The U.S. Treasury Department is set to restrict U.S. investment in China’s life sciences industry, releasing highly anticipated proposed rules that add biotechnology to the National Outbound Investment Security (COINS) Act.
Released Thursday, the draft regulations (PDF) classify “pharmaceutical compounds” as a “prohibited technology” that would trigger an outright ban on certain outbound transactions with “countries of concern,” such as China. The definition of pharmaceutical compounds runs the gamut of different modalities, covering small molecules, polymers, vaccines, blood products, allergens, cell and gene therapies, monoclonal antibodies and other recombinant therapeutic proteins, and their delivery systems.
If implemented in their current form, the rules would cause additional headaches for U.S. biopharmaceutical companies seeking to exploit Chinese biotechnology innovations. But despite the ban’s sweeping scope covering various types of drug molecules, biopharmaceutical business development teams can breathe a measured sigh of relief.
The proposed rule largely spares the regular licensing deals and drug R&D collaborations for hire that have led to the majority of multibillion-dollar deals between Western biopharmaceutical companies and their Chinese counterparts. That detail matches the description in a September Reuters report, which said Treasury was working on rules that would continue to allow pharmaceutical companies to enter into most licensing deals for Chinese medicines.
In an accompanying Q&A (PDF), the Treasury Department outlined the types of investments that would be covered by its rules: “Under the proposed rule, certain transactions that involve the acquisition of equity, the provision of debt financing convertible into equity or having certain rights, new investments or other business expansions, the creation of joint ventures, or certain LP investments would be covered.
“Activities that do not meet the definition of a national security covered transaction would not be subject to the program, except when undertaken to circumvent or avoid the proposed rule,” the agency explained.
Therefore, traditional asset licensing agreements, in which Western drugmakers pay cash, milestones and sales royalties for drug rights outside China, do not fall within the scope of covered transactions.
The language of the rules matches the current text of the COINS Act itself. COINS was passed as part of the FY 2026 national defense bill, giving Treasury the power to control — or outright ban — U.S. investments in sensitive foreign sectors involving countries it considers adversaries. Although the law does not name biotechnology, it allows Treasury to add new sectors when developing specific rules.
When calls for the inclusion of biotechnology in the COINS Act arose earlier this year, Laurie Burlingame, an attorney at Morse, Barnes-Brown & Pendleton who specializes in life sciences transactions, explained to Fierce that a purely industry-specific expansion of the law would likely not cover pharmaceutical licensing deals because the law is heavily focused on equity investments rather than typical product transactions.
Several high-profile deals between major U.S. pharmaceutical companies and Chinese companies have attracted the attention of China hawks in Washington as part of their campaign to expand the COINS Act. But these transactions appear to be pure licensing agreements based on public announcements. These include Bristol Myers Squibb’s potential $15.2 billion deal with Hengrui Pharma covering 13 early-stage programs.
However, some other types of transactions that have gained traction recently would fall victim to these rules.
The COINS Act qualifies “the acquisition of an interest” in a Chinese entity as a “covered national security transaction.” The provision would prevent U.S. venture capital firms from investing in Chinese biotech and would also impact future deals such as Pfizer’s recent partnership with 3SBio.
When Pfizer licensed a PD-1xVEGF bispecific antibody from 3SBio last year, the New York pharmaceutical company invested $100 million in stock in the Chinese biotech. This transaction structure would be prohibited under Treasury’s proposed rules.
Burlingame previously raised concerns about the COINS Act’s potential impact on the “NewCo” model, in which venture capitalists create a new U.S. biotechnology based on Chinese-licensed assets. The Chinese licensor often takes a stake in the new company to capture long-term gains.
Under current COINS language, only a Chinese ownership of 50% or more would make NewCo a target as a Chinese entity. But the proposed anti-avoidance clause in Treasury rules could subject any future deal with China involving equity participation to greater scrutiny.
Additionally, “entering into a joint venture” is also a notable transaction category regulated by the COINS Act.
In the proposed rules, Treasury deliberately chose not to define “joint venture” but rather “to refer to the common English meaning of the term, that is, as involving the contribution of capital and/or assets by two parties and the sharing of profits and losses.”
This murky definition adds uncertainty to certain transactions. Under the $10.5 billion, 12-asset collaboration between Pfizer and Innovent Biologics, the two companies will co-develop four programs globally and share development costs, as well as U.S. and European profits or losses. While this unincorporated partnership does not necessarily fit the common idea of a joint venture, it does involve the provision of capital from both parties to fund R&D and profit sharing, and Treasury said its term “would not require the creation or formation of a new entity.”
It is not immediately clear whether Treasury intends to crack down on this transaction structure. If so, the Pfizer-Innovent deal could be subject to regulatory action: only transactions completed before the COINS Act was enacted on December 18, 2025 are exempt from Treasury rules, if implemented.
Following the release of the draft rules, the biopharmaceutical industry reacted cautiously, warning against any broadly restrictive provisions as it studied the details of the policy.
“The administration is right that biotechnology is a strategic technology industry for the United States. We need policies and initiatives that maintain and advance our global leadership in biotechnology, particularly as we compete with China,” John Crowley, president and CEO of the influential biotechnology industry lobbying group Biotechnology Innovation Organization (BIO), said Thursday.
“The details of the Treasury Department’s proposed rules are important. We cannot restrict our path to success,” he continued. “As Treasury considers comments on the proposed rule, we must ensure that we do not have an overly broad approach that would create uncertainty for innovators and investors and could unintentionally risk weakening U.S. biotechnology competitiveness.”
In a separate statement, Kendalle Burlin O’Connell, CEO and president of Massachusetts biotechnology trade association MassBio, said that “efforts to address national security risks must be carefully targeted to avoid undermining the innovation ecosystem that has made the United States a global leader in new drug development.” »
“For the Massachusetts biotechnology industry, international partnerships and licensing agreements can bring promising scientific discoveries to the U.S. drug development pipeline, in which U.S. companies invest and advance potential new therapies,” she added. “Preserving the ability to develop breakthrough innovations from our own cutting-edge domestic pipeline while identifying promising innovations from elsewhere is essential to maintaining America’s competitive advantage and access for American patients.” »
The Treasury Department is seeking comments until December 7, 2026. Apparently recognizing the risk of collateral damage to public health and legitimate business conduct, the agency explicitly requests comment on “whether and how ‘pharmaceutical compounds’ (…) should be more precisely targeted to focus on advanced or cutting-edge technologies.”
Editor’s note: The article has been updated to clarify that the 50% ownership threshold is used to determine that an entity is a covered foreign (Chinese) person.
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