Treasury Draft Rules Hit China Biotech Equity Deals, Spare Licensing

By Olivia Hart

The U.S. Treasury proposed rules on Oct. 22 that would bar American capital from equity stakes and joint ventures in Chinese biotech, while leaving ordinary drug licensing contracts untouched. The proposal, issued under the Comprehensive Outbound Investment National Security Act (COINS Act), adds biotechnology as the third regulated sector after semiconductors and artificial intelligence. The public comment window runs through Dec. 7, with the final rule and effective date to follow.

What does the proposal actually cover?

The draft classifies pharmaceutical compounds as "prohibited technology." The list is broad: small molecules, polymers, vaccines, blood products, allergy treatments, cell and gene therapies, monoclonal antibodies, recombinant therapeutic proteins, and delivery systems. Brain-computer interfaces, gene sequencing, bioinformatics tools, and laboratory automation technology also fall inside the regulatory perimeter.

Targeted transactions include equity acquisitions, convertible loans, greenfield investments, business expansions, joint venture formation, and certain limited partner investments. The stated aim is to block channels through which U.S. capital flows directly into Chinese biotech development and expansion.

The takeaway: the rules aim at money, not molecules.

Which deals escape — and which don't?

Plain licensing contracts sit outside the rules. In a Q&A document, the Treasury said activities that do not meet the definition of a covered transaction are, in principle, not subject to them. Upfront fees, milestone payments, and royalties paid in cash for rights outside China all remain permissible.

The ambiguity starts with joint ventures. Treasury does not require a separate legal entity, defining a joint venture as "both parties contributing capital and assets and sharing profits and losses." Some observers expect joint development contracts that share costs and split profits to be captured by that language — a definition loose enough to swallow deals nobody calls joint ventures.

Why Pfizer's $10.5 billion deal is the test case

Pfizer's agreement this year with Innovent Biologics, worth up to $10.5 billion, licenses and jointly develops 12 cancer drug candidates. No separate joint venture entity exists. But the structure involves global co-development of four programs and shared development costs and U.S. and European profits — precisely the fact pattern that could fall under Treasury's definition.

Pfizer's $100 million equity investment last year, made alongside its licensing of 3SBio's bispecific antibody, would be prohibited outright under the draft rules.

Bristol Myers Squibb's deal with Hengrui Pharma, worth up to $15.2 billion for 13 early-stage programs, appears to avoid the rules: based on disclosed details, it is a pure licensing arrangement. The "NewCo" model, in which venture capital licenses Chinese assets to launch a new U.S. company, also remains outside current law when the Chinese side holds less than 50%. Circumvention provisions, however, mean future deals with equity stakes could face additional review.

The takeaway: structure, not size, now determines regulatory exposure.

How did the market respond?

Hong Kong trading on Oct. 23 delivered an immediate verdict. GenScript fell as much as 14% intraday. Insilico Medicine dropped 5.2% and Duality Biologics lost 3.9%. The declines reflect concern that Chinese biotech firms' fundraising and overseas partnership channels could narrow.

U.S. industry pushed back the same day. John Crowley, president of the Biotechnology Innovation Organization (BIO), said in a statement that while the group recognizes the strategic importance of biotech, "broad restrictions risk increasing uncertainty for innovative companies and investors and weakening U.S. biotech competitiveness." He added that "regulation cannot be the path to success" and called for careful calibration of the detailed design.

What happens next?

Treasury said it will seek industry input during the comment period on whether the compound scope should be narrowed to advanced and frontier technologies — an implicit acknowledgment of collateral damage to public health and normal commerce. Whether that narrowing happens, and how Treasury polices hybrid deals like Pfizer-Innovent, will decide how much of the China licensing pipeline actually keeps flowing.

The draft creates a dual structure: a higher bar for equity-and-development deals, an open door for pure licensing. Global pharma's hunt for Chinese innovation will likely continue, but every deal's fate will now hinge on how it is structured — and how Treasury chooses to read its own vague definition.