Chinese pharmaceutical firms’ US expansion plans to come up against brick wall of greater regulatory scrutiny

October 2, 2022 GMT

Chinese pharmaceutical companies will see their US expansion plans curtailed by tougher regulatory scrutiny, analysts said.

The tightened regulation of deals involving biotechnology and biomanufacturing in the United States could result in fewer transactions getting approvals, and could lead to China-based biotechnology companies seeking targets in Europe and Belt and Road Initiative countries.

“We believe transactions involving biotechnology and biomanufacturing will be subject to stringent screening by the Committee on Foreign Investment in the United States (CFIUS), as the US is keen to protect its technological leadership and therefore national security,” said Flora Zhu, corporate research director at Fitch Ratings.

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Her remarks came after an executive order by US President Joe Biden on September 15, which clarifies and lays out the key US industries and business sectors that should expect heightened regulatory scrutiny from CFIUS. The committee was founded in 1975 with the authority to block direct foreign investment in US companies on national security grounds. Biden’s executive order says that it should take into consideration the potential impact on US technology leadership and critical US 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 review transactions, since its establishment 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 US.”

China-based Asymchem’s acquisition of an 81.82 per cent 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, 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.

The deal fell through as 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 US$161 million acquisition of US-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 signalled the tightened regulatory scrutiny of deals involving pharmaceutical-related technology, following Biden’s executive order.

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“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 US biotechnology firms could lead them to seek targets and investment opportunities in other countries”.

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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, he said.

“Chinese companies with contract development and manufacturing organisations (CDMOs) services were supposed to be a service industry and not as sensitive,” he said. “We have seen companies like Wuxi PharmaTech and PharmaBlock expand in the US. But that could be impacted with the new executive order impacting biomanufacturing.”

Another hindrance for Chinese biomanufacturing companies could be the Biden administration’s National Biotechnology and Biomanufacturing Initiative. Passed through another executive order, the initiative includes up to US$1 billion for the establishment of manufacturing infrastructure over five years.

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There has been concern about its negative impact on Chinese CDMOs, which have been expanding their manufacturing capacities aggressively over the past few years and rely heavily on US customers for revenue.

Fitch, however, said the US initiative to boost domestic biomanufacturing was unlikely to affect credit profiles of most leading Chinese pharmaceutical CDMOs, as their exposure to biologics outsourcing was limited.

Production capacity expansion in the US remained uncertain and could take years to ramp up, Fitch said. The actual impact on Chinese CDMOs would also depend on the competitiveness of US production.

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

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