What Does Biden’s Executive Order Restricting Chinese Investment Really Mean?

Marriage therapists say that when couples argue in a relationship, the topic they think they’re arguing about is usually just a surface-level trigger for the deeper, ongoing tensions couples tend to have.

It’s not a perfect parallel for the US and China, but it’s not a bad one either.

President Biden’s recent executive order – the same legal power that Abraham Lincoln used to end US slavery via the Emancipation Proclamation – only intends to limit US PE and VC investment into the AI, quantum computing, and semiconductor industries in China.

Officials repeatedly used the word “narrow” in their talking points, and between the 45-day comment period and when the order takes effect (likely in 2024), what’s actually restricted within those industries will likely be narrowed further.

“No Biotech”

I spoke several times with the BBC and also with Caijing about this executive order, and was delighted to share my thoughts in this newsletter when Leon asked. While the order doesn’t restrict biotech or pharmaceutical investment, the fact that everyone’s immediately saying that it has “no biotech restrictions” is itself telling of what restrictions may come next.

The intention of this order is likely to fill the gap between export restrictions and company-specific blacklists. More simply, the US wants to avoid investment situations like 4Paradigm – a Chinese AI company that received investment from Sequoia as well as Goldman Sachs, and whose technology is now being used by the Chinese military.

Think of it this way: If you’re the US government, and if you have a budding adversary that you say is stealing hundreds of billions of dollars in IP from your country every year, and whose military has been threatening to attack an island you’ve implicitly, if not explicitly, committed to defending militarily, having your nation’s businesses supply capital and know-how to startups there – startups that must help their government if asked to – is a bad look.

And although the Chinese Embassy called Biden’s order “blatant economic coercion and technological bullying,” given China’s own requirements that outbound investments get cleared by both the Chinese National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) – in addition to the requirement that the outbound money transfer to be approved by the State Administration of Foreign Exchange (SAFE) – it seems unlikely that the Chinese government would allow Chinese investors to directly support American military or surveillance technology.

The US and China are feuding, and this is what feuding nations do. And it’s not really about the money – it’s more about the know-how that tends to accompany it.

I don’t see this particular executive order as as big a blow to the Chinese startup industry as what may come next. Nobody in Congress seems to be saying it went too far, and many are saying it was too appeasing to China – in fact, Janet Yelled alerted Chinese offices to this order during her visit last month, and the White House is likely intending to signal restraint to their Chinese counterparts.

At the same time, Biden seems equally likely to use what he believes to be a muted, anodyne step to rally international allies around. But that could take a year or more.

Biotech: How Long Until More Restrictions?

The untold and unfortunate story, well-known to readers of this newsletter, is that there are a lot of Chinese biotech entrepreneurs who truly want to help patients and make the world better, and there are a lot of US investors who want to fund them. The cross-border medical industry was the last to be affected by the trade war for this reason.

Nothing about that is restricted by this order. Furthermore, cross-border university collaborations and IP licensing are specifically not set to be restricted, too.

In the last half-decade, the US has added teeth to both biotechnology export restrictions and the CFIUS process (which regulates US inbound foreign investment); those remain the bottom line for now. And while stories like CFIUS’ September 2022 blocking of China-based Asymchem’s attempt to buy 82% of Massachusetts-based MIT spinoff Snapdragon Chemistry, or F-Star Therapeutics struggle (ultimately successful) to get acquired by the UK subsidiary of Sino Biopharmaceutical make the headlines, the majority of CFIUS requests are approved, even by Chinese applicants (who tend to make up 15%-20% of CFIUS applications, making them the largest group).

That reflects a self-selection bias, though. Many Chinese PE firms once active in the US have stepped aside due to CFIUS headaches. And some others will be affected by this executive order, to the extent that it limits US investment firms investing in Chinese investment firms that in turn invest Chinese biotechs. And with global foreign direct investment (FDI) into China down 89% in the second quarter these Chinese investment firms have other headaches, too.

Bottom line? Biden’s executive order may be a welcome nothingburger for Chinese biotech startups as it’s written, but I see cross-border capital and IP collaboration getting harder, and not easier, over the next three to five years – if not more.

