Less than two years after the Inflation Reduction Act, another piece of US legislation with global impact is on the minds of the pharma and biotech industries. The Biosecure Act, if passed, would designate specific Chinese companies - including WuXi AppTec - as "biotechnology companies of concern" due to national and bio-security concerns over the companies' alleged links with Chinese state entities and the military. The Act would prevent US executive agencies from spending funds on products developed or produced with the aid of these "companies of concern" but also from working with companies that use their equipment or services, which is expected to have a major impact on global supply chains. This blog post considers the key aspects of the bill, the global impacts should this legislation pass in its current form, and the main implications for pharma and biotech companies in terms of minimising commercial disruption and exiting existing contractual arrangements.
Background to the draft bill – supply chain tension and increasing use of CROs and CDMOs
The draft legislation comes at a time when many countries vie to become hubs for the global biotech industry's capital investment and talent. It also reflects the US government's reaction to rising economic tensions by trying to decouple its economy from China to secure supply chains for critical industries ranging from biotech to semi-conductors.
In the past decades, WuXi AppTec and other Chinese Contract Research (CROs) and Contract Development and Manufacturing Organisations (CDMOs) have become an integral part of the global pharma and biotech supply chain, providing clinical research, drug discovery, development and manufacturing services for many of the world's biggest players, while enabling growing biotechnology innovators by providing access to sophisticated manufacturing facilities at short notice.
According to public reports in The New York Times, WuXi AppTec and WuXi Biologics are responsible for developing up to 25% of drugs currently used in the United States. The extent of the reliance or dependency on Chinese contractors is highlighted in regulatory disclosures. For example, Eli Lilly reported to the SEC that "We, and the pharmaceutical industry generally, depend on China-based partners for integral chemical synthesis, reagents, starting materials, and ingredients. Finding alternative suppliers if and as necessary due to geopolitical developments or otherwise may not be feasible or could take a significant amount of time and involve significant expense due to the nature of our products and the need to obtain regulatory approvals which would cause disruptions to patients and detrimentally impact our business". Merck similarly reported that it "has significant research and manufacturing operations in China, including working with Chinese entities such as Wuxi Apptech Co., Ltd" and that "disruption could result in a material adverse effect on the Company’s product development, sales, business, cash flow, results of operations, financial condition and prospects".
Key aspects of the draft bill(s)
Two drafts of the Biosecure Act are currently making their way through the two chambers of the US Congress. Whether either version of the bill will ultimately become law is unclear, despite bipartisan support – most recently at a House committee vote on 15 May 2024. Significant amendments may be made before the bill becomes law, in particular to include exemptions for new and existing contracts (so-called grandfathering provisions). This has already been the target of significant lobbying from individual companies and trade groups such as the Biotechnology Innovation Organization (BIO), and additional amendments are likely. BIO had initially opposed the bill, before changing its position and pushing for more comprehensive grandfathering provisions after reportedly cutting ties with WuXi AppTec.
In a nutshell, both alternative bills aim to prohibit US government agencies from "contracting with certain biotechnology providers". More specifically, the ban would extend to procuring equipment or services directly from such companies but also for example entering or renewing contracts with entities that use these companies' equipment or services. While Medicare discount agreements and Medicaid rebate agreements may be excluded in the latest version of the bill, nearly all other government contracts for the procurement of goods and services – including those with the Department of Veterans Affairs and Centers for Disease Control and Prevention – could be affected.
Specifically, the current draft bills target Chinese CROs WuXi AppTec, BGI, MGI and Complete Genomics and their subsidiaries, with one of the drafts also expressly naming WuXi Biologics. This list can be updated to include any company considered to be "subject to the jurisdiction, direction or control, or operates on behalf of the government of a foreign adversary" and to pose a national security risk. An earlier draft contained certain "findings" making it clear that the focus of the bill was indeed specifically on China, stating that the PRC government "seeks to dominate biotechnology as an industry of the future" and has "pursued a strategy known as “military-civil fusion” that merges public and private industries to enable the military modernization of the People’s Liberation Army (PLA)". While these points are absent in the latest bills, statements from the bills’ co-sponsors indicate that the purpose of the legislation is to limit Chinese government access to US health data and drug patents. In an open letter, WuXi AppTec denied that it poses a national security risk, and highlighted the important role it played in global supply chains over the past decades.
A more detailed description of the key provisions in the draft bills can be found in an extended version of this article here.
