China will reap the benefits of an antibiotic backed by U.S. taxpayers after the company that developed the drug auctioned off its rights amid bankruptcy.

Such deals may be on the horizon as other antibiotic manufacturers struggle to stay afloat.

San-Francisco based Achaogen Inc., which filed for bankruptcy in April, recently agreed to sell exclusive Chinese rights for its antibiotic Zemdri to Chinese drug maker QiLu Antibiotics Pharmaceutical Co. The drug, used to treat urinary tract infections, was supported by $124.4 million from the Department of Health and Human Services as part of a biodefense program incentivizing the creation of drugs designed to combat antibiotic resistance.

The drug will still be available outside China. Cipla USA Inc., the U.S. subsidiary of an Indian company, bought the worldwide rights for the drug. But the purchase of the drug by a Chinese company is causing some biodefense industry professionals concern for the safety of drugs that have similar backing from the U.S. government.

Use of the drug in China will put the U.S.-backed drug at risk of being overused and potentially being rendered ineffective, two biodefense industry sources and a former administration official told Bloomberg Law.

China is a hotspot for antimicrobial resistance as a result of overprescription of drugs and overuse in livestock, according to a 2017 study published by the National Center for Biotechnology Information.

The events are likely to repeat themselves as more U.S. companies with investments from the HHS go belly up. “We all saw the writing on the wall,” a biodefense industry source familiar with the sale said.

HHS’s Biomedical Advanced Research and Development Authority, commonly referred to by its acronym BARDA, knew there wasn’t a market for the drug when it made its investment, the source said.

Officials at BARDA were aware of the issue, but they didn’t tell HHS higher-ups “until it was too late to solve it,” a former administration official told Bloomberg Law.

An HHS spokesperson didn’t provide a comment for this story and didn’t respond to a request to make a BARDA official available. The spokesperson pointed to a blog by Rick Bright, the director of BARDA, who acknowledged that companies are struggling to stay afloat in the antibiotic market.

“These facts require a comprehensive re-examination of the existing marketing paradigm for new antibacterials,” Bright wrote in May. “In particular, a focus on creating novel business models and public-private partnerships to strengthen our essential and struggling antibiotic enterprise.”

On the Horizon

There’s concern that other, similar deals are on the horizon.

Two more companies selling antibiotics created in part by BARDA money are showing warning signs they might go belly up. Melinta Therapeutics and Tetraphase Pharmaceuticals both signaled financial distress in their company filings.

The federal government injected at least $67 million into Tetraphase’s antibiotic TP-434, now available as Xerava, in 2012. In a 2012 press release,the company CEO said the $67 million infusion brought federal support up to $100 million for Tetraphase antibiotics. Melinta bought two companies—Cempra and The Medicines Company—that will benefit from at least $192.2 million worth of BARDA grants, according to press releases from the two firms. That money was promised to the companies over separate five-year periods, starting in 2013 and 2016, respectively. Cempra got an additional boost in 2016.

Melinta reported in December the company’s debt was “substantial” and it was “not currently generating revenue from operations that is sufficient to cover our operating expenses” and didn’t “anticipate generating revenue sufficient to offset operating costs in the near term.”

Tetraphase reported that in 2018 it “incurred significant losses since inception” and expects “to incur losses for at least the next several years and may never achieve or sustain profitability.” The company lost $72.2 million in 2018 and $114.8 million the year before.

No Reward for Innovation

“The fundamental way we reward innovation is broken,” said Kevin Outterson, a corporate and health law professor at Boston University School of Law. “There’s no other innovative product that we’ll say, ‘Thank you for the innovative product, but we won’t buy any for five or 10 years.’ If we did that to any other product in the economy, we’d destroy the economy.”

Outterson equates the need for new antibiotics to investing in a sprinkler system, paying for the protection before there’s an emergency. “You don’t wait for the building to be on fire to pay for that,” he said. “We need to think about antibiotics as protection, not just for when somebody is dying of infection.”

It’s a problem federal health agencies are well aware of. The Food and Drug Administration released an antibiotics plan last year to boost new approvals.

The head of the federal Medicare agency brought the topic up last week when the agency approved higher reimbursement rates for hospitals that use certain new antibiotics. “The challenge of [antimicrobial resistance] is rapidly escalating,” Centers for Medicare & Medicaid Services Administrator Seema Verma wrote, while pointing out how “financial incentives for prescribing antibiotics are misaligned.’