Chinese pharmaceutical companies will see their U.S. expansion plans curtailed by tougher regulatory scrutiny, analysts said. The tightened regulation of deals involving biotechnology and bio-manufacturing in the United States could result in fewer transactions getting approvals, and could lead to China-based biotechnology companies seeking to invest in Europe and Belt and Road Initiative (BRI) countries. “We believe transactions involving biotechnology and bio-manufacturing will be subject to stringent screening by the Committee on Foreign Investment in the United States (CFIUS), as the U.S. is keen to protect its technological leadership and therefore national security,” said Flora Zhu, Corporate Research Director at Fitch Ratings.
An executive order by U.S. President Joe Biden on September 15 clarifies and lays out the key U.S. industries and business sectors that should expect heightened regulatory scrutiny from CFIUS. It says that it should take into consideration the potential impact on U.S. technology leadership and critical U.S. supply chains that may affect national security, when reviewing deals.
“The executive order is the first one to provide formal presidential guidance on the risks that should be considered by CFIUS when reviewing transactions, and it clearly states that biotechnology is included,” Zhu said. “We believe Chinese pharmaceutical companies – biotech firms in particular – will face rising regulatory hurdles in conducting acquisitions in the U.S.” China-based Asymchem’s acquisition of an 81.82% stake in Massachusetts-headquartered Snapdragon Chemistry was recently blocked by CFIUS, which has previously targeted deals initiated by Chinese companies in hi-tech sectors such as semiconductors and electronics.
On September 12, Snapdragon, which was formed in 2014 as a spin-off from the Massachusetts Institute of Technology (MIT), said its acquisition by Asymchem, a pharmaceutical research and manufacturing company based in Tianjin, will not proceed. The deal, which was first announced in February this year, fell through as it failed to get CFIUS’s approval. Both parties were unable to settle on mitigation terms requested by CFIUS, but the details are unknown, Zhu said. “It is likely that the transaction involved advanced pharmaceutical-related technology, which is under greater scrutiny by CFIUS. The targeted company focuses on early-stage chemical development processes,” she added.
Separately, CFIUS recently delayed the USD161 million acquisition of U.S.-listed biotechnology company F-star Therapeutics by Hong Kong-listed Sino Biopharmaceutical. The Committee said it required an additional 45 days to review the transaction, which Fitch said also signaled the tightened regulatory scrutiny of deals involving pharmaceutical-related technology following Biden’s executive order. “Chinese pharmaceutical companies have been actively engaging in overseas acquisitions to obtain advanced technologies and expand product offerings in recent years,” Zhu said. The tightened regulation of “foreign acquisitions of U.S. biotechnology firms could lead them to seek targets and investment opportunities in other countries”.
Biotechnology is being viewed by CFIUS as a critical technology for review and clearance, said Bruce Liu, a China-based Partner at strategy consultancy Simon-Kucher and Partners. Many cross-border biopharma deals in recent years have mainly been in the form of licensing deals, instead of investments and mergers and acquisitions (M&As), he said. “We have seen companies like Wuxi PharmaTech and PharmaBlock expand in the U.S.. But that could be impacted with the new executive order.” Another hindrance for Chinese bio-manufacturing companies could be the Biden administration’s National Biotechnology and Bio-manufacturing Initiative. Passed through another executive order, the initiative includes up to USD1 billion for the establishment of manufacturing infrastructure over five years.
There has been concern about its negative impact on Chinese biotech companies which have been expanding their manufacturing capacities aggressively over the past few years and rely heavily on U.S. customers for revenue, the South China Morning Post reports.
