U.S. Government seeks to restrict biotechnology cooperation with China

Background of U.S. Focus on Biotechnology Industry and National Security

In the last several years, the U.S. government has increasingly focused on national security issues related to the biotech industry.  Largely in response to concerns that Chinese investments in the U.S. technology sector were undermining U.S. national security, Congress passed and then-President Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) and introduced mandatory filings to CFIUS for certain transactions.  Specifically, FIRRMA expanded CFIUS’s jurisdiction to include certain non-controlling foreign investments in U.S. businesses, including those in the biotech sector, and introduced a mandatory filing program focused on “critical technologies”, including some being developed in the biotech sector.  FIRRMA defined critical technologies to include emerging and foundational technologies, which are controlled pursuant to the process set forth in section 1758 of the Export Control Reform Act of 2018 (ECRA).  Section 1758 of ECRA also requires the Department of Commerce to impose licensing requirements for exports of such emerging and foundational technologies to countries, such as China, that are subject to a U.S. embargo, including a U.S. arms embargo.

In addition, U.S. policymakers have grown increasingly concerned about U.S. reliance on China for drugs and medical suppliers, and the pandemic have further intensified U.S. government concerns.  As a result, on September 12, Biden signed EO 14081 to boost American biotech R&D and provide regulatory clarity to the biotech industry. EO 14081 announced the initiation of a “whole-of government approach” to launch a National Biotechnology and Biomanufacturing Initiative that will engage numerous federal agencies in developing policies to support the U.S. bioeconomy. Bioeconomy refers to the share of the economy based on products, services, and processes derived from biological resources, and it will be a key component of the future economy. Key agencies involved include the Department of Health and Human Services, the Department of Commerce (DOC), the Department of Agriculture , and the Department of Energy. 

Expansion of Export Controls on Biotechnology

Following the passage of ECRA, DOC’s Bureau of Industry and Security (BIS), which administers U.S. “dual use” export controls, has steadily expanded export controls on emerging and foundational technologies, including biotechnology.  In its advanced notice of proposed rule-making (ANPRM) issued in November 2018, BIS highlighted biotechnology as an emerging technology (also known as Section 1758 technology) essential to national security for potential additional export controls restrictions. 

Since then, BIS has established 38 emerging technology controls, and two of them concern biotechnology. BIS establishes its controls on emerging technology through modifying an existing ECCN, adding a new subparagraph to existing an ECCN, or adding new standalone ECCNs. The two biotechnology items are ECCN 2B352.b.2.b (single-use biological cultivation chambers with rigid walls), and ECCN 2D352 (software designed for nucleic acid assemblers and synthesizers).

More recently, on September 12, 2022, BIS announced its Request for Comments Concerning the Imposition of Section 1758 Technology Export Controls on Instruments for the Automated Chemical Synthesis of Peptides. In particular, BIS is seeking public comments on:

• the potential uses of this technology, particularly with respect to its impact on U.S. national security (e.g., whether such technology could provide the United States, or any of its adversaries, with a qualitative military or intelligence advantage); and
• how to ensure that the scope of any controls that may be imposed on this technology would be effective (in terms of protecting U.S. national security interests) and appropriate (with respect to minimizing their potential impact on legitimate commercial or scientific applications).

April 2018 Expansion of Controls on Genetic Materials Related to Controlled Pathogens

In 2018 BIS made change to its existing export controls on genetic materials that continues to have a significant impact on life sciences and  biotechnology companies, universities and research institutes.

On April 2, 2018, BIS issued a Final Rule to amend ECCN 1C353 (Genetic Elements and Genetically Modified Organisms). Importantly, the final rule removed the pathogenicity requirement for items to be controlled under ECCN 1C353.a.1, expanding the reach of this category to genetic materials that contain non-pathogenic genes of controlled pathogens (and some cases fragments of such genes). Specifically, this rule amends ECCN 1C353 to control any genetically modified organism that contains, or any genetic element that codes for:

• any gene or genes specific to any virus controlled by ECCN 1C351.a or .b or 1C354.c;
• any gene or genes specific to any bacterium controlled by ECCN 1C351.c or 1C354.a, or any fungus controlled by ECCN 1C351.e or 1C354.b, and which in itself or through its transcribed or translated products represents a significant hazard to human, animal or plant health or could endow or enhance pathogenicity; or
• any toxins, or their subunits, controlled by ECCN 1C351.d.

