Since October, in just four short trading days, WuXi AppTec's stock on the Hong Kong stock market has surged by over 30%; although there has been some pullback, the increase over the past six months has already doubled.

Many people are wondering if the inflection point in WuXi AppTec's fundamentals has arrived?

Determining whether this is an inflection point is crucial because, despite the significant rebound, compared to its historical peak, WuXi AppTec's stock price has still fallen by more than 70%, leaving a very large gap.

Over the past three years, WuXi AppTec's market value has almost evaporated by nearly 400 billion yuan. The reasons for this, in addition to the collective plunge in the pharmaceutical sector, include another reason, which is the decoupling between China and the United States.

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This brings us to the United States' "Biological Security Act."

At the beginning of 2024, the "Biological Security Act" of the United States became an inescapable nightmare for Chinese technology companies, including WuXi AppTec and WuXi Biologics. On September 10, the U.S. House of Representatives passed the bill with an overwhelming majority. According to the process, once the Senate votes to pass it and the President of the United States signs it, the bill will become an official law of the United States.

Currently, the likelihood of the bill being passed is relatively high.

However, attentive friends have already noticed that WuXi AppTec's stock price has quietly risen before the bill was implemented. Why is that?

Compared to the original bill, this bill has modified a clause, allowing designated companies to continue their contracts funded by the U.S. government for their clients until 2032. In simpler terms, it sets an 8-year buffer period, allowing U.S. pharmaceutical companies to extend the deadline for changing CDMOs until 2032.

Note, this information is extremely important.Without a transition period, American pharmaceutical companies might not sign new contracts with Chinese CDMO companies, casting a significant shadow over the growth potential of these companies. However, with an 8-year transition period, it is highly likely that the cooperation between the two parties will continue. As for what will happen after 8 years, even the President of the United States may have changed twice by then—who knows?

Why was an 8-year transition period set instead of an immediate decoupling? The most plausible explanation is that American innovative pharmaceutical companies cannot do without China.

The rise of Chinese CDMO companies is not due to the generosity of American politicians, but rather the result of a rational division of labor and allocation of global pharmaceutical resources.

It is well known that the research and development cost of an innovative drug follows the "double ten rule," which means an average development cycle of ten years and a cost of one billion dollars. It is said that this figure has even increased in recent years. Even American pharmaceutical giants cannot afford to independently develop a new drug from start to finish, as they cannot bear the financial cost and, more importantly, the time.

It is against this backdrop that the concept of research and development outsourcing emerged. China, leveraging its labor costs and the dividend of engineers, has seized the initiative and worked hard to achieve its current position.

In fact, American pharmaceutical companies are also unwilling to decouple.

One piece of data is very illustrative. According to the semi-annual report, WuXi AppTec has added more than 500 new customers, with orders on hand amounting to 43.1 billion yuan, representing a year-on-year growth of 33.2% after excluding specific commercial production projects; revenue from the top 20 global pharmaceutical companies increased by 11.9% year-on-year.

Therefore, this brings us to the core competitiveness of WuXi AppTec.

Firstly, WuXi AppTec is the only company in the world capable of providing end-to-end integrated CRDMO services. What does this mean? The research and development chain for an innovative drug is very long. If a pharmaceutical company were to engage different research and development companies for each link in the chain, it would undoubtedly be a laborious and unrewarding process. The best approach is to find one company that can handle it all, allowing the pharmaceutical company to simply provide funding and ideas. In other words, WuXi AppTec is the optimal choice.

Secondly, the cost of decoupling is too high, and American pharmaceutical companies and patients will be the victims. It is reported that nearly a quarter of the drugs used in the United States have been developed with the involvement of WuXi AppTec. Additionally, according to a survey by BioCentury, if the bill eventually passes, more than 90% of the research progress will slow down.Someone might ask, will India replace us?

As mentioned earlier, WuXi AppTec's industry status is not due to politicians' patronage, nor is it due to personal connections, but rather it is achieved through market competition. Without discussing other aspects, let's just say that WuXi AppTec is willing to accept quality audits and information security upgrades from global customers, regulatory agencies, and independent third parties. Can India, known for its generic drugs, achieve this in the short term?

Finally, there is the issue of valuation.

Compared to itself, WuXi AppTec's current market value is only about 20% of its peak; compared to its peers, it is far behind Samsung Biologics, which ranks lower. In terms of performance, WuXi AppTec reiterates that its 2024 performance target remains unchanged, with operating income between 38.3 billion yuan and 40.5 billion yuan, maintaining positive growth after excluding COVID-19 projects.

After experiencing a roughly 80% decline, coupled with the realization of decoupling expectations and the relaxation of domestic regulations on innovative drugs, WuXi AppTec will start anew and look forward to a double rebound in both performance and valuation.