A new Federal Trade Commission (“FTC”) rule, which became effective December 16, 2013, targets the pharmaceutical industry and requires Hart-Scott-Rodino Act (HSR) notices for a broader array of licensing transactions, expanding the types of deals that have to be notified to the government to allow antitrust enforcement agencies to scrutinize whether those deals may violate antitrust law before the licenses become effective.

HSR filings are generally required for transactions valued over about $70 million (increased threshold of $75.9 million will become effective on February 24, 2014). The FTC has long required notification of exclusive licenses to patents that transfer the right to “make, use and sell” a product, such as a drug, to another firm. Previously, if the licensor retained rights to manufacture or use the product, the license was considered non-exclusive and no HSR filing was required. However, the new rule requires notification of licenses that transfer “all commercially significant rights” to “any therapeutic area (or specific indication within a therapeutic area),” even if the licensor retains manufacturing or other rights.

Importantly, these rules are only applicable to the pharmaceutical industry, underscoring the Commission’s intense scrutiny of the industry. The new notification requirements provide the Commission with the authority to review and potentially challenge additional transactions in the industry—including transactions by innovators that grant rights to larger firms to develop and commercialize a product.

The new rule is a significant development for pharmaceutical companies because it sets up hurdles to the use of common business arrangements that have immense importance to the industry. Any contemplated exclusive pharmaceutical license agreement that meets the HSR thresholds must be notified, and the parties must observe the mandatory HSR waiting period, before the license becomes effective. Companies must take the delay of HSR review into their plans when considering license agreements.

Increased burdens and transaction costs that parties to exclusive pharmaceutical licenses should consider include: (i) determining if a transaction’s value exceeds the HSR thresholds; (ii) negotiating appropriate risk-shifting contractual provisions in connection with the license; (iii) preparing any necessary HSR filings; and (iv) defending the substantive merits if the FTC staff decides to investigate the potential competitive effects of a transaction.

Posted by Cooley