Patent Acquisitions – When Are They HSR Reportable? LIVE Webcast

Speaker Firms and Organization:
Cadwalader, Wickersham & Taft LLP
Ngoc Pham Hulbig
Attorney
Clifford Chance
Timothy Cornell
Counsel
Ropes & Gray LLP
Deidre J. Johnson
Counsel
WilmerHale
Hartmut Schneider
Partner
Wilson Sonsini Goodrich & Rosati
Christopher A. Williams
Attorney
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April 09, 2014
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Thank you to our partner firms:
April 09, 2014
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Clifford Chance is one of the world's leading law firms with 36 offices
in 26 countries and some 3,400 legal advisers, creating a significant
depth and range of resources across five continents. As a single,
fully integrated, global partnership, Clifford Chance prides
themselves on their approachable, collegiate and team based way of
working. They strive to exceed the expectations of their clients,
which include corporates from all the commercial and industrial
sectors, governments, regulators, trade bodies and not for profit
organisations. Clients are provided with the highest quality advice
and legal insight, which combines the firm's global standards with in-
depth local expertise.
Established in New York in 1792, Cadwalader, Wickersham & Taft
LLP is a leading advisor to corporations and financial institutions,
providing innovative solutions to complex legal issues. With offices
in strategically located financial and governmental centers, the firm
is well positioned to offer top-flight services to clients conducting
business across the globe.

Thank you to our partner firms:
April 09, 2014
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Ropes & Gray LLP is a leading global law firm with offices in New
York, Washington, D.C., Boston, Chicago, San Francisco, Silicon
Valley, London, Hong Kong, Shanghai, Tokyo, and Seoul. Built on a
foundation of more than 140 years of forging strong client
relationships, Ropes & Gray has over 1,000 lawyers and professionals
representing interests across a broad spectrum of industries in
corporate law and litigation matters, as well as counseling on labor and
employment issues, tax and benefits, creditors' rights, and private
client services. The firm's clients include leading industrial companies,
financial institutions, government agencies, hospitals and health care
organizations, colleges and universities, as well as families and
individuals.
WilmerHale offers unparalleled legal representation across a comprehensive
range of practice areas that are critical to the success of our clients. We
practice at the very top of the legal profession, working at the intersection of
government, technology and business to offer a cutting-edge blend of
capabilities that enables us to handle deals and cases of any size and
complexity. WilmerHale has one of the leading global antitrust and
competition practices, with more than 50 years of experience and more than
70 competition lawyers in the United States, Europe and China. We have
secured antitrust clearance for hundreds of complex mergers and joint
ventures, helped clients avoid fines and prison terms in many cartel
investigations, and won numerous victories for clients in private and
government litigation.

Thank you to our partner firm:
April 09, 2014
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Wilson Sonsini Goodrich & Rosati is the premier provider of legal
services to technology, life sciences, and growth enterprises
worldwide. For more than 50 years, the firm has offered a broad
range of services and legal disciplines focused on serving the
principal challenges faced by the management and boards of
directors of business enterprises. WSGR is nationally recognized
as a leader in the fields of corporate governance and finance,
mergers and acquisitions, private equity, securities litigation,
employment law, intellectual property, and antitrust, among many
other areas of law. With deep roots in Silicon Valley, Wilson Sonsini
Goodrich & Rosati has offices in Austin; Beijing; Brussels;
Georgetown, DE; Hong Kong; Los Angeles; New York; Palo Alto;
San Diego; San Francisco; Seattle; Shanghai; and Washington,
D.C. For more information, please visitwww.wsgr.com.

