Is WuXi AppTec 'exempt'? After the renaming of the 'Biological Safety Act'...

The biggest downside for CXOs has not yet been fully realized, but there are multiple positive factors at play, and the international market landscape has shown some improvement.

U.S. Senate Version of the "Biological Safety Act" Renamed: Is WuXi Exempt?

According to the official U.S. Congress website, on September 23, progress was made regarding the U.S. "Biological Safety Act." In the latest amendment (Senate Bill S.3558), WuXi Biologics has been removed from the list, while WuXi AppTec, BGI, BGI Genomics, and its subsidiary Complete Genomics remain included.

Notably, this new version of the bill has undergone significant changes compared to the earlier S.3558, adding extensive content related to gene business and being renamed the "Prohibition on Foreign Acquisition of U.S. Genetic Information Act." However, it still focuses on prohibiting U.S. companies from entering into contracts with the specified biotechnology suppliers, including bans on procuring or acquiring any biotechnology equipment or services provided by these companies, as well as prohibiting the signing, extension, or renewal of contracts with them. The U.S. Congress website indicates that the S.3558 amendment has been scheduled for consideration in the Senate under the legislative agenda number 521.

The new bill is interpreted as limiting only the gene business, with no implications for healthcare, making it relatively more moderate compared to previous versions. If WuXi AppTec completely divests its gene therapy-related GCT business, it may also be able to extricate itself, as WuXi AppTec's primary business, the high-end CTDMO sector, is more closely related to the bill, though its revenue from this segment is low and has little impact on the company’s overall performance. WuXi Biologics primarily focuses on large-molecule biopharmaceutical CRDMO business, which does not involve gene segments, making its removal reasonable. Additionally, the amended bill has eliminated the eight-year grandfather clause.

Moreover, on September 19, 2024, the U.S. Senate's National Defense Authorization Act (NDAA) did not include the "Biological Safety Act," removing the possibility of the bill passing through the NDAA in 2024. Due to election-related time constraints, the likelihood of it independently completing the legislative process in 2024 is also low, which is a short-term positive for CXOs.

Divergence Between the Two Versions of the Bill, Yet Shared Purpose: CXOs Still Face Overseas Headwinds

This year, the legislative turmoil surrounding the "Biological Safety Act" has persisted, involving both "WuXi" and "BGI" entities. There are two versions of the bill: the Senate version, Senate Bill S.3558, and the House version, House Bill H.R.8333.

Currently, the Senate version appears to be moderating its restrictions. Even if it ultimately merges with the House version for independent legislative processing, the combined effects could somewhat alleviate the impact on Chinese CXOs. However, this does not imply that the biggest overseas negative factors for CXOs have been resolved, as the House version continues to advance aggressively.

On September 9, the House voted on H.R.8333, passing it with 306 votes in favor, 81 against, and 44 abstentions. WuXi Biologics remains targeted in H.R.8333, with the bill specifying a collaboration deadline of January 1, 2032, for listed companies.

The evolution of the Biological Safety Act, from its introduction and amendments to its entry into the legislative agenda, has caused over 30 Chinese CXO companies to lose more than 100 billion yuan in market value, illustrating its detrimental impact on the sector.

Although the two versions of the bill exhibit a stark contrast in intensity—one being strong and the other relatively moderate—their legislative aim remains the same: to prohibit contracts with certain biotechnology providers and to serve other purposes. Despite WuXi and BGI publicly asserting that their operations do not involve data collection, and WuXi AppTec lacking human genomics business, they continue to be listed and experience stock market fluctuations. Until the final version of the bill is confirmed, the most significant overseas negative factors for CXOs will remain unresolved, making them susceptible to ongoing repercussions.

Industry insiders suggest that the S.3558 amendment focuses on content and companies related to gene business, while the specific entities and grandfather clauses mentioned in the House version could become a potential point of divergence between the two chambers. Bridging this gap may require considerable time in the future.

Emerging from the Darkest Hour: Improvement in International Market Conditions for CXOs

In the first half of the year, CXOs faced a severe downturn. This was driven by the industry hitting a cyclical bottom, with leading companies experiencing a sharp decline in revenue and profits once COVID-related orders were removed, while mid-tier firms reported their first losses. This led to a bearish outlook in the secondary market for the once high-growth CXO sector.

Additionally, the introduction of the "Biological Safety Act" draft disrupted growth expectations for CXOs, particularly as over half of the revenue for leading companies came from the U.S. market, amplifying the negative impacts of the bill and eroding investor confidence in CXO valuations.

Faced with a combination of a cyclical low and severe market headwinds, CXOs endured some of their toughest times. While it's still too early to declare a complete recovery, recent mid-year reports have revealed the sector's resilience: the Biological Safety Act has not resulted in a decline in performance for leading firms like WuXi, ChemPartner, and Kelun in the U.S. market; in fact, some business segments have shown growth against the trend, and there are clear signs of a recovery in the industry. (Read More: In addition to WuXi AppTec, the market trends for these other CXOs have also collectively reversed (Part I))

Currently, there are multiple positive developments for CXOs looking to expand internationally. Firstly, the onset of an interest rate cut cycle has occurred, with the Federal Reserve lowering rates by 50 basis points for the first time since March 2020, setting the federal funds rate target range to 4.75%-5%. This shift in the global interest rate environment may lead to lower financing costs for biotech firms, helping CXOs to advance their international strategies and secure more international orders.

Secondly, there is a reversal in sector performance. Recent half-year reports from publicly listed companies have attracted significant attention as institutional investors have adjusted their portfolios. All 38 CRO companies have received strong interest from institutional investors, with 51 companies having more than 50 institutional shareholders, and 12 companies exceeding 100. Moreover, among stocks held by over 100 institutions, 10 companies saw an increase in institutional shareholding percentages in Q2 compared to the end of Q1.

Lastly, there are positive trends in orders, and with the suppression effects of the NDAA no longer in play, CXO performance is expected to improve sequentially in the second half of the year. WuXi AppTec has $43.1 billion in orders, with a year-on-year growth rate of 33.2% after excluding COVID-related figures; Kelun has seen new order growth exceed 20%; ChemPartner’s new orders have grown over 15%; and Boteng has reported a growth rate of over 40% in small molecule API CDMO orders. As these orders are gradually fulfilled, there is optimism for improved performance in the second half of 2024.