In the coming months, a federal judge is expected to rule in a case brought by the biggest pharmaceutical and biotech companies attacking a Federal Trade Commission rule implemented late last year that will subject many more drug patent transfers to antitrust review.
In November, the FTC required that transfers of exclusive rights to pharmaceutical patents be reported to the FTC and the Department of Justice under the Hart-Scott-Rodino Act, even if the original developer retained manufacturing rights. Previously, the FTC allowed patent-licensing deals in all industries to avoid antitrust review if the patent holder retained the right to manufacture. The FTC, in consultation with the DOJ, proposed in August 2012 to change that policy, but only for pharmaceutical licenses.
The Pharmaceutical Research and Manufacturers of America sued the FTC in December, arguing that the FTC had no authority to single out an industry for extra antitrust burdens. The rule "is both contrary to the plain language of the [HSR] statute and unsupported by record or fact," the group said in its lawsuit. PhRMA, as the group is known, numbers among its members some of the biggest drug makers, including Abbvie Inc., Amgen Inc., AstraZeneca Pharmaceuticals LP, Bayer HealthCare LLC, Biogen Idec Inc., Merck & Co., Otsuka Pharmaceutical Co. Ltd., and Sanofi. PhRMA based its lawsuit on two arguments.
First, PhRMA said, the HSR Act does not permit the commission to expand "the scope or coverage of the act to a specific industry or set of industries." PhRMA noted that in 1976 when HSR was being drafted, House negotiators rejected a Senate provision that would have granted to the FTC power to impose greater notification requirements on particular industries. Congress "specifically refused to grant the commission the authority to do what the commission has purported to do here," PhRMA wrote.
Second, the FTC offered no evidence that pharmaceutical patent deals were more likely to pose competition problems than those in other industries. "The commission provided no reasoned, data-driven basis for treating the pharmaceutical industry differently," PhRMA said. The group said that the FTC's assertion that drug developers are more likely to engage in the type of exclusive patent right transfers targeted by the rule than companies in other industries is based on the anecdotal conclusions of the FTC and not on empirical evidence. PhRMA cited a study submitted to the commission during the rule-writing process indicating that "these types of licenses are, in fact, common in the technology industry and many other industries."
The FTC has allowed patent-licensing deals to avoid antitrust review if the patent holder retains manufacturing rights after granting another company the exclusive right to sell the patented product. The FTC reasoned that most exclusive licensing deals, if they don't transfer the right to manufacture, are simply distribution agreements and not asset acquisitions that warrant antitrust review.
But in the pharmaceutical industry, the FTC decided that exclusive licenses present unique competition issues. Because many drug developers are small startups, they don't have the financial resources to carry their discoveries through the Food and Drug Administration approval process or to effectively promote the drugs when they are allowed on the market. To bring a drug to market, developers often enter exclusive licensing agreements with bigger pharmaceutical companies that can cover the costs of approval and marketing. But the bigger drug companies also will often demand royalty agreements that allow them to retain as much of the drug profits as possible. Because the patent holders essentially become captive manufacturers for the larger companies, these types of drug-licensing deals are "substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product," the FTC said when it proposed the pharma licensing rules.
Antitrust attorneys specializing in pharma deals said the FTC has long been concerned that too many licensing deals have been escaping antitrust review and that the exemption for deals in which manufacturing rights were retained was a loophole that had been exploited.
The FTC has denied the PhRMA lawsuit's allegations. A lengthier defense is expected on March 10 when it replies to the group's motion for summary judgment.
PhRMA is being represented by Baker Botts LLP partners Joseph Ostoyich and James Rill, senior counsel William Bradford Reynolds and associate Emma Burnham. The FTC's legal team is led by general counsel Jonathan Neuchterlein, deputy general counsel for litigation John Daly and attorney Michele Arington.
The FTC has estimated that the proposed change would subject an additional 30 drug-licensing transactions to antitrust review each year. The agency, though, insisted that would be an increase of only 2% over the 1,500 deals antitrust regulators review on average each year. Antitrust experts said the 2% figure plays down the burden that would be imposed on the pharmaceutical industry.
Jon Dubrow, a partner in the antitrust and competition practice group at McDermott Will & Emery LLP, has noted that FTC statistics show only 75 chemical and pharmaceutical transactions were reviewed by the FTC and the DOJ in 2011, and 48 in 2010, so an additional 30 would actually be a significant increase.
Dubrow said the core issue in the case will likely be PhRMA's claim that the FTC's policy is discriminatory because it singles out pharmaceutical license deals for extra disclosure burdens. "Normally federal agencies get substantial deference in promulgating rules related to the statutes they implement," Dubrow said. "But PhRMA's position is that the FTC has gone several steps beyond what the statute allows for and it's not just a matter of interpreting the statute. If the judge follows that line of logic, I don't think she will give substantial deference to the agency."
How Judge Beryl A. Howell views the deference issue may turn on how far-reaching she believes is the FTC's power to take "necessary and appropriate" steps to enforce the HSR statute. Said Dubrow: "I expect the FTC will rely heavily on an argument that this was a 'necessary and appropriate' step' to protect competition."
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