"CHIPS Act PTSD?" What Chinese Pharma Companies Should Focus on After Biden's New Executive Order

More than two weeks have passed since President Biden signed the new executive order. During this period, interpretations of the event have been ubiquitous, with headlines such as “Has the CXO industry’s underlying logic collapsed?” “Will clinical development, commercialization, license-in, and license-out activities for other companies be hindered?” and “Warning of a comprehensive US-China decoupling?” The scope of discussion has continued to expand, ranging from CXO companies to the broader pharmaceutical industry and even to US-China trade relations.

In fact, this sense of panic is not unfamiliar to industry insiders.

On March 8 this year, Chinese companies including BeiGene, Hutchmed, and Zai Lab were placed on the provisional list under the Holding Foreign Companies Accountable Act by the U.S. Securities and Exchange Commission (SEC). The news triggered an immediate reaction in the sensitive secondary market, with the share prices of all three companies falling sharply.

On February 11 of this year, the U.S. Food and Drug Administration’s (FDA) Oncologic Drugs Advisory Committee (ODAC) voted 14 to 1 against approving sintilimab’s first marketing application in the United States. On that day, discussions titled “Innovent’s Overseas Setback: Chinese Companies Face Growing Challenges” nearly dominated social media feeds.

Market panic is not unfounded,The enactment of the CHIPS Act marked a critical turning point. In the wake of its ripple effects, geopolitical discussions between China and the United States have entered the mainstream, often leading to misinterpretation of events, amplification of crisis perceptions, diversion of public discourse, and obscuring of truly significant information.

On September 18, Blue Ocean Capital organized a discussion among industry experts titled “What Is the Impact of the New U.S. Biotechnology Initiative on China’s Pharmaceutical Industry?” to examine President Biden’s signing of the new initiative, the National Biotechnology and Biomanufacturing Initiative, and its implications for the development of China’s pharmaceutical sector. Attendees includedProfessor Zhu Xun, a renowned immunologist; Dr. Shao Yan, Executive Director of Grand Pharma; Dr. Zeng Yongqin, former Innovation Director at Philips Healthcare; and Mr. Yang Feng, Founding Partner & CEO of Blue Ocean Capital.

Experts have reached a consensus: Although this initiative has not been elevated to the level of legislation and is less severe than the “CHIPS Act,” whether it will escalate further remains to be seen. In the context of today’s globalized industrial collaboration, it is extremely challenging for the United States to build an independent and complete domestic supply chain, with infrastructure and costs posing significant hurdles. For Chinese pharmaceutical companies and the industry as a whole, it is essential to further enhance innovation capabilities and internationalization, seize opportunities for global expansion, and avoid proactive decoupling. Regarding overseas business collaborations, investments, and mergers and acquisitions, careful attention must be paid to adapting to changes in industrial and investment policies and managing related risks.

With the release of President Biden’s new executive order, the immediate reaction from most industry insiders was to draw comparisons between this order and the “CHIPS Act.”

However, a rational analysis shows that Biden’s new executive order cannot be compared with the CHIPS Act.

First, there is a fundamental difference between legislation and executive orders. The CHIPS Act is a law that represents the consensus of U.S. national stakeholders, having been deliberated for an extended period before its enactment. In contrast, President Biden’s new executive order is merely an initiative issued by his administration, not reflecting a national consensus; it remains to be seen whether U.S. states and industry giants will choose to comply.

Secondly, in terms of funding, Biden announced a total allocation of $2 billion across multiple sectors, including energy, agriculture, materials, and biomanufacturing. Some experts have bluntly criticized this amount as “insincere.” Compared to the $280 billion in subsidies provided under the CHIPS Act, with $52.7 billion alone earmarked for the semiconductor sector, the two are simply not comparable. Moreover, this figure is even less than half a year’s revenue of WuXi AppTec alone.

Before the “CHIPS Act” drew attention, many large pharmaceutical companies also frequently encountered obstacles when entering the U.S. market. However, discussions at that time largely focused on reassessing market potential, analyzing differences in overseas industry environments, localizing strategic and tactical approaches, cultivating multidisciplinary international talent, and pursuing flexible and diverse international collaborations, with little attribution of these challenges to China-U.S. relations.Overall, whether in terms of the industry, the stock market, or the media landscape, there is a strong consensus that opportunities outweigh challenges.

Following the “CHIPS Act,” nearly every case of Chinese pharmaceutical companies facing setbacks in their global expansion has sparked unrest within the industry.—While large industry players may have their own assessments, concerns in the stock market and among biotech firms about global expansion are growing. Meanwhile, such news is often interpreted, to varying degrees, as evidence that political factors are making it increasingly difficult for Chinese pharmaceutical companies to expand overseas.

Startups and investors in the industry are highly sensitive to market trends, which, combined with the impact of media coverage, has created an atmosphere of panic—largely a form of “CHIPS Act” PTSD.

At a discussion forum organized by Blue Ocean Capital, participating experts reached a consensus that it is virtually impossible for the United States to independently build a complete industrial chain in the biopharmaceutical sector amid the current decoupling between China and the U.S.

Data shows that in recent years, approximately 50% of U.S. pharmaceutical manufacturing facilities have been located overseas, with more than 70% of factories producing active pharmaceutical ingredients (APIs) situated abroad and 80% of key ingredient manufacturing completed outside the United States. Rahul Singhvi, CEO of the biotechnology company Resilience, has stated that three to four out of every five U.S. pharmaceutical companies collaborate with China’s WuXi AppTec or South Korea’s Samsung Biologics.

Professor Zhu Xun stated, “Unlike other sectors, the subsectors of biopharmaceuticals are relatively small in scale, and their products are largely non-substitutable. Among more than 5,000 small-molecule drugs and approximately 400 biologics, there are very few that can be substituted for one another.” Meanwhile, many unmet clinical needs remain, which cannot be addressed by any single country alone.

