US tightens scrutiny of foreign investment into biotech sector
- Foreign investment into American biotech companies will get a closer look from the U.S. government moving forward as part of a broader White House effort to protect U.S. technological know-how and intellectual property.
- Under new regulations the Treasury Department put in place Wednesday, foreign investments that result in a non-controlling equity stake in U.S. biotechs would be subject to review by the Committee on Foreign Investment into the United States, or CFIUS. The expanded rules also cover 26 other critical fields, including guided missile technology and nuclear electric power generation.
- Previously, the committee was only authorized to review mergers, acquisitions or takeovers that resulted in foreign control of a U.S. company.
Broadening CFIUS' scope could have serious implications for early-stage U.S. biotechs, which have seen an influx of venture money from abroad.
Through the first eight months of 2018, cash from Chinese and other Asian investors made up nearly half of venture capital investments flowing into U.S. biotechs, according to data from Pitchbook cited by Reuters. That figure is up sharply from just two years ago, when Chinese and Asian investment made up a little more than a tenth of deal flow into U.S. biotechs.
Since venture funding rounds typically result in minority stakes for participating investors, biotechs raising cash from foreign sources will now potentially find their funding under CFIUS' magnifying glass.
The high-flying cancer sequencing company Grail, for instance, recently raised $300 million in a Series C venture round that included Asian investors such as Sequoia Capital China, Ally Bridge Group and China Merchant Securities.
"These temporary regulations address specific risks to U.S. critical technology while informing the development of final regulations that will fully implement FIRRMA," said Treasury Secretary Steven Mnuchin in an Oct. 10 statement, referring to the Foreign Investment Risk Review Modernization Act of 2018, the law which expanded CFIUS jurisdiction.
The Treasury Department said biotechnology and the 26 other industries selected were included because "the threat of erosion of technological superiority from some foreign direct investment requires immediate action."
In biotechnology, China is newly relevant, as regulatory reforms helped unlock a domestic sector that's widely trailed its U.S. and European counterparts in developing novel medicines. The Chinese government has made biotech part of its "Made in China 2025" initiative and loosened requirements that acted as a brake on clinical testing and new drug approvals.
The new rules also cover transactions that give a foreign investor membership or observation rights on a board of directors for a company in the 27 selected industries.
If an investment qualifies, companies and investors must file a declaration with CFIUS, which then can decide to require a more formal notice, block the transaction or allow the deal to proceed.
Currently, the interim rule is structured as a pilot program that's designed to implement provisions of FIRRMA that didn't automatically take effect upon the law's enactment in August. The law will be fully put in place no later than February of 2020, upon which date the pilot program would end.
- U.S. Treasury Department Interim rule
- Reuters As China builds biotech sector, cash floods U.S. startups
- BioPharma Dive Pharma's betting big on China, but R&D boom still to come
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