April 19, 2014

New Hart-Scott-Rodino (HSR) Rules Will Require More Filings for Pharmaceutical Patent Transfers: Increased Review Raises Importance of Valuation

Amendments to the Rules under the Hart-Scott-Rodino (HSR) Act have been adopted that will require compliance with the Act’s reporting and waiting period requirements for certain acquisitions of exclusive pharmaceutical patent licenses that historically have not been reportable because the licensor retained manufacturing rights under the patent. Because these transactions will no longer be HSR exempt, determining the transaction value will now be critical in assessing whether the patent license will require an HSR filing.

On November 6, 2013, the Federal Trade Commission (FTC), in consultation with the U.S. Department of Justice, issued final Amendments1  to the premerger notification Rules to formalize and broaden unofficial guidance given by FTC Staff regarding the circumstances under which transactions involving the transfer of exclusive rights to a pharmaceutical patent - generally by license - are potentially reportable under the HSR Act.  Notably, the Amendments will result in a significant change in the weight given by FTC staff to retained manufacturing rights by deeming a license to be exclusive even when the licensor retains the right to manufacture pharmaceuticals for the licensee.

In the pharmaceutical industry it is not uncommon for licensors to retain the right to manufacture, granting only the rights to “use and sell” under the patent, and over time the FTC staff has viewed the grant of such a license to be a non-reportable event similar to entering into a simple distribution agreement.  The Amendments reflect the Commission’s current belief that the pharmaceutical industry “presents unique incentives for the use of exclusive licenses.” According to the Commission, in the pharmaceutical industry an innovator may discover a compound, but not have the resources to support its approval and marketing, so it must license the rights to others (often to a much larger company).  

Patent license valuations will now take on a greater significance in determining HSR’s reportability.  The HSR transaction value for an asset acquisition, including an exclusive license acquisition, is the fair market value or, if determined and greater than the fair market value, the acquisition price.2   The acquisition price of an exclusive license is equal to the gross amount of future royalties due under the license agreement during the life of the license at face value, not discounted to present value or for risk.3   If, as is often the case when dealing with intellectual property rights, future royalties are too speculative to estimate reasonably (e.g., payment milestones are contingent on approvals or other events outside the parties’ control), the acquisition price is “undetermined,” and the value of the license is the current fair market value of a fully paid-up license.4   

Given the FTC’s longstanding position on non-exclusive intellectual property licenses, it may come as a surprise to some parties that the HSR Act may apply to their transaction.  Companies considering granting exclusive rights to a pharmaceutical patent should at this time analyze the HSR Act’s reportability of the transfer under the Amendments and, if necessary, provide for additional time to comply with the HSR Act’s notification and waiting period requirements.5  Identifying potentially reportable license transactions will require analysis of the rights transferred and retained, as well as a calculation of the somewhat amorphous acquisition price and fair market value of the rights being transferred.

1 Amendments to the Premerger Notification Rules 801.1 and 801.2: HSR IP Rulemaking, Project No. P989316.

2 Rule 801.10.

3 PNPM #87.

4 PNPM #86.

5 The initial waiting period under the HSR Act is usually 30 calendar days (15 calendar days in certain limited situations).  See Rules 803.10, 801.30; 11 U.S.C. 363(b).

©2014 Greenberg Traurig, LLP. All rights reserved.

About the Author

Of Counsel

Mary K. Marks practices in the areas of antitrust and competition counseling, with a focus on complying with and obtaining clearance under the Hart-Scott Rodino Act and global merger control and foreign investment laws for U.S. and multinational acquisitions, divestitures and joint ventures. Mary advises transaction parties with respect to permissible pre-clearance and pre-closing activities. She also counsels clients regarding coordination and information sharing activities, and has been invited to participate in Federal Trade Commission discussions regarding HSR practice issues.


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