Brief Speaker Bios:
April 09, 2014
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Timothy Cornell
Tim heads Clifford Chance's US antitrust practice and advises clients on antitrust issues in government civil and criminal
investigations, the regulatory review of mergers and acquisitions, intellectual property and technology licensing, supply and distribution
agreements, joint venture formation, retail pricing issues, horizontal and vertical restraints, private party civil litigation, and the adoption
of antitrust best practices. Tim has advocated on behalf of dozens of clients before the U.S. Federal Trade Commission and U.S.
Department of Justice, representing transacting parties and parties opposing transactions between their competitors. He brings
significant experience in assisting clients through government antitrust investigations, representing targets of governmental
investigations and non-parties cooperating with the government. He has litigated antitrust and other high profile cases before
arbitration panels, and in federal and state courts across the US. His antitrust representations span numerous industries including
telecommunications, software, business services, computer networking, banking and financial services, healthcare, electronic
lotteries, satellites, solar energy, power distribution and generation, automotive, printing, pharmaceutical, media, and fire and security
systems.
Tim obtained his JD from Georgetown Law Center, cum laude, and his Bachelor of Science from the United States Naval Academy.
Ngoc Pham Hulbig
Ngoc Pham Hulbig’s practice focuses on counseling regarding U.S. and global premerger notification requirements. She has
extensive experience in preparing filings under the Hart-Scott-Rodino Act and has coordinated competition filings around the world for
complex and high-stakes transactions. Ngoc also counsels clients in the full range of antitrust matters, including mergers and
acquisitions, joint ventures, and in connection with investigations by the U.S. Department of Justice and the U.S. Federal Trade
Commission. She has experience representing clients in matters involving a wide variety of industries, including software, airlines,
pharmaceuticals, gaming, spirits, chemicals, credit, financial services, and security.

Brief Speaker Bios:
Hartmut Schneider
Hartmut Schneider is a partner in the Regulatory and Government Affairs Department of Wilmer Cutler Pickering Hale and Dorr LLP,
resident in the firm’s Washington office. Mr. Schneider practices antitrust law primarily before US agencies and courts and has
extensive experience in securing merger clearance for transactions in a diverse range of industries. He also regularly counsels clients
on legal issues at the intersection of antitrust and intellectual property law, as well as on the compliance of joint ventures, other
horizontal cooperation agreements and vertical distribution agreements with the antitrust laws. Before relocating to Washington, Mr.
Schneider worked in the Antitrust and Competition Department of the firm's Brussels and Berlin offices. In addition to his US antitrust
law expertise, Mr. Schneider has significant experience in EC and German competition law.
April 09, 2014
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Deidre J. Johnson
Deidre Johnson focuses her practice on antitrust and is head of Ropes & Gray’s premerger notification practice. She counsels clients
on their obligations under the Hart-Scott-Rodino Antitrust Improvements Act and foreign premerger regimes and has successfully
guided numerous clients through the premerger process, responding to informal inquiries and second requests as necessary. Deidre
routinely represents buyers, shareholders and sellers in financial and strategic acquisitions of all types from leveraged buy-outs, stock
acquisitions, joint venture formations and public takeovers to licensing transactions and co-development/co-promotion agreements.
Her clients include multi-national corporations, private equity, venture capital and hedge funds, mutual funds and investment advisors.
She also counsels executive officers and directors in HSR Act compliance in connection with the grant and exercise of stock and stock
options, and advises clients with respect to permissible pre-clearance and pre-closing activities, including information exchanges.

Brief Speaker Bios:
April 09, 2014
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► For more information about the speakers, you can visit:
http://theknowledgegroup.org/event_name/the-federal-trade-commissions-ftcs-rules-for-exclusive-pharmaceutical-patent-licenses-
explored-live-webcast/
Chris Williams is an associate in the Washington, D.C., office of Wilson Sonsini Goodrich & Rosati, where he is a member of the firm's
antitrust and national security practices. His antitrust experience includes merger notification and clearance, civil and criminal litigation,
government investigations, and business counseling. He has represented clients in a wide range of industries, including information
technology, electronics and computer hardware, semiconductors, telecommunications, healthcare, life sciences, pharmaceuticals, and
energy and utilities.
Chris's national security experience includes counseling clients on matters affecting foreign investment, export controls, and economic
sanctions laws. He has represented various companies in obtaining clearance before the Committee on Foreign Investment in the
United States (CFIUS), as well as in obtaining export approvals and classifications, particularly in the area of encryption, from the U.S.
Department of Commerce.
Prior to joining the firm, Chris was an associate in the Washington, D.C., office of Squire, Sanders & Dempsey, where he practiced
antitrust, international trade, export controls and economic sanctions, and foreign investment law. During law school, he studied
comparative law and Latin American competition, trade, and foreign investment law in Chile and Argentina. He was also a fellow in the
Marshall-Brennan Constitutional Literacy Program, through which he co-taught a course on constitutional law and juvenile justice at a
public high school in the District of Columbia.

