Proposed Technology Transfer Block Exemption Regulation (TTBER)

							                         EuropaBio Position Paper on

   -    the draft Commission Regulation (EC) on the application of Article 81 (3)
        of the Treaty to categories of technology transfer agreements,

   -    the draft Guidelines on the application of Article 81 of the EC Treaty to
        technology transfer agreements.

                                                            November 26, 2003

EuropaBio, the European Association for Bioindustries, represents 40 multinationally
operating corporate members and 18 national associations (totalling around 1200
small and medium-sized enterprises) involved in the research, development, testing,
manufacturing, sales and distribution of biotechnology-derived products and services
in the fields of healthcare, agriculture, food and the environment. EuropaBio external
advisors are experts involved in bioethics and particularly interested in the many
aspects of modern biotechnology.
EuropaBio promotes the interests of the biotechnological industry in society, mainly
in respect of public authorities and the public at large. The biotechnological industry
maintains close contact with other interested parties, such as clinicians and patient
associations, and is a party to the discussion of new regulations and strategies.
This proposed Technology Transfer Block Exemption Regulation (TTBER) is a
replacement of the current Regulation 240/96. As with the current Regulation, the
proposed Regulation provides a „block exemption‟ from EU competition rules for
certain agreements between companies that are potentially anti-competitive. However,
the proposed Regulation contains some important points which could have serious
implications for biotechnology companies and the development of innovative
products. This is mainly due to the nature of the biotechnology business, which
increasingly involves collaborations between companies for the development and
marketing of medicinal products.

Scope
The definition of "technology transfer agreement" does not include agreements
relating to biological materials. It is not uncommon in the biotechnology industry for
such materials to be licensed for a number of purposes including use in the
manufacture of a product. A good example is the license of a hybridoma cell line for
the manufacture of antibodies. Such materials are treated for commercial purposes no
differently from more conventional intellectual property and so we cannot see any
reason for excluding these from the draft regulation and guidelines.
Article 2 of the draft regulation exempts agreements for "the manufacture or
provision of contract products". This seems to imply that the benefit of the block
exemption is only available where the product covered by the license agreement is
ready to be manufactured and sold, and so, excludes agreements where further
development work is necessary. Such agreements are the life-blood of the biotech
industry since few biotech companies have the resources to undertake late stage
clinical trials and so are reliant on out-licensing to big pharma partners to see their
products through to market. The exclusion of such agreements seems like a
disincentive to innovation and it is difficult to see how such agreements could be
considered anti-competitive.

Guideline 41 expressly excludes "the licensing of a technological research tool
used in the process of further research activity" from both benefit of the proposed
block exemption and the guidelines. This means that such license agreements, which
are an important part of many biotech companies' business strategy, fall into a vacuum
as regards competition policy with no guidance as to how competition law would treat
these agreements and to what extent they would be considered beneficial to the
economy. Our view is that these agreements actually fall outside article 81(1) and so it
would be far more helpful for this to be explicitly stated in the guidelines rather than
for the guidelines to remain silent on the exact status of such agreements.

Market share thresholds
In the draft Technology Transfer Block Exemption Regulation (TTBER), the block
exemption will not apply to licensing agreements where the combined market share of
the parties exceeds 20%, if the parties are competitors, and where the market share of
either of the parties exceeds 30%, if the parties are non-competitors. The proposed
TTBER does not address the situation whereby a company goes into a licensing
agreement on an innovative product, entering a market with little or no competition,
and the product is successful (which is the commercial objective) with the likelihood
of gaining a high market share. Should the market share thresholds be exceeded,
which is very likely to be the case with innovative biotechnology products, this would
subject the parties to an unnecessary degree of uncertainty regarding the
enforceability of their agreement.

The current proposal could result in companies being faced with the costly task of
having to monitor the market share of the product for the life-time of the agreement so
as to ensure that the market share thresholds are not exceeded. In cases where the
thresholds are exceeded, the parties will need to consider whether to make
amendments to the agreement to remain within the block exemption. This could
cause them to renegotiate the agreement in mid-stream, which could upset the
commercial terms underlying the original agreement. Moreover, this could lead to a
potential reduction in innovative products being brought to the market due to the loss
of the product development benefits which arise when companies enter into licensing
agreements in the biotechnology sector.

