FTC Proposed Rulemaking Attacks Pharma Licensing Transactions, Likely Increases HSR Filing Burden

On August 13, 2012, the Federal Trade Commission (FTC) published for public comment a Notice of Proposed Rulemaking (NPR) that significantly affects Hart-Scott-Rodino (HSR) premerger notification filing requirements for pharmaceutical licensing transactions.1 The FTC has called for public comment on the NPR by October 25, 2012. If implemented, the proposed rule will increase the number of pharmaceutical licensing transactions requiring HSR clearance and could complicate the use of a business tool with significant importance to the industry.

This is an important development for the pharmaceutical industry. It highlights the Commission’s intensive scrutiny of all aspects of the pharmaceutical business, proposes to provide the agency with the authority to delay or possibly challenge some licensing transactions, and would add significant transaction costs to certain types of deals.2

1. Current HSR practice in pharmaceutical licensing transactions

Currently, exclusive patent licenses (regardless of subject matter or industry) are subject to HSR filing requirements as asset acquisitions only if they are fully exclusive; that is, when the licensor retains no rights to the licensed patent in one or more fields of use in the United States. The FTC's Premerger Notification Office (PNO), through a variety of informal rule interpretations, has opined that when the licensor retains any significant right(s) under the patent -- for example, the right to practice the patent in the same field of use for some purposes, or to manufacture product under the patent for the licensee -- the license is non-exclusive and not subject to HSR.3

Pharmaceutical patent licensors often retain rights to manufacture any commercial compound, or to practice the patent for purposes other than those intended by the licensee, or the right to enforce the patent or to co-develop, co-promote or co-market with the licensee. Under current interpretations, any of these retained rights could be enough to make the license non-exclusive, with no need for a HSR filing.

2. Proposed rulemaking: concept of "all commercially significant rights" and expansion of licensing subject to HSR

The proposed rulemaking would amend the HSR Rules, solely in the case of patent rights in the pharmaceutical and biologics industries,4 to (i) create a new definition ("all commercially significant rights") applicable to licensing transactions,5 and (ii) make a patent license subject to HSR when "all commercially significant rights to a patent" have been transferred to another entity "for any therapeutic area6 (or specific indication7 within a therapeutic area)."

"All commercially significant rights" are defined as "the exclusive 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." NPR at 16. Two categories of rights are particularly singled out with the effect that, even if a licensor retains these rights, the parties are still considered to have transferred "commercially significant rights," thus triggering HSR. Those categories are:

  1. "Limited manufacturing rights", defined as "the rights retained by a patent holder to manufacture the product(s) covered by a patent when all other exclusive rights to the patent within a therapeutic area (or specific indication within a therapeutic area) have been transferred to the recipient of the patent rights." NPR at 16. The NPR notes that this exclusion represents "a significant change" in the way such rights are treated for HSR purposes. NPR at 7 (emphasis added). Under previous FTC staff interpretations, when a licensor retained manufacturing rights, the license was considered non-exclusive and not subject to HSR.
  2. "Co-rights", defined as "shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent . . . [which] include, but are not limited to, co-development, co-promotion, co-marketing and co-commercialization." NPR at 16-17. While the NPR states that this does change current policy, it does, of course, codify this interpretation, with the potential for expansive application in the future.

The explanations offered for each of these exclusions are themselves significant, and may offer opportunities for interested parties to push back against this potentially burdensome rule. In the case of manufacturing rights, the NPR states that "the right to manufacture is far less important [in the pharmaceutical industry] than the right to commercialize," NPR at 7, and that, when a "licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license." Id. Implicitly, manufacturing is given short shrift in this interpretation.

In the case of co-rights, the FTC states that rights to develop, market, promote, and so forth are typically retained by the licensor only "to assist the licensee in maximizing the licensee's sales of the licensed product so that the licensor might have a more robust royalty revenue stream or other revenue sharing arrangement." NPR at 8. While this might be the case where, for example, all licensor revenue is derived through royalty payments and the licensee is solely responsible for sales,8 it ignores other arrangements where commercialization, marketing, promotion, or sale (or some mix of these functions) may be more evenly divided between the parties, and where each party may derive revenue from sales and other activities.

3. Public comments

Public comments on the NPR are due by October 25, 2012. Once the comment period has closed, the FTC is obligated to consider all comments as it shapes its final rule and, in its statement of basis and purpose for any final rule, justify any changes in the rule and state how it took comments into account. Well-reasoned public comments from affected parties have often had significant impact on past HSR rulemakings, so it is not an exercise in futility for clients with an interest in this subject area to comment on the NPR.