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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Hannah England: Hello, and welcome to our Ropes & Gray podcast series on the new Hart–Scott–Rodino (“HSR”) Act rules, with this first episode focused on impacts to the pharmaceutical industry. My name is Hannah England, and I’m a partner in our strategic transactions practice based in Boston. I represent large pharmaceutical companies, a wide range of public and private biotechs and academic institutions from around the globe on licensing and complex collaboration transactions, asset acquisitions, and royalty finance transactions.
On October 10, 2024, the Federal Trade Commission (“FTC”) with concurrence of the Antitrust Division of the Department of Justice (“DOJ”) finalized its June 2023 rulemaking, amending the premerger reporting and notification rules under the Hart–Scott–Rodino Improvements Act. The new rules will take effect 90 days after publication in the Federal Register and will likely become effective in January or February of 2025. While significantly pared back from the original proposal, the amended rules introduced new disclosure requirements for all types of transactions, including expanded 4C production and requires significantly more disclosure and transactions where competitive overlaps or vertical relationships exist.
In a time of transition, we wanted to sit down with two leading antitrust attorneys, Jackie Grise and Zak Goodwin, to discuss the impact of the new HSR rules, particularly in the pharmaceutical industry. Jackie represents corporate clients before the FTC and the DOJ in connection with mergers and acquisitions with a particular focus on representing life sciences companies on strategic transactions and licensing agreements. Zak represents leading companies across a variety of industries before the FTC and the DOJ in antitrust investigations and litigation and was recently the lead in-house antitrust lawyer at a leading global life sciences company. Thank you both for joining the discussion.
Zak Goodwin: My pleasure.
Jackie Grise: Happy to be here.
Hannah England: To kick things off, I’d like to delve into the practical implications of these news rules. Jackie and Zak, how have your clients reacted to the new rules and what do they see as primary challenges?
Jackie Grise: Hannah, I’ll kick off here. I think across the board, clients are reacting as you would expect, with a recognition that the new HSR rules will create more burden for all filers. But the rule changes have been in the works for over a year and a half now, so it isn’t exactly coming as a surprise to anyone. As you mentioned at the top, the changes are vastly scaled back from what was originally proposed, so that is being received quite positively by our clients. On another positive note, along with the rule changes, early termination will be coming back for those that request it, bringing more efficiency back into the system from a timing perspective. I think over time, everyone will get used to the new process to prepare for HSR filings, but perhaps the biggest change that we see is how the new procedural rules may impact substantive strategy, and we’ll talk about that some here today. But, Zak, what are your thoughts at the top here?
Zak Goodwin: Yes, I agree with that. I think there’s a recognition that this could’ve been a lot worse. I think the proposed rules last year were much more expansive, and there’s a sense of relief at what got pared back. But there’s also recognition this is going to be a heavy lift and there’s a lot that’s going to have to go on with filings. I think most clients have just been really focused on getting into the weeds of the new rules and figuring out exactly how they’re going to go about complying, which I think is the right thing to do.
Hannah England: So, the new rules require more documents, adding in new custodians and also expanding ordinary course documents. If we take these two items in turn, can you explain the new category of person who needs to provide documents and any challenges in identifying the right person in a pharmaceutical company?
Jackie Grise: The new rule requires production of all 4C documents, which HSR filers are used to. The current rule covers 4C documents prepared by or for officers or directors, and now, the new rule will expand to a newly minted document custodian called the “supervisory deal team lead,” or otherwise the “SDTL”—we’ll use that for purposes of not having to say “supervisory deal team lead” every time. The SDTL is an individual who functionally leads or coordinates the day-to-day process for the transaction who is not otherwise an officer or director. The purpose of this is reaching down lower into the organization to capture more real time documents that aren’t filtering up to management, so to say. The SDTL will need to be specifically identified in the filing, so we’ve got to pick a person and that person is going to be identified and the person that’s signing the form, under penalty or perjury, has to say, “That really is the SDTL.” So, we can’t just come up with whoever here—it really should be something that’s given quite a bit of thought to. And ideally, the SDTL will be identified in advance and understand the scope of their responsibilities as an HSR document custodian from the very beginning, rather than taking a retrospective look at it at the time of preparing the filing.
Zak Goodwin: Just to add a quick point—It’s often relatively clear, I think, who this person should be. You do need to think carefully about it, but my experience so far is that clients have pretty quickly arrived at the single person that will apply here on really all their deals. It could be different for some clients, but that’s what I’ve seen so far.