The Knowledge Group has developed a panel of key thought Leaders and practitioners to help companies
understand the Hart-Scott-Rodino (HSR) rules for patent acquisitions, including the new rules of the
Federal Trade Commission (FTC) for exclusive pharmaceutical patent licenses. The program will cover the
most significant topics involved along with a Q&A panel to whom the attendees' questions will be
addressed.
Key Topics includes:
• The HSR Act: An Overview
• The "Size of Transaction" Test
• The "Size of Parties" Test
• Patents as "Assets" Whose Acquisition May Be Reportable
• Patent Acquisitions in the Pharmaceutical Industry: What Is New and What Is Not under the
Amended Rules?
• Impact and Key Risks
• Compliance Issues
• Up-to-Minute Regulatory Updates
April 09, 2014
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Featured Speakers:
April 09, 2014
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Deidre J. Johnson
Counsel
Ropes & Gray LLP
Timothy Cornell
Counsel
Clifford Chance
Hartmut Schneider
Partner
WilmerHale
Ngoc Pham Hulbig
Attorney
Attorney

Introduction
• New rules took effect December 2013
• Expand the reportability of pharmaceutical patent licenses
• Result in more transactions being HSR reportable
• Significant ambiguity remains regarding when transactions are reportable, including transactions in
related industries
• New rules are being challenged by Pharmaceutical Research and Manufacturers of America (PhRMA)
April 09, 2014
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Deidre J. Johnson
Counsel
Ropes & Gray LLP

When May an HSR Filing Be Required?
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Exclusive Licenses as Acquisitions
• Under the HSR rules, exclusive licenses are treated as asset acquisitions
– Acquiring person = licensee
– Acquired person = licensor
• If the HSR thresholds are met, both the acquiring and acquired persons have HSR filing obligations
• What is considered to be “exclusive” has changed as a result of the rule-making
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Previous Rule on Exclusivity: Bundled Rights to “Make, Use and Sell”
• To be potentially reportable, a patent owner must transfer all “make, use and sell” rights to a patent (or
part of a patent) on an exclusive basis to the licensee, even as against the grantor
- “Make” referred to the right to manufacture the commercial product
• Anything less than an exclusive license on the bundled rights to “make, use and sell” rendered the
transfer less than an “asset acquisition” and thus non-reportable
- “Make” or manufacturing rights often were the rights excluded, rendering the license non-
exclusive and non-reportable
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Some Results Under the Previous Rule
• A license was not “exclusive” if:
– Licensor retained the right to manufacture but could not sell the licensed product (or had to pay a
fee to licensee to do so)
– Licensor retained manufacturing rights solely to supply licensee
– Licensor and licensee could both manufacture product
– Licensor retained right to manufacture in the U.S. but could sell products only abroad
April 09, 2014
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Ngoc Pham Hulbig
Attorney

New Rule on Exclusivity:
“All Commercially Significant Rights”
• To be potentially reportable, “all commercially significant rights” to use a patent for any therapeutic
area (or specific indication within a therapeutic area) must be transferred to the licensee
– “Make, use and sell” no longer is the test for exclusivity
• Applies only to pharmaceutical patent licenses:
– Medical and Botanical Manufacturing
– Pharmaceutical Preparation Manufacturing
– In-Vitro Diagnostic Substance Manufacturing
– Biological Product (except Diagnostic) Manufacturing
• Other industries dealt with on a case-by-case basis
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Retention of Limited Manufacturing Rights Is Not “Commercially Significant”
• Under new rule, license is “exclusive” even where grantor retains limited manufacturing rights (e.g., to
supply only the licensee)
• FTC notes that “the right to manufacture is far less important than the right to commercialize” in the
pharmaceutical industry
– Often “licensor retains the right to manufacture exclusively for licensee. As the 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”
– If licensee is the only party who can commercially use the patent, then transfer may be
reportable
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Comparison of the Rules
April 09, 2014
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Ngoc Pham Hulbig
Attorney

Rationale Behind the New Rule
• Pharmaceutical industry “presents unique incentives for the use of exclusive licenses”
• “Typical” scenario: Small innovator, without financial resources to bring a drug to market, teams with
larger pharmaceutical company that can shepherd a drug through FDA approval process,
marketing/promotion of drug
• Both companies share in profits of commercialized product
• Result: Exclusive license “unlike that seen in any other industry”
April 09, 2014
22
Timothy Cornell
Counsel
Clifford Chance

“Co-Rights”/”Co-Exclusivity” and Impact on Filing
• “Co-rights" will not render an otherwise exclusive license non-exclusive for HSR purposes.
• Co-rights—including the right to co-develop, co-promote, co-market or co-commercialize, to
assist the licensee in developing and commercializing the product—are ones that the FTC views
as not affecting whether the grantee has received exclusive rights
April 09, 2014
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Timothy Cornell
Counsel
Clifford Chance

