Since January 25, 2024, when a U.S. legislator submitted a draft of the "Biosecurity Bill" to the U.S. Congress, the market value of WuXi AppTec's A-shares has plummeted by nearly 30%, with more than 50 billion yuan evaporated in market value.

Bad news is closing in step by step. On March 6, local time in the United States, at a hearing held by the Senate Committee on Homeland Security and Governmental Affairs, the Senate version of the "Biosecurity Bill" draft was passed with a vote of 11 to 1. This is a procedural step in the process of the bill eventually becoming law.

The draft includes Chinese companies such as WuXi AppTec and BGI in the list of "biotechnology companies of concern," claiming that they pose a national security crisis to the United States.

Republican Senator Rand Paul from Kentucky cast the only dissenting vote, as he believes that such an approach is "narrow protectionism." Next, the aforementioned committee is expected to first carry out internal organization and revision work before sending the draft to the Senate for a full vote by all members.

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As of March 7, WuXi AppTec has clarified five times in succession. The clarification announcement from WuXi AppTec at noon on that day showed that in the coming months, the aforementioned draft will continue to go through the legislative process in the Senate; the company will continue to communicate and dialogue with the participants and relevant parties, and the content of the draft is still subject to further review and may be changed.

The U.S. Senate's vote to pass the draft has caused WuXi AppTec, which had shown signs of recovery, to once again face a decline in market value. As of the close on March 7, WuXi AppTec's A-shares hit the daily limit down, and its Hong Kong stock fell by 20.74%, dragging down peer companies such as Tigermed, Kai Lai Ying, Zhao Yan Xin Yao, and Kang Long Hua Cheng.

This leading company, which has consistently ranked in the top three in market value in the A-share pharmaceutical industry over the past five years, not only reveals a confidence issue due to this turmoil but also exposes some hidden concerns.

WuXi AppTec founder Li Ge once said with confidence, "In the near future, one person, one idea, a piece of paper, a pen, and a credit card can conduct new drug research and development at WuXi AppTec."

However, under such a strategy, how can the confidence of the capital market in this industry be restored?

Is it being targeted?WuXi AppTec, a leading global pharmaceutical and medical device development and manufacturing organization, is currently undergoing a test of confidence. Despite the company's immediate response on January 25th when the draft was first introduced, its A-shares still experienced two consecutive trading day limits on January 26th and 29th.

WuXi AppTec has repeatedly emphasized that it does not engage in human genomics business, and its existing businesses do not collect human genomic data. "We have not, and will not in the present and future, pose any national security risks to any country," the company stated, asserting that it should not be pre-defined as a "biotechnology company of concern" in the aforementioned draft.

On February 2nd, the stock experienced another limit down. That day, WuXi AppTec urgently introduced a share repurchase plan. Three days later, the company repurchased over 20 million A-shares through a centralized competitive bidding transaction, accounting for 0.69% of the total share capital, using a total of 1 billion yuan in funds.

This move did not cause much of a stir in the industry. Opinions on WuXi AppTec and the CRO (Contract Research Organization) industry, in which it operates, are not uniform. A senior practitioner told Financial & Health that "the main issue is being targeted by the United States, and there is nothing abnormal in the business operations." However, others hold different views, suggesting that there are inherent issues with the CRO industry itself, as well as governance lapses within WuXi AppTec, compounded by geopolitical factors, leading to a multifaceted outcome.

As of the close on March 7th, WuXi AppTec's A-market value stood at 156.1 billion yuan. This incident has led to a market value erosion of over 50 billion yuan for WuXi AppTec.

"Pay attention to Sino-American relations. Before the U.S. elections, this card might continue to be played," a secondary market analyst commented to Financial & Health, suggesting that the improvement of Sino-American relations may be the key to lifting the industry's threats.

Among the Chinese companies named by the United States, not only WuXi AppTec but also BGI Genomics and BGI Tech are included. The former experienced a drop followed by a rise, with a 4.4% drop on March 7th, closing at 42.16 yuan per share, almost catching up with the level on January 26th; the latter fell by 1.44% on the 7th, losing about 10% from the pre-draft turmoil stock price.

