BEIJING – The ongoing trade war between the U.S. and China has helped put the biotechnology field on the U.S. foreign investment restriction list, causing a chilling effect on the market.
With the amount of Chinese money entering the U.S. biotech sector dropping sharply, many believe it is the U.S. that is taking the hit.
The U.S.-China trade war shows little sign of abating; nor are negotiations moving forward. Higher tariffs on about $110 billion worth of Chinese imports kicked in Sept. 1, as did tariff increases of between 5% to 10% on about $75 billion of U.S. exports to China.
Following that newfound protectionist philosophy, the U.S. Treasury Department's Office of Investment Security decided last October to expand scrutiny of foreign investments in "critical technologies," which includes biotech.
The move means that the Committee on Foreign Investment in the U.S. (CFIUS) will review foreign investments that result in non-controlling equity stakes in U.S. biotech companies. The policy has been in place for some time now, and the impact is starting to show.
Katherine Andersen, head of life science & health care relationship banking at Silicon Valley Bank (SVB), said she expects to see an impact on investments this year.
"We are predicting a 27% decline in total funding into the U.S. and Europe biopharma in 2019," she told BioWorld MedTech. SVB is predicting an estimated 36% decline in total health care funding across all subsectors into the U.S. and Europe combined this year.
Seattle-based data provider Pitchbook also indicated a declining trend. In the first half of this year, there were 12 venture capital deals in U.S. biotech companies involving Chinese investors that totaled $689 million. That number marked a slump and added up to less than half the 26 deals worth $1.65 trillion in the same period last year.
The CFIUS move last October has been seen as a way to prevent Chinese money from flowing into the U.S. advanced biotech sector unchecked. That amount has been substantial in recent years. In 2017, Chinese investment in the U.S. biotech industry grew 187%. Chinese investors contributed about 30% of the total venture capital raised by private U.S. biotech startups.
The trend continued into the first quarter of 2018, with Chinese investors supplying 40% of the funds raised by U.S. biotech companies. In that year, Chinese and Asian investors took up almost half of all the deal flows into U.S. biotech companies, and the U.S. health and biotech industry received the most Chinese capital.
Andersen also noted that syndicated capital from Asia into U.S. and European biopharma companies surged more than 200% in 2018 relative to 2017.
But she said she remains cautious about blaming the decline of inbound capital to U.S. biotech this year solely on CFIUS.
"[The decline in biopharma investment] is driven by several macroeconomic factors, not just potential CFIUS impact," she said. "We're also still in the early stages with CFIUS and are waiting to see how increased scrutiny could impact the industry, as regulators have been looking to control access that foreign investors have to patient-level data."
However, Helen Chen, managing director and head of China and Asia Life Sciences at L.E.K. Consulting, said she believes CFIUS is in play already.
"The technologies which have a human genetic component and thus are controlled are unlikely to pass regulatory review now, and thus the cross-border flow is shut off," she told BioWorld MedTech.
"Again, the equity investment from China to the U.S. biopharmas that was on the upswing is now dampened," Chen added.
A chilling effect
While it is still disputable to what extent CFIUS has impacted Chinese investment into U.S. biotech, it is widely agreed that the policy already has hampered market sentiment.
The noise related to geopolitical concerns and potential changes to drug pricing policies also are making investors more cautious about the biopharma sector overall, SVB's Andersen said.
"The anxiety about pricing risk and political concerns seems to have created some underperformance in the public markets and more selectivity from investors overall," she added.
Chen echoed that view, noting that for Chinese equity investments in the U.S. – both from companies in the space and from financial investors – there is much more caution, with investors often passing on borderline deals that they would have considered in years past.
U.S. biotech entrepreneurs also are more hesitant about accepting lucrative Chinese money.
"From my own experience and from conversations with others, there is no question that some companies have become leery of taking Chinese money," said Carl Valenstein, partner at Morgan Lewis & Bockius LLP, who has extensive experience in life sciences.
CFIUS also poses as a procedural hurdle to discourage deals to go forward.
"If the U.S. biotech companies have 'critical technology,' a CFIUS filing may be mandatory and the company – and the Chinese investor – may not want to go through the process," Valenstein told BioWorld MedTech.
As the current definition of "critical technology" is still narrow, he stressed that only a few biotech deals involve mandatory filings for now. But the uncertainty over U.S.-China relations could mean there is a possibility of the definition being widened and further discouraging cross-border investment. Among the concerns is U.S. President Donald Trump, who is widely seen as unpredictable at the negotiating table.
"Whether that changes as a result of the Export Control Reform Act process of defining emerging and foundational technology remains to be seen," Valenstein said, noting that the biotech industry is trying to prevent that result.
With China handing out less money and the U.S. hesitating to take Chinese money, L.E.K's Chen said she believes it is the Americans who end up being on the losing side.
"CFIUS is hurting U.S. biotechs more. They are being blocked from an increasingly important funding source that is keen to participate in this global industry," she said. "Chinese biotech companies and investors can choose to invest in Europe and Israel, for example, and are spending more efforts than before in those geographies."
Researchers have already felt the hit.
Chung-Kang Peng, director of Beth Israel Deaconess Medical Center/Harvard Medical School, told BioWorld MedTech that his project in collaboration with Stanford University and Chinese tech giant Huawei was called off.
"It won't affect Huawei because it can still carry out the project inside China or with European partners. From a researcher's perspective, it hurts the U.S. It is better to have a more open attitude to include more people in research," Peng said.
"When the U.S. restricts itself from collaborating with certain parties, its progress will be slower," he added.
But Valenstein said he believes U.S. companies can look for other capital pools even if that's the case.
"Good U.S. companies can still find funding within the country and from other non-restricted sources, although it might be more expensive and the investors may demand more onerous terms," he said.
"I think, on balance, the Chinese are more impacted because it has had a chilling effect on Chinese investors who are intimidated by the process and, in some cases, the willingness of U.S. companies to take on Chinese investment," he added.
Although the tense relations are curbing Chinese investment in the U.S. biotech sector, industry insiders are still able to strike some positive notes.
"The compound in-licensing deals, where China or broader rights are licensed to companies in China, are not perceived to be restricted and thus are continuing," Chen said.
Andersen shared the same optimism.
"CFIUS could also create a slowdown with acquisitions, but what we're seeing in the first half is pretty in line with 2018, which is at least encouraging," she said.
She remains positive about the financing for life sciences, noting there is a tremendous amount of capital recycled back into the industry in the form of M&A in the U.S.
"So, while the industry has been faced with a fair amount of noise in the first half of 2019, what's clear is that the fundamentals for life science remain strong across the globe," Andersen said.