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Why the WuXi NextCode split makes strategic sense for the multinational genomics company
WuXi NextCode’s regional split positions both companies to better navigate tightening data protections
WuXi NextCode’s move to split its China business from operations in the U.S. and Europe seems like the best path forward for both entities, as each faces tightening regulations that restrict the flow of genomic data across international borders.
The U.S.-headquartered genomics company announced restructuring plans on June 23 that would integrate its U.S., Ireland and Icelandic operations under a renamed entity called Genuity Science, while cutting ties from the Chinese operations of WuXi NextCode Genomics Inc. in Shanghai. Both entities integrate genomics across the drug development continuum with applications ranging from target identification to patient stratification.
According to Rob Brainin, CEO of the newly named U.S. company, the split will better position both the Chinese and non-Chinese entities to execute on their business models in the face of increasingly restrictive privacy and patient data regulations in China, the U.S. and Europe.
Updates to China’s Human Genetic Resource Regulation (HGRAC) finalized last July made it more difficult for companies with non-Chinese governance or investors to use genomic data from Chinese patients. The regulation was the trigger for WuXi NextCode’s split, which will be finalized later this year.
While the update to the 1998 rules changed little in the regulations themselves, the penalties for non-compliance are higher and the perception among industry is that enforcement is stronger.
The rules restrict foreign organizations and individuals without a Chinese partner from collecting, storing or sharing human genetic resources -- organs, tissues, cells and genetic data derived from them -- from Chinese patients (see “Mapping China and U.S. Wall-Building Around Genetic Data”).
“It isn’t that the law itself is more stringent. Many companies attribute the challenges to interpretation of the law. Regulators have taken a conservative approach in terms of enforcement,” said Katherine Wang, partner in the life sciences group at Chinese law firm Ropes & Gray LLP.
For companies like WuXi NextCode or any international or foreign company using genetic information from Chinese patients, those rules add cumbersome operational burden at best, and can even bar the use of the data.
Wang explained that some uses of genetic data, such as regularly validating in vitro diagnostics using patient samples, aren’t readily conducted through local research collaborations and would therefore not be allowed. The rules also add uncertainty for companies, as use of data can be shot down if they deem it to pose national security risk.
“With the almost simultaneous enhancements of these laws and regulations, business operations definitely have to adjust their models.”
“Data will also be reviewed from a national security perspective, which is a vague concept that may be arbitrary, so multinational companies may not know if their use of data will trigger national security concerns,” she said.
Although WuXi NextCode has clear ties to China through its affiliated companies, Wang noted that it’s always been considered a foreign entity for the purpose of the law, so making a clear divide between Chinese and non-Chinese operations is a logical strategic move.
And giving the Chinese business its independence is only one benefit of the model. With ever-evolving policies around regulation of foreign investment and export of sensitive personal data in the U.S., keeping Chinese governance out of the U.S. business may mean less red tape and a clear path to a U.S. listing for Genuity (see “Proposed Changes to CFIUS Rules Would Ensnare More Chinese-Backed U.S. Biotechs”).
Data protections have also been strengthening in the EU, where strict privacy rules put patients in control of their own data (see “Navigating IP Strategies in the World of Digital Therapeutics”).
“With the almost simultaneous enhancements of these laws and regulations, business operations definitely have to adjust their models to comply with all the changes in different countries, and I think WuXi NextCode’s separation makes a lot of sense,” said Dan Zhang, executive chairman of Chinese CRO Fountain Medical Development Ltd.
Such a split should allow the international genomics company to limit exposure to operational burdens imposed by both the Chinese and U.S. governments.
Other companies may follow suit.
Strategic break-up
Though WuXi NextCode was formed by piecing together operations in the four different regions, its breakup suggests the synergies gained from pulling all these technologies and functions under one roof are out-weighed by the tightened regulations.
WuXi NextCode was created in 2015 when Chinese CRO WuXi PharmaTech Inc. acquired NextCode Health, a company that spun out of DeCODE Genetics Inc. in Iceland.
WuXi NextCode built its Irish roots when it expanded a sequencing program in the country through the acquisition of Genomics Medicine Ireland Ltd. in 2018, with plans to make the country a global hub for genomics research (see “WuXi NextCode Investing in Genomic Sequencing”).
With the restructuring, Genuity Science is now better positioned to operate in each of those regions, as well as in the U.S.
Brainin told BioCentury the company is already well-versed in navigating Europe’s strict data protection requirements which grew out of the 2018 implementation of the EU General Data Protection Regulation (GDPR).
And though data protection rules are still evolving in the U.S., the company’s new structure may preempt challenges with compliance.
Genuity Science has a new board of directors from the U.S., Ireland and the U.K., with Chinese directors notably absent.
It also now has a pair of national security advisers to serve as intermediaries between the company and its shareholders, which include Chinese venture capital firms 3W Partners and Yunfeng Capital, Singapore investor Temasek and China-linked VC Sequoia Capital. The advisers are tasked with ensuring that sensitive data from the company is not accessible to shareholders.
The hope is that those governance structures will shield the U.S. company from review by the Committee on Foreign Investment in the United States (CFIUS), which regulates foreign investment in companies with, as well as export of, sensitive personal data, among other data and technology categories.
The restructuring also gets around legislation proposed in May that would tighten auditing rules for U.S.-listed foreign companies. The Holding Foreign Companies Accountable Act, which was passed by the Senate but hasn’t yet appeared before the House, would prohibit securities of a company from being listed on any U.S. exchange if the company failed to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row (see “Proposed Legislation Could Deter Chinese Biotechs from Listing in the U.S.”).
Genuity isn’t disclosing any IPO plans, but Brainin said that given the new board of directors leading the company, he believes Genuity is well-positioned for whatever financial path it pursues.
“The reality is, we are dealing with an evolving landscape of data regulations. We didn’t make this structure with CFIUS in mind per se, but we feel like in some ways we’ve future-proofed ourselves. Whatever we end up doing in the future, we will be well-positioned,” he said.
Details of the governance and operational structure of WuXi NextCode’s remaining Chinese entity aren’t available, but Wang said it would make sense for the Chinese company to cut foreign ties as well to facilitate less burdensome operations with Chinese clients.
“If it still has foreign shareholders, this would still pose issues under the new regulation,” she said.
A model structure
Inconsistent privacy requirements across countries make it hard to apply consistent standard operating procedures, providing another reason to split up a business by region.
Neither Zhang nor Wang are aware of any other international companies that have completed a similar restructuring, but they both expect to see this model play out on a larger scale in the future.
“With global operations like NextCode, I think this is going to serve as a good example of how to structure in this environment and the chance is very high that other companies will follow suit unless there’s a global consensus to harmonize the protection of genetic information and privacy,” said Zhang.
He noted that consortia such as the International Council on Harmonization (ICH), which exists to harmonize regulatory and technology standards in drug development, could be used to harmonize these international requirements as well.
“That would help to create unified operations globally. Otherwise, you really have to break up operations to deal with it. If such a framework could be applied in this area it would be beneficial for all countries,” he added.
The model is a good fit for WuXi given its international client mix and multinational allegiances, but it isn’t yet clear which other companies could benefit from a similar construct. “This may not be a role model for companies that mainly serve operations and businesses in China,” said Wang.