I hope I’m wrong.  — James Early

Global Biotech News

2023-08-06: Fierce Biotech did a feature on Singapore’s biotech landscape. The city state launched a government-led campaign in 2000 to become a biotech hub. But the country still needs a series of success stories to really establish itself as a major player in the global biotech ecosystem, observers and stakeholders of the Singapore biotech industry said. The sudden collapse of Temasek-backed cell therapy expert Tessa Therapeutics inevitably put a damper on local investors’ interest, and a growing talent gap has been an ongoing concern. But Singapore has made progress, including having at least one drug approved in the U.S. and having formed R&D alliances with Big Pharma companies. And the Singapore government remains the biggest champion of local biotechs with myriads of programs to nurture talents and support companies along the drug development process. — Angus Liu

2023-08-08: Is oncology no longer the most lucrative therapeutic area? Findings of Wegovy’s ability to reduce cardiovascular risks pushed up the stock price of its developer Novo Nordisk—and its rival Eli Lilly. The general understanding is that if Wegovy, a GLP-1 agonist, can pull off a CV benefit, then Lilly’s GIP/GLP-1 dual agonist Mounjaro can do it, too, even though Lilly’s own CV outcomes study won’t read out until 2027. Fueled by that expectation and a surge in Mounjaro’s sales in the second quarter, Lilly’s market cap added some $60 billion Tuesday and reached an all-time high. The Indianpolis pharma’s stock value now stands at above $500 billion, and Novo’s above $410 billion. By comparison, Johnson & Johnson’s market cap is at about $450 billion. — Angus Liu

From investors’ point of view, what will be the peak sales of GLP-1 class and who will be the first trillion-dollar healthcare company? At this week’s Biotech Hangout, Bloomberg forecasted ~50 billion peak sales of the GLP-1 class, one of the lowest on Wall Street. Pushing back on this low forecast, Chris Garabedian pointed out that only 10 million Americans on the drugs (one third of Americans are eligible for the drugs) would generate ~$100bn sales, not to mention the sales from the rest of the world. 

Jared Holz, a healthcare strategist from Mizuho, believed Eli Lilly would be the best healthcare candidate to enter the trillion-dollar club, along with Apple, Alphabet, Microsoft, and Amazon. He further argued that Eli Lilly’s Mounjaro shares similarity to Apple’s iPhone, both of which are consumer products that can potentially reach hundreds of millions of customers. Because of that, he believed many generalists would start investing in Eli Lilly and Novo Nordisk because of their attributes of consumer products, which is best exemplified by Elon Musk’s endorsement of Wegovy last year.  — Leon Tang

2023-08-11: China's biopharma industry is facing another strong headwind: nation-wide anti-corruption movement. According to a report from China Daily, 155 presidents or high-level officials of hospitals had been put under investigation, twice more than the total of 2022. How does this impact the biopharma and biotech companies in China? The largest China biopharma Jiangsu Hengrui lost ~20% market in a week, according to a report from Blue View (深蓝观),  

In addition to this headwind,8 rounds of drug pricing negotiation have created the lowest price of innovative drugs among pharmaceutical markets. For example, a recent Bloomberg article reports that Innovent Biologics / Eli Lilly’s PD-1 Tyvyt costs about 38 times less than Keytruda in the US, the current best-selling drug in the world. This lower drug price has benefitted many patients in China and meaningfully improved the public health, but it might also have caused the 50% stock rout of China biotech index on Hong Kong Stock Exchange in the past 3 years.

Jason Bao, a veteran of China biopharma, summarized the current challenges in China’s biopharma industry:

1. Earlier this year, the latest IPO guidelines of Shanghai Stock Exchange has raised the IPO bar so high that it will disincentivize investment to China biotech companies, most of which would run out of cash soon.
2. The current movement on anti-corruption in the healthcare system in China is pressuring out this generation of biopharma professionals and hurting the livelihood of many healthcare providers.
3. Along with the recent major guidelines shift of CDE (China’s equivalent to the FDA’s CDER & CBER), China biopharma industry has officially entered a new era when the agency would only approve two me-too drugs per indication, significantly narrowing the regulatory path for many me-too drugs in China.

Jobs from Member Companies (newsletter subscribers only)

Associate director or director: A leading CRDMO with significant ownership of a NASDAQ-listed commercial stage cell therapy company is looking for a director/associate director of strategic marketing. MSc or PhD in life sciences is required, MBA is a plus. MSc with 8 + years of experience or PhD of 4+ years is required, but exceptional individuals with less years of experience would be considered. Fluency in English is required, and work level of Mandarin is a plus. 

VP of BD: HanchorBio, founded by Henlius founder and ex-CEO Scott Liu, is a spin-off from Henlix (Henlius Taiwan) that focuses on discovery, development and commercialization of novel next-generation biologics to treat life-threatening malignancies. The VP of Business Development will drive the process of identifying and evaluating innovative assets in pharmaceutical, biotechnology and academic arenas with a focus on immune oncology but also expanding to other immune disease areas when needed. The position will also lead the efforts to license out HanchorBio assets to biotech and pharmaceutical companies to facilitate the development of the drug candidates.