Confusion among Chinese investors about shifting U.S. regulatory policy is draining billions of dollars from the American biotechnology sector and stressing startups that rely on foreign capital to cure disease.
That was the message of James Huang, a managing partner in Kleiner Perkins’s China office who specializes in facilitating cross-border deal financing. He told attendees at the BIO Investment Forum that the Trump administration’s new rules scrutinizing foreign investment are causing eager Chinese investors to park their capital in Europe instead.
“It’s kind of sad,” Huang said. “For many years I’ve worked with the [U.S. biotechnology industry] and Chinese CEOs. U.S. manufacturers were taking advantage of low-cost models in China to innovate, and the U.S. biopharmaceutical industry was a major beneficiary. Keytruda, the cancer immunotherapy, is a great example.”
However, a proposed rule by the Committee on Foreign Investment in the United States (CFIUS) could trigger a U.S. government national security review of deals involving certain investments in biotech companies that collect genetic information from even a single patient – a common practice in an era of precision medicine and genomic breakthroughs. This is on top of the pilot program CFIUS instituted a year ago that would require mandatory review of certain foreign investments in so-called “critical technologies.”
New CFIUS rules could also lead to a lengthy delay before cash-strapped U.S. biotech startups can receive urgent capital infusions that may be required to keep their doors open long enough to bring breakthroughs to market.
“The last two years have been very chaotic,” Huang said. “There has been so much confusion among investors and companies in China, so investment in U.S. health companies took a pause. Young companies don’t have time to w six months for the money to come in.”
Last year, the value of venture capital deals involving a Chinese investor in U.S. companies reached a record $1.65 billion, The Chinese capital helps promising American startups survive the so-called Valley of Death.
This year, Chinese investment in U.S. biotech companies has dropped nearly 60 percent to $725 million in the first half of 2019, according to Seattle-based data provider Pitchbook.
“We recently did a survey, and 80 percent of Chinese investors are concerned whether deals in the U.S. market will be able to close,” said Helen Chen, managing partner at L.E.K. in Shanghai. “China’s crackdown on the price of generics has really moved the country toward innovation. Licensing technology is a quick way to do that, and the U.S. is still the clear leader in this area.
The Trump administration is expected to post its final CFIUS rules next year, and organizations like BIO are advocating for more narrowly focused rules that are tailored to specific national security threat to avoid an undue burden on companies focused on making medicine.
“The administration’s proposed rulemakings would really reach into new territories, like companies that have collected genetic information on patients. It’s possible that’s the CFIUS of the future,” said Joshua Gruenspecht, a Washington attorney with more than a decade of experience in Wilson Sonsini’s national security practice. “Right now, it’s a nuisance, not an obstacle. As things go forward, it could become a much bigger factor.”
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