House Speaker Mike Johnson has made clear the schedule when Congress resumes next month: China, China and China. At a July speech at the Hudson Institute in Washington, D.C., the Louisiana congressman said that because “China poses the greatest threat to global peace, Congress must keep our focus on countering China with every tool at our disposal.” High up on his agenda of China-related legislation is the Biosecure Act — a bill that could dramatically reorder the global pharmaceutical supply chain. 

If passed, the Biosecure Act would forbid American biotech companies that receive federal grant money — which is a majority of global pharma companies — from working with five Chinese biotech companies: WuXi AppTec, its sister company WuXi Biologics, BGI Group, and its subsidiaries, MGI and Complete Genomics. While this may not seem to affect much on the surface, it addresses a little-known truth: Few drugs today are actually manufactured by the companies that sell them. 

WuXi AppTec popularized and exemplifies this pharmaceutical outsourcing. In recent years, the Shanghai-headquartered company has made some of America’s most prescribed and lucrative drugs, according to data collected by Qyobo, a German analytics firm that tracks pharmaceutical ingredients and chemicals. WuXi, for example, helps produce Nirmatrelvir, an antiviral medication developed by Pfizer, which is one of the ingredients in the Covid treatment Paxlovid. It also produces Trikafta, a wonder drug for cystic fibrosis that generated close to $9 billion last year for Boston-based Vertex Pharmaceuticals. And it makes Imbruvica, a cancer treatment from AbbVie and Janssen that was one of the top 10 best-selling drugs in the U.S. in 2022. 

Inside WuXi’s R&D and manufacturing facilities in Shanghai. Credit: WuXi AppTec

In other words, WuXi AppTec is the most important drugmaker American patients have never heard of. And its success — $5.6 billion in revenue last year — has inspired hundreds of copycats known as “contract research, development and manufacturing organizations,” or CRDMOs. Today, a clinical treatment approved by the Food and Drug Administration may be researched, tested, and manufactured by CRDMOs — and they are often Chinese. The Biotechnology Innovation Organization (BIO), an American trade association for the biotech industry, says that 79 percent of its member respondents have contracts with Chinese drug manufacturers. 

But few Chinese companies are feeling the heat like the WuXi group, which was founded in 2000 to build a “one-stop shop” of services for big pharma giants looking to cut costs. More than 65 percent of AppTec’s revenues last year came from contracts with American companies. The company’s dominant position in the pharmaceutical supply chain has been likened to TSMC, the Taiwanese semiconductor manufacturing giant. Just as TSMC doesn’t design its own chips, instead manufacturing for chip designers like Nvidia and AMD, WuXi AppTec doesn’t design its own drugs, instead offering manufacturing services at a level of quality and price that few rivals can compete with. 

George Baeder, a biotech executive with three decades of experience in China, says “it makes perfect sense to have service providers doing bits and pieces” in such complex industries. “It takes a lot of work to discover [a drug], and go through all the clinical trials and then launch the drug globally,” he says.

But after a string of acquisitions and expansions, some say the WuXi group of companies is not only doing bits and pieces. The company has muscled its way from pharmaceuticals to biotechnology and even genomic information. Through WuXi Healthcare Ventures, the company’s venture capital arm, the company has made investments in more than two dozen global companies, including the U.S. genealogy tracking firm 23andMe. 

WuXi STA, a subsidiary, is also one of China’s largest producers of active pharmaceutical ingredients (APIs), the main component in medicines. America’s overreliance on China for APIs has long been a point of concern in Washington. In 2019, Christopher Priest, a senior official with the Department of Defense’s Defense Health Agency, told a congressional hearing: “Should China decide to limit or restrict the delivery of APIs to the United States, it would have a debilitating effect on U.S. domestic production and could result in severe shortages of pharmaceuticals for both domestic and military uses.”

