HONG KONG, Sept 14 (Reuters Breakingviews) - China biotech’s American honeymoon is ending. Cross-border tie-ups in the sector have boomed despite intensifying geopolitical tensions , but U.S. President Joe Biden wants to cut dependence on foreign manufacturers. While building up domestic capacity will take years, some form of decoupling is now underway.

Modeled on John F. Kennedy’s ‘Moonshot’ speech that urged Americans to lead space exploration, Biden’s executive order signed on Monday called for a ‘Cancer Moonshot’ and urged local drugmakers to pioneer new treatments. Key to his initiative is ensuring that “biotechnologies invented in the United States of America are made in the United States of America”. Over 70% of drug ingredient manufacturing facilities registered with the U.S. Food and Drug Administration are outside the country, according to White House data; 13% in the People’s Republic.

Investors promptly sold off major Chinese stocks, including Hong Kong-listed WuXi Biologics (2269.HK) , which lost 20%, or $7 billion, in market value in a single day. China’s leading contract drugmaker, now worth $28 billion, has benefitted by offering companies like Johnson & Johnson (JNJ.N) manufacturing, research and development and other services, often at far lower costs than in the United States. American customers accounted for 54% of WuXi’s first half sales this year, up from 44% two years ago.

The rout looks a bit premature. Building up local manufacturing and other infrastructure will take years. Biden has yet to disclose any details, but analysts at Jefferies reckon replacing Chinese production would result in a one-off cost as high as $18 billion for U.S. drugmakers, as well as an additional $12 billion of labour costs each year.

Still, the U.S. biotech initiative could gain momentum as geopolitical tensions flare. Similar to Washington’s $30 billion push to bolster domestic chipmaking, reshoring drug manufacturing would create jobs, reduce supply chain risks and strategically, keep Chinese competition at bay. With the right government incentives and subsidies, demand for WuXi’s services might gradually wane over time.

Even after yesterday’s selloff, WuXi’s shares are trading at 33 times forecast one year ahead earnings, well above Swiss rival Lonza’s (LONN.S) 28 times. With more bad news set to trickle out of Washington, Chinese biotech companies have a bitter pill to swallow.

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CONTEXT NEWS

U.S. President Joe Biden on Sept. 12 signed a new executive order to direct an unspecified amount of money towards U.S. research into biologically derived technologies, bolster domestic biomanufacturing and cut reliance on foreign companies. The order "directs the federal government to ensure biotechnologies invented in the United States of America are made in the United States of America," Biden said.

Hong Kong shares of WuXi Biologics, a Chinese contract drug manufacturer, closed down 20% on Sept. 13 to HK$53.40.

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