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The FTC’s Proposed Revisions to the Premerger Notification Rules for Pharmaceutical Patent Licensing Transactions

Katherine I. Funk, Baker & McKenzie, Client/Legal Alert, September 2012.

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Recent developments

On August 13, 2012, the Federal Trade Commission (“FTC”) released proposed amendments to the Hart-Scott-Rodino (“HSR”) premerger notification rules relating to the transfer of patent rights in the pharmaceutical and medicine manufacturing industry. The purpose of the proposed amendments is to clarify what types of transfers of exclusive rights are reportable under the HSR Act.

Implications for Pharmaceutical Companies

Under the proposed amendments, a pharmaceutical licensing transaction is reportable if it involves the transfer of “all commercially significant rights” for any therapeutic area. This test focuses on whether the licensor retains any rights to control the patent’s use. Thus, the proposed amendments focus on two exclusive licensing arrangements where the licensor retains a particular right: (1) where the licensor retains manufacturing rights, and (2) where the licensor retains co-rights to assist the licensee in promoting the drug.

The major change to existing FTC practice is to the reportability of exclusive licensing transactions where the licensor retains manufacturing rights. Previously, the FTC viewed these licenses as non-reportable distribution agreements. In the proposed amendments, the FTC reversed historical precedent, and explained that the right to manufacture is a “far less important than the right to commercialize,” and is not a significant right to control the patent’s use. Therefore, because the licensor is not retaining a significant right, exclusive licensing transactions where the licensor retains manufacturing rights are potentially reportable.

Unlike manufacturing rights, the proposed amendments reflect the FTC’s current view that exclusive licenses are potentially reportable where the licensor retains rights to assist the licensee in maximizing sales of the licensed product. Under the new “all commercially significant rights” test, these transactions remain reportable because the licensee receives all significant rights to use the patent, even though it may share profits with the licensor.

The FTC explained that the proposed amendments are limited to the pharmaceutical industry because of the industry’s unique patent license agreements. Licenses for pharmaceutical patents are unique because they often involve an agreement between a small innovator and a large pharmaceutical company to finance development, navigate the approval process, and market a drug. Because of the risks involved, the licensee often negotiates exclusive rights to use the patent, which is unlike licensing arrangements in other industries.

The proposed rules reflect the FTC’s continued focus on the pharmaceutical industry. Although the proposed amendments will only affect a small number of exclusive licensing transactions – 30 according the FTC’s estimate – they will help the FTC ensure that it reviews all potentially anticompetitive exclusive licenses. Interestingly, the FTC’s reasoning behind the proposed amendments appears unrelated to the major change, which is that exclusive licenses where the licensor retains manufacturing rights are now potentially reportable. The FTC’s example involves a small company granting a license to a large company. In these transactions, typically the small licensor will grant the full range rights to a large licensee such that the transaction would be reportable. Rarely would the small licensor retain the right to manufacture, nor would it want to. Thus, the FTC’s own reasoning does not appear to support its rule. It is possible that the FTC identified a set of otherwise reportable transactions where licensors retained manufacturing rights, solely or primarily in order to avoid making an HSR filing. However, it remains unclear what the characteristics of these deals are or whether they are likely to be anticompetitive.

Actions to consider

The main function of the proposed amendments is to ensure that the FTC is able to review more exclusive patent licensing transactions in the pharmaceutical industry. Pharmaceutical companies should be aware that exclusive licenses where the licensor retains manufacturing rights are now potentially reportable, where they were not previously. Furthermore, companies should remain aware that the FTC may investigate licensing transactions, whether reportable or not.

Conclusion

In sum, the proposed amendments do not affect the reportability of most exclusive licensing transactions in the pharmaceutical industry. But they do reinforce the fact that the FTC continues to scrutinize the pharmaceutical industry and expand its review of patent licensing transactions.

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