(Yicai) Oct. 27 -- A US proposal to expand outbound investment curbs to biotechnology is clouding the outlook for deals involving Chinese drugmakers, with executives expecting conventional licensing-out agreements to remain largely open while equity investments and overseas newly created companies, known as NewCos, face greater scrutiny.

The US Treasury Department recently issued a draft of the implemention regulations for the Comprehensive Outbound Investment National Security Act, which became law last December, proposing to bring biotechnology under outbound investment restrictions. The period for public feedback runs through Dec. 7.

Licensing-out deals has become a key way for China’s innovative biotech companies to fund drug development and expand globally, with deals worth USD130 billion signed in the first nine months of this year, nearly matching the total for last year.

At the China BioMed Innovation and Investment Conference in Nanjing this past weekend, a representative of a multinational pharmaceutical company said it is taking legal advice on how to interpret the proposed rules. Conventional licensing deals remain broadly open for now, the person said, but the potential implications for equity investments and NewCo-related business are still unclear.

Investors are also weighing the potential impact. Pivotal BioVenture Partners, an American venture capital firm that focuses on life sciences, said that it is still assessing the proposed rules and has yet to reach a conclusion, according to Dan Liu, the firm's managing partner in China.

For Chinese drugmakers, navigating the proposed restrictions will require closer scrutiny of cross-border transactions, even as executives remain confident about future cooperation.

Chinese drugmakers need to conduct legal, financial, compliance, and intellectual property reviews early in cross-border licensing deals and strengthen risk controls when drafting contract terms, said Gloria Luo, senior director of business development at Hengrui Pharmaceuticals, which specializes in oncology, immunology, and metabolic diseases. 

Trency Gu, managing director of HongShan, formerly known as Sequoia Capital China, said companies can find workable solutions as long as regulators provide clear and detailed rules, adding that solutions tend to outnumber difficulties.

He Xiang, chief financial officer at drugmaker 3SBio, also expressed confidence in the outlook for overseas licensing. European drugmakers face relatively less pressure from the proposed US restrictions, and while government policies reflect broader strategic interests, private sector cooperation will go on as businesses find ways to operate within regulatory frameworks, He said.

Overseas pharmaceutical companies have a clear need to boost their drug pipelines and offset revenue losses from expiring patents, said Luo Fei, founding partner of VC firm Green Pine Capital Partners. After a decade of investment and development, Chinese players have established differentiated capabilities in early-stage drug discovery, clinical development, and drug-delivery technologies, he added.

Nevertheless, China’s innovative drugmakers still need to strengthen their global development and commercialisation capabilities to move beyond licensing drug candidates to overseas partners and capture more value from bringing medicines to international markets, according to industry insiders.

Editor: Emmi Laine