With an uptick in antitrust enforcement action across the US, UK, EU and China (among other jurisdictions), companies in the life sciences sector should conduct antitrust “due diligence” as they enter new licensing and collaboration arrangements. These strategic contractual relationships can often endure for 10 to 20 years, during which time companies’ product portfolios and pipelines will change and antitrust risks can evolve. These contractual relationships also often reflect high upfront investments, despite significant time periods before the full value of the investment is expected to be realized. To ensure that commercial objectives can be achieved as intended, companies need to be able to anticipate – at the time of valuation and deal signing – a range of antitrust and related regulatory risks that may crystallize many years down the line.
As such, deal-makers should be aware of the following common ‘antitrust risk traps’, which can have significant implications for the value of the licensed assets, the day-to-day running of the collaboration and each party’s ability to exercise key rights under the agreement.
1. Different antitrust authorities have different perspectives, which can significantly impact the risk associated with certain types of provisions—like exclusivity clauses and non-competes
It is routine for a licensee to ask a licensor to refrain from developing or commercializing a competing product during the term of a license and collaboration agreement. While antitrust laws generally recognize that non-competes can be necessary (and justified) to ensure that the parties are able to deliver on the overall pro-competitive objective of the venture — i.e., to bring a new (licensed) product to market — these clauses need to be carefully drafted. Different jurisdictions take different views on permissible product scope, geographic scope, and duration.
For example, in the EU, UK and the US the permissible scope of such non-competes depends heavily on the nature of the collaboration between the parties after execution of the license. A relatively long exclusivity clause that may be permissible in the context of an ongoing collaboration could be deemed overly restrictive of competition in circumstances where the deal is more akin to an outright asset sale—such as, for example, an option-to-license in which, following exercise of the option, the licensee takes full control over the asset. This means that the parties need to keep an eye on the overall nature of the agreement (including risk sharing, governance, and decision-making provisions) when negotiating exclusivity clauses or non-competes. In the China context, it is also important to keep in mind that there is currently no clear-cut guidance on permissible product scope, geographic scope and duration. This adds a degree of complexity when negotiating global non-competes or exclusivity clauses and reinforces the importance of case-by-case analysis of the specific circumstances of a licensing or collaboration arrangement.
Multi-product deals, platform technology deals and very early-stage asset deals all present their own unique sets of challenges when scoping non-competes. In particular, parties will have to tread the fine line between identifying those future products and activities against which protection is genuinely required so that the collaboration can be successful, while also seeking not to stray beyond what is necessary. If there are different ways to construct a non-compete, EU competition law stipulates that the parties must choose the one that is the least restrictive of competition. Likewise, in the US non-competes are permissible but must be narrowly tailored to the circumstances surrounding the transaction and reasonably necessary for achieving the procompetitive benefits of the transaction. Going beyond this could render an extremely important clause void and unenforceable from the outset in key jurisdictions such as the EU (as well as opening the parties up to potential commercial disputes and enforcement action).
2. Option structures may create delayed filing obligations and potential completion risk
Many license and collaboration deals are structured as option arrangements, where an exclusive license is only granted following the exercise of an option (and typically, payment of a corresponding option exercise fee). Yet, these deals also typically involve sizeable sums being paid to the putative licensor on signing—prior to option exercise—usually as upfront funding to support an agreed research and development plan. Thus, many option deals may not be notifiable under the merger control rules at the time of signing (because no exclusive licenses have been granted at that time) but could become notifiable once the rights are exercised (and could then face potentially lengthy reviews depending on how the parties’ own pipelines and product portfolios evolved in the period between signing and notification). Depending on the timing between signing and option exercise, there is the additional risk that agreed option rights cannot be exercised by the expected licensee due to market developments, such as another deal concluding in the meantime and creating a challenging product or innovation overlap (see, e.g., the issues arising in BMS / Celgene / Nimbus). And further compounding risk to the expected licensee, very often the money that has already been paid—e.g., on signing, and during the option period to fund research and development—cannot be recovered.
To manage this risk, potential licensees should conduct a thorough review of their product pipelines as well as their M&A strategy at the time of deal negotiations to ensure that option rights are structured in a way that maximizes the prospects of delivering on key commercial objectives. For example, prospective licensees may want to ensure that option rights can be exercised at lower non-controlling levels or can be divested to another suitable party should this become necessary for regulatory reasons. As a practical matter, companies will find it hard to predict future M&A many years out (but they can usually assess at least the near-term) and there is therefore a certain degree of risk associated with these structures that an investor/licensee cannot entirely mitigate.