Compounding that concern is alarm about WuXi itself. In 2021, the National Counterintelligence and Security Center, which is part of the Office of the Director of National Intelligence (ODNI), issued a warning about WuXi’s 2015 acquisition of NextCODE Health, an American and Icelandic genomics company.¹Pressure from Congress and the specter of a review of the deal by the Committee on Foreign Investment in the United States (CFIUS) eventually led WuXi to hive off the subsidiary’s Chinese unit and rebrand its international division. Two recent research reports have also accused the company of being linked to China’s military-civil fusion program. And in a confidential briefing in February, U.S. intelligence officials reportedly told senators on the homeland security committee that WuXi had transferred U.S. intellectual property to Beijing without consent. The senators ultimately voted 11-to-1 to advance its version of the Biosecure Act to the Senate floor. The House followed in May.

“[B]iotechnology’s influence is expanding rapidly, but it is critical that Americans gain these life-saving advancements without exposing our genetic data to exploitation by foreign adversaries,” Congressman Raja Krishnamoorthi (D-IL), who co-sponsored the House’s version of the Biosecure Act, said in a statement to The Wire China. “The Biosecure Act is our shield, blocking foreign adversaries from siphoning U.S. taxpayer dollars and ensures that America remains the global leader in biotech innovation, outpacing any threats on the horizon.”

WuXi did not respond to The Wire’s requests for comment. But its executives have pushed back against the allegations against it. “WuXi AppTec has a strong track record of upholding the highest intellectual property, data and privacy protection standards, as well as maintaining the trust of our customers,” the company’s senior executives wrote in an open letter to its customers in February. “We have always been guided by our core value of ‘doing the right thing and doing it right.’ And we remain committed to this ethos despite recent unfounded and misleading claims about our company.”

Nevertheless, the stock of two of its publicly listed units, WuXi AppTec and WuXi Biologics, have fallen about 45 and 65 percent respectively since the start of this year. And few experts think the company can survive the congressional name-and-shaming; many U.S. firms, for instance, are already negotiating with rival contract manufacturers to diversify production. 

The dissolution of the WuXi way, warns Scott Moore, a professor of political science at the University of Pennsylvania, will reverberate for the foreseeable future, not unlike the recent shakeup to the chips industry.

“As biotech moves into the crosshairs of U.S.-China technological competition, the Biosecure Act is the highest profile policy measure that the U.S. government has taken,” he says. There are U.S. firms that can do what WuXi and other CRDMOs do, he notes, and it’s largely positive that Congress is being proactive when it comes to such a highly innovative and impactful field. But, he adds, “The Biosecure Act increases the cost of biomedical research, at which point you have to ask if the cure is worse than the disease.” 

THE WUXI WALL

The mid-20th century was a great time to be a pharmaceutical researcher. Companies such as Merck Co. became national champions in the race to produce breakthrough pharmaceuticals like vaccines and antibiotics. The explosion of private health insurance in America, meanwhile, funneled a wave of money into the healthcare sector and encouraged drugmakers to aggressively develop and market new drugs. 

But Li Ge, a recent Peking University graduate who was pursuing a doctorate in organic chemistry from Columbia University, arrived in the U.S. just as the music was starting to slow. It was the early 1990s, and big pharma companies were on the back foot owing to the rising cost of drug discovery as well as their arrival at the ‘patent cliff’: the moment when a pharmaceutical patent expires, opening the door to generic competition and a dramatic drop off in drugmakers’ revenues. 

Biotech is an area where the U.S. has a lead in the innovation space. We can innovate all we want, but if the core vulnerability is dependencies in the supply chain and all roads lead back to China, that’s the key vulnerability we need to solve for.

David Lin, a senior director at the Special Competitive Studies Project

In 1993, after graduating Columbia, Li joined Pharmacopeia, Inc, a New Jersey-based startup that was co-founded by Clark Still, Li’s PhD advisor. The company’s technology promised a new way to rapidly synthesize chemical compounds, eliminating a major bottleneck in the drug discovery process. The other co-founders included several ex-Merck scientists as well as Larry Bock, a serial entrepreneur and renowned biotech investor. By leveraging the veteran scientists’ connections, Pharmacopeia offered large firms a way to accelerate their early-stage drug discovery. Some of its earliest clients included Merck and Schering Plough, and within three years, the company listed on the NASDAQ stock exchange. 

