New FTC/DOJ Position Will Require Heightened Regulatory Reporting Of Pharma, Biological And Diagnostic Licenses

The Federal Trade Commission and Department of Justice recently announced revisions to the Hart-Scott-Rodino (HSR) Act's premerger notification rules to require enhanced reporting of transactions (including licenses) relating to patents involving pharmaceutical, biological and diagnostic products.1 In the past, these "pharma" patent licenses were not reportable under HSR if the licensor retained either (i) manufacturing rights, even if only to manufacture for the licensee, or (ii) certain other forms of "co-exclusivity." These rules precluded the need to assess HSR valuation issues on many transactions that might otherwise have met "size of transaction" thresholds for reporting. As the historical carve-outs are now disappearing, valuation will take on much greater importance, and more pharma patent licenses will need to be filed under the HSR Act.2 This alert discusses the background of HSR's application in this arena, the nature of the proposed changes, and areas requiring further clarification.

Background. The HSR Act requires filing a "premerger notification form" to both the FTC and DOJ for acquisitions meeting a "size" threshold of $68.2 million and not qualifying for certain exemptions. Exclusive licenses of intellectual property are considered asset acquisitions subject to the HSR Act, with most precedents analyzing whether the bundle of rights granted is sufficient to treat the license as "exclusive," and if so, whether its valuation meets the size threshold.

If filing is required, it triggers a 30-day waiting period (15 days for a cash tender offer or a bankruptcy sale), during which closing or other steps implementing the proposed acquisition cannot occur. The waiting period can be extended significantly if a "second request" is issued investigating the transaction. On the other hand, expiration of the waiting period without incident is not a regulatory "clearance" per se — a transaction can still be challenged even after the HSR filing is completed, the waiting period expires and the deal closes.

Historical Effect of Licensor Manufacture, and Proposed Change. In the past, the Agencies consistently held that licenses in any industry where the licensor retained manufacturing rights, even if only to manufacture for the licensee, were not "exclusive" and thus not asset acquisitions subject to the HSR Act. Under the proposed changes, this position is reversed, but only for the pharmaceutical industry. Going forward, the Agencies will treat manufacture of pharma products by the licensor for the licensee (termed "limited manufacturing rights") as irrelevant, and if "all commercially significant rights" are being transferred, will require valuing the transaction and filing an HSR notification form if "size"" thresholds are met. "All commercially significant rights" are defined as "rights to a patent that allow only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area (or specific indication within a therapeutic area)." Notice of Proposed Rulemaking, 77 Fed. Reg. at 50,061.

Historical Effect of Licensor "Co-Exclusive," and Proposed Clarification. The Agencies have also historically treated certain "co-exclusive" licenses whereby the "licensor retains rights to the IP" as granting insufficient exclusivity to require reporting. A number of elaborate discussions of whether the package of rights licensed or retained is sufficient to trigger HSR reporting can be found in the FTC's "informal interpretations"...

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