In comparison, WuXi AppTec has been severely impacted. Financial & Health attempted to inquire why this has happened, but as of the time of publication, WuXi AppTec has not responded.Many investors have noticed that around January 26th, the short selling of WuXi AppTec's shares surged dramatically.

Data from China Securities Finance Corporation shows that during the five trading days from January 26th to February 1st, WuXi AppTec had a total of 1.2429 million shares lent out through the securities lending program, involving 35 transactions.

In the eyes of some investors, WuXi AppTec seems to have encountered a "short selling" crisis. If an investor is bearish and believes that the stock price of an individual stock will fall, they can borrow the stock from a securities firm at a relatively high price and sell it. When the price really drops, they can buy back the corresponding number of shares, return them to the securities firm as required, and earn the difference.

However, the actual situation of this so-called "short selling" and whether it really has such a significant impact is still a matter of debate.

There have been precedents where well-performing "blue-chip stocks" experienced a rapid decline in stock prices in the short term and showed a linkage with margin trading and short selling funds. According to statistics from the Securities Times, in the second quarter of 2021, "blue-chip stocks" including Midea Health, SF Holding, China Duty Free, and Hengrui Medicine successively suffered heavy losses, trading halts, or even flash crashes. This contrasted with the market situation before and after the Spring Festival that year, where institutional funds, including public mutual funds, "clustered" to drive the rise of individual stocks in industries such as liquor and new energy.

Therefore, the current controversy over the short selling of WuXi AppTec's shares is seen by a primary market pharmaceutical investor as a precision short selling operation using American news, which is "really heartbreaking."

In the capital market, "short selling" disturbances occur from time to time, and this is also a force that forms the market's internal price stability mechanism.

In the U.S. stock market, Tesla also faced short selling, but in the end, the "short sellers" fell, their funds suffered severe losses, and the short selling funds were completely defeated.

On February 6th, the China Securities Regulatory Commission (CSRC) stated that it would further strengthen the supervision of the securities lending business, suspend the addition of new securities lending scales, and set the current securities lending balance as the upper limit. It will legally suspend the addition of new securities firms' securities lending scales, gradually settle the existing ones, and continuously increase the intensity of regulatory law enforcement. It will legally crack down on illegal and irregular behaviors such as improper arbitrage through securities lending transactions to ensure the smooth operation of the securities lending business.

As of that day, the securities lending balance had decreased by 24%, falling to 63.7 billion yuan, accounting for 0.1% of the circulating market value of A-shares.WuXi AppTec has once again stated that the company does not engage in human genomics business, and its existing businesses do not collect human genomic data, thus posing no risk to the national security of the United States or any other country.

Whose fault is the unimpressive performance?

The downturn of WuXi AppTec is reflected in its financial performance, which shows a slowdown in growth.

In the first three quarters of 2023, WuXi AppTec's operating income was 29.541 billion yuan, a 4.04% increase compared to the same period last year; the net profit was 8.076 billion yuan, a 9.47% increase compared to the same period last year.

This financial performance is not as impressive as that of 2022. In that year, WuXi AppTec's third-quarter report showed a 72% increase in revenue compared to the previous year, and the net profit increase was even greater, doubling compared to the same period the previous year.

The business model of WuXi AppTec is essentially that of a "water seller" on the path to new drug discovery, providing pharmaceutical companies with services for new drug research and development and production. Global new drug research and development is led by the United States.

The recent disturbance affecting WuXi AppTec originated in the United States, and the largest source of income for WuXi AppTec's business is indeed the U.S. market.

According to the 2023 third-quarter report, WuXi AppTec's income from U.S. clients was 19.4 billion yuan, which calculates to 66% of the total income from the United States. Income from Chinese and European clients accounted for only 18% and 11%, respectively, while income from Japan, Korea, and other regions contributed 5%.

In this incident, WuXi AppTec was unfortunately caught in the crossfire. However, there are also biotechnology industry insiders who point out that there may be issues with the company's governance itself.In the past year of 2023, among the A-share listed companies that experienced shareholding reduction, WuXi AppTec was the one with the largest amount of shares reduced by major shareholders.

