Question
From:
(REDACTED)
Sent:
Monday, July 14, 20084:40 PM
To:
(REDACTED); Verne, B. Michael
Subject: HSR -Exclusive License Analysis
Mike,
I have beenanalyzing whether an HSR filing would be required for the grant of a particularexclusive license to a drug patent. I have reached a tentative conclusion as towhether a filing would be required, but would be grateful for your concurrenceor contrary opinion. In sum, I have concluded based on the analysis below, thatno filing would be required as long as the licensee's board of directionsconcludes that the fair market value of the license is less than $63.1 million.
Here is aninformal outline of the facts and my analysis.
I. Parties
Licensor --AEuropean pharmaceutical company (with little US. presence)
Licensee --AEuropean pharmaceutical company (also with little US. presence)
License --Anexclusive license to a drug patent for exploitation in the US., Canada and Mexico.
I believe that the US. aspect of the exclusive license would render it, for HSR purposes, anacquisition ofan asset in the US. (regardless of the fact that the parties areboth foreign, with little US. assets or revenue).
II.Size of the Person Test
A. The transaction size is small enough to requireapplication of the size of the person test.
B. Licensee and Licensor are both public companiesand their own UPEs.
C. Licensor exceeds the $12.6 million asset andrevenues tests, assuming there is no reduction for assets and revenues outsideof the US. for purposes of the size of the person test.
D. Licensee exceeds the $126.2 asset test, given thesame assumption I made in IIC.
E. Therefore, the size of the person test would besatisfied.
III.Size of the Transaction Test
A. The size of the transaction would be determinedbased upon one of two valuation methods applicable to exclusive licenses, i.e.,either (i) if determined, the gross, undiscounted sum of future royalties, or,(ii) if royalty amounts are speculative, then fair market value. (lnt. 86 in4th ed. of the ABA Premerger Notification Practice Manual).
B.Gross Royalties Test:
1. I have assumed that payments characterized as"milestone" payments would be treated the same as royalty paymentsfor purposes of the first test.
2. There is no minimum guaranteed royalty, or if thereis one, the minimum would not be sufficient to reach the size of thetransaction threshold.
3. The drug requires FDA approval, which has not yet beenobtained, before sales can begin.
4. If the first test were applied, then the gross sum offuture, undiscounted royalties and milestone payments would probably beexceeded if the Licensee's sales projections are ultimately realized.
5. I would conclude, however, that although the Licenseemight have a reasonable basis for its projections, they are simply that, andthe contingency of FDA approval or and any uncertainty regarding the ability toachieve sales projections, would render the gross royalty payments test to be"undetermined," or too speculative to be used for the HSR test.
C.Fair Market Value Test:
1. Applying the fair market value test, the Board ofDirectors of the Licensor (or its qualified nominee) will have to determine whetherthe fair market value of the US portion of the exclusive license transactionexceeds US$63.1 million.
2. This determination is made on a present day basis,appropriately discounting potential payments for time value and the risksinvolved.
3. This determination would also assume no othercontingent payments required in the future (i.e. the potential valuerepresented by such payments must be incorporated into the fair market valuefigure).
4. If the Board determines in good faith and on areasonable basis that the fair market value of the exclusive license is lessthan $63.1 million, then the size of the transaction test would not besatisfied and no filing would be required.
5. This result is not impacted by the fact that applicationof the gross royalties test, if it had been applied, might have yielded greaterthan $63.1 million, assuming the Licensee's conclusion that the royalties werespeculative was based on the facts as described and not simply a tactic toavoid an HSR filing.
D.I have not found any guidance that would lead to a different result simplybecause we have here two entities that are not currently active in the US. licensing a drug not currently sold in the US. (thus bringing a new product andparticipant into the relevant drug market) but would appreciate your insight asto whether there is anything on that point that would change the analysis.