FTC proposes framework for the transfer of patent rights in the pharmaceutical industry

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Summary
The FTC has proposed amendments to the premerger notification Rules to codify prior FTC guidance concerning when a transaction involving the transfer of rights to a patent in the pharmaceutical and medicine manufacturing industry is reportable under the Hart-Scott-Rodino Act.

The Federal Trade Commission (FTC) recently proposed amendments to the premerger notification rules (Rules) to codify prior FTC guidance concerning when a transaction involving the transfer of rights to a patent in the pharmaceutical and medicine manufacturing industry is reportable under the Hart-Scott-Rodino Act (HSR). Specifically, the FTC proposes to amend §801.1 and §801.2 of the Rules to "reflect the longstanding [FTC Premerger Notification Office (PNO)] 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 reportable under the Act." The proposed Rules also define and apply the concepts of "all commercially significant rights," "limited manufacturing rights," and "co-rights" to determine whether the transferred rights constitute a reportable asset acquisition.

Although the FTC is limiting the proposed Rules to the pharmaceutical industry, the transfer of exclusive rights to a patent in other industries remains a potentially reportable event under the Act, and thus, parties in other industries should consult PNO staff in such circumstances. Comments to the proposed Rules must be received on or before October 25, 2012.

Background

Currently, acquisition of a patent is an asset acquisition under HSR and is therefore a reportable transaction if the reporting thresholds are met – and this will not change under the proposed Rules. In the case of a transfer of rights to "use a patent to exclusively manufacture a product, develop the product for all potential uses, and sell that product without restriction," however, the analysis is "more challenging." Generally, "[i]f the licensor retains the right to manufacture, the deal is, in most instances, non-reportable." Under the current PNO approach, such agreements are considered distribution agreements rather than asset acquisitions. PNO staff found that the focus of its analysis in such cases was on what rights the licensor granted and those it retained, which rights are typically classified as "co-rights" and "manufacturing rights."

All Commercially Significant Rights

As defined in the proposed Rules, "all commercially significant rights" flow from the exclusive rights to a patent. "As a result of these exclusive rights, only the recipient has the right to use the patent in a particular therapeutic area, or specific indications within that therapeutic area, to generate eventual profits (some of which will be shared with the licensor through royalties or other revenue sharing agreements). The recipient alone gains all commercially significant rights to the patent through the transfer of the exclusive rights to it."

Because PNO's analysis focuses on the substance and not the form of the transfer, any transfer of exclusive rights to a patent in the pharmaceutical industry is a potentially reportable event, even if the transfer is characterized as an exclusive license. The proposed Rules focus on the transfer of exclusive rights to a pharmaceutical patent in a particular "therapeutic area." A "therapeutic area" covers the intended use for the patent, such as neurological, and includes all "indications." An "indication" encompasses a narrower segment of a "therapeutic area," such as Parkinson's disease within the neurological "therapeutic area."

Retention of Co-Rights

Under current policy, retention of co-rights does not render a license non-exclusive. Under the proposed Rules, this approach will not change because under the proposed "all commercially significant rights" concept the profits result from a potentially reportable transfer to the licensee of the exclusive right to use the patent. By way of example, a licensor may grant a licensee the exclusive right to make, use and sell a product, but retain rights to assist in maximizing sales of the licensed product. In the view of PNO staff, the licensor does not retain the right to use the patent in the same therapeutic area. Consequently, "the all commercially significant rights test reflects the PNO staff's existing position on the reportability of exclusive licenses in which the patent holder retains co-rights."

Retention of Manufacturing Rights

Under the proposed Rules, retention by the licensor of the right to manufacture "exclusively for the licensee" is a potentially reportable asset acquisition because "all commercially significant rights" have passed to the licensee. This contrasts with PNO staff's prior view that retention of the right to manufacture was a non-reportable event because the license appeared to be a distribution agreement. Under the proposed Rules, "when the licensor retains the right to manufacture exclusively for the licensee, it will retain ‘limited manufacturing rights.'" In the view of PNO staff, "the licensor is still transferring all commercially significant rights to the licensee and a potentially reportable asset acquisition is taking place."

Conclusion

In summary, the proposed Rules appear to broaden the types of transactions subject to reporting, although the FTC estimates the increase at less than 2 percent. Notwithstanding, the proposed Rules are meant to clarify the analysis of the reportability of transfers of pharmaceutical rights and to clarify that the retention of "limited manufacturing rights" and "co-rights" does not affect whether the transfer of "all commercially reasonable rights" has occurred. We continue to monitor the rulemaking progress and will report on any amendments and adopted final Rules. The complete text of the proposed Rules can be accessed here.