LawFlash

Biotech Deals Targeted for More Scrutiny in New Trump Administration Trade Report

March 27, 2018

The biotech industry, now designated as a technology and innovation-related area of special concern to the protection of the US industrial and scientific base, is one of seven sectors that the United States Trade Representative recently identified as being of significant national security concern.

Foreign acquisitions and investments in the US biotechnology industry have been targeted for additional scrutiny by the Trump Administration in the voluminous report issued March 22 by the White House Office of the United States Trade Representative (USTR). The USTR’s primary concern in its investigation was with acquisitions and investments related to technology transfer, intellectual property, and innovation in seven industry sectors that it specifically identified as being of significant national security concern. Biotechnology is one of the seven sectors highlighted for increased scrutiny, through expanded reviews of certain types of deals by the Committee on Foreign Investment in the United States (CFIUS). While the USTR report focused on Chinese acquisitions and investments, the identification of biotech as one of the seven main industry sectors of concern means that acquisitions and investments by entities located in other foreign nations may also be subject to heightened scrutiny by CFIUS. This Morgan Lewis LawFlash by our CFIUS Group summarizes the USTR report and provides links to the report and to the Presidential Memorandum also issued March 22, directing certain actions in furtherance of the USTR’s recommendations.

While biotech acquisitions have occasionally been filed for review by CFIUS in the past by us and others, filings for review of most biotech drug and agriculture foreign acquisitions and investments have not been considered warranted, outside of certain areas such as bioterrorism vaccines or toxins or radiological screening devices, and CFIUS review often has not been considered in deal planning. The USTR report broadens the foreign acquisitions or investments of interest for CFIUS reviews by its designation of biotech as a technology and innovation-related area of special concern to protection of the US industrial and scientific base (p. 100-102 of the USTR report). Consequently, corporate counsel for both foreign buyers/investors and sellers need to consider whether proposed acquisitions or investments, by entities from any foreign nation, properly should be filed for review, and the timelines for CFIUS reviews be built into the closing timeline.

The USTR report discussed biotech drug and agriculture acquisitions and investments in detail in its report (p. 125-29), including two examples of acquisitions of concern: Beijing Genomics Institute’s acquisition of Complete Genomics’ gene sequencing equipment manufacturing and IP, and China National Chemical Corp.’s acquisition of Syngenta AG’s patented genetically-modified seed, agriculture, and biotech products. The range of deals potentially impacted by the need to consider CFIUS filings thus is now considerably broader.

CFIUS jurisdiction extends not only to complete acquisitions, but also to equity investments by which a foreign entity obtains some control over the US biotech business. There is a low standard for determining whether such control would exist, based on several factors relating to the ability to influence significant operations decisions of the US business, including appointment/dismissal of officers and major investments/expenditures. There is no threshold dollar amount of investment or percentage of equity acquired that establishes control. Consequently, even investments in emerging biotech businesses may be affected by this broadening of interest in the biotech industry.

At present, acquisition only of IP/technology is not within the jurisdiction of CFIUS, nor is extension of financing, except for certain loan transactions by which the lender obtains some control rights. CFIUS now reviews acquisitions of IP/technology when they are part of acquisitions of other assets. Pending legislation to expand the review authority of CFIUS, however, may incorporate jurisdiction over solely-IP/technology acquisitions.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Stephen Paul Mahinka.