China biotech: investors fear a negative reaction from the US

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When a stock falls sharply on a minor setback, it is a sign investors are already worried about something else. An outsized sell-off in the stock of a Chinese biotech group is a case in point. The shares of Wuxi Biologics fell 30 per cent following warnings of a possible miss on full-year earnings. Plainly, sector risks are growing.

The medical contract research and manufacturing company enjoyed a windfall during the pandemic. It supplied ingredients for AstraZeneca’s Covid-19 vaccine.

Growth is slowing as vaccine demand falls. Wuxi Biologics is likely to miss its original sales target for the year by about $400mn. A decline in biotech funding is another headwind.

A large chunk of this is due to a pullback by US investors. Investment in Chinese biotech groups by US venture capital funds has fallen by more than half over the past two years.

The fortunes of Chinese biotech and pharma companies are more politicised than you might think. This year, the US tightened investment guidelines. Regulators are required to meet regularly to review technological advances in “countries of concern”. Most of the scrutiny has been on digital technology. But official wording is vague. Investors fear oversight could one day include biotech.

The related concern is long-term growth. The US is the biggest pharmaceutical market in the world. Clinical development has been growing rapidly in China in recent years. To enter the US market, Chinese companies require approval from regulators including the US Food and Drug Administration. Sourcing key ingredients and materials from the US is another potential issue.

Shares of Wuxi Biologics are down more than 50 per cent this year and trade at about 20 times forward earnings, a sharp decline from 120 times two years ago. Peer Pharmaron Beijing has recorded a similar drop.

Biotech stocks carry high risks that products under development will fail. Chinese biotechs now come with an added ingredient: political risk.