The BIOSECURE Act’s prohibition on doing business with China-based companies may have implications for biotech and biopharma markets on both sides of the Pacific.
While the U.S. market is on an upswing this year with the biotech sector gaining 53.3% issuance in the first half of 2024 compared to the previous six months, the Chinese market has seen a 34.73% decrease in its biotech index over the last year. Whether this overall slump is due to the BIOSECURE Act is unclear, but in February 2024 shares of WuXi AppTec and its sister company WuXi Biologics, both now named in the BIOSECURE Act, lost approximately $17 billion due to investor apprehension over the potential U.S. law, as reported by Bloomberg.
More than three-quarters of American biotech companies contract out preclinical and clinical services to Chinese companies, and 30% of the participants are also dependent on China-linked companies for manufacturing of approved medicines. The survey also found that many life sciences firms are already aiming to shift their supply sourcing away from China as a result of the BIOSECURE Act, legislation introduced in January 2024 to distance the U.S. from foreign companies of concern.
The BIOSECURE Act introduced in the U.S. House of Representatives aims at blocking federal funding, such as grants, for U.S.-based companies that do business with select Chinese service companies or Chinese contract development and manufacturing organizations (CDMOs). It would also prevent U.S. government entities from procuring equipment, services, or entering into contracts with such U.S. companies.
The bill has yet to reach a vote in Congress, but should it become law, it could have a significant impact on both Chinese contractors and the U.S.-based biotech firms. A June 2024 global survey by L.E.K. Consulting found that U.S.-based life science companies are now 30% to 50% less confident about collaborating with their Chinese counterparts in light of the BIOSECURE Act. About one in four life sciences firms aim to shift their supply sourcing away from China. And almost 70% of companies that participated in the survey reported implementing precautionary measures such as running thorough background checks on existing partners, diversifying supplier networks and increasing their legal compliance efforts.
China and the US’s Tangled Web of Drug Production
Over the past decade, China has become one of the largest suppliers of pharmaceuticals for the U.S. In 2023 alone, companies including Merck, GSK and AstraZeneca invested over $44.1 billion in biotech licensing deals with Chinese drugmakers. Pharmaceutical imports from China rose 485% in two years, from $2.1 billion in 2020 to $10.3 billion in 2022.
A May 2024 survey by the Biotechnology Innovation Organization (BIO) found that 79% of the 124 companies that responded have at least one contract with or purchase one product from China-owned or -based CDMO/CMOs. Kathleen Jaeger of the Center for American Medicine Resiliency said she finds these numbers concerning. “Last year’s 2023 ASPI’s critical technology report, sponsored by the U.S. State Department, revealed that China is leading the U.S. in science and technology for 37 out of 44 technology sectors including defense, space, and biotechnology,” she wrote in an email to BioSpace. “Moreover, the [People’s Republic of China] has a strong desire to become the world’s leading biopharmaceutical sector - making rapid and substantial investments in Made in China 2025.”
The White House stated in a 2021 executive order that it considers pharmaceuticals to be of critical importance, similar to batteries and semiconductors, and requested a report on risks to the supply chain and recommendations for addressing them. Some senators and representatives have focused on developing strategies to ensure that active pharmaceutical ingredients (API)—chemicals that impart drugs with their desired properties—aren’t used as leverage in the U.S.-China trade war, wrote Niels Graham, former associate director at the GeoEconomics Center, in a 2023 Atlantic Council story.
In the latest revision to the draft BIOSECURE Act, presented on May 9, 2024 in the House of Representatives, U.S. legislators established a deadline of 2032 for U.S. pharmaceutical and biotech companies to sever ties with the Chinese companies listed in the bill. Chinese companies named in the BIOSECURE Act include WuXi AppTec, Complete Genomics, Beijing Genomics Institute and MGI.
The bill received bipartisan support in the House of Representatives and the Senate but mixed reactions from experts. For instance, Jaeger said she is hopeful that the BIOSECURE Act will not only address what she sees as a significant national security issue, but also bring skilled jobs back to the U.S. or to trusted allies and strengthen the America’s competitiveness in this sector.
