Menu

Patent Damages in “At-Risk” Generic Drug Launches: Lessons from the Federal Circuit in AstraZeneca v. Apotex

-By Ryan Sullivan

An “at-risk” generic drug launch occurs when a company launches a generic pharmaceutical product into the marketplace while patent litigation is still ongoing. These situations can be highly complex from a damages perspective, for example, if several generic entrants have individual and unique influences on sales and prices in the marketplace. Our experiences serving as economic experts in at-risk launch litigations have revealed the importance of applying sound economic principles to the specific facts and economic circumstances of each case. The Federal Circuit’s opinion in AstraZeneca v. Apotex, issued on April 7, 2015, confirms that sound economic principles and case-specific facts are the foundation for a reliable analysis of damages in the context of at-risk generic drug launches, and provides insight on key issues in patent damages in a pharmaceutical context.

We draw from collective experience from over one hundred cases involving economic analysis of pharmaceuticals and a number of at-risk generic launches. For example, Ryan Sullivan, Ph.D. evaluated at-risk generic drug launches as an economic expert in In re Gabapentin Patent Litigation (D.N.J., MDL No. 1384, Case No. 00-CV-2931) and Altana Pharma AGA and Wyeth v. Teva and Sun, et al. (D.N.J., Consolidated Civil Action Nos. 04-2355 (JLL), 05-1966 (JLL), 05-3902 (JLL), 06-3672 (JLL), 08-2877 (JLL)), among other cases.

AstraZeneca v. Apotex

AstraZeneca v. Apotex is a case in the Southern District of New York under Judge Denise Cote whereby AstraZeneca asserted two patents related to pharmaceutical formulations containing omeprazole against generic supplier Apotex.[1]

Omeprazole is sold by AstraZeneca under the brand name Prilosec, and is one of the best-selling proton pump inhibitors (PPIs) in the marketplace.[2]

Apotex launched its generic omeprazole product at risk, in the presence of patent litigation wherein AstraZeneca claimed that Apotex’s generic omeprazole product infringed AstraZeneca’s formulation patents. Apotex sold its generic product from 2003 to 2007, and stopped selling when the district court held that Apotex’s formulation infringed AstraZeneca’s patents.[3]

Apotex’s generic product was sold in the presence of several other generic suppliers, including Kremers Urban Development Co., Lek Pharmaceutical, and Mylan Pharmaceuticals, Inc., all of which launched prior to Apotex.[4]

Following a bench trial on damages, the district court held that AstraZeneca was entitled to 50% of Apotex’s gross margin on its omeprazole sales from 2003 to 2007 as a reasonable royalty.[5]

Price competition among multiple generic entrants

Price competition among multiple generic entrants can be complex, particularly in the presence of the possibility of a branded drug launching its own authorized generic.[6]

In cases where multiple generic suppliers, the branded supplier, and sometimes an authorized generic supplier all compete for the same sales, intensive economic and factual analysis may be required to determine the magnitude of economic harm caused to the patent holder by each individual defendant.

Intuition might suggest that generic entrants who launch after a number of other generic suppliers have already launched would have a relatively lower impact on prices, all else being equal. In AstraZeneca v. Apotex, defendant Apotex was not the first generic entrant, the second entrant, or even the third. Nonetheless, the district court found that AstraZeneca had “‘every reason to expect that the launch of a fourth generic, particularly for a licensed product, would swiftly accelerate the decline in omeprazole prices’ and would lead to the destruction of the remaining Prilosec market.”[7]

The court’s conclusion was reached from a fact-based analysis of the economic impact of each generic entrant. According to the court, the first generic entrant was found to not have the “manufacturing capacity to supply the full needs of the market immediately, and it kept the price of its omeprazole product high.”[8] For the second and third generic entrants, the court found that “[i]n light of the risk that they might be held to be infringing Astra’s patents, Mylan and Lek did not cut their prices aggressively” and that “the modest decline in the price of omeprazole… was not sufficient to cause the [third-party payers] to take steps to promote the use of generic omeprazole over [AstraZeneca’s branded products] Prilosec or Nexium.”[9] In other words, the district court resonated with economic analysis in the context of case-specific facts to support its conclusion of the potential effect of Apotex’s generic product on prices even in the presence of other generics.[10]

