In an effort to “enhance the effectiveness of the agencies' premerger program,” the two U.S. antitrust agencies are soliciting public comments on proposed changes to the premerger notification rules governing pharmaceutical mergers, the Federal Trade Commission announced Aug. 13.
In a notice scheduled for publication in the Federal Register soon, FTC said the proposal under consideration “could require companies in the pharmaceutical industry to report proposed acquisitions of exclusive patent rights” to the Justice Department and FTC for antitrust review. Thus, the proposed rulemaking would clarify when a transfer of exclusive rights to a patent in the pharmaceutical industry would result in a potentially reportable asset acquisition under Clayton Act § 7A.
The premerger notification program helps the agencies distinguish which transactions need to be reported under §7A, added in 1976 by the Hart-Scott-Rodino (HSR) Act, which is designed to prevent anti-competitive transactions prior to consummation. Proposed transactions above a specific threshold must be reviewed for possible anti-competitive consequence by the FTC or DOJ.
The notice said the FTC is proposing to amend §801.1 and §801.2 of 16 C.F.R. Part 801 to reflect the long-standing FTC staff position “that a transaction involving the transfer of exclusive rights to a patent in the pharmaceutical industry, which typically takes the form of an exclusive license, is potentially reportable” under the HSR Act.
The proposal defines and applies the concepts of “all commercially significant rights,” “limited manufacturing rights,” and “co-rights” to help parties to a transaction determine whether the rights transferred with regard to a pharmaceutical patent constitute a potentially reportable asset acquisition, the FTC said.
Unlike the situation with the outright acquisition of a patent, determining whether the transfer of rights through licensing and other arrangements is potentially reportable has usually entailed “a more challenging analysis,” the notice said. “From an early point, the Premerger Notification Office (PNO) analyzed these transactions by focusing on whether the exclusive rights to 'make, use and sell' under a patent were being transferred by the license,” it added.
“That is, the focus was on the transfer of the bundle of rights to use a patent to exclusively manufacture a product, develop the product for all potential uses, and sell that product without restriction,” and the transfer of this bundle of rights was seen as a potentially reportable asset acquisition, the FTC continued.
If the licensor retained the right to manufacture, the deal was, in most cases, treated as nonreportable because, “without the right to manufacture, they are viewed as distribution agreements rather than asset acquisitions,” the notice said. In the pharmaceutical industry, however, “the right to manufacture is far less important than the right to commercialize” and, in fact, “the right to manufacture is often retained by the licensor who has the relevant manufacturing expertise and facilities,” the notice said.
“The proposed rule would treat this kind of exclusive license agreement as a potentially reportable asset acquisition,” the notice said, adding “This aspect of the rule is a significant change in the weight given to manufacturing rights in determining whether or not exclusive rights to a patent are being transferred.”
The notice said the PNO, based on “extensive experience providing advice regarding the transfer of rights to a patent through exclusive licenses in the pharmaceutical industry” and the industry's “unique incentives for the use of exclusive licenses,” concluded that the proposed rule changes should apply only to the pharmaceutical industry.
This industry, the notice said, often sees a large company with resources develop for Food and Drug Administration approval a compound discovered by an individual or entity that “does not have the financial resources to shepherd the compound through the approval process required by the FDA, nor to effectively market or promote it in drug form after FDA approval.”
In this instance, the discoverer may enter into an exclusive licensing agreement with a pharmaceutical company that can provide the financial resources for FDA approval and drug marketing and promotion. This relationship is marked by a great deal of uncertainty “as neither party to the exclusive licensing agreement knows whether the compound will actually become an approved drug and be commercially successful,” the notice said.
“But if the drug is successful, the licensee will be able to book enormous profits, some of which will be shared with the licensor through royalties or other revenue sharing arrangements. Given its financial investment, the licensee wants the exclusive right to as much of these profits as possible to recoup its costs,” the notice continued.
“The result is an exclusive license agreement that is, in the PNO's experience, unlike that seen in any other industry. As a result of these unique incentives and because, in the PNO staff's experience, these arrangements have been limited to the pharmaceutical industry, the Commission has limited the proposed rule to analyzing the transfer of rights to a patent in the pharmaceutical industry,” it concluded.
Comments on the proposal should be submitted by Oct. 25 to Secretary, FTC, Room H-113 (Annex Q), 600 Pennsylvania Ave. N.W., Washington, DC 20580.
The commission vote approving the Notice of Proposed Rulemaking was 5-0.
A prepublication copy of the Federal Register notice of proposed rulemaking is at http://www.ftc.gov/os/2012/08/120813hsr-ipnprm.pdf.