Taking the second part of the question, which is really about ordinary course documents that are going to have to go in with the filing, in deals where you have some competitive overlap, there are two categories of ordinary course documents that have to go in. One is regularly prepared plans and reports that analyze competition with respect to the overlap product that were shared with the CEO, and that were prepared or modified within a year of filing. The second category is all plans and reports—so, not necessarily regularly prepared ones—that were shared with the board of directors that relate to an overlap in the transaction, and, again, were prepared within a year of the filing. So, this is really a big change. It’s also somewhat hard to prepare for simply because these are documents that might be prepared nine months before you decide to do a transaction, so you’re not going to know necessarily what effect this document’s going to have on a deal you do in the future, and that’s a pretty big change.
Hannah England: How do you think that this will change the timeline for a typical review? Will it make things more efficient?
Zak Goodwin: No, I don’t really think so. It is possible in some cases that having this more information will let the agency come to a decision faster, but, I think, often, it’s just going to take longer to get on file because there’s more information. I think providing more information often just raises new questions that the agencies are going to have to think through, and those may or may not result in second requests or even antitrust issues. It’s just going to be more information that the staffers have to think through, which takes time to do.
Jackie Grise: I agree with all that. Just expanding on it—there are a certain number of filings that go in every year, and if there’s twice as much information in each filing, can you imagine the burden on the reviewing staff at the FTC and the DOJ who are screening all these filings? It’s going to take them a lot more time to do the screenings. So, while early termination is coming back, it’ll be interesting to see if there’s any impact on whether the agencies will be completely overwhelmed with the amount of information that they’re getting, and how they, on their side, are going to be dealing with processing all this additional info.
Hannah England: In terms of the new rules, they also require a narrative description of the overlaps and also focus on potential overlaps. What challenges do you see for our clients, many of whom are licensing molecules and products that are years away from commercialization? How will we identify and describe potential overlaps?
Zak Goodwin: The rules are very clearly trying to get at this potential competition or future competition between products. I think this raises a number of questions that clients are going to have to think through. One, for pharma clients specifically: At what stage of development, do you really have to be disclosing a product as an overlap? Obviously, there’s a spectrum here and it will require some judgment, but presumably, an idea on a whiteboard for a product is not enough to trigger an overlap but maybe a funding decision triggers that. You’re going to have to figure out where to draw that line of when a product requires disclosure if it overlaps. I think the other is, for pharma clients, often, you might not know earlier in development exactly what indication a molecule or something, a therapy is going to address—you might know it’s in oncology or something—so, you’re going to have to think through how to frame that with the agency if you have an acquisition target that is in that general area. And I think, generally, being candid and just saying, “We don’t know exactly what the indications will be—it will be in this general area if it’s successful,” and maybe say something about how it may or may not compete with the target, and that should be sufficient. I think that’s one thing pharma clients, specifically, are going to have to think through carefully.
Jackie Grise: That was a great explanation of the challenges that pharma clients face for pre-marketed products, but even for on-market products, I see that there really has to be a lot of thought put into identifying what is competing here. For pharmaceutical clients, it can be an API, mechanism of action, the indication in general—what is it exactly that is competing? I think a lot of thought has to go into each one of those things for each filing.
Hannah England: The other thing that the rules are going to require now in addition to competitive overlaps is to identify actual or potential supplier relationships, and this seems somewhat tricky in the pharmaceutical or biotech context perhaps more so than in other industries. What are the requirements here and what do you see as the challenges for our clients?
Jackie Grise: Parties will need to list and briefly describe products and services where there’s about a $10 million threshold of sales between them, and/or to competitors. This could be for any number of things, like an input—it could be an API, it could be drug substance, it could be contract manufacturing provided to either the other party or to a competing entity of the other party. And the question really is aimed at scoping out whether a transaction presents what we call “potential vertical concerns.” The FTC does have a number of pending matters right now on vertical foreclosure issues, both in the life sciences industry that are pending and then other industries as well. For example, there’s pending litigation right now for the FTC to block Tempur Sealy’s proposed acquisition of the Mattress Firm, which is a vertical issue. So, it’s a really important question and is really going to require a lot of thought to appropriately answer it. But honestly, the vast majority of pharma deals, based on our experience, will probably not touch on this issue unless, again, there are unique circumstances where there’s an API relationship or contract manufacturing.
Zak Goodwin: I agree. I think where this will come up for pharma will be contract manufacturing, and then to the extent they sell or have any role in diagnostics or research tools and services that they provide to others. But I think by and large, this is a problem for companies that are involved in distribution, of both your own products and maybe third-party products—it’s just going to be a real pain for those types of clients.