US legislation - global impact
While the ban prevents US "executive agencies" from dealing with the CROs "of concern", the impact of the legislation will not be restricted to the US market. Early indications suggest that the impact instead will be felt by pharmaceutical and biotechnology companies across the globe. Both established pharma businesses and biotech start-ups might pivot away from using the services of the designated CDMOs and CROs, to avoid losing access to US government contracts.
The passing of the Biosecure Act could also signal to companies that further economic tensions with China are to follow - in the form of similar legislation in other countries or US import/export controls on the Chinese CROs. To mitigate that risk, companies may look at alternative suppliers. While a number of the industry's main players have said little in public to date (aside from regulatory disclosures highlighting the risk associated with the Biosecure Act), it seems that at least some companies are already preparing to find alternative partners, moving away from WuXi AppTec and other Chinese CROs. In that sense, the lawmakers may achieve their main goal before the Biosecure Act comes into force - or even if it never becomes law at all.
What's next for pharma and biotech companies?
Regulatory requirements: Public and listed companies will need to consider whether the Biosecure Act will impact their operations in a way that requires a disclosure to the market. Given the draft legislation's broad application to any subsidiary, parent, or affiliate of any designated entity, enhanced due diligence regarding corporate structure may be required. Disclosures by public companies such as Eli Lilly, Amicus, Iovance Biotherapeutics over the past months have highlighted risks to operations generally, or regarding the development of specific drugs. Companies may also need to carry out enhanced due diligence on their supply chains to ensure that subcontractors comply with the Biosecure Act. In the context of upcoming IPOs or fund-raising rounds, smaller biotech companies with links to the restricted entities may also be required to make disclosures which may impact or delay their growth.
Commercial disruption: The Biosecure Act could become law before the end of 2024. However, this became less likely on 12 June 2024, when the Biosecure Act was not included among the amendments to the National Defense Authoritzation Act for Fiscal Year 2025 – a wider bill on defence spending which is virtually guaranteed to pass. However, and in any case, depending on the grandfathering provisions, businesses will need to consider shifting to new partners, which might lead to delays in the development and production of new and existing drugs, for example if clinical trials need to be repeated by new CROs, production shifted to different CDMOs, and regulatory re-approvals being required following changes to the development and production processes. Eli Lilly commented in a regulatory filing that it relied on Chinese partners and finding alternative CROs and CDMOs "may not be feasible or could take a significant amount of time”. This could lead to delay on some drugs getting to market, and some therapeutics not making it to market due to increased development costs or revised timelines. It is likely due to these and similar concerns that a transition period until 2032 was included in the latest draft of the Act.
In the medium-term, the market for CRO and CDMO services is likely to become increasingly competitive, with CROs and CDMOs based outside of China facing unprecedented demand as at least some businesses shift away from the designated entities. Resulting inflation for the services of providers based outside of China is one way that even companies and research organisation that are not directly affected by the Biosecure Act, may ultimately feel the impact of the legislation. Options for larger pharmaceutical companies include extending internal research and production capacities (in-sourcing), moving supply chains to countries that are geopolitical allies (friend-shoring), or – as AstraZeneca reportedly plans – maintaining two parallel but separate manufacturing networks for supplying different markets. In that sense, the Biosecure Act also opens up new opportunities, not least for other major CROs and CDMOs based in – for example - Korea, Switzerland, Germany or India.
Exiting existing contracts: Many businesses will be considering whether - facing political pressure - they can exit existing agreements and enter new ones with CROs outside of China. However, exiting existing agreements can pose legal challenges. Each contract will need to be analysed separately to assess if and when an exit is possible without penalties or whether there might be an argument of force majeure or frustration. Alternatively, where the CRO is required to obtain all necessary permits or consents to supply services, the CRO could potentially be in breach once the Biosecure Act comes into force. Parties seeking to exit a relationship may also pay closer attention to their counterparty's performance more generally, with an eye on any applicable termination rights or leverage in any commercial discussions to facilitate an exit.
Global trends: The Biosecure Act comes at a time when major economies are actively trying to protect supply chains by moving key suppliers out of high-risk jurisdictions and ideally 'onshore', as well as regulating investment from high-risk jurisdictions into sensitive sectors - for example, the National Security and Investment Act 2021 in the UK gives the government the power to veto foreign investments in key sectors, and the headline-grabbing push in the US to have semi-conductor factories built on US territory. It remains to be seen how a pivotal year of elections will affect this trend.
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