GMTEight exclusive offer | "Biosecurity Act" aborted? CXO returns

Can the transformation into shoes safely land? There were market rumors this afternoon that on September 19th, the official website of the Senate Armed Services Committee announced that the Senate version of the NDAA included 93 amendments, none of which included the biosecurity proposal. In the list of amendments to the House version of the NDAA previously announced by the United States, the Biosecurity Act of 8333 was not included. Now the Senate version of the NDAA also does not include the Biosecurity Act, which means that the proposed "Biosecurity Act" against SINO BIOPHARM promoted by some political groups in the United States has been aborted in the legislative stage. Affected by this good news, on September 20th, the CXO sector of the Hong Kong stock market collectively soared, with Pharmaron Beijing (03759), WUXI BIO (02269), and WuXi AppTec (02359) seeing the largest intra-day gains of 16.51%, 14.19%, and 15.64%, respectively. Head CXO companies such as Hangzhou Tigermed Consulting (03347) and Asymchem Laboratories (06821) also saw their stock prices rise by 5%-10%. In fact, since September, the CXO sector of the Hong Kong stock market has seen a wave of recovery and upward trends. Now, with the short-term dissipation of geopolitical uncertainties, combined with the liquidity released by the recent Fed rate cuts, the second half of the year will be a window for the domestic CXO sector to accelerate valuation recovery. Reviewing the "Black Swan" of the Biosecurity Act This year, when it comes to domestic CXO companies, one cannot ignore the impact of geopolitics. Looking back at the formation and fermentation of this "Black Swan," investors can easily see that it involved malicious interference from US congressmen as well as some organizations and media in the US. As early as 2023, there were rumors in the market that the US was targeting Chinese biotechnology companies. As this occurred during a period of declining performance for the CXO sector in Hong Kong, the birth of this "Black Swan" exacerbated the volatility of stocks within the sector. In late January, the US Biosecurity Act proposal rapidly gained traction. The Senate version of the relevant proposal was formed on January 25, 2024. It proposed that, from the perspective of national biosecurity, it is recommended to prohibit bio-technology suppliers, including WuXi AppTec, from signing contracts to ensure that foreign bio-technology companies cannot access US taxpayer funds. On January 26, 2024, stocks related to the WuXi AppTec company plummeted, with continuous limit-downs for two consecutive trading days. On March 6, at a hearing of the US Senate Committee on Homeland Security and Government Affairs, the Senate version of the Biosecurity Act passed with a high number of votes after clauses targeting WuXi AppTec were included, further exacerbating market concerns. During lunchtime on March 7, WuXi AppTec issued a clarification announcement stating that the company strongly opposed the unscrupulous and unfair definition, and reiterated that the company had no human genomics business, and its existing businesses did not collect human genomic data. On March 13, the Biotechnology Innovation Organization (BIO) in the US issued a statement announcing its support for the US Biosecurity Act and its termination of cooperation with WuXi AppTec. In April, Endpoints reported that the list of companies covered by the US Biosecurity Act could include more Chinese CRO/CDMO companies, causing a collective decline in the CXO sector of the Hong Kong stock market. On May 10th, the US released an amended version of the Biosecurity Act, which aimed to give more time to sever ties between Chinese and American biotech companies. This law would require US companies to end cooperation with these companies by 2032. In fact, the 8-year period given for this transition is not out of "conscience." Among the 124 bio-pharmaceutical and biotechnology companies involved in signing contracts, 79% of them had signed at least one contract or product agreement with companies with Chinese backgrounds, and the majority of businesses investigated were considered to be related to WuXi AppTec, among others. From a legislative perspective in the US, the Biosecurity Act is technically "stillborn" at this point. However, some US politicians were still pushing for it, and on September 9th, the US House of Representatives passed the Biosecurity Act (H.R.8333) with 306 votes to 81. But the significance of this vote in the House is greater than its actual impact. The market may still have concerns that the Biosecurity Act may continue to hinder the industry's development. However, it is important to understand that there are two legislative pathways for the advancement of the Act: one is a standalone bill version, which requires negotiation of the bill, voting in both the Senate and House, and submission to the president; the other is the NDAA (package legislation) version, including the Senate NDAA vote. The fact that the Senate version of the NDAA did not include the H.R.8333 proposal indicates that the rapid passage channel for the NDAA package legislation version has been completely blocked, leaving only the standalone bill option. This also means that it will impact domestic CXO companies...The negative impact of geopolitical risks has been temporarily alleviated.CXO is about to start the rebound trend in the second half of the year. For the Hong Kong stock CXO sector, the recent rate cut by the Federal Reserve has accelerated the global biopharmaceutical industry's recovery, and now, with the unexpected geopolitical "black swan" subsiding, it is a double blessing for Xilinmen Furniture. According to a recent report by HSBC Innovation Bank, in 2023, there were only 161 global biopharmaceutical financing deals totaling $4 billion, while in 2024 alone, there were 71 deals totaling over $5.2 billion. The report also stated, "In terms of exits or financing numbers, the first half of 2024 has already matched that of the whole of 2023, and is expected to catch up to the level of 2022." As is well known, a healthy exit mechanism is an important indicator of the health of the biotechnology industry, indicating that the global biopharmaceutical industry is gradually recovering. The signals of recovery in downstream industries are already reflected in the mid-term financial reports of the Hong Kong stock CXO companies. Taking WUXI BIO as an example, according to its 2024 interim report, driven by the increase in early research business, WUXI BIO's project numbers have shown rapid growth, signing 61 new comprehensive projects during the reporting period. Compared to the first half of 2023 where they added 46 comprehensive projects, this new project number represents one of the best half-year performance to date. In addition to WUXI BIO, Asymchem Laboratories, Joinn Laboratories, and Pharmaron Beijing's newly disclosed