Question
From: (redacted)
Sent: Friday, January 13, 2006 10:22 AM
To: Verne, B. Michael
Subject:HSR question
Dear Mike:
I have a question about the possibleapplication of the Hart-Scott-Rodino ("HSR") Act and Rules to aproposed collaboration and licensing agreement for development andcommercialization of biotechnology-based medicines and treatments. Based onyour prior advice on similar agreements, the proposed agreement should nottrigger HSR notification obligations because the only exclusive rights acquiredunder the agreement are marketing and distribution rights, and the licensorwill retain co-manufacturing rights for the licensed products in the United States. I thought it would be most helpful to outline thebasic facts briefly in this email, and then follow up with a telephone call toconfirm that you concur with that conclusion.
1. Proposed Agreement
A U.S. biotechnology companythat is focused on research and development of biotechnology medical therapies("US Company") proposes to enter a Collaboration Agreement with theU.S. subsidiary of a foreign pharmaceutical company (collectively,"Foreign Company") to cooperate and jointly fund the development ofcertain biotechnology therapies, and to grant one another licenses tocommercialize the resulting products. The two companies will cooperate todevelop a plan and budget for joint development of the products, and to developa global strategy for commercialization.
Under the proposedagreement, US Company grants Foreign Company licenses under its technology forexclusive commercialization rights outside the United States and Canada(collectively, "North America") for up to ten products (as well ascertain related "follow-on" products) to be selected later by ForeignCompany from candidates developed by US Company. US Company also grants ForeignCompany non-exclusive rights for development and manufacture of the licensedproducts anywhere in the world. Foreign Company will have no rights to market,sell, or otherwise commercialize the licensed products in North America, however.
In exchange, Foreign Companywill provide substantial support for US Company's research and developmentefforts starting with an initial cash payment at the time of signing, but withthe bulk of its commitment in the form of additional payments each quarter overa number of years and possible additional milestone payments in amounts thatvary depending on when or if certain development milestones are hit. The totalof these payments is therefore not certain, but may be more than $250 millionover the full life of the agreement. Foreign Company will also purchase USCompany common stock valued at well under $53 million, and provide a creditfacility to US Company at commercial rates and terms. Finally, Foreign Companywill make additional payments when it selects a product, with the amountsdepending upon the stage of product development at the time of selection, and,if any selected product is successfully commercialized, it will also pay aroyalty based on a percentage of its net sales.
US Company retains for itself the rights to market, sell and otherwisecommercialize the licensed products in North America. To support US Company's retained North Americacommercialization rights, Foreign Company also grants reciprocal licenses underits technology to US Company for exclusive rights to market, distribute orotherwise commercialize the licensed products in North America, and US Companywill pay a royalty based on its net sales in the event any of the products issuccessfully commercialized in North America. But Foreign Company grants onlynon-exclusive manufacturing and development rights, and retains the right to useits own technology for development and for manufacture of the licensed productsanywhere in the world, including the United States (and it will have anon-exclusive license to use US Company technology for such development andmanufacturing as well). Thus the only exclusive rights granted under theCollaboration Agreement are marketing and distribution rights, and both ForeignCompany and US Company will have co-manufacturing rights as well asco-development rights in the United States and elsewhere.
2. No HSR filing isnecessary for the proposed license grants, because the licensor retains U.S. manufacturing rights.
My question focusesspecifically on the grant of license rights to US Company. Under PNO interpretations,a grant of an exclusive license to intellectual property is deemed anacquisition of an asset that may be subject to HSR filing requirements. But asyou know, a license grant limited to exclusive marketing and distributionrights is not deemed an asset acquisition, and is not subject to HSR reporting.(See, e.g., Interpretation 29, ABA Premerger Notification Practice Manual(3d).) Under the proposed agreement, US Company will receive license rightsfrom Foreign Company to support commercialization of the licensed products inthe United States (and Canada), but the only exclusive rights that US Companywill receive are marketing and distribution rights. Foreign Company only grantsnon-exclusive manufacturing rights and development rights to US Company, andwill retain co-manufacturing rights as well as co-development rights in the United States and everywhere else. Because the exclusive rightsunder the license granted to US Company are limited to marketing anddistribution only, under PNO interpretations the license grant to US Companyshould not be deemed an exclusive license that creates an acquisition of assetsthat is subject to HSR reporting.
You recently advised otherparties, for instance, that no HSR notification was required for closelysimilar arrangements under a pharmaceutical "co-promotion" agreementwith the following relevant features: (1) Licensor and Licensee would haveco-promotion rights outside the United States, and Licensee would haveexclusive U.S. sales rights (except for a limited option for Licensor toco-promote the product to certain specialists only); (2) Licensor and Licenseewould each have non-exclusive co-manufacturing rights in the U.S. andelsewhere; and (3) both parties would have "full engagement in strategyand planning" for global sales. (Letter to Michael Verne, InformationStaff Opinion 0507007 (July 17, 2005).) Likewise, in the proposed CollaborationAgreement, the only exclusive rights granted to US Company will be marketingand distribution rights, both parties will have non-exclusive co-manufacturingand co-development rights, and both parties will be engaged in strategy andplanning for global sales.
I will call you shortly todiscuss the issue and confirm that you concur with these conclusions, butplease feel free to reply by email or telephone me at (redacted). Many thanksfor your help with this question.