaceutical companies.
How soon will the legislation affect them?
WuXi AppTec could see the impact reflected in its balance sheet as early as fourth quarter as customers hesitate to engage with the company in anticipation of the Senate vote, according to Bloomberg Intelligence analyst Jamie Maarten and Duane Wright. While BGI has a very small operation in the US providing sequencing services to research institutes and drugmakers, the proposed legislation, once passed, could deal a heavy blow to the sale of sequencers made by Complete Genomics, at least in the US. The San Jose, California-based company had tried to make the case that it’s in the business of manufacturing instruments and not handling data.
How would this bill change the biotech landscape?
The move raises questions around the availability of drugs that are already in short supply, such as blockbuster GLP-1 agonists to advanced cancer treatments. Also, much of the active base ingredient used in Eli Lilly & Co.’s blockbuster weight-loss drugs Zepbound and Mounjaro is produced by WuXi AppTec, according to a Bloomberg report in March. US biotech company Cabaletta Bio has been in partnership with WuXi AppTec for years on its CAR-T therapy that is still in clinical trials.
WuXi companies will, in a few years’ time, have to explore new businesses to bridge the loss of their existing revenue streams. Meanwhile, the space that WuXi will leave wide open is likely to be filled, perhaps not by one but a clutch of non-Chinese contract research organizations and manufacturers, with each grabbing a slice of the services that WuXi provides to its global pharma clients now.
In the next eight years, “Chinese companies will continue to be very strong players” given the sector has very high barriers to entry, said Victoria Mio, head of Greater China equities and portfolio manager in the Asia ex-Japan equity team at Janus Henderson.
How could Beijing retaliate?
China opposed the passage of the US bill, with the nation’s foreign ministry calling it discriminatory against Chinese companies. For now, Beijing has projected itself as being more open in the healthcare space. Just ahead of Biosecure Act’s vote in the House, China removed restrictions on foreign investment into stem cell and gene therapies and gene diagnosis in select regions of the country, while allowing wholly foreign-owned hospitals to open in some cities.
--With assistance from Shadab Nazmi.
(Adds comment in fifth section. An earlier version of this story was corrected to clarify the affiliation of BGI and MGI Tech)
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