Following legislation forcing ByteDance’s divestment in TikTok, anti-China sentiment on Capitol Hill has refocused on restricting the federal government from contracting companies that contract with biotech firms linked to foreign adversaries. Legislation being considered on both sides of Capitol Hill takes an aggressive stance. The BIOSECURE Act (the “Act”) would prevent federal agencies from contracting with companies that have contractual relationships with biotech companies with ties to foreign adversaries, or “companies of concern.” The Act is based on national security concerns regarding the collection of genomic data, and its prohibition extends to companies that receive federal funds. This has broad implications for companies throughout the pharmaceutical and biotech sectors, many of whom rely significantly on the listed companies of concern for contract manufacturing and other services.
The text of the bill specifically identifies four prohibited biotechnology companies and authorizes the Office of Management and Budget—in consultation with 7 other federal agencies—to add additional companies of concern to the original list. The four biotechnology companies specifically named as being subject to the prohibitions are: (1) BGI; (2) MGI; (3) Complete Genomics; and (4) WuXi AppTec.
Given the interconnected nature of the biotechnology sector, the volume of potential contractual relationships implicated and the biotech presence in China, achieving compliance with the requirements of the Act could prove to be burdensome for companies in the space.
Current Procedural Status. On March 6, 2024, the Senate Homeland Security and Government Affairs Committee (HSGAC) approved the Act, with an amendment that contained industry-supported changes to the legislation. This amended version is somewhat less draconian and allows for existing contracts to be grandfathered in based on industry feedback to the legislation.
The HSGAC version passed Committee on a bipartisan vote of 11-1, with Republican Ranking Member Rand Paul the lone no-vote. That places the path forward for the Act somewhat unclear, given that Ranking Member Paul could object to the Act being passed by unanimous consent as it moves to the Senate floor, or prevent it from being added to must-pass legislative packages, like the National Defense Authorization Act (or NDAA).
The House version of the Act was introduced by Rep. Mike Gallagher, who recently resigned from the House, including his post as the Chairman of the Select Committee on Strategic Competition between the United States and Chinese Communist Party. As such, the House version currently does not have a lead Republican sponsor. It was referred the Committee on Oversight and Reform but has not been scheduled for a Committee mark-up.
Implications. While it is unclear precisely how wide-ranging Congress intends for the Act’s effects to be, the Act is drafted in broad, sweeping terms, potentially implicating a substantial number and variety of contractual relationships, including nearly any arrangement with a Chinese biotech.
The Act is not tailored to certain categories of government contracts – rather, it appears to restrict the government from entering any contract with an entity that has a contract with a company of concern. This could limit a biotech company from not only contracting with the government to supply medicines, but also prevent it from engaging in any contractual arrangement with the government, including for reimbursement programs, research grants, and more.
With respect to the four specifically named entities, the Act also identifies as companies for concern any “subsidiaries, parent affiliates, or successors” of such entities as being subject to the prohibitions, further broadening the reach of the Act to additional contractual relationships. It is not yet clear how Congress will treat affiliates of these entities not in a direct parent or subsidiary relationship.
More generally, the definition of “biotechnology company of concern” is wide-reaching. As drafted, it implicates any biotech involved in the “manufacturing, distribution, provision, or procurement of a biotechnology equipment or service.” An “equipment or service” is also defined broadly, encompassing devices or instruments “designed for use in the research, development, production, or analysis of biological materials” as well as software programs, support and consulting services, and disease detection services. Any contracts related to such equipment or services could be compromised.
Many Chinese biotech companies that would be swept in by this language also manufacture drugs themselves, or components thereof. In other words, if a company wishes to contract with a Chinese biotech to manufacture its API, even if such API did not itself constitute an “equipment or service,” the fact that the Chinese biotech also manufactures equipment or services as part of its larger operations could preclude the contractual arrangement with respect to the API. This could, in turn, implicate a broad swath of life sciences deals beyond just supply transactions, including out-licenses of new medicines developed in China to the US market.
Industry Response to the Act. A key trade association, the Biotechnology Innovation Organization (BIO), announced its support of the legislation in March 2024 following the removal of WuXi’s removal from the organization. This announcement followed the House Select Committee on the Chinese Communist Party requesting the Justice Department to investigate whether BIO had undertaken lobbying efforts on behalf of the Chinese Communist Party. However, several BIO members (Takeda, Pfizer, and UCB) have recently ended their membership with BIO, citing routine reviews of their trade memberships.
Although successful in pushing for an amended version of the Act that was permissive of grandfathering existing contracts, the industry has reacted to news of the Act with considerable concern. Recognizing that essentially any contract with a Chinese biotech could be implicated, several pharmaceutical companies have begun to seek new suppliers outside of China in order to manage the potential risk of major supply chain disruptions, and some have begun to make disclosures to investors with respect to dependency on their relationships with Chinse biotech companies.
Effect on China. The economic impact of the Act on China’s biotech industry has already begun to become apparent. Prior to introduction of the BIOSECURE Act, China’s biotechnology industry had rapidly expanded, in part by leveraging its domestic manufacturing capabilities, particularly with respect to preclinical assets. For example, in 2023, 66% of WuXi AppTec’s revenue was attributed to its business in the U.S. (46% for WuXi Biologics). Following announcement of the draft legislation, Chinese biotech stock prices have dropped dramatically as the industry grapples with the pending legislation and how to mitigate its widespread effects.
The Path Forward. As noted above, it is unclear if this legislation will move forward this Congress, given Sen. Paul’s objection, and as Capitol Hill turns its focus to the November presidential election. However, companies that currently have dependencies on the four named companies, or other companies that could be considered “companies of concern,” should consider analyzing those relationships and the Act’s impact on their supply chain to mitigate any potential risks.
