Opinion: China’s Pharmaceutical Firms Feel First Impact From Trump's Trade War
The latest restrictions on foreign investments in the United States have revealed the enviable status of China's pharmaceutical sector amid President Donald Trump's tariffs on Chinese goods.
Understandably, some of the sector's biotechnology companies have been feeling the heat since the U.S. Treasury Department's Office of Investment Security decided in October to ramp up scrutiny of foreign investments in 27 strategic areas tied to critical technologies.
Biotech is an area covered by the decision, which complements Trump's protectionist foreign trade policy and takes effect Nov. 10. The Committee on Foreign Investment in the United States (CFIUS) will act on the ruling by boosting its reviews of proposed foreign investments.
CFIUS will have the power to block business deals based on national security concerns or perceived threats to U.S. “technological superiority.” The rule, which is set to expire no later than March 5, 2020, comes under the Foreign Investment Risk Review Modernization Act of 2018.
On a broader scale, however, the ruling will not change the fact that Trump's tariffs have yet to impact China's pharmaceuticals industry, including biopharmaceutical companies. U.S. imports of Chinese raw ingredients used in drug manufacturing have avoided the new restrictions. And U.S.-China trade friction hasn't dampened enthusiasm for biopharmaceutical investment in China against the backdrop of strong growth potential for the nation's health care sector.
U.S. pharmaceutical companies have in fact won Trump administration support for a tariff exemption. Company executives got that backing in mid-May after arguing at a government hearing that tariffs should not be imposed on pharmaceutical raw materials produced in China, since non-Chinese suppliers are hard to find.
That said, the tightened foreign investment review mechanism will likely affect what has been a strong influx of Chinese investments in the U.S. pharmaceutical sector, including biotech firms.
Since 2017, Chinese venture capital and private equity funds have been pouring billions of dollars into American drug developers, particularly biotech and life science businesses, according to Bloomberg, Financial Times, The Wall Street Journal and Reuters reports.
U.S. biotech and drug developers raised about $10 billion from venture capital investors in 2017. Of that amount, a record $3.5 billion came from Chinese investors. According to a Financial Times report, China has become one of the most important sources of capital for biopharmaceutical companies in the United States.
This trend has become more pronounced in recent months. In the three months ending March 31, China's venture capital investors poured $1.4 billion into biotech companies in the United States, an amount that represented about 40% of all funds raised in the sector during this period, according to a Bloomberg report based on data from the research firm Pitchbook.
Chinese investment in U.S. biotech is driven by a long-nurtured hope that the fruits of American drug development will be introduced to China's market, where a huge population underscores a capacity for high-yield investment.
At the same time, costs tied to in-licensing U.S. drug developments — that is, acquiring permission and the rights to develop, perform clinical trials, launch and market a drug — have been soaring. Chinese companies exclusively built on the in-licensing business model such as Brii Biosciences and Zai Lab have been happy to pay a premium for assets aligned with overseas drug development pipelines. The strategy can yield an investor 10 times an initial, in-licensing payment for a drug sold in China over three years, Reuters reported.
But what do the new U.S. foreign-investment restrictions mean for Chinese investors? Certainly, Chinese funds will be subject to more stringent scrutiny by CFIUS if they try to acquire research and development know-how from American biotech and life science companies, or seek to obtain in-licensing for certain drugs under development.
The new rules could hamper future Chinese acquisitions of U.S. biotech assets by going beyond the scope of previous CFIUS reviews, which focused only on mergers and acquisitions, to include proposed minority investments as well as joint ventures.
While CFIUS previously had authority only over deals that gave foreign investors a controlling stake, it now has power over all transactions including minority equity investments, investment funds and joint ventures. Without CFIUS approval, an investment can be doomed.
In addition, if CFIUS thinks foreigners who invest in sensitive technology in the United States have the ability to access private technical information or participate in corporate decision-making (for example, by putting a representative on a company’s board of directors), the investment or acquisition plan can be denied.
A biopharma venture capital executive said his firm is reviewing the potential impact of the new U.S. rules.
“We made some substantial investments in overseas bio-pharmaceutical assets" and "really positioned ourselves strategically in cross-border transactions" before the latest broadening of CFIUS' power. "Looking forward, it will be critically important to work around funding sources and vehicles."
Meanwhile, as Sino-U.S. trade friction shows no signs of abating, many are asking about the possible lasting impact on China’s health care industry.
The Trump administration has adopted a two-fold strategy against China, taking aim at trade and investment. It's a strategy influenced by rising anxiety over China's science and technology capabilities and the fact that the country is catching up with the United States.
On June 15, Trump announced tariffs on $50 billion worth of Chinese goods and taxes on 1,102 items. Notably, following drugmaker objections, pharmaceutical products including biopharmaceutical were not on the list of products for which tariffs were imposed by the United States Trade Representative.
China is the world's largest supplier of raw materials for chemical compounds. Tariffs on pharmaceutical ingredients and related products imported from China would affect Chinese producers as well as U.S. companies that rely on those raw ingredients, potentially driving up U.S. consumer drug prices, which would be to Trump's chagrin.
Chinese-made pharmaceutical ingredients are used to produce a variety of drugs including insulin, epinephrine, heparin, antibiotics, antidepressants, sedatives and vaccines. Many generic drugs sold in the United States are produced in India with raw ingredients mass produced in China. Moreover, the raw materials needed to produce high-priced, non-generic drugs account for a small portion of the total manufacturing cost.
U.S. authorities would have to map out the entire supply chain of ingredients for generics and non-generics if they wanted to understand the full impact of imported Chinese pharmaceuticals and related products on the U.S. market. But the fact that drugs are not included in the Trump tariff catalog proves that Chinese pharmaceutical companies are in a relatively low position on the pharmaceutical sector value chain.
On the other hand, Chinese companies are making rapid progress in the biopharmaceutical sector. They're even catching up with competitors in other countries in terms of research and development.
Progress in CAR-T cell therapy and other types of immunotherapy may catapult Chinese companies into industry-leading positions. Joint research and development projects in which Nanjing Legend works with Johnson & Johnson, and WuXi AppTec teams up with Juno have generated confidence in China's technological abilities and the proficiency of its professionals.
Many scientists who worked overseas have returned to work for Chinese companies, and that fact has in turn attracted investor support. Moreover, better health care is a prominent expectation among the nation's rising middle class.
Surely, the future is bright for China's heath care industry as a whole and the biopharmaceutical sector in particular. China's role as a drug ingredients supplier and its fast-growing domestic pharmaceuticals sector are overshadowing the U.S. trade war against China.
Indeed, the rise of China's pharmaceutical sector is a phenomenon that cannot be blocked by Trump.
Wang Zhen is the managing director at Zhifei Impact Communications.
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