Could you provide a brief introduction to Jones Day and the firm’s operations within the healthcare and life sciences space?

Our firm has a significant focus in the healthcare and life sciences industries and has experts in various offices, including San Francisco, San Diego, Boston, New York, Europe and China. Our life sciences lawyers work seamlessly across multiple disciplines, including cross-border transactions, IP licencing and registration and M&A to solve regulatory, transactional and litigation issues for our healthcare, pharmaceutical, medical device and biotechnology clients. Jones Day’s life sciences clients include public and private companies in all stages of development, such as multinational pharmaceutical companies, fully integrated biopharmaceutical companies, diagnostic and medical device companies, consumer products companies, academic medical centers, research institutions and universities. We also work with venture and private equity funds and investment banking institutions active in the life sciences arena.

What changes in cross-border investment activity have you been noticing in biotech, especially between China and the United States?

In terms of cross-border activities with China, there are now capital controls which limit the amount of foreign exchange that can be taken out of China. This can present a significant challenge to M&A activity and bring into question a Chinese buyer’s source of funds, the process and approvals needed for getting the money out of China, and the effect on timing of the transaction. 

From the U.S. side, there has been more scrutiny by the Committee on Foreign Investment in the United States (CFIUS) on foreign investment from certain countries, particularly China. CFIUS is an organization composed of representatives of various departments within the U.S. government and is responsible for approving transactions that present issues relating to national security in the United States. In the last few years, CFIUS has been scrutinizing transactions more closely as well as taking a broader view of what falls under their coverage. In August 2018, a new piece of legislation - The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) - was passed, which further expands the authority of CFIUS.  FIRRMA mandated the commerce department as well as other authorities within the government to look at the current export control regime in the United States. Often, technologies move faster than regulations and it then takes time for the regulations to catch up. There is therefore some concern in certain areas that export controls need to be further tightened to protect critical and sensitive technologies from falling under the control of foreign powers. CFIUS filings were previously voluntary, but after FIRRMA was passed, 27 industry “pilot programs” were announced, one of which was biotech R&D, and the new rules mandate filings with CFIUS for transactions that fall within the scope of the pilot program. CFIUS is now being used not only to protect national security, but also to protect industries that have critical economic and strategic importance to the United States, including biotech, and prevent such technologies from being transferred or sold to foreign countries. 

Taking these factors into account, is there increased hesitation from Chinese investors to invest in the United States?

There is still a huge amount of interest in the United States from Chinese investors as there is a substantial amount of available capital in China and companies are looking for new and interesting investment opportunities.  One of the reasons Chinese investors are still interested in the U.S. market is due to the liberalization of the Chinese drug market. China has opened up its drug approval process and it is now much more transparent and faster. China also now accepts drug trials conducted overseas.  As a result, Chinese investors are interested in acquiring drugs or medical devices in the U.S. with the hope that they can be commercialized for the Chinese market.  A few years ago that would have been inconceivable in light of the Chinese FDA approval process.

However, because there are limits on what Chinese companies can realistically look to invest in in the United States (with the FIRRMA legislation also recently tainting the attractiveness of the biotech industry), they are now looking globally for other investment opportunities. The Chinese do not want to spend significant time and energy trying to invest in a business if the transaction is ultimately going to be rejected by CFIUS.

Is the Hong Kong stock exchange, now open to biotechs, a viable option for U.S. biotechs?

The Hong Kong stock exchange is more targeted towards Chinese companies – NASDAQ or the NYSE are still likely the better options for most U.S. companies to list on. However, there are some situations in which it does make sense for U.S. companies to consider Hong Kong as a listing venue; such as if they are targeting the Chinese market for their products and are looking to raise their brand profile in China and Hong Kong, or if they have Chinese or Hong Kong investors looking for an Asian exit.. Consumers in the healthcare network will likely view these companies and their products more favorably  as a locally-listed player. Previously, there was a valuation gap between the United States and China, and companies could receive a premium for their stock by listing in the United States. This started to change once China built up a significant amount of capital and the number of retail investors grew. These investors began to significantly drive up stock prices in China. Currently,  companies are generally receiving higher valuations for their new listings in Hong Kong than in the United States. However, the recent pre-revenue biotech IPOs in Hong Kong have not reflected this. 

Are you now seeing a different attitude towards IP protection in China?

Companies are starting to become more optimistic about IP protection in China. China has set up 15 IP-related courts specifically to deal with IP cases. Policies have also been adopted mandating that cases be adjudicated more rapidly. The main benefactors of these new  IP regulations and enforcement work being done are domestic Chinese companies, meaning that the country is starting to care more about IP protection locally. Currently, the amount of IP litigation in China exceeds the United States and all signs are pointing to better IP protection in China. More enforcement of IP protection in China is also creating more value, since protected and enforceable IP is valuable IP.

What is your outlook for clients working in both the United States and China?

The relationship between China and the United States is currently not on good terms, and both sides seem unlikely to back down without some significant diplomatic breakthroughs. There are many reasons and incentives for both sides to come back to the negotiating table, but even if some mutual concessions can be reached in the short term, it will likely take a significant period of time to for the relationship to be mended and for currency controls and CFIUS restrictions to be eased.