Guideline 41 expressly excludes "the licensing of a technological research tool used in
the process of further research activity" from both benefit of the proposed block
exemption and the guidelines. This means that such license agreements, which are an
important part of many biotech companies' business strategy, fall into a vacuum as
regards competition policy with no guidance as to how competition law would treat
these agreements and to what extent they would be considered beneficial to the
economy. Our view is that these agreements actually fall outside article 81(1) and so it
would be far more helpful for this to be explicitly stated in the guidelines rather than
for the guidelines to remain silent on the exact status of such agreements.

Another implication of the market share limits could lead to venture capitalists being
more reluctant to invest in biotech start-up companies due to reduced business
potential. This is also of significance to the licensor because, if there are less biotech
start-up companies (potential licensees), then this would indirectly increase the
internal R&D costs.

EuropaBio recommends that the proposed TTBER should either exclude
altogether, or include a ‘grace period’ (e.g. 10 years) for innovative medicinal
products, which would be in-line with current EU data protection provisions,
throughout which the market threshold limits do not apply. The present 2 year
period is simply too short a time to recoup the return on an R&D investment of at
least 10 years. An extended grace period is required to provide an incentive for
innovative medicinal products to be developed and brought to the market using the
advantages of working under licensing agreements with other companies.

In the case of orphan medicinal products brought onto the market under the Orphan
Medicinal Products Regulation (2000)1, the TTBER goes against the intention of this
Regulation. Orphan designated products are developed by companies for people with
a rare disease which would, otherwise, be left untreated. The products are developed
because of the assurance of incentives, such as market exclusivity, so that a return on
the lengthy and costly investment can be ensured. For example, companies could be
in a licensing agreement involving an orphan medicine with the intention of the
product obtaining a 100% market share, which is in accordance with the market
exclusivity provisions of the Orphan Medicinal Product Regulation (2000). Under the
proposed TTBER, this would mean that if and when the market share thresholds are
exceeded, then the licensing agreement could be subject to uncertainty regarding its
enforceability.

EuropaBio highlights to the Commission that for the continued development of
orphan drugs, and in the spirit of the Orphan Medicinal Product Regulation
(2000), it is essential that an exclusion for orphan medicines is explicitly taken
into account in either the TTBER or the Guidelines so that the market share
thresholds do not apply to orphan medicines.

Grant-back of rights to product improvements


1
 Regulation (EC) No 141/2000 of the European Parliament and of the Council of 16
December 1999 on orphan medicinal products. The orphan medicines regime is
discussed on the DG Enterprise (Pharmaceutical Unit) website
(http://pharmacos.eudra.org/F2/orphanmp/index.htm).
With regard to licensing agreements in the biotech sector, an important issue which
often comes up is the obligation of the licensee to grant-back the rights on product
improvements to the original licensor. With the proposed TTBER, the licensee,
potentially, may not be obliged to grant-back, on an exclusive basis, its rights on
improvements to the licensor. Quite often, the licensor is a smaller innovative
company that has developed specific expertise in a narrow area and the licensed
innovation constitutes the “crown jewels” of the company. Unless the licensor is able
to impose such an obligation on the licensee, the licensor may decide not to grant a
license at all, which seems contrary to the basic goal of encouraging the dissemination
of technology.

This problem is particularly acute in subcontracting arrangements where the licensee
is given a license to allow it to research ways of improving the technology
applications of the product. Again, this is of particular relevance in the biotechnology
sector where smaller companies have developed new technology, but cannot conduct
all the necessary research to bring the innovation to fruition. EuropaBio urges the
Commission to reconsider the treatment of grant-back clauses in the context of
subcontracting arrangements. Unless licensors can be assured of their ability to
control the developments in their technology through appropriate grant-back clauses,
they may be reluctant to outsource their R&D activities.

EuropaBio stresses to the Commission the need to allow licensors to require an
exclusive grant back of improvements made by the subcontractor. The rationale
in favor of an exclusive grant-back is particularly strong in such situations because the
licensee does not require grant back rules to protect its incentive to innovate, as the
licensee is already being paid by the licensor to innovate, which is the very purpose of
the agreement.

For any further information, please contact Erwan Gicquel at EuropaBio
(e.gicquel@europabio.org); Tel: +32 (0)2 735.03.13