WuXi Group Wrestles With Uncertainty Over Pharma Tariffs

Drugs services giant WuXi AppTec cashed in a stake in a sister firm to soften the blow from a first round of Trump tariffs, as the pharma sector braces for another barrage

Key Takeaways:

• The sale of shares in WuXi XDC, a developer of antibody-drug conjugates, came a day before the U.S. president shocked markets with his tariff plan on April 2
• The impact of any further punitive actions specifically targeting pharmaceutical products is hard to quantify at this point

Could tariff fever spread to the pharmaceutical sector? Medicines have been exempted for now from the import tax offensive launched this month by the United States, but drug producers are nervously scrutinizing their options and girding for battle.

A day before U.S. President Donald Trump delivered his "Liberation Day" tariff bombshell on April 2, one of China's top drug services companies sold off a block of shares in a sister firm specializing in bioconjugate research.

In doing so, WuXi AppTec (603259.SH; 2359.HK) was able to cash out its holdings at a favorable price, just before the unexpected scale of Trump's tariffs began sending financial markets into a tailspin.

Although the drugs industry was spared in that initial round of tariffs, President Trump has since vowed to bring in new levies on pharmaceutical products, spreading deep anxiety across the highly globalized sector.

In that light, the block sale of shares in WuXi XDC Cayman Inc. (2268.HK) appears to have been a preemptive move to hedge against tariff risks and a potential slide in market confidence.

After the market close on April 2, WuXi AppTec announced it had sold 50.8 million shares in its sibling company a day earlier for around HK$2.18 billion ($281 million). The sale was equivalent to around 4.23% of shares in WuXi XDC, a contract developer and producer of antibody-drug conjugates (ADCs) that was spun off as a separate entity within the WuXi biomedical group in 2023.

It was WuXi AppTec's third disposal of shares in the ADC services firm in the past half year, taking its cumulative proceeds to more than HK$4.6 billion.

The company said the money would be ploughed into boosting global production capability, cultivating its talent pool and strengthening its business model as an integrated provider of research, development and manufacturing services for the global pharmaceutical sector. The statement said the share sale produced an investment gain of around 1.85 billion yuan, representing more than 10% of its audited net profit attributable to parent company shareholders for the 2024 financial year. 

In fact, WuXi AppTec is flush with cash to grow its business, with free cash flow reaching a record high of 7.98 billion yuan at the end of last year. Rather than build up its buffer, the company was likely looking to lock in profits and mitigate the potential damage from looming tariffs. As it happened, WuXi XDC's share price reached HK$49.5 per share on the day of the sale, the highest level since the company's IPO in November 2023.

That price peak was soon a distant memory, as the share dropped for four straight days on the general tariff shock. When the Hang Seng Index suffered a record one-day sell-off on April 7, WuXi XDC stock plunged 27.58% and is now trading around HK$30.

WuXi XDC's earnings had been looking good up to this point. In March the company reported annual revenues of 4.05 billion yuan for 2024, a year-on-year jump of nearly 91%. Net profit surged 277% to 1.07 billion yuan and net profit margin rose from 13.4% to 26.4%. Revenue from North America increased from 40% to 50% of the total, with China and Europe accounting for 26% and 16% respectively.

The stock encountered some turbulence last year in the months after its Hong Kong debut, but even this latest depleted level is 50% higher than the listing price of HK$20.6. A boom in demand for ADCs, a type of precision drug to fight cancer with fewer side effects than earlier treatments, is bolstering investor interest in the company.

The value of the global ADC market rose 24% to $13 billion in 2024, and six new ADC drugs together delivered sales exceeding $1 billion, fueling demand for research and development services. In its earnings report, WuXi XDC said it added 154 clients last year, bringing its total customer base to 499, including 13 of the top 20 pharma multinationals based on revenue.

How big is the tariff risk?

At this stage, the industry is struggling to quantify the scope and impact of the threatened pharmaceutical tariffs, given the sector's dispersed supply chains. A research note from China Securities said Chinese drugs contractors tend to export services to the United States in the late stage of research. When it comes to commercialization orders, Chinese companies may only carry out initial steps with the rest being fulfilled in European countries. If these activities are not covered by impending tariffs, the fallout for companies such as WuXi XDC could be limited.

That being said, raw materials and equipment costs could be inflated by tariffs, squeezing corporate profit margins. A senior executive at WuXi AppTec acknowledged the potential for damage, speaking on an April 10 earnings call. Vice Chairman and CIO Hu Zhengguo said the extent of the impact was unclear, but he vowed to work with customers to minimize the effects.

Like many Chinese companies, WuXi XDC has been offshoring production capacity to circumvent or blunt the effect of punitive U.S. actions. It has built a 22,000 square meter research and manufacturing site in a Singapore biomedical park that is due to go into operation at the end of this year, with production lines for ADCs and other formulations.

Meanwhile, drug multinationals served by the WuXi group have announced plans to boost U.S. production in moves that could affect the business of contract suppliers in the long term. For example, Novartis plans to invest at least $23 billion in U.S. infrastructure in the next five years to ensure key drugs destined for U.S. patients will be made locally. Meanwhile, Eli Lilly and Company will invest at least $27 billion to build four new U.S. production bases to meet growing demand for its best-selling diet and diabetes drugs.

WuXi XDC is trading at a price-to-earnings (P/E) ratio of 32 times, a significant premium over WuXi AppTec's 14 times. Investors need to keep a close eye on tariff developments, and general trade tensions, to gauge the implications for WuXi XDC's stock price. Whatever the company's growth potential, a market panic could take a heavy toll.