Starting from the beginning of 2023, WuXi AppTec has frequently faced shareholding reduction and cashing out by shareholders. Since January 13, 2023, WuXi AppTec has issued five announcements, declaring the share reduction plans of the actual controller of the company, and has cashed out approximately 10.007 billion yuan by October.

Shareholding reduction has always been one of the most sensitive events in the A-share market. Generally, investors tend to view the act of shareholding reduction as a signal of the shareholders' lack of confidence in the company, which may subsequently lead to a decline in stock prices.

In August 2023, the China Securities Regulatory Commission (CSRC) issued a notice proposing to "strictly control the total amount of share reduction by shareholders of other listed companies" and to "encourage controlling shareholders, actual controllers, and other shareholders to commit to not reducing shares or extending the share lock-up period."

The person in charge of the relevant department of the CSRC has pointed out that share reduction is a basic right enjoyed by shareholders. However, major shareholders of listed companies (i.e., controlling shareholders, shareholders holding more than 5% of the shares), and directors, supervisors, and senior executives, as the "key minority," bear special obligations and responsibilities in the company's operation, development, and governance. They should earnestly protect the interests of the listed company and small and medium shareholders, consciously regulate the behavior of share reduction, and must not evade the restrictions on share reduction through any means such as divorce, dissolution and liquidation, or division.

It's hard to develop innovative drugs, and CRO follows the downturn.

Every track has its bottleneck period, and now it's the turn of the CRO industry led by WuXi AppTec.

Currently, not only WuXi AppTec, but the business expansion of other CRO companies is also slowing down. In the first three quarters of 2023, the operating income of KaiLaiYing decreased by 18% compared to the same period last year, and the net profit decreased by 19%; the revenue of Boteng Shares also declined, down 42% compared to the same period last year, and the net profit decreased by 71%; the revenue of ZhaoYan New Medicine increased, but the net profit decreased by 48%.

A person who has been paying attention to the biopharmaceutical industry for a long time told Financial & Health that CRO provides services for industries such as innovative drugs, and it is inevitable to rely on them. When innovative drugs are popular, CRO is also popular. On the contrary, how low the innovative drug industry is, then CRO will also encounter this downturn, "the two sides can be said to be symbiotic and win-win, and even a passive industrial form."

Not only domestic CRO, in fact, the global peers also have this hidden worry.Firstly, it is becoming increasingly common for pharmaceutical companies to build their own clinical trial capacities, replacing part of the business of Contract Research Organizations (CROs). For instance, on February 6th, AstraZeneca announced that it would invest $300 million in Rockville, Maryland, USA, to establish a factory for the production of cell therapy products for key clinical trials and commercial supply.

During the briefing, AstraZeneca's management indicated that recent trends show that "having a self-sufficient supply chain is becoming increasingly important, and often companies cannot keep up with their ambitious growth due to insufficient supply investment."

Some pharmaceutical companies have decided to acquire Contract Development and Manufacturing Organizations (CDMOs) outright. On February 5th, Novo Nordisk, a multinational pharmaceutical company with a star product—weight loss drug semaglutide—announced through its controlling shareholder that it would acquire CDMO company Catalent. Novo Nordisk stated, "This acquisition complements our significant investment in active pharmaceutical ingredient facilities, and these factories will provide strategic flexibility to our existing supply network."

WuXi AppTec's "water-seller" business relies on large multinational pharmaceutical companies. According to the Q3 report for 2023, WuXi AppTec's revenue from the top 20 global pharmaceutical companies is still growing, reaching 11.82 billion yuan, accounting for 40% of its total revenue. Nearly 99% of the company's revenue comes from existing customers.

"The Foxconn of the pharmaceutical industry." In the eyes of a biotechnology industry insider, WuXi AppTec is more akin to leveraging the high-educated bioscience and chemical talent pool in China to conduct global business.

The "fountain of wealth" in front of WuXi AppTec is narrowing. In fact, Chinese CRO companies have deeply integrated into the global biopharmaceutical industry chain, and short-term overseas policy fluctuations do not affect the long-term fundamental logic of Chinese CRO companies. What WuXi AppTec needs is a new strategy to cope with the changes in the industry as a whole.