FTC Examples of Reportable Transactions
• Where A obtains exclusive right to all of B’s patent rights, and B retains limited manufacturing
rights for certain ingredients to be sold by A under the agreement
• Where B grants A an exclusive license of all patents for certain enumerated indications and B
retains all patent rights for separate and distinct indications
• Where B grants A an exclusive license to all of B’s patent rights in all therapeutic areas, but A
and B also enter into co-development and co-commercialization agreements
• Where B grants A an exclusive license to use a certain compound in order to manufacture and
sell a finished product in a certain therapeutic area, while B retains the right to manufacture the
same or similar products in separate and distinct therapeutic areas
April 09, 2014
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Timothy Cornell
Counsel
Clifford Chance

FTC Examples of Non-Reportable Transactions
• Exclusive distribution agreement (which was also not reportable under the old rule)
April 09, 2014
25
Timothy Cornell
Counsel
Clifford Chance

Where Ambiguity Remains
• Between the “clearly reportable” and “clearly non-reportable” transactions there is significant gray area
• Proposed rule does not address territory covered by license or duration of license
– What if retained manufacturing rights are not only limited to providing the recipient of the patent
rights with products?
– What if licensor retains right to manufacture in U.S. but only for sale abroad?
• Rules emphasize “use” of patent but provide no definition/examples
– What if licensor retains the right to “sell” but not specifically to “use”?
– Is this merely retention of a “co-right” and still reportable?
• NPRM appears to differentiate between sale and commercialization
April 09, 2014
26
Timothy Cornell
Counsel
Clifford Chance

Where Ambiguity Remains (cont’d.)
• Application to other industries is unclear even though current rule continues to apply
– “Combined” transactions – e.g., license for pharmaceutical product combined with medical
device license?
– Technological license?
April 09, 2014
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Timothy Cornell
Counsel
Clifford Chance

April 09, 2014
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Valuation
• The value of a license is the fair market value (“FMV”) or, if determined and greater, its acquisition
price
• Rules don’t change how valuations are made
• Complexity in valuation frequently arises from multiple contingent payments, development stage of
products
– Up-front payments
– Developmental milestones
– Sales milestones
– Royalties
– Other transactions – e.g., equity investment?
April 09, 2014
31
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Acquisition Price
• An acquisition price is “determined” if it can be reasonably estimated
• Includes the value of all consideration given, including:
– Up-front consideration,
– Future royalties or contingent payments (valued at face value) likely to be paid to the licensor,
and
– Consideration for voting securities, non-corporate interests or additional assets acquired.
• It is up to the acquiring person to decide whether it can make a reasonable estimate of the acquisition
price.
• The acquisition price is frequently not able to be determined (e.g., in cases where the product is still in
development or without sufficient sales history).
April 09, 2014
32
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Principles for Making a Fair Market Valuation
• Little guidance on how to perform FMV
– Good faith
– Reasonable basis
• Generally, FMV is the amount a third-party buyer, in an arm’s length transaction, would pay at present
for the assets being acquired (e.g., the license) without any contingencies – essentially a risk-adjusted
net present value.
• FMV must be determined:
– in good faith
– by the licensee’s board of directors or equivalent body (or its designee)
– within 60 calendar days of filing HSR or the closing of the licensing transaction (if a filing is not
required).
April 09, 2014
33
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Practical Aspects for Determining Valuation
• Many valuation methodologies may be reasonable depending on the specifics of the transaction,
including:
– Summing annual minimum royalty and other contingent payments,
– Determining expected royalty payments based upon historic sales,
– Discounting future royalty payments if the “useful life” of the licenses will likely be limited, and
– Using the net present value of the annual minimum (or estimated) royalty and other contingent
payments adjusted downward for any expected changes in the nature of the license.
April 09, 2014
34
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Foreign Asset Exemption in Licensing Context
• Where license includes US and ex-US component, only include US value for HSR determination
• Foreign-registered IP is a “foreign asset” for HSR purposes
April 09, 2014
35
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Remember other aspects of transaction value
• Investment in Voting Securities of Acquired Person
– When voting securities of a non-publicly-traded issuer are acquired, their value is the acquisition
price; if the acquisition price is undetermined, the value is FMV.
– There are separate rules for valuing acquisitions of stock of publicly-traded issuers.
• Aggregation with Other Transactions
April 09, 2014
36
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Practical Implications
• More HSR filings
– Result in at least 50% increase in HSR filings in the pharmaceutical industry
• Increased costs underestimated? (FTC: $1.225 million)
– Filing Fees: $1.35 - 8.4 million per year
– Preparation: $1.0 million per year
– Second Requests: $10 - 15 million per year
April 09, 2014
37
Deidre J. Johnson
Counsel
Ropes & Gray LLP

