U.S.-China Decoupling Poses Supply-Chain Risks for Drug Companies
Proposed bill in Congress targets Chinese biotech businesses that play an important role in developing drugs
By David Wainer
A WuXi AppTec lab in Shanghai in 2016. Legislation in Congress would restrict business with certain Chinese biotech firms that have cut drug-development costs. PHOTO: ALY SONG/REUTERS
Earlier this week, as the U.S. government said Intel was getting billions of dollars in grants as part of the Chips Act, some drug-industry representatives couldn’t help but feel a twinge of envy.
Targeting Chinese threats to supply-chain resilience has become a bipartisan effort in Washington these days, but the approach to each industry has been notably different.
While the semiconductor industry is getting a $53 billion plan to build in America, biotech companies are getting mostly sticks without any carrots: Both chambers of Congress are seriously considering blacklisting certain Chinese businesses that have pushed down the cost of drug development.
That could bring some unintended consequences for U.S. companies that have outsourced contract manufacturing and research such as animal testing to Chinese companies.
The legislation now being debated is designed to protect Americans’ health information from foreign adversaries by restricting business with certain Chinese biotech companies.
Known as the Biosecure Act, the bill specifically names companies such as BGI and WuXi AppTec, and stipulates that companies that use the named entities’ services wouldn’t be eligible for government contracts, which could arguably exclude them from Medicare and Medicaid.
Suffice it to say, no Western drug company would want to run that risk.
Chris Meekins, a Washington analyst at Raymond James, says the odds of some version of the bill becoming law are high, noting that Congress increasingly sees biotechnology as a top national-security concern.
“What good is it to have all the missiles and semiconductor chips if the soldiers are sick because you can’t get them the medication,” he says.
But it doesn’t seem like Congress has figured out how to disentangle those relationships without causing harm to U.S. companies.
Until recently, WuXi AppTec was actually a member of the high-profile biotech lobbying group BIO (Biotechnology Innovation Organization), which was opposed to the legislation.
But after BIO was accused by Rep. Mike Gallagher (R., Wis.) of lobbying for a foreign agent, the group said it would separate from WuXi and back the legislation.
While it is mostly unknown to Americans, WuXi AppTec represents a crucial part of the drug supply chain, providing, together with its affiliates, drug development and manufacturing solutions for companies large and small.
The company generates 66% of its revenue from the U.S., so it is no surprise that its Hong Kong-listed shares are down nearly 50% this year.
Companies including Eli Lilly, Amicus, Iovance Biotherapeutics and Vir Biotechnology have recently warned investors about potential risks to their business stemming from laws targeting WuXi, according to a list compiled by trade publication EndPoints News.
Amicus, for example, says that its therapy for Pompe disease, a rare genetic condition that causes muscle weakness, is entirely reliant on WuXi Biologics, a sister company of WuXi AppTec.
“The PRC, and WuXi specifically, has faced increased scrutiny by the U.S. government which could impact our ability to supply Pombiliti to meet our forecasted future demand, as WuXi is our sole supplier,” Amicus noted in an annual report released last month.
More recent discussions in Congress have focused on possibly softening the bill by allowing contracts already in place with WuXi to run their course, according to a person familiar with the talks.
That would probably prevent any sudden drug shortages.
In principle, companies such as Lonza Group, Thermo Fisher Scientific, Charles River Laboratories and Medpace Holdings —all of which provide different elements of what WuXi and its affiliates do—would benefit from the reduced competition and eventually scale up their own capacity.
Shares in those companies have risen in recent months as WuXi AppTec and its sister company, WuXi Biologics, have dropped.
Elizabeth Anderson, an analyst at Evercore ISI, estimates that roughly $300 million in annual revenue could flow to Charles River if a ban goes ahead.
But there is hardly a glut in capacity in that space.
Novo Nordisk’s recent acquisition of Catalent plants to overcome a supply shortage of Ozempic and other GLP-1s was a stark reminder of how manufacturing has become a bottleneck for the industry.
Will Sevush, a Jefferies healthcare strategist, doesn’t expect a sudden surge in business for these companies.
If anything, he says, passage of the legislation could force WuXi, or some of its businesses, to be sold to other entities.
Driving business away from China would probably drive up drug-development costs for biotech companies.
And punishing Chinese biotech companies could also lead China to retaliate against similar businesses providing services there.
Charles River, for instance, has a significant presence in China.
“Let’s not forget many non-China based R&D companies have China operations,” wrote Eric Coldwell, an analyst at Baird.
Protecting the drug supply chain is a real national-security concern, just not one with simple solutions.
Figuring out how to safeguard against potential risks from China without inadvertently harming U.S. companies won’t be easy.
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