“In the field of biology, there are areas where the United States cannot achieve self-sufficiency and must rely on others,” Professor Zhu Xun further pointed out. “Since China’s bio-manufacturing sector is currently dominated by low-end manufacturing, if infrastructure were to reshore to the United States, overall costs would rise significantly. In contrast to China’s lower costs, this would actually accelerate the entry of Chinese products into the U.S. market.”

The newly enacted Inflation Reduction Act explicitly calls for cost reductions to curb inflation, which runs counter to the reshoring of manufacturing. Faced with the choice between lowering costs and adhering to President Biden’s initiatives, businesses and markets will naturally make their own decisions.

The fundamental cause behind multiple incidents, such as being held accountable by the U.S. and failed overseas expansions, is non-compliance with U.S. guidelines and industry standards.

In the incident where Chinese companies were placed on the SEC’s list under the Holding Foreign Companies Accountable Act (HFCAA), Beijing Sinovac Biotech, which was also named, disclosed that its auditing firm was an independent certified public accounting firm that issued audit reports in its annual filings with the SEC. However, this auditing firm is currently not fully subject to inspection by the PCAOB, thereby failing to meet SEC requirements. Other companies named for the same issue include Zai Lab, BeiGene, and I-Mab.

In February this year, WuXi Biologics was placed on the U.S. “Unverified List.” The reason was that, due to the impact of the COVID-19 pandemic, U.S. government officials were unable to conduct an on-site inspection of its facility in Wuxi, China, in a timely manner. Consequently, WuXi Biologics was added to the list solely because the verification process could not proceed as normal, reflecting a technical issue rather than a political one.

In the setback experienced by Innovent Biologics in its overseas expansion, publicly available conference materials indicate that the Orient-11 trial was conducted exclusively in China, rather than as a global multicenter clinical study, thereby failing to align with the ICH E17 guideline. Meanwhile, the global development of PD-1 monoclonal antibodies has become intensely competitive; to date, more than six PD-1 monoclonal antibodies have been approved in the United States, covering over 80 indications.

The tightening of approvals for PD-1 monoclonal antibodies has long been foreseeable. Since February last year, AstraZeneca, Roche, Merck & Co., Bristol Myers Squibb, and Agenus have successively announced the voluntary withdrawal of their applications for PD-1 indications. The reasons were almost invariably poor clinical trial data from the past two years, or the prior approval of other drugs for the same indication with comparable efficacy, leading to discouragement from the FDA.

Conversely,For companies that have thoroughly mastered the “rules of the game,” going global is not so difficult.Legend Biotech’s partnership with Johnson & Johnson has enabled a deeper understanding of U.S. regulatory requirements, significantly smoothing the path for its CAR-T product’s global expansion. Through its partner Johnson & Johnson, Legend Biotech has maintained effective communication with the FDA, facilitating the smooth progress of clinical trials and the review and approval process for new drug marketing applications.

Looking back at President Biden’s signing of the new executive order, panic within China was primarily confined to the stock market and media landscape. In contrast, WuXi AppTec and Pharmaron publicly stated that their business operations were proceeding as usual and had not been affected by the executive order, with other leading enterprises expressing similar sentiments.

It is reported that WuXi Biologics initiated its global expansion in 2018, establishing overseas manufacturing facilities in Ireland, Germany, and the United States, and continues to expand its global footprint. This month, WuXi Biologics’ GMP facility in New Jersey will commence operations. Next week, the structural topping-out of its Boston facility is also scheduled to be completed.

Biden Signs New Executive Order, Setting a Preemptive Standard: To Enter the U.S. Pharmaceutical Market, One Must Comply with American Principles and Values.

Professor Zhu Xun believes that,China is far from being powerful enough in the pharmaceutical sector to set its own rules.. Therefore, companies need to adjust their overseas expansion strategies in accordance with the market access principles of the United States, with the most critical consideration being,How to Identify Value Points in Overseas Markets and Pharmaceutical Systems。

First, the development and global expansion of new drugs must still start from unmet clinical needs. In terms of unmet clinical needs, the United States has spent two to three decades and invested substantial funds, yet still failed to resolve the issues; ultimately, it requires mobilizing global resources. For example, currently less than 40% of genetic diseases can be effectively treated, representing a significant unmet clinical need.

Secondly, thoroughly understand the rules for global expansion to avoid unnecessary detours. The pharmaceutical sector differs from other industries, as it involves a series of prerequisite approval processes. From FDA regulatory requirements to the U.S. healthcare reimbursement system, each stage entails extensive market access principles and requirements. Companies should carefully study overseas expansion case studies and seek partners with a strong grasp of these regulations.

Biden’s new biopharmaceutical initiative also sends a positive signal for promoting the development and innovation of the U.S. biopharmaceutical industry.For example, clarify and streamline regulatory requirements to provide scientific and risk-based services that are predictable, efficient, transparent, and openly accessible; establish a Bioeconomy Data Initiative to ensure that high-quality, comprehensive, accessible, and secure biological databases can drive breakthroughs in the U.S. bioeconomy; and launch a Biosafety and Biosecurity Innovation Initiative aimed at reducing biological risks associated with advances in biotechnology, biomanufacturing, and the bioeconomy.

Overly politicized interpretations of the Biden administration’s initiatives fail to address current challenges. For Chinese pharmaceutical companies to successfully penetrate overseas markets, they must fundamentally enhance their innovation and commercialization capabilities, conduct in-depth research on foreign markets and healthcare systems, grasp clinical needs and industry norms in these markets, and promptly adjust their global expansion strategies.