Practical Implications (cont’d.)
• Preparation time
• Waiting period prior to closing
• How to treat options to acquire product coupled with reportable license?
• Risk that transaction poses substantive risks
– Risk shifting and other provisions
April 09, 2014
38
Deidre J. Johnson
Counsel
Ropes & Gray LLP

When does an HSR Filing Become More than an Administrative Issue?
• Potential substantive issues raised by exclusive licenses
– May prevent actual competition from another drug
– May prevent potential competition from a drug in development
– May discourage innovation by foreclosing third-party access to the licensed drug
• Many difficult questions in practice, e.g.:
– Relevant market?
– Licensed compounds are often years away from FDA approval and commercialization
– Exclusive license may be part of larger collaboration between the parties
• Which rules apply?
April 09, 2014
39
Hartmut Schneider
Partner
WilmerHale

Basic Approach
• IP Guidelines (1995) ¶2.1
– “The Agencies apply the same general antitrust principles to conduct involving IP that they apply
to conduct involving any other form of … property.”
• IP Guidelines (1995), ¶5.7
– “The Agencies will apply a merger analysis … to a transaction in which a person obtains … an
exclusive license for intellectual property …”
April 09, 2014
40
Hartmut Schneider
Partner
WilmerHale

Merger Analysis: Background
• Section 7 Clayton Act
– “Substantial Lessening of Competition”
• Sources of Guidance
– IP Guidelines (1995)
– Horizontal Merger Guidelines (2010)
– DOJ/FTC Speeches
– Recent Enforcement Actions
April 09, 2014
41
Hartmut Schneider
Partner
WilmerHale

Potential Effects
• Substitutable drugs
– Horizontal merger analysis
– Substantial lessening of actual or potential competition in the relevant market?
• Complementary drugs
– Vertical merger analysis
– Substantial lessening of competition as a result of incentive and ability to foreclose rivals?
April 09, 2014
42
Hartmut Schneider
Partner
WilmerHale

Examples
• Biovail Corp. (FTC 2002)
– Biovail was branded manufacturer of Tiazac
– Acquired exclusive license to patent on API in Tiazac from DOV Pharma
– FTC alleged that exclusive license and other conduct sought to delay entry of generic Tiazac
– FTC order required Biovail to divest part of the exclusive rights of the acquired patent back to
DOV Pharmaceuticals, among other things
• Fresenius Medical Care/Daiichi Sankyo (FTC 2008)
– Fresenius acquired exclusive license to manufacture and supply Venofer, an intravenous iron
drug, to dialysis clinics
– Fresenius was large provider of dialysis services and products
– FTC alleged that acquisition would enable Fresenius to inflate the average sales price for
Venofer used in its clinics, thereby increasing reimbursement rates
– FTC order placed restrictions on Fresenius’ ability to report intra-company transfer prices
April 09, 2014
43
Hartmut Schneider
Partner
WilmerHale

Reportability of Patent Licenses Ex-US
• Pharmaceutical (and other) patent licenses may not be reportable in many jurisdictions
• Many jurisdictions follow the EU model, which requires that the patent at issue represents an
“undertaking with market presence to which a turnover can be clearly attributed”
• As a practical matter, this means that acquisitions of, or exclusive licenses under, patents that don’t
generate a current royalty revenue steam are not reportable
• But consider “associative agreements” in Brazil
• Joint venture analysis
April 09, 2014
44
Hartmut Schneider
Partner
WilmerHale

PhRMA Complaint
• PhRMA filed a complaint against FTC challenging new rule on December 12, 2013 (in D.D.C.)
• Four Count Complaint Seeking Declaratory and Injunctive Relief
– Rule exceeds FTC’s statutory authority under the HSR Act
– Rule is arbitrary, capricious, and an abuse of discretion in violation of the Administrative
Procedure Act (APA)
– Rulemaking was without observance of procedure required by APA
– There is an actual controversy of sufficient immediacy and concreteness relating to the legal
rights and duties of PhRMA’s members to warrant declaratory relief
April 09, 2014
45
Attorney

