Question
From:(redacted)
Sent:Friday, May 19, 2006 3:35 PM
To:Verne, B. Michael
Subject:Product Development Agreement
Dear Mike:
I aminterested in your views as to the reportability under HSR of a productdevelopment agreement between my client, a Foreign Company, and a U.S. Company.
Boththe Foreign Company and the U.S. Company have intellectual property relating tothe development of a new pharmaceutical product. They propose to enter into aCommercialization Agreement which will enable the parties to develop andcommercialize the intellectual property more quickly and effectively. Under theproposed Agreement each party grants to the other certain licenses to use andexploit the intellectual property described above for a specified"field", and in the event the product development is successful, tosell the resulting product in specified territories. The Agreement contemplatesthe grant of "research licenses" upon execution and"commercialization licenses" upon regulatory approval in any country.Under the commercialization licenses the U.S. Company will be granted the exclusiveright to sell the product in a Country, and the Foreign Company will be grantedthe exclusive right to sell the product in the rest of the world.
Boththe research and commercialization licenses contemplate that only the Foreign Companywill have the right to manufacture the product except that the U.S. Companywill have the right to use or sublicense its technology for other"fields". The U.S. Company agrees to purchase its supply of theproduct from the Foreign Company for sale in its territory. In the event thatthe Foreign Company defaults in its supply of the product to the U.S. Company,the U.S. Company is entitled to assume the manufacturing of the product (orhave the product made by a third party) until the Foreign Company demonstratesthat it is able to resume supply to the U.S. Company. In the event oftermination of the Agreement (except for breach by the U.S. Company), the U.S.Company will have the exclusive right to develop and commercialize the productworldwide.
As compensationfor the licenses from the U.S. Company to the Foreign Company, the ForeignCompany agrees to make a number of payments over a period of time. Theyinclude: (1) upfront payments over a two year period; (2) clinical developmentpayments over a six year period; (3) milestone payments if and when sales ofthe product hit certain sales targets; and (4) royalty payments based onrevenues or sales from the product in its territory. Obviously, payments (3)and (4) relate to the commercialization licenses and are contingent upondevelopment and regulatory approval of the product, and the specific amounts tobe paid under (3) and (4) are dependent upon the sales, which are unknown atthis time.
Ascompensation for the commercialization license from the Foreign Company to theU.S. Company, the U.S. Company agrees to pay royalties based on the sales, ifany, of the product in its territory.
Inconsidering whether this transaction is reportable under HSR, I understand theissues to be:
(1) Would the licenses from the U.S. Company to theForeign Company be considered exclusive licenses and therefore acquired assetsfor HSR purposes?
(2) Does it matter that the research licenses are grantedupon execution whereas the commercialization licenses are only granted uponregulatory approval in a country?
(3) If either or both licenses are considered acquiredassets, how should they be valued? Which of the payments should be taken intoaccount in valuing the asset? If future sales are to be taken into account, arethey limited to sales in the U.S.?
(4) Would either of the licenses by the Foreign Companyto the U.S. Company be considered an exclusive license?
(5) If so, would it be exempt as a foreign asset?
Pleaseadvise if you need any additional information. I look forward to hearing fromyou at your earliest convenience.