JPM2023 Trendspotting: evaluating CFIUS risks in the biotech sector

During the last several years, the U.S. Government has repeatedly emphasized the linkages between U.S. national security and the biotech industry. In 2018, The Foreign Investment Risk Review Modernization Act of 2018 expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to include certain non-controlling foreign investments in certain types of U.S. companies, including ones in the biotech sector. Moreover, the Trump and Biden administrations have highlighted biotech in various defense and national security strategy documents and included biotech in published lists of critical and emerging technologies. National Security Advisor Jake Sullivan has flagged “biotechnologies and biomanufacturing” as one of three families of technologies of particular importance to U.S. national security over the next decade. Even the pandemic has caused more U.S. policymakers to elevate biotech as a national security priority, as they recognize both the risk that disease could create widespread harm to U.S. national security and the importance of supply chain resilience in the biotech space. Consistent with this emphasis on the national security implications of biotech, on 15 September 2022, President Biden signed executive order 14083 (EO), which provides guidance to CFIUS and highlights several areas critical to national security, including biotechnology and biomanufacturing, for CFIUS to consider during its reviews. Although the EO did not expand CFIUS’s jurisdiction, it sends yet another signal to the biotech sector and its prospective foreign investors that the U.S. Government considers biotech to be an area of critical importance for U.S. national security.

Background on CFIUS’s jurisdiction and mandatory filing programs

The jurisdiction of CFIUS, a U.S. Government interagency committee that conducts national security reviews of foreign investments in U.S. businesses, extends not only to every transaction through which a foreign person acquires a controlling interest in a U.S. business, but also to non-controlling investments in which a foreign person acquires certain investor rights in a Critical Technologies, Critical Infrastructure, or Sensitive Personal Data U.S. business, or a so-called “TID U.S. business” —namely, a U.S. business that (i) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies, (ii) performs certain functions with respect to covered investment critical infrastructure, or (iii) maintains or collects sensitive personal data of U.S. citizens. The CFIUS regime also legally requires the parties to certain transactions to submit a filing to CFIUS at least 30 days prior to closing the transaction. Transactions implicate one of CFIUS’s two mandatory filing programs – the critical technologies mandatory filing program – if (i) a foreign person acquires certain investor rights in a TID U.S. business that deals with critical technologies (as described above) and (ii) a U.S. export license would be required for the hypothetical export of such technologies to the principal place of business of the foreign investor or certain entities or individuals in the foreign investor’s ownership chain. Transactions implicate CFIUS’s second mandatory filing program – the foreign government-backed mandatory filing program – if (i) a foreign person will acquire a voting interest of 25% or more, directly or indirectly, in any TID U.S. business and (ii) a foreign government holds a voting interest of 49% or more, directly or indirectly, in that foreign person. 

CFIUS implications for the biotech sector

CFIUS’s broad jurisdiction and its two mandatory filing programs directly impact the biotech sector. In particular, CFIUS’s jurisdiction over certain non-controlling foreign investments impacts U.S. biotech companies that develop “critical technologies” or maintain or collect sensitive personal data of U.S. citizens. So even a foreign venture capital (VC) fund’s 1% investment in an early stage U.S. biotech company could fall within CFIUS’s jurisdiction, if, for example, the VC fund will acquire a board observer right and the company holds certain types of sensitive personal data. Further, foreign investments in U.S. biotech companies could implicate CFIUS’s mandatory filing programs. For example, if a foreign strategic investor co-developing certain technologies with a U.S. biotech company were to invest in the company, the parties could be legally obligated to submit a filing to CFIUS if the company were developing certain critical technologies, which cover certain export-controlled technologies and certain select agents and toxins.

Impact of EO 14083 on the biotech sector

EO 14083 did not expand the scope of CFIUS’s jurisdiction, but it directs CFIUS to focus on certain factors during its reviews of transactions, including protecting U.S. supply chain resiliency, preserving U.S. technological leadership, and examining transactions in the context of wider industry and investment trends. EO 14083 also makes clear that CFIUS should focus on the foreign investor’s ties to third-party foreign persons that may pose a national security threat. The EO identifies the following five factors, most of which are relevant to the biotech sector:

• The effect on supply chain resilience and security, in areas affecting U.S. national security, including biotechnology and biomanufacturing;
• The effect on U.S. technological leadership in areas affecting U.S. national security, including biotechnology and biomanufacturing;
• The effect of a transaction on national security viewed in the context of multiple acquisitions or investments in a single sector or in related sectors (e.g., a foreign investor making multiple investments in U.S. biotech companies);
• The potential for a transaction to provide a foreign person (or third parties) access to capabilities or information databases and systems on which to conduct cyber intrusions or other malicious cyber-enabled activities (e.g., unauthorized foreign person access to a U.S. biotech company’s sensitive personal data critical technologies); and
• The potential for a transaction to result in a foreign investor (or the parties to whom the foreign investor has ties) exploiting a U.S. business’s sensitive personal data to the detriment of U.S. national security.

Further, EO 14083 directs the White House Office of Science and Technology Policy to periodically publish a list of sensitive technology sectors, including biotechnology and biomanufacturing.

CFIUS recommendations for the biotech sector

Overall, the U.S. Government’s message is clear: biotech is critical to U.S. national security. Accordingly, we offer these CFIUS-related recommendations for the biotech sector:

• Examine every foreign investment in a U.S. biotech company to determine whether it triggers a mandatory CFIUS filing or otherwise is subject to CFIUS’s jurisdiction;
• Consider, as a U.S. biotech company, conducting a critical technologies and sensitive personal data assessment prior to an investment round – to increase the efficiency of responding to investor diligence questions and revising transaction documents;
• Consider whether the U.S. biotech company in which a foreign investment is being made is an important node in any critical supply chain; and
• Consider the national security implications of investments in U.S. biotech companies that involve foreign investors that have repeatedly invested in the U.S. biotech sector.

For further information or assistance (i) evaluating transactions potentially subject to CFIUS's jurisdiction or mandatory filing programs or (ii) conducting a critical technologies or sensitive personal data assessment, please contact the authors or the Hogan Lovells attorneys with whom you regularly work.

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Authored by Zach Alvarez, Kelly Zhang, Anne Salladin, and Brian Curran.