Foreign investment in U.S. biotechnology and pharmaceutical companies is expected to get tougher scrutiny following the new coronavirus pandemic.
Recently enacted rules allow The Committee on Foreign Investment in the United States (CFIUS) to increase its already close reviews of certain cross-border biotechnology deals, giving it additional authority to assess minority investments in companies handling what’s considered to be critical technology, infrastructure, and sensitive personal data.
The impact of Covid-19 could mean investments and transactions with the potential to affect the U.S. response to future outbreaks, including extended supply chains for medicines and equipment, may receive more intense oversight, attorneys say.
“One can imagine that the current crisis will focus new attention on issues of health care and biotechnology for a number of reasons,” said Aimen Mir, a partner at Freshfields Bruckhaus Deringer LLP who previously led the Treasury Department’s CFIUS work as deputy assistant secretary for national security.
The U.S. government might start thinking differently about “the potential for disease to create significant national security harm, and perhaps in a way that people had not considered before,” Mir added. Moving forward, there could be “continued or increased interest, not just with respect to Covid-19, but in the biotechnology and health care space more generally.”
CFIUS, which is comprised of multiple U.S. agencies and receives input from White House staff, can delay and impose conditions on deals raising national security concerns.
President Donald Trump and former President Barack Obama both accepted its recommendations to block transactions or investments. Deals involving Chinese companies and its potential access to sensitive data and new technologies have gotten increased attention since Congress expanded the panel’s authority in 2018 to include certain minority investments.
While transactions involving U.S. adversaries will remain a priority for CFIUS, there will likely be heightened scrutiny “across the board” for health care and biotechnology transactions, said Giovanna Cinelli, who leads the international trade and national security practice at Morgan, Lewis and Bockius LLP.
“Whether you have a U.K. company buying a U.S. company, or a transaction originating from a more challenging destination, there will still be questions about what is being produced and who will ultimately control it,” she said. The crisis has “highlighted the critical need to understand who owns what, and who controls what in biotechnology, health care, and other areas.”
Even in the early stages of the U.S. pandemic, biotechnology companies had started to warn investors of emerging uncertainty posed by CFIUS’s increased interest in the industry.
Holliston, Mass.-based Biostage Inc., in its March 27 annual report, said it could fall under the panel’s expanded authority, and that any delays in obtaining foreign investment could adversely affect its stock price.
The company said it intends to generate “significant” revenues outside the U.S., including in China, but that CFIUS-related restrictions could impact the transfer or licensing of technology from the U.S. into China and other markets. Another company, Selecta BioSciences Inc., warned in its own March 12 annual report, that enhanced oversight by CFIUS and “substantial restrictions” on investment from China could limit the company’s business overseas.
Now, the outbreak could create new risks for more U.S. biotechnology firms, as well as the pharmaceutical and medical supply industries, especially those working on coronavirus mitigation efforts.
“If, and hopefully when, a vaccine is identified, if it’s identified and developed by a U.S. company you can imagine there will be interest in making sure that the company is under U.S. control —or at least its resources remain available to the U.S. and to the U.S. government,” Mir said during a recent presentation on CFIUS issues.
U.S. national security officials, including CFIUS members, could show heightened interest in medical research, particularly for technologies that might be used to cause widespread, biological harm.
“At CFIUS, there’s always a tension between wanting to encourage foreign investment in industry and protecting U.S. national security interests,” said Francesca Guerrero, who recently joined Thompson Hine LLP as a partner after more than a decade at Winston & Strawn LLP.
Even more mundane equipment and materials could draw more attention, she said. “There might be more scrutiny going forward for items that are seen as more basic yet essential medical items.”
In light of the pandemic, CFIUS could impose more requirements on deals before giving its approval, Guerrero added.
“CFIUS, as a mitigation measure, already requires that some companies agree to continue to supply certain items to the federal government,” Guerrero said. “I wouldn’t be surprised if we see more mitigation efforts like this.”
Businesses involved in producing materials needed to respond to of U.S. health crises could face more scrutiny regarding suppliers and their ancillary supply chains.
Most government contractors already provide comprehensive supply chain information, which also is sometimes produced during CFIUS reviews. However, attorneys say supplier assessments might garner more attention during national security reviews of certain foreign deals.
“You could find that shifts in the supply chain could have a disproportionate impact because choke points are created,” Cinelli told Bloomberg Law. “You can have the best companies ready to produce ventilators, protective masks, or other items. But if you don’t have the cloth, you can’t make the end product.”
“There are countries that have a lock on those lower levels in the supply chain, and their geopolitical circumstances could dictate whether they slow down or cut off the flow of that supply chain,” Cinelli said. “It’s definitely an area of concern.”