On December 23, Financial Association reported (by journalist Lu Afeng) that for the "water sellers" of the biomedical CRO industry, 2024 appears to be fraught with challenges, not only deeply affected by the declining prosperity of the biomedical sector, but also the biosafety bill introduced by the USA Congress at the beginning of the year casts a shadow over the industry all year long.

Financial Association reporters found that due to the aforementioned factors, from the beginning of the year to now, among the 21 CRO concept stocks in the A-share market, only three have seen positive price increases, while the market value of the other 18 has notably evaporated. However, in terms of performance, over half of the aforementioned 21 companies still experienced revenue growth, with the leading companies in the industry showing particularly strong performance.

Industry experts interviewed by Financial Association reporters indicated that from a profitability standpoint, this year, the USA's biosafety bill has indeed disturbed the stock prices and market values of related companies. Looking ahead to next year, the performance divergence between leading CROs and smaller enterprises may become more pronounced; at the same time, the disruption from the biosafety bill may continue.

The "shadow" of the biosafety bill permeates the year, but performance remains resilient.

Since the beginning of the year, domestic CRO companies have been forced to accept the fact that relevant members of the USA Congress have officially proposed legislative procedures for the biosafety bill, which has become a shadow looming over domestic CROs throughout the year.

Subsequently, the related hype about the bill, accompanied by periodic appearances from relevant USA Congress members to increase their presence, continuously disrupts the stock prices of CRO companies represented by WUXI APPTEC, which have a high percentage of revenue from the USA.

For example, WUXI APPTEC's stock price reached a low point of 36.36 yuan this year, and its market value once shrank by more than a third.

As the U.S. Congress session ended at the end of the year, with the standalone legislation of the "Biological Safety Act" attempting to hitch a ride on the fiscal year 2025 National Defense Authorization Act and CR Act failing, the stock prices and market caps of WUXI APPTEC and CROs finally experienced some recovery.

"Undoubtedly, the Biological Safety Act has been an unexpected disaster for CROs this year, significantly affecting investors' enthusiasm and expectations for the sector," said an industry expert to a reporter from Caixin.

However, when looking back at the fundamentals, the revenue of CROs seems to have "stabilized" this year. Among the 21 listed companies in the WIND CRO Concept Sector, more than half of the CRO enterprises saw positive growth in revenue during the first three quarters of this year, with Nuotai Biotechnology (688076.SH), Boji Medical Technology (300404.SZ), and Sunshine Neohwa (688621.SH) having the top three year-on-year growth rates; while Asymchem Laboratories (002821.SZ), Jinkai Biological (301509.SZ), and Shanghai Medicilon Inc. (688202.SH) faced the most significant declines, down 35.52%, 34.29%, and 32.29% respectively.

The securities department of Asymchem Laboratories stated to a Caixin reporter who called as an investor that although the performance appeared to be somewhat reduced, the previously special substantial orders were only fully executed in the last quarter of last year, and excluding the impact of these substantial orders, the company’s revenue showed year-on-year growth.

"The performance contraction of 'Big Brother' WUXI APPTEC (603259.SH) is somewhat similar to that of Asymchem Laboratories. In the first three quarters of 2024, WUXI APPTEC achieved revenue of 27.702 billion yuan, a year-on-year decrease of 6.23%. However, if the revenue from the commercialization of COVID-19 projects is excluded, the revenue showed a year-on-year growth of 4.6%. As of the end of September 2024, WUXI APPTEC had unfulfilled orders amounting to 43.82 billion yuan, a year-on-year increase of 35.2%.

It is worth noting that the Biological Safety Act does not seem to have affected WUXI APPTEC's customers' confidence and decision-making. In the first three quarters of this year, WUXI APPTEC added over 800 new customers, maintaining a large active customer base of over 6,000, with the U.S. market still contributing significantly, accounting for 64%.

