Politics. The great filter that is the national media obsession over things like I.C.U counts in Texas or the bipartisan infrastructure bill has allowed some aggressive legislative work to be conducted against the Chinese Communist Party in the name of industrial policy and national security.
Sen. Chuck Schumer’s United States Innovation and Competitiveness Act (S. 1260) began life In April 2020 as the Endless Frontier Act to create a new Technology and Innovation Directorate, among other things. It is the kind of legislation that will attract little opposition because its impact will be slow to develop.
As the pandemic has unfolded, critical supply chains disrupted and the international consensus about China’s role in the pandemic shifted, Schumer’s bill has morphed into something more aggressively focused on limiting the PRC’s influence over economic activity in the U.S. and abroad.
The House has not taken up Schumer’s bill but instead is crafting its own, anchored around Rep. Greg Meeks’ EAGLES Act, which follows a similar course in its focus on developing U.S. innovation and competitiveness while supporting critical supply nations through diplomacy and economic support.
The House’s slow walk allows more time to ensure the political response is symmetrical with ongoing revelations and actions by the CCP related to Taiwan and Hong Kong among other things. That means what ends up emerging in the final bill could be more aggressive.
House conservatives released their version last week. While it may be dismissed by leadership it does articulate a growing sense of urgency unimaginable just 24 months ago. Unlike a more paced approach that requires years of diplomacy, conservatives are calling for tax incentives, subsidies and deregulation to permit repatriation of medical and other critical supplies as quickly as possible.
Congress has crossed the Rubicon when it comes to the U.S. tolerance of China’s industrial policy and it will probably escalate from here.
Policy. There are a lot of reasons, the “transitory inflation” argument is difficult to buy. One of the more interesting ones is the way in which almost everyone seems to be ignoring the costs associated with repatriating the medical supply chain to the U.S.
Yes, subsidies and incentives are going to play role as might protectionism. Agricultural subsidies for wheat, corn and soybeans have been in place for years keeping production capacity in place and protecting against price swings. However, there is no denying that China’s industrial policy targeted the American generic pharmaceutical industry with predatory pricing strategies that forced the closure of many U.S. plants.
The result has been a steep drop in CPI for pharmaceuticals, driven mostly be generics, since 2016, notwithstanding the headlines. Meanwhile there has been a commensurate increase in imports from China. Since the early 00s, both things have accelerated in their respective directions.
Nonprofits that have entered the market since about 2016 like Civica Rx might provide a solution, particularly if they are eligible for whatever incentives Congress cooks up. Another possibility is that some of the drug chain revenue gets diverted. GDRX’s business model rests on its ability to offer customers a cash price lower than the co-payment amount. The former reflects the steep drop in price of generics while the latter is driven by the mythical “list price.”
Power. It is difficult to get used to. Health policy analysts have haunted Senate HELP and Finance Committees for years. But Senate Select Committee on Intelligence? Last week they held an opening hearing on the “Beijing’s Long Arm: Threats to National Security.” Witness testimony focused on “nontraditional collectors” of intellectual property and personal data as well as the role of social media amplifying social tensions including the efficacy of the COVID-19 vaccines.
The testimony is a tough read considering the last year. Witnesses highlighted theft of intellectual property from the biotechnology industry, compromised genetic data and supply chain concerns.
The most interesting point was one that explains the naivete or hubris of Wall Street that we seem to revisit every few decades. From Bill Evanina, former Director for the National Counterintelligence & Security Center (NCSC):
The current debate on how to deal with China as a strategic competitor rarely acknowledges the assumptions that have shaped how the United States and other economically developed nations forged ahead with engagement, commerce and scientific collaborations with China. Discussions about the benefits of globalization, decoupling, techno-nationalism and what it takes to be innovative are all shaped by this. These core beliefs have the following underlying assumptions: that you need democracy to be innovative and creative that you need a market economy to be successful, and that we—especially the United States—will always out-innovate them. In practice, these beliefs play out in the following way:
· We are not a U.S. business, we are a global one
· Innovation comes from the private sector, not government investments
· Everyone has the same driver—making money
However, the biggest assumption has been that China would change and acquiesce to the belief system of western capitalism and globalization. But China’s actions tell a different story.
Other witnesses suggested leadership at relevant American domiciled companies be educated and regularly engaged with the intelligence community about known risk and breaches. If the policy approach is adopted, some US industries, particularly biotechnology, may be on collusion course. The U.S. government may take the position that things like PACB’s advanced sequencing technology and ME’s genetic data are national security assets and thus worthy of mandated reporting. On the other, major market access may evaporate in China if they comply.
It is an important warning to investors who have longed looked to China's market for a growth thesis. The risks currently emerging have not yet made their way fully into Risk Factors making the future a bit opaque.
The more the relationship between the two countries deteriorates the more likely the dust-up.
Have a great rest of your weekend.
Emily Evans
Managing Director – Health Policy
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