3. Equity investments, which often accompany licenses, may impact medium-term M&A strategy
Many license and collaboration deals include, as a form of “upfront” payment, the purchase of a minority stake in the licensor. Often these equity investments do not trigger any regulatory filings (e.g., because the stake remains at a level that does not trigger filing thresholds—including even relatively low control thresholds, such as those in the UK, Germany, and Austria). Even so, these minority investments need to be considered through a broader antitrust lens because they can have a disproportionately adverse impact on the licensee’s future, unrelated, M&A plans.
This is because antitrust authorities increasingly analyze minority stakes and other investments as if they are part of the overall portfolio of merging parties. This means that without holistic planning, relatively small collaborations or equity stakes could complicate or delay a company’s future M&A goals. For example, in J&J / Actelion, the European Commission closely analyzed one such minority holding – J&J’s agreement with Minerva for the co-development of a Phase II compound – as if it were part of J&J’s proprietary product pipeline. Ultimately, to obtain clearance and close the global deal, J&J was required to divest its entire minority interest, granting Minerva new rights over the global development and waiving J&J’s royalty rights on Minerva's sales in the EEA.
In a world where antitrust authorities are increasingly reluctant to engage on remedies, the potential future implication of equity investments on M&A pipelines needs to be well-understood before they are entered into.
4. Regulatory obligations will evolve along with the collaboration and should be re-assessed at key transition points
Several events may occur during the lifetime of a collaboration that should prompt a reassessment of antitrust obligations and risk. For example, amendments to commercial terms or informal changes in the day-to-day running of the venture may create new regulatory obligations—e.g., a transition from a co-commercialization arrangement to a sole-commercialization arrangement. Similarly, changes to the product’s role in the marketplace—e.g., as a result of the parties achieving label extensions, or a party’s acquisition of a competing product—may alter the competitive landscape. In such shifting circumstances, the parties would need to seek appropriate legal advice to re-assess the regulatory requirements (including possible filings) and overall risk profile of the restated arrangements.
Given the risks associated with a shifting antitrust landscape, if there is any possibility that the parties are, or could become, actual or potential competitors during a collaboration agreement, they should consider, at the outset of the collaboration and at any key transition points, the need to implement appropriate safeguards, including around information exchange and possible “spillover” risk between the collaboration project and their own businesses. For example, robust firewalls should be implemented and maintained between potentially competing programs (recognizing that antitrust authorities can take both broad and narrow approaches to product market definition, and which may not always align with how the business views competition)—this applies both during pre-signing diligence (e.g., via clean teams) and as the collaboration evolves.
It is also important to consider at the outset how data will be shared during the collaboration, as well as afterwards when both parties walk away. If the parties want to also use data generated from the collaboration outside of the scope of the agreement, they could encounter obstacles under antitrust laws, as well as privacy laws, privacy policies and contract terms. It is important to understand the interplay of these various regulatory regimes as their objectives and requirements do not always align (e.g., antitrust laws may favor data sharing and portability whereas data privacy laws may restrict this).
5. Collaborations often require hand-back of a product to the licensor on termination which may require further approvals
License and collaboration agreements typically contain provisions that apply when the agreement terminates, typically as a result of the licensee exercising an optional termination right—e.g., because the product is not successful, or it no longer fits within the licensee’s strategy. It is typical in these agreements for the licensee to agree to return the product to the licensor under certain termination scenarios, and these hand-backs can include grant-back licenses of a licensee’s IP to the original licensor. As the parties reach this exit stage, they could be faced with further regulatory processes. In certain jurisdictions, hand-back or pure IP license-back structures could trigger their own filings (even after the original licensing deal was notified and cleared). The extent of global filings will depend, among other things, on the nature of the change in control (e.g., is the venture changing from joint control to a sole control situation) and the overall asset package that is being handed back (e.g., whether it is purely IP or if other assets are also being contributed to the package, such as customer lists, key employees, etc.). Various merger control regimes around the world have a broad concept of what constitutes a ‘transfer of a business’, which could capture a range of exit strategies. In addition to potential merger control requirements, the parties will need to keep an eye on the terms associated with grant-backs in order to avoid antitrust risks.
We discuss these issues (and more) in our two-part 19th episode of our Antitrust Essentials podcast. If you are interested in joining our discussions or hearing more from our global experts on these topics, do get in touch.
Several events may occur during the lifetime of a collaboration that should prompt a reassessment of antitrust obligations and risk