But while successful, Pharmacopeia was looking for its own way to cut costs by 1999. Reflecting the general business wisdom of the time, it dispatched Li and its chief scientific officer, John Baldwin, to China to find a joint venture partner that could both help with research and conduct clinical trials, which had become astronomically expensive in the United States. 

Li and Baldwin settled on a potential partner in Wuxi, a suburb of the city of Suzhou less than 90 miles from Shanghai. The company, called Taihushui, owned an eclectic collection of assets, from beer breweries to horse racing tracks. But Li and Baldwin found it promising because the firm had some experience in chemistry-related manufacturing, including manufacturing and selling green tea extracts to U.S. food manufacturers. 

Pharmacopeia’s board was skeptical, however, and voted against going forward with the partnership. So, Baldwin and Li Ge split off and pursued the idea on their own, establishing WuXi Pharmatech and eventually signing up Pharmacopeia as a client. 

The timing was just right. By the turn of the century, the average cost of bringing a drug to market in the U.S. had careened upwards to about $800 million and took between 10 and 15 years. By outsourcing preclinical work and trials to China, pharmaceutical companies could significantly reduce their costs. 

“By virtue of a population that’s four times the size of the U.S.’s and a healthcare system that is historically less developed, you’ve got masses of potential subjects for clinical trials,” says Baeder. For “a rare disease in the U.S. with 5,000 or less people…you could find 50,000 people in China [with that same disease].”

WuXi received generous subsidies, including income and sales tax exemptions from the central government and incentives from the local governments of Wuxi and Shanghai to establish facilities. Securing early big-name clients like Merck (in 2002) helped to shore up its credibility, and the company took on investment from two Singaporean banks as well as Fidelity Asia Ventures. 

In 2007, when WuXi Pharmatech went public on the New York Stock Exchange, it was already employing more chemists than Pfizer, the largest drugmaker in the world at the time. “The reason we exist is because the cost for research is just too high,” Li said in an interview with Bloomberg that year. “Every company is talking about how they can’t afford it.” 

With its pockets flush, WuXi could afford the next frontier: biotech. In 2007, WuXi bought Philadelphia-based AppTec Laboratories for $151 million. AppTec, like WuXi, offered third-party manufacturing services, but catered mostly to small- and medium-sized biotech companies. With over 700 clients, AppTec gave WuXi not only a foothold in biotech, but one in the U.S. market. 

It was a rocky start — the financial crisis the following year hit the biotech industry especially hard — but it wasn’t until 2012 that WuXi’s business model faced a real crisis. That year, a Chinese court convicted a WuXi researcher of stealing two Merck compounds and attempting to sell them to a middleman on the internet. It was the first known incident in the company’s history in which a client’s IP had been misappropriated. While the companies and local authorities were able to thwart the sale, it was something of an existential crisis for a company built on trust.

“At WuXi PharmaTech, customer IP protection is our lifeline and we are committed to working closely with our customers to ensure the security of their projects,” Li said, following the researcher’s conviction. “As in any company, there will always be the risk of damage caused by a determined criminal.”

Dai Jialing, founder of PharmaDJ, an industry intelligence firm, says WuXi seemed to take the incident seriously. “After the Merck incident, WuXi invested a lot in internal firewalls. Teams working on specific projects don’t know what other teams are working on,” he says. “You have to protect your client’s IP.”

According to a 2016 interview with Daniel Auerbach, a former managing director at Fidelity who oversaw the firm’s investment into WuXi, Li’s credibility and WuXi’s reputation for quality was critical to the company’s continued rise. “Why? Because they’re dealing with IP that’s borrowed, worked on and handed back,” he said. “If that’s ever violated, the company is toast.” 