PhRMA: Overview of Arguments
• Principle arguments why the Rule should be declared unlawful and vacated
– Rule exceeds scope of FTC’s authority under HSR Act
– Rulemaking was arbitrary and capricious
– Rulemaking was without observance of procedure required by law
• Impact of Rule Change
– FTC: Additional 30 transactions reportable per year, at a cost of more than $1.0M each year
– PhRMA: FTC underestimates impact and cost; filing fees for 30 transactions range $1.35M-
$8.4M per year; cost of preparing forms range $2.4-$3.6M per year; Second Request range:
$5M-$20M.
April 09, 2014
46
Attorney

FTC: Overview of Arguments
• PhRMA does not dispute substantive standard contained in Rule
• Only question before the court is whether the Rule must apply to all industries and not just
pharmaceutical industry
– FTC reasonably interpreted the HSR Act
– FTC complied with requirements of APA
• Vacating the Rule is not warranted
April 09, 2014
47
Attorney

PhRMA: No Statutory Basis
• Statute of General Application
– “Except as exempted . . . no person shall acquire . . . any . . . assets of any other person . . . .”
– Applies across-the-board to every person
– FTC only permitted to grant exemptions for specific and limited classes of transactions or
persons (narrowly drawn)
April 09, 2014
48
Attorney

PhRMA: No Statutory Basis (cont’d.)
• Legislative History – Rejected Language in Senate Bill that:
– Would have allowed FTC “to require pre-merger notifications from particular companies or
industries or from any class or category of persons.”
 Rep. Rodino: “In the view of the House conferees, the coverage of this bill should be
decided by Congress—not the FTC and the Justice Department.”
– Would have allowed FTC to promulgate rules of “general or special applicability as may be
necessary or proper.”
 Sen. Hruska: Language intended to be narrowly construed to apply only to exemptions and
not “so broad and general as to undermine an otherwise carefully structured statutory
scheme.”
April 09, 2014
49
Attorney

PhRMA: No Statutory Basis (cont’d.)
• Beyond FTC’s Rulemaking Authority
– Clayton Act 7A(d)(2) grants FTC authority to:
 define the terms used in this section;
 exempt, from the requirements of this section, classes of persons, acquisitions, transfers,
or transactions which are not likely to violate the antitrust laws; and
 prescribe such other rules as may be necessary and appropriate to carry out the purposes
of this section.
• FTC cannot use authority to define terms to circumvent that HSR requirements apply uniformly to all
“persons"
– FTC adds defined terms that do not appear in HSR Act
• Rule not “necessary and appropriate”
– HSR Act intended only to apply to transactions:
 Substantially lessen competition; and
 Difficult to unwind
– No evidentiary showing of FTC/DOJ ever challenging a transaction of the type at issue
April 09, 2014
50
Attorney

PhRMA: No Statutory Basis (cont’d)
• Other related points:
– First time since enactment of HSR Act (37 years) that HSR requirement has singled out one
industry
– Industry sector discrimination contrary to principles of non-discrimination in antitrust enforcement
promoted by FTC and DOJ globally
April 09, 2014
51
Attorney

FTC Response: Statutory Basis
• Chevron two-part test applies
– Step 1: Whether Congress has “directly spoken to the precise question at issue.”
 If yes, the court “must give effect to the unambiguously expressed intent of Congress.”
 If statute is silent or ambiguous, proceed to second step
– Step 2: Defer to agencies interpretation if it offers “permissible construction of the statute.”
April 09, 2014
52
Attorney

FTC Response: Statutory Basis (cont’d)
• Step 1: Congress has not “directly spoken to the precise question at issue.”
– Nothing in text that Congress intended to prohibit industry-specific coverage
– Legislative history does not demonstrate a “clear congressional intent” to prohibit industry-
specific rules for above-threshold transactions
 Senate bill provision addressed transactions falling below the HSR Act’s monetary
thresholds prescribed by Congress
 Sen. Hruska was not the original proponent of “general or special applicability” language.
 Wanted to eliminate the premerger notification section altogether
 Opposed the provision at issue not because he disliked rules of “special applicability”
in particular, but because he wished to keep the Commission from exercising any
rulemaking authority (other than to exempt transactions from the notification
requirement)
April 09, 2014
53
Attorney

