Law firm interviewed: Ropes & Gray 

The United States has extended its sprawling trade and technology control regime to cover the biotechnology sector as it is determined to “de-risk” from China. In a bid to slow China’s advance to sophisticated biotechnology while bolstering domestic drug manufacturing capacity, the U.S. Congress is considering a proposed legislation known as the BIOSECURE Act with clear bipartisan backing.

The legislation targets any “biotechnology company of concern” that is subject to the control of a  “foreign adversary,” most likely China - a major supplier of drugs to the EU and the U.S. A few PRC biotech companies were singled out in the bill, namely WuXi AppTec, BGI Genomics, MGI, Complete Genomics, and their affiliates including WuXi Biologics.

The bill will go into effect 120 days after its enactment. Despite apparent consensus across the aisle, it is unlikely the Act will passed until after the U.S. presidential election in November. Regulatory uncertainty and potential compliance burdens, however, have prompted companies to seek legal advice on their contractual obligations and eligibility for federal grants.

WHAT RESTRICTIONS DOES THE DRAFT BILL IMPOSE?

Primarily, the proposed BIOSECURE Act would ban U.S. companies receiving federal grant money from working with the four named Chinese biotech service providers. But it does not propose a blanket prohibition on U.S. biotech and pharmaceutical companies from partnering or transacting with the listed Chinese entities.

The U.S. has been a profitable market for the WuXi companies. According to the Financial Times, WuXi AppTec, which provides research and development services and a well-known partner to large pharmaceutical and emerging biotech companies, earned 66 per cent of its $2.6 billion in revenues last year from the U.S. Meanwhile, its sister firm WuXi Biologics generated 46 per cent of its revenue from the U.S.

Lawyers from Ropes & Gray believe that if enacted in its existing form, the Act would have a dramatic impact on biotechnology and pharmaceutical companies that are reliant on biotechnology companies of concern for the manufacture of their pharmaceutical products, especially given the scale of the manufacturing operations of WuXi AppTec and WuXi Biologics in particular.

“The bill could result in some pharmaceutical products being temporarily unavailable in the U.S. or the delayed launch of certain new products, as companies scramble to get alternative manufacturers up and running,” say Ropes & Gray’s David McIntosh, a life sciences and intellectual property transactions partner, and Lauren Kimmel, a life sciences licensing associate.

HOW ARE PHARMACEUTICAL COMPANIES REACTING?

Since the bill’s introduction, many U.S. life sciences companies have spared no time negotiating technology transfer and termination provisions in their contracts with those “biotech companies of concern” to give themselves a clear contractual path to move their business to alternative vendors, according to lawyers.

And for those life sciences companies which have or are contemplating strategic arrangements with such a company of concern, McIntosh and Kimmel believe they will likely seek to avoid exclusivity or other commitments that require them to use the equipment or services of the concerned company or prevent them from engaging alternative service or equipment providers.

In a bid to alleviate the financial pressure confronting U.S. biotech companies in finding alternative vendors, the U.S. Senate has added a “grandfathering clause” to the draft bill.

As a result, existing contract manufacturers will be exempted from the bill’s restrictions before the Act takes effect. But lawyers raise concerns that such grandfathering clause could be subject to interpretation.

“For instance, will a grandfathered contract’s subsequent amendments or new statements of work under an existing agreement also be exempted under the clause?” ask McIntosh and Kimmel. “If amendments to agreements benefit from the grandfathering clause, one might expect parties to take advantage of that feature by amending existing agreements rather than entering into new ones, lessening the law’s impact.”

WHAT DOES THE BILL SAY ABOUT THE FUTURE U.S. REGULATORY APPROACH?

According to co-sponsors of the bill, the BIOSECURE Act aims at addressing concerns stemming from “foreign adversaries’ hostile biotech pursuits”. The Act is also meant to stop the PRC government from acquiring American genomic data, as the Chinese military has allegedly invested in advancing their biotech and AI capabilities through joint business ventures with U.S. companies.

As a result, lawyers expect Chinese pharmaceutical companies to be targeted with growing oversight around bulk data transfers from the U.S. On the other hand, U.S. pharmaceutical companies will also want to ensure that their arrangements with Chinese contract parties do not require them to transfer sensitive personal information or biometric data.

In addition, McIntosh and Kimmel believe the White House will continue to pursue a data-oriented regulatory approach restricting foreign adversaries’ potential access to American data.

“Looking ahead, one could imagine future legislative and regulatory attention focusing on any industry that both has access to sensitive personal or genomic information of U.S. citizens (such as healthcare, health insurance, life sciences, social media and technology, telecom, and financial services) and is characterised by interdependencies with Chinese companies,” say McIntosh and Kimmel.