Around this time, Wuxi undertook a major restructuring and shifted its footing much closer to home. First, in 2015, WuXi Pharmatech delisted from the New York Stock Exchange in a $3.3 billion take-private deal. The consortium of investors included Sequoia Capital as well as many of China’s biggest names in private equity: Hillhouse Capital, Boyu Capital, Ping An Insurance, Legend Capital, Yunfeng Capital, and the international arm of Shanghai Pudong Development Bank. 

The company then split into two entities: WuXi AppTec and WuXi Biologics. WuXi Biologics, which focuses less on contract manufacturing and more on developing its own therapeutics, went public on the Hong Kong Stock Exchange in 2017, followed by AppTec in 2018. While the companies have different management and say they operate independently, Li remains chairman of both firms.²A subsidiary of AppTec, WuXi STA, is also involved in a joint venture with Biologics called WuXi XDC, which was publicly listed in Hong Kong last year.

At the same time, WuXi embraced a strategy of acquisitions and investments. In 2015, WuXi bought U.S.-based NextCode Health, a spinoff of a company called DeCode that collected DNA data from much of Iceland’s population. And it joined a consortium of Chinese companies to buy Ambrx, an American drugmaker specializing in antibody-drug conjugates — a type of treatment that combines antibodies with drugs to treat cancer. According to data from Crunchbase, an investment database, 70 percent of WuXi Healthcare Investments’ 39 investments are in U.S. companies. 

John Baldwin, Li’s mentor and co-founder of WuXi, described the strategy concisely: “The consensus was, we will keep putting blocks together until we have a wall.”

NAMED AND SHAMED

By last summer, Washington had set its eyes on breaking down WuXi’s wall. In Congress’s annual defense spending bill, then-House Select China Committee chair Mike Gallagher introduced an amendment to prohibit contracting with biotech “companies of concern” and singled WuXi AppTec out by name. (Executives at WuXi AppTec were reportedly shocked by the move.) Although WuXi’s name was left out of the final version, Senator Gary Peters (D-MI), chairman of the homeland security and governmental affairs committee, introduced standalone legislation in December that again targeted WuXi by name. 

The hits kept coming.

Just a few months later, in February, the Jamestown Foundation, a conservative defense policy think tank, published a report about WuXi’s alleged links to the CCP, the People’s Liberation Army and China’s civil-military fusion efforts. James Mulvenon, a Chinese linguist and researcher with Pamir Consulting, released a blockbuster report of his own in April alleging that “Li and the WuXi Group have not shied away from partnerships with numerous PLA organizations, including those conducting biological warfare research, nor from taking strategic direction from the Chinese Communist Party apparatus.” 

Taken together, the reports found that WuXi scientists had participated in public events alongside Chinese military officials, and that WuXi’s management committee includes representatives affiliated with government institutions. The researchers also found that three mutual funds that picked stocks affiliated with China’s military-civil fusion program had acquired stakes in WuXi AppTec. One fund was managed by AVIC Fund Management Company, a subsidiary of the Aviation Industry Corporation of China, a state-owned defense conglomerate. 

The stakes are miniscule — accounting for 0.001 percent, 0.0005 percent and 0.0005 percent of AppTec’s total shareholdings — and the AVIC fund, which held the largest of the three stakes, sold its holdings after one quarter in 2019, according to public disclosures. But critics of the company argue that the intent behind the investments, not their size, is sufficient cause to question whether WuXi is supporting China’s military. 

By saying you’re not able to work with biologics, you’re saying that things being developed in China that are quite innovative won’t be available to U.S. patients. Do you really want to be in the position of slowing down or increasing the cost of drugs for patients in your country?

Gary Rieschel, a venture capital investor with a focus on the biotech sector

“The whole point of these funds is to facilitate the civil-military fusion strategy. How is that not part of the state apparatus?” says Sunny Cheung, an associate fellow for China studies at the Jamestown Foundation, who co-authored one of the reports. 

