Is There Still Investment Value in Chinese Healthcare Companies Amid US-China Decoupling?

Under the cloud of tense US-China relations, the US has repeatedly introduced legislation targeting Chinese pharmaceutical companies. President Biden signed an executive order urging the reshoring of biotech manufacturing. Additionally, the “Biosafety Act” was introduced to protect American genetic and personal health data, prohibiting US pharmaceutical companies from outsourcing production to Chinese contract manufacturers.

The stock prices of relevant pharmaceutical companies have plummeted, spreading pessimism across the sector.

In such a political environment, do Chinese pharmaceutical stocks still hold investment value?

To answer this question, we can start by examining the potential impacts of the US legislation. First, the president’s executive order on reshoring biotech manufacturing is relatively mild, aiming to regain control over the pharmaceutical supply chain. Companies engaged in manufacturing for US clients might face some risks but could circumvent policy sanctions through supply chain relocations or building factories abroad. The “Biosafety Act,” however, specifically targets pharmaceutical outsourcing companies, including CROs (Contract Research Organizations), CMOs (Contract Manufacturing Organizations), CDMOs (Contract Development and Manufacturing Organizations), and CSOs (Contract Sales Organizations). The Act has named several pharmaceutical companies, with WuXi AppTec being notably impacted, having previously been a favorite among investors.

WuXi AppTec primarily undertakes drug development, testing, and mass production for global pharmaceutical companies. American biotech firms, especially smaller ones, rely on experienced and well-staffed companies like WuXi AppTec for drug development and manufacturing. While WuXi AppTec has generated significant profits for these companies and improved the health conditions of many Americans, its business inevitably involves accessing US public health data and drug patents. Currently, this seems to be an unsolvable issue. Although the Act provisionally allows existing contracts to be extended to 2032, giving WuXi eight years for soft landing, the challenges facing the CXO business amid US-China decoupling appear to lack clear short-term solutions.

As of the end of 2023, there are 26 CXO companies listed on A-shares and H-shares, comprising a small portion of the pharmaceutical sector. The sector also includes many other companies engaged in medical services, medical devices, traditional Chinese medicine, chemical pharmaceuticals, and biotech. These companies, if focused on domestic business, are naturally less affected by US-China conflicts. Even those involved in exports, such as leading medical device companies and innovative biotech companies, may not be as significantly impacted by geopolitical tensions as one might think.

The reason is that top-tier medical device and original biotech companies mainly rely on their own R&D capabilities and innovation to compete internationally, unlike outsourcing companies that depend on foreign orders. The US has little incentive to suppress Chinese innovative drug companies due to the significant gap between the two countries’ strengths in this field. US innovative drug development is highly advanced, with many treatments for cancer and critical illness originating from US patents. Currently, the number of innovative drugs exported by China is minimal. The US government barely has any reason to stifle such a small competitor, especially that China is its major export market for innovative drugs. Even if China’s technological advancement rapidly improves in the coming years, the healthcare industry is fundamentally based on patent protection, which means it’s improbable for the US to deny Chinese innovative drug patents without undermining its own. The pharmaceutical sector accounts for over 17% of US GDP, and dismissing Chinese patents would have unimaginable repercussions for US pharmaceutical companies and the economy.

Therefore, we remain optimistic about domestic innovative drug companies with strong original research capabilities. A recent phenomenon shows Chinese innovative drug companies selling their developmental drugs to small American pharmaceutical firms, acquiring equity in these companies. When large multinational pharmaceutical companies acquire these American firms for their drugs, Chinese innovators benefit from equity transactions. While preclinical drug trading among pharmaceutical companies is common, Chinese-developed drugs in the US market often cost less than similar drugs developed by Japanese and Korean companies. This method helps secure fairer prices for good drugs.

Of course, for pharmaceutical companies, the ideal model is to directly export patented innovative drugs. China’s R&D investment as a percentage of GDP has been soaring through the past years. Against this backdrop, it is promising for Chinese innovative drug companies to play an increasingly important role in the international market.


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