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Life Sciences Tools Firms, Observers Sound Alarm on Near-Term China Business Outlook


NEW YORK – Throughout August, US life science tools companies repeated the same refrain when reporting their second quarter financial results: Business in China wasn't returning to pre-COVID levels as expected and likely wouldn't for the remainder of the year.

Next-generation sequencing giant Illumina said revenues from China hadn't increased in Q2, despite the end of COVID-related restrictions, and the firm cut its full-year revenue guidance by about $300 million, with about a quarter of that related to China.

Similarly, Thermo Fisher Scientific missed its internal and the consensus Wall Street Q2 revenue estimate by about $300 million and lowered its 2023 revenue forecast by more than $1 billion, both partially attributable to issues in China.

While some firms with more of a diagnostics focus like Bio-Techne, Bio-Rad Laboratories, and Revvity reported positive growth in the country, 10x Genomics, Agilent Technologies, Bruker, Danaher, and Qiagen all told investors similar tales of woe.

Industry observers have taken notice. "The commentary [on China] for the last decade has been overwhelmingly positive," said Stephane Budel, CEO and cofounder of DeciBio, a consulting firm for the precision medicine industry. But the second quarter reports were "among the most negative about China's growth in a while," he said.

In general, China's economic recovery after lifting stringent pandemic-related restrictions at the end of 2022 hasn't gone as expected, affecting both domestic and global companies doing business in the country. Other China-wide dynamics, such as a sagging real estate market, haven't helped the situation. More specifically, "there has been a slowdown in the capital markets to fund innovative biotechs," said Helen Chen, head of LEK Consulting's China and Asia life sciences and healthcare practice.

That's not necessarily a China-specific problem, she added, but Chinese companies are being hit harder than, say, their US counterparts. "The capital market is not as mature, and you don't have the large number of biotech-familiar investors who understand the ups and downs," she said. "Many investors are new, and the pullback has taken them by surprise. For folks who have only seen things go up, having a setback is perhaps more of a shock to the system."

On top of that, certain global companies — especially those offering next-gen sequencing, mass spectrometry, and immunoassays — are seeing more competition from domestic Chinese firms. "A number of local players are really starting to emerge with quite good alternatives to instruments and reagents" from Western firms, Budel said. 

Looming over everything is the issue of geopolitics, including a battle over access to advanced technology. Internal goals of the Chinese government reflect a "rising urgency to reduce China's technological dependency on external markets and mitigate the vulnerabilities of its supply chains to geopolitical tensions," Canaccord Genuity analyst Kyle Mikson wrote earlier this month in a note to investors on these issues.

Though China has taken some measures that could stimulate its general economy, challenges could remain for the next year or more, he said. Still, investing in R&D, especially in precision medicine, is part of China's medium- to long-term goals.

While the US has mostly constrained China's access to American defense-related and high-concept technologies like computer chips, artificial intelligence, and quantum computing, its recent actions have cast a shadow over all science and technology exchange.

Mikson told GenomeWeb that in late August, the US and China renewed their cooperative agreement on science and technology, but only for six months, rather than the usual five-year terms that had been the standard going back to 1979. "It implies either they're renegotiating it or they're just going to do this in smaller intervals and maybe even wind it down," he said. "It's another example of how there's tension between the countries from a scientific angle."

Self-reliance is already Chinese government policy, especially for public healthcare institutions. In 2021, the Ministry of Finance and Ministry of Industry and Information Technology launched Order 551, also known as the "Buy China" policy. Sequencing, PCR, mass spec, and sample prep instruments are all covered under the list of targeted products, according to Chen. And even provincial authorities are evaluating imported products at hospitals, requiring justifications for purchases from foreign companies, she said.

In its half-year report, Chinese sequencing instrument maker MGI Tech, which does business as Complete Genomics in the US, noted that "domestic substitution has become a trend … leaving potential and space for continued advancement."