Hannah England: What about the expanded reporting requirements for prior acquisitions? Can you touch a little bit on those and how you think that this could impact our life sciences clients in unique ways or present unique challenges?
Jackie Grise: Yes, there are expanding reporting requirements for prior acquisitions. It’s much scaled back from what was originally proposed, so that is the good news. The original proposal was to go back 10 years for prior acquisitions, and the actual new rule that is coming out is maintaining the current baseline of five years, so there’s no expansion of the rule from a temporal perspective. But what is changing here is that the current rules require identification of prior acquisitions by what we call a “NAICS code”—an industry classification code. The new rules are much broader in that it’s going to cover prior acquisitions of competing and potentially competing products. For pharmaceutical companies, I think this does raise really unique challenges because an acquisition of a pre-marketed product wouldn’t have a NAICS code, so under the current rules, you wouldn’t have to ever really be reporting that in this section of the form. But now, with the identification of competing or potentially competing future products, it will reach down and require reporting of those things, and sometimes, the targets of a pre-marketed, licensed product aren’t even defined yet—other than maybe in oncology—so, it isn’t going to require a lot of thought here. Also, what’s unique to pharma is that exclusive licenses are reportable, and so, this section will also continue to capture exclusive licenses that need to be reported, and that same issue about licensed in pre-marketed technology is something that’s going to be a challenge as far as whether or how to report it in this section.
Zak Goodwin: Agreed. The only thing I’d add is just under the new rules now, both the acquiring and the acquired person are going to have to report these things. Previously, it was just the acquiring person, so it does expand the reporting requirements in that sense too.
Hannah England: There’s been a lot of conversation about these rules for a while. Is there any possibility that they get struck down?
Jackie Grise: There is a possibility that the new HSR rules could be struck down after the Trump administration enters in January and prior to their implementation, which is happening in February, but I think we see that as a low probability here. The new rules passed the FTC with a 5-0 vote, so the full commission voted, including both sitting Republican commissioners. And while they did both vote to pass them, they both issued concurring statements indicating that they were pleased that the new rules did get scaled back from their original proposal, but both also indicated that if they were starting from scratch they would not have drafted the new rules the way that they appear now, indicating that there are still some things about them that both of the sitting Republican commissioners don’t necessarily agree with. They’ve both said that after implementation, after a period of time, it would be appropriate to do a retrospective about how the new rules are working, both for filing parties and the agency in terms of burden and value—like a cost-benefit analysis of the extra burden of these things yielding information that’s been useful for the agency—and depending on how that retrospective comes out, some modifications may be needed going forward and that that would be the appropriate time to do it. So, I think it’s unlikely that they’re going to just rip these out and start over again. I think it’s more likely that the new rules will come into effect for some period of time, and then, with the possibility of revisiting and maybe trimming them down in the future.
Zak Goodwin: Yes, I agree. I think there was a lot more enthusiasm about challenging the proposed rules than the final rules. It doesn’t mean it can’t or won’t happen, but I think that the likelihood has certainly gone down.
Hannah England: Thank you both. Do you have closing thoughts that you’d like to share?
Jackie Grise: Really coming back to that point at the beginning, these are procedural changes largely, but they will have an effect on strategy—it’s inevitable. For those pharma deals that are likely to draw substantive antitrust questions, these rule changes make it more important than ever to be fully prepared on the antitrust analysis prior to filing, because much of what we’ll be submitting in this initial HSR form now is what we would normally have been doing during an initial 30-day waiting period where the FTC might call and ask questions or issue an access letter—that type of information is being front-loaded here. And so, the way we’re thinking about it is that the rule changes effectively accelerate the substantive advocacy on the merits, and each deal is different and there’s no one-size-fits-all approach. I think each deal will require a bespoke approach that marries the procedural HSR compliance that we were just talking about under the new rules to the ideal strategic approach for that particular transaction based on what, if any, substantive issues it raises. Zak, do you have anything more to add on this one?
Zak Goodwin: It is an opportunity in the sense that it creates more complication which is, of course, always a pain. But if you’re a bidder and you can develop a track record of doing this really well, that can help differentiate your bid for an asset. So, I think you have to view this as an opportunity in that sense and work carefully with your in-house lawyers and antitrust counsel to best maximize on that opportunity.
Hannah England: There’s a lot to think about here. Thank you both for joining me today. Thanks also to our listeners. If you’d like more information on this topic or have any follow-up questions, please don’t hesitate to contact us or visit ropesgray.com. You can also subscribe and listen to other Ropes & Gray podcasts on your preferred podcast platform, including Apple and Spotify. Thanks again for tuning in.