Spotlight on the U.S.: Panelists discuss trade challenges and opportunities

Kicking off the webinar, Dr. Frederick Ch'en, partner in the Hogan Lovells Intellectual Property, Media, and Technology practice, APAC lead for life sciences, and Office Managing Partner of the firm’s Tokyo office, noted that, as international trade becomes more complicated, many multinational companies have questions and concerns about managing risks and protecting their global operations in view of legal changes in both the United States and elsewhere, including China, and possibly in their home jurisdiction as well.

U.S. inbound investments and CFIUS: biotechnology is a critical technology

By now, Brian P. Curran, partner in the Hogan Lovells international trade and investment practice, noted, many companies are aware that the Committee on Foreign Investment in the United States (CFIUS) is authorized to review certain foreign direct or indirect foreign investments in U.S, businesses. Specifically, CFIUS has jurisdiction over investments that result in foreign “control” of an existing U.S. business, as well as over certain non-controlling foreign investments in U.S. businesses involved in critical Technologies, critical Infrastructure, or sensitive personal Data (TID U.S. Business). Importantly, companies should think carefully about whether their investments will trigger a mandatory CFIUS filing.

A mandatory CFIUS filing is triggered where

1. the foreign investor is acquiring a controlling interest in the U.S. business or obtains certain foreign investor rights;
2. the U.S. business produces, designs, tests, manufactures, fabricates, or develops critical technologies (including certain select agents and toxins); and
3. hypothetical export of the critical technologies to the principal place of business of the foreign investor or any person who holds a voting interest of 25% or more in the foreign investor would require a U.S. export license.

A CFIUS filing is also mandatory (although less often triggered) where

1. the foreign investor is acquiring in the U.S. business a voting interest of 25% of more, directly or indirectly;
2. a foreign government holds a voting interest of 49% or more, directly or indirectly, in that foreign investor; and
3. the U.S. business is a TID U.S. Business.

While CFIUS may not always be top of mind for life sciences transactions, he noted that the U.S. government has begun to focus more closely on the technology that life sciences companies are developing, as well as the personal data that life sciences companies may hold. For example, the Biden administration has highlighted biotechnology and biomanufacturing and artificial intelligence (AI) as recent areas of focus, as also noted in the September 2022 CFIUS Executive Order. He also noted that CFIUS has increasingly focused its attention on non-notified transactions (i.e., transactions not filed with CFIUS), such as inquiries into small foreign investments into early stage companies, including those in the life sciences sector. CFIUS’s pursuit of non-notified transactions is also not limited to foreign investments in small, privately held U.S. companies.  CFIUS  also pursues foreign investments in, or acquisitions of, U.S. publicly traded companies, and foreign investors-backed special purpose acquisition company acquirers.

From a practical point of view, parties considering making a foreign investment directly or indirectly into U.S. businesses must figure out if there is a mandatory CFIUS filing requirement. Mr. Curran noted that often, part of that determination necessitates a certain amount of diligence to understand whether that U.S. business is developing critical technologies. Less sophisticated early stage companies, he noted, may not have done the work to figure out whether they are developing critical technologies, so investors should consider building this type of review into their investment and diligence timelines. Our team has also discussed CFIUS impacts on life sciences early stage companies here. Mr. Curran also highlighted a number of representations to consider in negotiating transaction documents. As enforcement continues to be a CFIUS focus, companies and investors would benefit from understanding where there may be potential CFIUS implications to their transactions.

U.S. outbound investment screening program: a watch out for life sciences companies?

Highlighting another potential watch out for life sciences companies, Anne Salladin, also a partner in the Hogan Lovells international trade and investment practice, provided an overview of the U.S. outbound investment screening program as proposed under a recent executive order (EO) and associated Advanced Notice of Proposed Rulemaking (ANPRM) outlining over 80 technical questions and soliciting private sector input on the ultimate structure of this investment screening program. While the biotechnology sector is not specifically included in the current proposals, she highlighted that companies in the space should nevertheless be aware that potential legislation could cover biotechnology in the future. In addition, life sciences companies should be mindful of the proposal to the extent their work may touch on certain AI systems, which are expressly mentioned in the proposal as drafted.

In brief, Ms. Salladin noted, in August, President Joe Biden issued the long-awaited EO giving the U.S. Department of the Treasury (Treasury) the authority to establish and enforce an outbound investment screening program to be administered by Treasury in consultation with other U.S. government agencies. At a high level, the program will prohibit or require notification to Treasury for certain transactions in which a U.S. person engages with a person of a country of concern, such as China, that is engaged in certain activities involved in covered national security products in three advanced technology sectors:

1. semiconductors and microelectronics,
2. quantum information technologies, and
3. certain AI systems.

Final implementing regulations are expected in 2024, but in the meantime, Ms. Salladin noted, life sciences companies should consider the potential impact to their businesses as the program is intended to target investment by U.S. persons and primarily investments into Chinese entities; potential extraterritorial applications are also possible under the EO and ANPRM. You can also see our detailed analysis on the EO and ANPRM here.

U.S. trade controls and Chinese counter-measures

Continuing with specific practical tips, Benjamin Kostrzewa, foreign legal consultant in the international trade and investment practice, summarized certain U.S. trade controls on China, including economic sanctions and export controls.

Of consistent concern for life sciences companies with operations in Asia, Mr. Kostrzewa noted, are the risks related to doing business in Xinjiang and running afoul of current restrictions involving the Xinjiang Production and Construction Corps (XPCC), which, most notably for this sector, owns and operates many hospitals in China. Robust screening processes are important to ensuring ongoing compliance with U.S. regulations. On the flip side, Mr. Kostrzewa also discussed the fallout of various recent Chinese counter-measures, such as the anti-espionage law (enacted in 2023), the anti-foreign sanctions (2021) and unreliable entity list (UEL, 2020).

This complex global landscape, he noted, can make compliance a game of “3D chess”. Of key importance, he noted, is that companies should understand who the end user (or ultimate beneficial owner) is for any transaction to ensure that the transaction or export of goods is not prohibited. Companies face difficult risk assessments in trying to measure and manage not only the risks that they face today, but also the risks that may arise in an evolving landscape as geopolitical tensions continue to shift.

Why Hogan Lovells?

The Asia-Pacific region presents an immense, but also immensely challenging, commercial opportunity for future-ready pharmaceutical, biotech, medical device and health care companies.

We have been supporting clients in Asia-Pacific for over three decades and we are backed by a global dedicated life sciences practice comprising over 500 lawyers around the world. Leveraging the full-service capabilities of our offices within the region, we can offer a dedicated team of culturally-attuned, multi-jurisdictional and multi-practice lawyers with substantial experience and background in the life sciences and health care sector and the ability to advise on the full scope of issues in this sector.

We hope that the above summary has highlighted some key considerations in order to prepare for and navigate evolving issues, risks, and opportunities relevant for your commercial interests in the APAC region.

The full webinar is available here and you can view the slides here.

Authored by Dr. Frederick Ch'en, Brian P. Curran, Anne Salladin, and Benjamin Kostrzewa.