According to two people familiar with the bill’s drafting process, WuXi’s extensive and growing involvement with U.S. companies further persuaded members of Congress that immediate action was needed to curtail its operations. “WuXi’s business model has its finger in every single aspect of the supply chain — to the extent that we heard some lawyers say if they were a U.S. firm they’d be in violation of antitrust regulations,” one of the people involved in the drafting process told The Wire. 

In May, the Biosecure Act was introduced in the House by Brad Wenstrup (R-OH) and Krishnamoorthi, who is the ranking member on the House’s Select Committee. The co-sponsors honed in on WuXi’s work with China’s military and the company’s alleged involvement in collecting genetic data without consent. 

“Biotechnology companies controlled by the Chinese Communist Party (CCP) collected DNA from millions around the world, and without patient consent, used that data on genomic projects conducted by the Chinese military,” Wenstrup said in a statement to The Wire China.

In an interview with Outsourced Pharma that same month, WuXi AppTec’s president, Rick Connell, responded to the military investment claim, stating: “We are also a publicly listed company. Anybody, whether we like it or not, can invest in our company. These are not our ‘endorsements.’” He also defended the company’s activities with PLA researchers, stating that “wherever in the world we operate, our employees will engage in our communities.” (A Reuters investigation in June, citing patent filings, found that staff at AppTec had worked with PLA scientists to co-develop altitude sickness drugs.) 

Even though the Biosecure Act hasn’t yet passed, the industry is already wary — and not just of WuXi. A survey by LEK Consulting, an American consultancy, found that confidence among U.S.-based life sciences companies has dropped by as much as half when it comes to working with Chinese companies, with contract drug manufacturers the worst hit. About a quarter of respondents said they were looking to shift away from their Chinese suppliers. 

“Five years ago people would’ve thought the geopolitical risk of working with AppTec was very low. Now, it’s gone from a 10 percent to maybe 50 percent risk,” says Gary Rieschel, a venture capital investor with a focus on the biotech sector. “If you’re a multi-hundred billion dollar pharmaceutical company, you can’t be exposed to AppTec as your sole supplier.”

For companies, however, this new reality has been a source of consternation. In a survey conducted in March by Biocentury, a business intelligence platform, over 90 percent of company respondents said they would expect delays to their drug development pipeline if the Biosecure Act passed. 

To give companies more time to transition away from WuXi, lawmakers amended the bill to include an eight year buffer period. But companies aren’t the only ones likely to be impacted by new rules; universities like Harvard, Yale, and the University of Texas’s MD Anderson Cancer Center also contract with WuXi.

“The second order effects are potentially even larger,” says the University of Pennsylvania’s Moore. “Universities tend to adopt as their own policy anything affecting federal funding rules. So you could see it meaning a whole swathe of universities not allowing their researchers to work with WuXi.”

David Lin, a senior director at the Special Competitive Studies Project, a Washington, D.C. think tank, says this trade-off — between cost and supply chain security — is necessary if the U.S. is to remain competitive and keep its supply chains secure. 

“Biotech is an area where the U.S. has a lead in the innovation space,” he says. “We can innovate all we want, but if the core vulnerability is dependencies in the supply chain and all roads lead back to China, that’s the key vulnerability we need to solve for.”

Rieschel, however, says that U.S. efforts to exorcize China from all of its supply chains have gone too far, especially since other countries likely won’t follow suit when it comes to WuXi. “By saying you’re not able to work with biologics, you’re saying that things being developed in China that are quite innovative won’t be available to U.S. patients,” he says. “Do you really want to be in the position of slowing down or increasing the cost of drugs for patients in your country?”

Indeed, regardless of if the Biosecure Act passes — analysts expect the bill may pass in the House, but face a steeper climb in the Senate — Baeder, the biotech executive, says he is mourning the most recent example of decoupling between the U.S. and China. 

“I can’t think of an area that’s better than biotech for collaboration,” he says. “It should be a win-win for everyone.”

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