new signed orders are also indicating an overall industry recovery. Although Asymchem Laboratories experienced a significant decrease in revenue and profits in the first half of this year, this was mainly due to the impact of large orders from the previous COVID-19 pandemic. Looking at the situation of new signed orders, the company stated in their financial report that there have been no fundamental changes in their international division, with a month-on-month improvement in new signed orders, totaling 480 million RMB, an increase of 20% year on year. Data shows that in the first half of this year, Joinn Laboratories saw a 20% increase in new signed projects, a 30% growth in overseas projects, and stability in the American market. Pharmaron Beijing has seen a slight recovery in global customer inquiries and visits, with a growth of over 15% in new signed orders, where most of the growth comes from European and American clients, and overseas order prices have not decreased, indicating stable growth. These performances will surely boost market confidence. Speaking of the domestic CXO sector in the first half of this year cannot be avoided mentioning the impact of geopolitical issues, as the significant pullback in the CXO sector is related to investors' concerns about geopolitical risks in the industry. The US political creation of the "Biomedical Security Act" against Chinese pharmaceutical companies, which was directly aborted during the legislative process, indicates that this "black swan" has already landed. However, looking at the overall financial data, the growth in overseas orders for top domestic CXO companies has not been significantly affected, and the growth logic of the industry is still intact. At the same time, the aggressive rate cuts by the Federal Reserve in September undoubtedly serve as a key signal for thawing the global biopharmaceutical financing winter, which will become an important indicator for the gradual recovery and growth of the CXO sector in the second half of the year. WUXI BIO (02359) In the first half of 2024, the company signed 61 new projects (+32.6%), including 9 "winning molecule" projects. As of June 30, 2024, the company had a total of 78 "winning molecule" projects, with an order backlog of $20.105 billion, basically flat compared to the same period last year. With a steady increase in the number of projects, as of June 30, 2024, the company had a total of 742 ongoing projects (+21.0%), expanding its biopharmaceutical research pipeline, including 316 single monoclonal antibody projects (+13.7%), 123 dual-specific and multispecific antibody projects (+17.1%), 167 antibody-drug conjugate projects (+51.8%), 76 fusion protein projects (+13.4%), 37 other protein projects (+8.8%), and 23 vaccine projects (+21.1%). In the first half of 2024, the company made strategic investments worldwide. A 2000L liquid capacity was added in New Jersey, USA, to strengthen clinical formulation and liquid production capacity. The first PPQ project in Dundalk, Ireland, was successfully completed. The MFG20 facility in Hangzhou, China, was officially completed with the introduction of three sets of 5000-liter disposable bioreactors. The DP2 and DP5 facilities in Wuxi, China, successfully completed FDA pre-approval inspections for the first time in the first half of this year. The upgrade of the global strategic layout further solidified the company's position as a leading global biopharmaceutical CDMO service provider. Hangzhou Tigermed Consulting (03347) The non-GAAP net profit attributable to the mother in 1H24 was RMB 337 million, an increase of 11.29% month-on-month; the company's performance in 2024Q2 improved compared to the previous quarter. As of the end of June 2024, the company conducted 263 projects overseas, including 208 single-region clinical trial projects, representing an increase of 14 projects since the beginning of the year; and 55 multicenter clinical trial (MRCT) projects, with accumulated MRCT project experience exceeding 133. In terms of expanding the US market, the company's local clinical operations team in the US has nearly 100 people and has partnered with over 700 clinical research centers in 45 states. There are over 45 ongoing clinical trials in the US region. In July 2024, the company completed the acquisition of the Japanese CRO company Medical Edge Co., Ltd. The new signed orders in 1H24 saw a "good growth." Asymchem Laboratories (06821) In 1H24, the company's new signed orders increased by over 20.00% year-on-year, with a significant increase in the second quarter compared to the first quarter. The orders from European and American market clients showed a growth rate exceeding that of the entire company.The growth rate of the company's order book is at a moderate level. As of the disclosure date of the mid-term performance report, the company's total outstanding order amount reached 970 million US dollars. According to the expected outstanding orders, the company's small molecule business and new business verification batch phase (PPQ) projects are expected to reach 28 and 9 respectively by 2024, forming a sufficient reserve of commercial orders and providing strong guarantees for long-term stable growth in performance. Against the backdrop of the industry still being in an adjustment period and considering the market environment, the company expects that non-COVID revenue in 2024 can achieve growth of over 10%.Pharmaron Beijing (03759) The laboratory service revenue for the first half of 2024 was 3.371 billion yuan (a decrease of 0.3%), with the revenue for Q2 being 1.767 billion yuan (an increase of 2.3%), an increase of 10.1% compared to the previous quarter, showing significant improvement. The growth in new signings and new production capacity input are expected to maintain steady growth in the second half of the year. The new signing orders for laboratory services in the first half of 2024 increased by 10%, and the laboratory orders have a relatively short period, with expected conversion to revenue in the second half of the year. In addition, the new production capacity in the Ningbo Third Park is being utilized, laying the foundation for business growth. Joinn Laboratories (06127) As of the end of the first half of 2024, the company's total backlog of orders was approximately 2.9 billion yuan (a decrease of 25.1% compared to the same period last year). In the first half of 2024, the company saw an increase in the number of new signed projects compared to the previous year, with new signed orders amounting to around 900 million yuan (a decrease of 30.8%). The main reason for the decrease in the total amount of new signed orders was the fluctuation in order prices due to intensified industry competition. Order prices gradually stabilized from the fourth quarter of 2023 to the first and second quarters of 2024, with new signed orders amounting to around 500 million yuan in the second quarter, an increase of over 20% compared to the first quarter.