On the other hand, CRO leader PHARMARON (300759.SZ) seems to have performed even better this year, with revenue of approximately 8.817 billion yuan in the first three quarters, a year-on-year increase of 3%; the net income attributable to the parent company is approximately 1.422 billion yuan, a year-on-year increase of 24.82%.

The securities department of PHARMARON stated to a Caixin reporter who called as an investor, "We previously disclosed in the third quarter performance communication that we aim for a revenue growth of 10% year-on-year in the second half of the year, and currently our operations are very normal."

Will the bill make a comeback next year and will the level of prosperity change significantly?

The level of prosperity in the CRO industry this year is not much different from last year, but it may be due to disruptions from the USA's biological safety bill, giving investors the impression that the CRO Sector is precarious, which is actually not the case,” said Zhao Heng, founder of the medical strategic consulting company LatitudeHealth, to a reporter from the Financial Associated Press.

However, there are still great uncertainties for next year, as the biological safety bill is likely to make a return,” Zhao Heng assessed.

This view has been endorsed by several industry insiders. Yang Tao, a Company Executive of a listed Biomedical company, told a reporter from the Financial Associated Press, “Next year the bill is likely to be resurrected to intimidate domestic CRO companies, and some legislators will initiate the legislative process again. Against the backdrop of intensified competition between China and the USA, the USA is trying to maintain its advantage in niche fields, while related legislators in the USA have misjudged the Chinese Biomedical field, a reversal cannot occur in the short term.”

Zhan Kai, a partner and lawyer at Shanghai Yuanda Winston, who is familiar with the legislative operations of the USA Congress, also told a reporter from the Financial Associated Press, “With the Republican Party leading both chambers next year, relevant clauses may become stricter, but this bill may be influenced by the broader direction of Sino-US relations. The USA's Trump 2.0 government has seen significant changes compared to the Biden administration, and the biological safety bill possesses a strong degree of uncertainty; it is possible that a package understanding may be formed in Technology, Biomedical and other fields between China and the USA.”

Reporters from the Financial Associated Press also sought opinions from several listed companies regarding the continued disturbances from next year’s Biological Safety Bill. WUXI APPTEC stated they would not respond for now, and most other CRO companies expressed, “The legislative process of the bill is unpredictable but should not cause significant disturbances, there’s no risk in this regard.” They also stated, “The growth rate of their Business in the USA market remains considerable.”

Yang Tao mentioned that the enthusiasm for project establishment in China's Biomedical sector is not high, especially recent regulations regarding 'B' level companies have largely extinguished the enthusiasm for the research and development of generic drugs. At this stage, CRO companies have to seek growth overseas, which also poses new requirements for CRO companies. “First, to become a truly international enterprise, it is essential to enhance the degree of localization in overseas markets, such as increasing overseas investment, hiring more local talents, and striving for recognition of values in the host country; second, to improve genuine compliance, aligning with international regulations. Only by integrating into the local society and economy can one resist potential risks.”

It is noteworthy that on July 5th, the State Council reviewed and passed the 'Full Chain Support Implementation Plan for Innovative Drug Development.' Subsequently, various provinces and cities have followed suit with relevant policies, using various measures including real financial investments to promote the high-quality development of the Innovative Drugs industry. Additionally, multi-level pilot programs at the national and provincial levels are accelerating the review and approval of innovative drugs and establishing related support Funds in the Biomedical field.

"Encouraging Innovative Drugs" seems to have become a consensus among the national and local governments at various levels. After the introduction of policies and measures to encourage and support innovative drugs, will they boost the CRO industry's performance in 2025?

Many industry insiders believe that "the R&D cycle for innovative drugs is long, and related bullish policies still need to be further implemented and become effective, thus influencing new drug projects and impacting CRO performance will take time."

However, the Biomedical industry in China will not lack vitality in 2025. Yang Tao believes that, in the near future, hot targets such as ADC, bispecific antibodies, and GLP-1 will still be actively pursued for innovative drug projects and research. "Next year, the performance divergence between leading CROs and small to medium-sized enterprises will be more pronounced."