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U.S. National Security Panel Reviewing Chinese Investors' Purchase of Pharma Firm

The Wall Street Journal. logo The Wall Street Journal. 7/11/2020 Kate O’Keeffe
a view of The Pentagon © CQ-Roll Call|, Inc via Getty Images

WASHINGTON—U.S. national-security officials are reviewing the 2017 acquisition of a South Carolina pharmaceutical company by Chinese investors after learning the firm was in talks to participate in a Pentagon project to develop injection devices for a coronavirus vaccine, according to people familiar with the matter.

The Committee on Foreign Investment in the U.S.’s inquiry into the acquisition of Ritedose Corp. of Columbia, S.C., was also referenced in a statement by the Pentagon’s Defense Logistics Agency, which earlier granted Ritedose a five-year contract to support daily pharmaceutical purchases for the government.

“At the time of award, Ritedose certified that the drug it offered was manufactured in Columbia, South Carolina,” a DLA spokesman said, adding the certification met DLA’s compliance criterion for the award. “DLA is currently reviewing the contract given the Cfius inquiries,” he said.

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The spokesman added later that he didn’t intend the reference to serve as further confirmation of the panel’s inquiry.

Ritedose was acquired by Hong Kong-based private-equity fund AGIC Capital and Chinese pharmaceutical company Humanwell Healthcare (Group) Co. three years ago.

Ritedose Chief Executive Jody Chastain said in statements to The Wall Street Journal he wasn’t aware of any Cfius inquiries. AGIC and Humanwell didn’t respond to requests to comment.

A spokeswoman for the Treasury, which leads the panel, declined to comment.

The deal, valued at $605 million, was never submitted to U.S. authorities for a security review, according to people familiar with the matter. The Cfius panel is now looking back at such acquisitions—including those involving pharmaceutical and biotech companies, firms that work with large consumer data sets, and real-estate transactions—amid concerns that the deals might give Chinese interests too much control over sensitive assets, the people said.

In July 2017, a month after the Chinese investors announced their deal for Ritedose, the Defense Logistics Agency, which manages the global supply chain for the U.S. military and other federal agencies, granted Ritedose the five-year pharmaceutical contract.

Mr. Chastain said Ritedose “has always complied with requirements set forth in any Ritedose-awarded DLA contract.”

While Cfius has the ability to scuttle foreign acquisitions it believes could threaten national security, it has no authority to review procurement contracts, an area U.S. officials and private-sector lawyers say is a black hole for risk.

Overburdened procurement officers might not have a clear picture of the risks associated with bidders and have limited recourse to reject them, they said. Even when officers contract with a well-known firm, that company’s supply chain could involve problematic actors nestled several layers in who are unknown to the contractor itself, they said.

“There is a disconnect between the federal government identifying China as a serious national security concern and certain procurement people seeking the lowest bidder,” said Ivan Schlager, a partner at law firm Kirkland & Ellis LLP who specializes in Cfius matters.

In May of this year, the Pentagon and the Health and Human Services Department said they had awarded a $138 million contract to Stamford, Conn.-based ApiJect Systems America to expand U.S. production capacity for domestically manufactured, medical-grade injection devices for an eventual coronavirus vaccine.

A Pentagon spokesman said at the time the project would “help significantly decrease the United States’ dependence on offshore supply chains.”

Some U.S. national security officials grew concerned after learning of Ritedose’s potential participation in the project, according to the people familiar with the matter.

CNN later reported on the ApiJect contract, quoting Mr. Chastain saying that that Ritedose was “pleased to be” one of the firms ApiJect had contacted to potentially assist on the contract.

An ApiJect spokesman said, “We don’t discuss business discussions until and unless any agreement is reached.”

HHS didn’t respond to requests to comment.

Ritedose, a contract development manufacturer focused on inhalation and ophthalmic products, specializes in blow-fill-seal technology, a manufacturing process for liquid-filled containers that lessens the likelihood of accidental contamination. Chinese media in 2017 had touted the Ritedose acquisition as an attempt to fill a technology gap in the country’s 13th Five-Year Plan.

The U.S. federal procurement process does take some national-security concerns into account. For example, if there were a defense contract involving top-secret information, only companies and individuals with appropriate clearances could participate in the bidding process, said Steve Sorett, a senior counsel at law firm Kutak Rock LLP specializing in public contract law.

There are also specific treaties and statutes such as the Berry Amendment, which prohibits the purchase of certain products from foreign companies.

But procurement regulations, meant to encourage open commerce, would generally forbid contracting officers from rejecting a bidder or canceling their contract later on, solely based on a factor such as the company’s country of origin—even though Cfius could use that type of justification to block a deal.

The aggrieved company could file a protest and argue they had been treated unfairly. “That would be problematic because they would have a good case,” said Mr. Sorett.

The challenge of excluding companies from the procurement process on a national security basis was laid bare with Russian cybersecurity firm Kaspersky Lab. While many private firms had stopped using the company’s products years ago over concerns it could have ties to Russian intelligence, the U.S. government continued to buy from it until 2017, when the Department of Homeland Security ordered federal agencies to purge the antivirus company’s software from federal networks and Congress passed a law codifying the ban.

A U.S. judge in 2018 dismissed a pair of lawsuits challenging the ban filed by Kaspersky, which has repeatedly denied accusations it uses its software to conduct espionage for Russia.

Write to Kate O’Keeffe at kathryn.okeeffe@wsj.com

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