But Chris Pereira, founder & CEO of iMpact, who has led multiple projects with Chinese clients in the biotech industry, has a different opinion. While he agreed that the bill can enhance the security and reliability of the U.S. pharmaceutical supply chain, he argued that it might also close off the U.S. from working with the best research partners and choke off the opportunity to welcome strong competition to the U.S. marketplace.
“The U.S. would benefit more from a diversified approach that includes bolstering domestic production capacity and seeking collaborative opportunities with a broader range of international partners, including China,” he wrote in an email to BioSpace. “Avoiding competition through legislation such as the BIOSECURE Act will in the long run only make the U.S. weaker.”
What the BIOSECURE Act Could Mean for Chinese Biopharma
Total foreign direct investment in China had already been on the decline since June 2023, and intensified geopolitical tensions between China and the U.S. arising from the BIOSECURE Act might worsen the current situation in China, according to Chia Lin, an APAC analyst from GlobalData’s Health Economics & Market Access Team. “After the Act was announced, several companies such as Eli Lilly and Vertex have discussed strategies to diversify production away from Chinese manufacturers named under the Act,” Lin wrote in an email to BioSpace. “Chinese manufacturer WuXi has also discussed moving its business units outside of the U.S.” In 2023, WuXi Apptec generated around $26.13 billion from U.S. contracts, accounting for 65% of its total revenue.
According to a Mordor Intelligence market analysis for 2024-2029, China held the world’s second-largest share of the global pharmaceutical CDMO market with revenue of $27.12 billion in 2023 (U.S. CDMOs pulled in $54.21 billion that year). The analysis also predicted a compound annual growth rate of 9.63% by 2028.
The BIOSECURE Act may affect the accuracy of that prediction. For instance, India Ratings and Research (Ind-Ra) predicts that India, which holds the third-largest share in the pharmaceutical CDMO market, might see an increase in orders from U.S. pharma companies in the next 12 to 18 months. Ind-Ra’s analysis of data collected from 15 India pharma companies over the last 12 months has revealed that over 60% of those listed saw an increase in the number of inquiries around new business.
Yicai Global reports that Chinese biopharmaceutical companies operating domestically are also suffering from dampened investor confidence. Several Chinese biopharma startups whose products are still in the early stages of research are grappling with financial difficulties owing to the extended industry slump, causing concern among investors.
What Does this Mean for US-based Biopharma Companies?
The bill will primarily affect startups that are dependent on China-based Contract Research Organizations (CROs) and CDMOs. As the landscape evolves, constraints on access to such CROs and CDMOs might call for a gradual transition to new vendors, who will need to be vetted, potentially delaying the start of new businesses and requiring added funding, said Cody Powers, principal and portfolio and business development practice lead at ZS Associates.
“This could unlock a new wave of investment in CRO and CDMO in the West to try to fill that gap,” according to Powers.
Looking further ahead, there is a possibility that follow-on legislation could impose more restrictions and bring about a “seismic shift,” he said, in which East and West each cultivate their own biopharma ecosystems for research and development, operating under their own regulatory frameworks and dictating the extent of innovation exchange.
Should that happen, we would see “increasingly isolated discovery” that would “at least limit if not unwind several decades of tighter global integration and cooperation,” Powers said.
Fady Boctor, president and chief commercial officer at Petros Pharmaceuticals, also believes that the bill becoming law can bring major shifts in the U.S. biopharma industry. He sees two different possible outcomes for the industry. The first is that more biotech companies will begin to explore alternative funding sources to U.S. federal grants; for that to happen, “The value in doing so will have to outweigh the burden of relying less or entirely from federal funding programs,” Boctor noted.
The second scenario is that new and emerging players, both domestically and among acceptable entities abroad, will begin to meet the shifting demands, thus changing the degree of reliance on the restricted entities identified by the U.S. government.
Pereira predicts that implementing the BIOSECURE Act could drive increased investment in the U.S. biotech and pharmaceutical sectors as companies work to enhance domestic production capabilities. However, he noted that the global biotech ecosystem is highly interconnected, and said that engagement and collaboration between U.S. and Chinese firms could bridge gaps in both markets.
“While the initial reaction has led to increased investor interest in the U.S., we should not overlook the resilience and adaptability of the Chinese biotech sector,” Pereira said. “Over time, I believe there will be a rebalancing as Chinese startups continue to innovate and seek new markets and investors.”