Driven by nationwide and other government directives in China from the past three years, priority in procurement of goods and services is to be given to domestic suppliers, especially for medical devices and equipment for public medical institutions.

MGI said it saw this as an opportunity to increase its market share, and apparently it is not alone in creating an alternative to Illumina and other next-gen sequencing instrument makers. Mikson noted that in addition to MGI, half a dozen other Chinese companies are in various stages of development.

In late 2022, for example, Shenzhen-based GeneMind launched its GenoCare 1600, a benchtop sequencer that can produce 240 million reads, or up to 12 Gb of data per run. Also in 2022, Chengdu-based Qitan launched its nanopore sequencing-based QNome-3841hex, which can process up to six chips and generate 18 Gb of data per run with read lengths of at least 2 Mb.

Other Chinese sequencing companies at early stages of development include Cygnus Biosciences, Fapon Biotech (which acquired Pleasanton, California-based Sequlite Genomics in 2021), Axbio, Genvida, and RH Genetech.

While most Western companies felt that general soft demand for research products in China was a bigger factor than competition in Q2, alternatives in next-gen sequencing and mass spec are shaping up to threaten future sales.

On its Aug. 3 investor call, 10x Genomics officials attributed a soft market in China to "a challenging macroeconomic environment," which led to high inventory levels in the country. Many customers had also loaded up on reagents ahead of a price hike, further contributing to the dynamics. "It does take some time for things like this to unwind because we sell to a distributor, the distributor sells to a service provider, and then a service provider sells to the end customers," CFO Justin McAnear said.

10x is also seeing some domestic competition in its spatial biology business from BGI's Stereo-seq product, according to Mikson.

Numerous mass-spec instrument suppliers also saw trouble in China, including Thermo Fisher, Agilent, and Danaher. Mikson noted that Guangzhou Hexin Instrument Company offers liquid chromatography/mass-spectrometry instruments for applications in environmental monitoring, food safety, pharma, and industrial production, even selling outside of China to the US, Russia, and Germany. Kunshan-based Jiangsu Skyray also offers LC-MS and gas chromatography-MS instruments.

However, Q2 was not a down quarter in China for everyone, as some publicly traded tools and diagnostics firms like Becton Dickinson, Bio-Techne, Revvity, and Bio-Rad reported growth in the country.

A renewed crackdown in China on corruption in healthcare, though, has spooked both hospitals and companies selling medical products to them. Some companies have canceled marketing events targeting hospitals, said Chen, the LEK consultant, while some hospitals have stated they won't be allowing sales reps to visit. "I'd imagine that impacts diagnostic companies quite a bit," she said.

Despite the challenges, doing business in China remains an attractive proposition. China is "having a rough patch, but remains a key market," Budel said, especially for precision medicine. "You just can’t ignore it. They're going to be an important market; it's just the next year or two are going to be a little rough."

"The current situation doesn't change our vision for this market and the vision that we have been explaining to the market for at least the last two years," Qiagen CEO Thierry Bernard said on an Aug. 8 call with investors to discuss the firm's Q2 financial results. Investing in China-based manufacturing, as Qiagen — and Danaher and Siemens Healthineers, among others — have done, is helpful, Bernard said, adding that molecular technologies likely face less local competition than immunoassays or clinical chemistry.

At the Morgan Stanley Global Healthcare Conference on Sept. 13, Thermo Fisher CEO Marc Casper said that in the mid- and long-term, China is "going to continue to be one of the fastest, if not the fastest-growing end market in our industry and for Thermo Fisher," with high-single-digit percentage growth year over year.

Having spent the latter part of August visiting the country as chair of the US-China Business Council, Casper said he met with government officials and Chinese economists. "It [was] very clear that China is trying to reduce the friction from the business community, make it easier to do business, and bring in reforms that will spur investment and growth," he said. "None of those things are going to happen tomorrow, but the direction of travel is to reduce the tension," he added. "I came away encouraged."

Huanjia Zhang contributed reporting for this article.