Momentum is building for the US BIOSECURE Act, and it is becoming more and more likely that it will soon become law. It may significantly impact pharmaceutical and biotechnology companies and supply chains, particularly if they or their customers do business with the U.S. Federal Government. It is therefore important to prepare now to avoid potentially serious adverse effects.
If enacted, the US BIOSECURE Act will, in essence, prohibit certain US Federal Governmental agencies from engaging with so-called “biotechnology companies of concern”. More specifically, the US BIOSECURE Act shall prevent US Federal Government bodies from sourcing equipment and services – or engaging in contract, or providing loans and grants – with: (1) companies which are, themselves, “biotechnology companies of concern”; and (2) companies which use or source equipment and services from “biotechnology companies of concern” in performance of government contracts or grants. There are likely to be only limited exceptions to the general ban. The bill specifies several large Chinese companies as “companies of concern” as well as their subsidiaries, parents, affiliates, and successors, specifically: BGI – formerly Beijing Genomics Institute; MGI; Complete Genomics, Wuxi Apptec, and Wuxi Biologics. In the future, this list will likely be expanded to include other biotechnology companies that pose a U.S. national security concern and are “subject to the jurisdiction, direction, control, or [that] operate[] on behalf of the government of a foreign adversary” of the United States.
China is one of the biggest suppliers of complex peptide, immunotherapy, and antibody drugs to pharmaceutical companies to the US and EU. A significant number of US and EU headquartered companies currently have contract services agreements (CSAs), licensing agreements, or partnership agreements with the Chinese companies to be blacklisted. Numerous drugs currently in late clinical stage trials, could be impacted by the BIOSECURE Act, as well as other pharmaceutical and biotechnology raw materials and end products. The BIOSECURE Act therefore has the potential to disrupt a significant number of US and EU supply chains that would be difficult and potentially expensive to reconfigure. As currently drafted, most of the act will not go into effect until 2032. But companies should begin preparing now to avoid what could be significant disruptions to their businesses and supply lines, at least where they interact with U.S. government contracts and grants. Initial steps may include ascertaining if and how your company or supply chain is impacted. Whether, for example: your company, or other entities in your supply chain, provide equipment or services to relevant US Federal agencies – or may do in the future; and whether your company, or others in your supply chain, using proprietary cell lines or supplies or may do so in the future, including any related materials from companies, or their affiliates, which are to be blacklisted. Next steps may include: Deciding whether to either to cut ties, or complete payments of all oblications, with blacklisted companies – or, alternatively, to cease supply with relevant US Federal agencies. Understanding how other entities in the same supply chain are adapting may be important here. Lastly, putting in place transition/contingency plans - for example, to ensure localized production or supply - may be critical. [see adapt our recommendations from GRC Outlook below]
Time is of the essence. While this is still only pending legislation, momentum behind the bill is growing and it is more likely than not that this bill will pass. Companies should consider thinking through how the BIOSECURE Act could impact their business going forward. To the extent they are doing business with the Chinese companies of concern listed in the BIOSECURE Act, they may want to think about how to manage that risk. On the other hand the BIOSECURE Act might create opportunities for some to take market share away from competitors. The BIOSECURE Act should also be viewed in the context of other recent U.S. legislation and regulatory actions that aim to address concerns about national security, intellectual property, human rights, and fair trade practices by restricting the ability of companies to do business with China in various ways. An overall strategy to determine what kind of China de-risking or de-coupling is needed and will require time and corporate stakeholder alignment. A number of other safeguard measures should also be considered, including the following:
- Closely examining supply chains, including development and research components and determine exposure to PRC companies, particularly those that have already been designated in the Act
- Conducting a detailed inventory of the intellectual property involved in the supply chain and determine where the company is over-reliant on Chinese technology (i.e., Chinese company owns the needed technology and any successful transition might require a license of that technology from the Chinese company)
- Working on the difficult task of creating transition strategies, paying close attention to agreements that form the foundation of contractual relationships in the supply chain. Special attention should be given to termination fees, liquidated damages, and royalty fees that might be triggered as a result of any transition strategy.
- Identifying strategic business and legal issues that make transition difficult or impracticable, including seeking new regulatory approvals as part of any transition plan that could be extremely time intensive, such as seeking new FDA approvals.
- Determining the cost of transition strategies and obtaining consensus with corporate stakeholders to provide appropriate financing contingencies to cover increased costs. Obtaining contractual guarantees and indemnities (including insurance and re-insurance assurances) from suppliers, may be one way of mitigating risk.
- Adding potential BIOSECURE Act costs, risks, and opportunities to issues to think through in the due diligence process for mergers and acquisitions.
- Monitoring and participating in the ongoing legislative process to shape the legislation and advocating for changes that reflect transition difficulties.