The final rule also amended the Technical Notes to ECCN 1C353 to clarify that “genetically modified organisms include organisms in which the nucleic acid sequences have been created or altered by deliberate molecular manipulation” and that inactivated organisms containing recoverable nucleic acids are considered to be genetic elements, whether genetically modified or unmodified, or chemically synthesized in whole or in part.

BIS is also focused on the enforcement of existing export controls on the export and reexport of controlled biological materials. In February 2021, a U.S. university reached a settlement with BIS related to exports of various strains and recombinants of animal pathogens from the U.S. to various overseas research institutions without the required export licenses. 

Background on Wuxi Biologics Designation

In addition to expanding export controls on biotechnology and genetic materials, BIS has imposed restrictions on certain Chinese companies that are significant players in the biotechnology industry.

On February 8, 2022, BIS added Wuxi Biologics Co., Ltd and its subsidiary, Wuxi Biologics (Shanghai) Co., Ltd., (collectively with Wuxi Biologics Co., “Wuxi”) to its Unverified List (UVL List).   However, effective October 7, BIS removed Wuxi Biologics Co., Ltd  from the UVL List, but Wuxi Biologics (Shanghai) Co., Ltd. still remains on the list. Wuxi Biologics and its affiliates are key parts of the biotechnology supply chain, and act as a contract research and manufacturing organization for U.S. and other life sciences companies.  Though the UVL List designation does not prohibit all transactions with the named Wuxi entity, parties that deal with this entity must exercise additional due diligence when engaging with it.

In general, BIS adds entities to the UVL when it is unable to verify the bona fides (i.e., legitimacy and reliability relating to the end use and end user of items subject to the EAR) of such entities because an end-use check or post-shipment verification could not be completed satisfactorily.  

A UVL designation is relevant only for exports, reexports, or transfers of items subject to the EAR. Before exporting, reexporting, or transferring any item subject to the EAR (and for which a license has not been granted by BIS) to an entity on the UVL, the exporter must obtain a specific UVL statement from the listed entity.

We note that the U.S. government is closely scrutinizing license applications to export-controlled items to Wuxi even for medical end-uses such as the development of new pharmaceuticals.   This scrutiny of Wuxi and other players in the Chinese biotech industry is likely to intensify.

Impact on Cross-Border U.S.-China Biotechnology Investments

FIRRMA’s expansion of CFIUS’s jurisdiction and CFIUS’s “critical technologies” mandatory filing program have directly impacted the biotech sector.  First, CFIUS’s jurisdiction now extends even to non-controlling foreign investments in U.S. biotech companies that develop “critical technologies” or maintain or collect sensitive personal data of U.S. citizens.  Second, CFIUS’s “critical technologies” mandatory filing program focused initially on foreign investments in particular U.S. industries, including the biotech sector, and the definition of “critical technologies” still includes select agents and toxins and other technologies being developed in the biotech sector, including emerging technologies identified pursuant to the process set forth in section 1758 of ECRA.

President Biden also recently issued Executive Order 14083, which instructs CFIUS to consider the effect of transactions subject to CFIUS’s jurisdiction on supply chain resilience and security, including with respect to biotechnology and biomanufacturing. Although the EO did not expand CFIUS’s jurisdiction, it does reemphasize for potential foreign investors, including Chinese investors, that biotechnology remains an area of critical importance for U.S. national security.

Finally, the Biden Administration, prompted by concerns that U.S. investors in the Chinese technology sector may be advancing Chinese development of advanced technologies to the detriment of U.S. national security, is considering the issuance of an executive order to implement an outbound investment screening regime.  The regime would involve a U.S. Government interagency committee that would review U.S. investments in foreign companies (potentially including Chinese biotech companies) and would possess the authority to prevent such investments from being consummated.  The potential executive order follows failed Congressional efforts to incorporate an outbound investment screening regime into the CHIPS and Science Act of 2022, which President Biden signed into law in August 2022.

Next steps

Hogan Lovells’ leading international trade and biotechnology practices bring deep knowledge and experience from both inside and outside of the U.S. government, and work as a team to assist the biotechnology sector to navigate the rapidly changing export controls landscape. If you have questions, please contact any of the lawyers listed above or the Hogan Lovells lawyer with whom you regularly work.

Authored by Ajay Kuntamukkala, Beth Peters, Aleksandar Dukic, and Kelly Zhang.