FTC Response: Statutory Basis (cont’d)
• Step 2: FTC entitled to deference because Congress silent on permissibility of industry-specific
implementing rules
– Appropriate for an agency to limit rules to those areas where it has observed a problem
– Rule gives meaning to (i.e., defines) terms (i.e., “acquisition” and “asset”) that appear in the Act
• FTC not required to demonstrate anticompetitive consequences of a class of transactions before
subjecting them to the Rule
– The HSR Act requires transactions that qualify as “acquisitions” meeting certain size criteria to be
reported, for the very purpose of allowing the antitrust agencies to ascertain whether or not they
pose competitive concerns;
– “Nonsense” to require FTC to show—as a condition of reportability—that a particular class of
transactions is likely to have adverse competitive consequences
April 09, 2014
54
Attorney

PhRMA: Violation of APA
• No reasoned explanation supported by evidence to justify discriminatory application to pharma
industry
– No rational empirical analysis
– Only justification was its “institutional experience”
• FTC’s explanation contrary to only record evidence and failed to respond to issues raised by PhRMA
– Pharma industry does not provide “unique” incentives for use of exclusive licenses
– Arrangements where licensor retains manufacturing rights and/or co-rights are not limited to
pharma: chemical, electronics, and medical device industries (Varner Report)
– No evidence provided to show that licensor’s manufacturing rights are less important in
pharmaceuticals than other industries
– Other industries have substantial R&D costs and/or require regulatory approvals
– Royalty provisions across industries are similar
April 09, 2014
55
Attorney

PhRMA: Violation of APA (cont’d.)
• FTC did not explain why targeted rule is necessary
– FTC did not reference any examples of problematic transactions involving the types of exclusive
licensing arrangements covered by the Rule
– FTC failed to explain how the Rule met its goal of providing “clarity and consistency”
– Applying the same rule to all industries equally would provide more clarity and consistency
• Rulemaking failed to follow procedures required by APA
– FTC did not set forth any factual material on which it relied in making the Rule; only its
institutional knowledge and experience
– Targets of Rule denied the opportunity to assess and refute any data supporting the FTC’s vague
assertions and conclusory remarks regarding institutional “knowledge,” “experience,” and
“expertise”
April 09, 2014
56
Attorney

FTC: Rulemaking Complied with APA
• FTC provided a reasoned basis for the Rule
– Increasingly common in recent years for licensors in the pharma industry to retain right to
manufacture only for licensee and to retain co-rights
– Pharma is only industry where these types of licenses are prevalent
 All 66 exclusive licensing filings in past five years involved pharma
 Requests for PNO guidance nearly all for pharma
– Not improper to rely on an agency’s experience in promulgating a rule
April 09, 2014
57
Attorney

FTC: Rule Complied with APA (cont’d)
• FTC justified in limiting to pharmaceuticals industry
– Exclusive arrangements cited by PhRMA are exclusive distribution agreements which convey
only an exclusive right to distribute a patented product
– Narrower rule is beneficial
 Tailor rule to terminology relevant to pharma industry, making it easier to apply
 FTC lacks experience with analogous licensing transactions in other industries, which
would make it a challenge to specify how the Rule should apply to those industries
 More prudent approach because avoids risk of unintended consequences
• FTC provided sufficient notice of basis for Rule
– PNO database is public
April 09, 2014
58
Attorney

PhRMA v FTC: Potential Outcomes
• Court denies PhRMA’s Motion for Summary Judgment and Rule stands
• Court remands to FTC on:
– Statutory Basis Claim
 Expand Coverage of Rule to All Industries
– APA Claims
 Further Explanation and Industry-Specific Rule Stands
• Court vacates Rule
• Appeal(?)
April 09, 2014
59
Attorney

What Is on Tap for the Future?
• Licensing Transactions in Other Industries?
– Will any old PNO guidance on pharmaceutical licensing transactions be applicable?
• Licensing transactions where incentives are not met?
− Generics licensing to other generics
• Nature of industry and access to PNO
April 09, 2014
60
Attorney

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type
your question in the box that appears and click send.
► Questions will be answered in the order they are received.
Q&A:
April 09, 2014
61
Deidre J. Johnson
Counsel
Ropes & Gray LLP
Timothy Cornell
Counsel
Clifford Chance
Hartmut Schneider
Partner
WilmerHale
Ngoc Pham Hulbig
Attorney
Attorney

April 09, 2014
62
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