The Federal Circuit recognized that economic factors may contribute to generic suppliers’ decisions to cut or keep prices high after obtaining a hypothetical license, and that those factors may bear on the appropriate amount of economic damage. In this case, the district court set aside actual prices charged by Apotex when it launched at risk, based upon a distinction between licensed suppliers and at-risk suppliers. As described by the Federal Circuit, the district court “explained that a licensed generic drug manufacturer would be able to launch at a lower price while an ‘at-risk’ entrant, with the threat of litigation hanging over it, would be forced to set an ‘uncharacteristically high’ price on its generic product. Based on that distinction, the district court correctly concluded that Apotex’s actual pricing history sheds little light on how Apotex would have priced its omeprazole if it had obtained a license from Astra.”[11]

Reasonable royalties versus lost profits

At-risk generic launches often involve claims of lost profits – i.e., that the branded drug company would have earned additional sales and profits but for the alleged infringement. In AstraZeneca v. Apotex, however, the parties agreed that damages were to be assessed based on reasonable royalties alone.[12] As a consequence, the Federal Circuit rejected Apotex’s focus on “the harm that Astra actually suffered” as being relevant in a reasonable royalty context.[13]

The Federal Circuit stated: “The reasonable royalty theory of damages, however, seeks to compensate the patentee not for lost sales caused by the infringement, but for its lost opportunity to obtain a reasonable royalty that the infringer would have been willing to pay if it had been barred from infringing.”[14] The Federal Circuit reaffirmed its recent focus on royalties reflecting the “value of what was taken—the value of the use of the patented technology.”[15] This principle was also referenced in Warsaw v. NuVasive, another recent Federal Circuit opinion on patent damages: “A reasonable royalty, on the other hand, is intended to compensate the patentee for the value of what was taken from him—the patented technology.”[16] In other words, whereas a lost profits analysis for an at-risk generic launch might involve economic reconstruction of the market but for the alleged infringement, a reasonable royalty analysis might involve reconstruction of the market assuming that licensed sales rather than at-risk sales occurred.

Interestingly, the Federal Circuit acknowledged that the patent holder might expect potential harm in the form of lower prices, but allowed a high royalty rate in that context to be applied to higher prices that actually occurred. Again, intuition might suggest that a reasonable royalty would be preferred to lost profits for defendants of at-risk generic launches, but AstraZeneca v. Apotex provides an example where royalties awarded may have exceeded an award based on lost profits.

Entire market value rule and apportionment

A hotly contested and evaluated area in patent damages for multicomponent products is apportionment.[17] Yet there has been dispute about whether those conceptual arguments relating to multicomponent products (such as electronics) apply to pharmaceutical products, where frequently the smallest salable patent practicing unit (indeed, often the only salable unit) is a single pill or tablet.

In AstraZeneca v. Apotex, the Federal Circuit agreed with the district court that the entire market value rule (“EMVR”) was not applicable in this case, since the rule “applies when the accused product consists of both a patented feature and unpatented features… Astra’s patents cover the infringing product as a whole, not a single component of a multi-component product.”[18] The court reasoned that, although the patents on the active pharmaceutical ingredient had expired, “Astra’s formulation patents claim three key elements—the drug core, the enteric coating, and the subcoating” and thus relate to the complete pharmaceutical product.[19]

However, the Federal Circuit confirmed that, even where EMVR does not apply and the patent covers the infringing product as a whole, the determination of damages more broadly still requires an inquiry of apportionment: “When a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.”[20] For pharmaceutical patents that can involve a combination of previously known elements, the court stated: “In such cases, the question is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone.”[21] While the Federal Circuit affirmed the district court’s finding that this particular formulation “substantially create[d] the value” of the entire omeprazole product (in part, since prior formulations lacking a subcoating were “not commercially viable”),[22] the Federal Circuit continued to focus on apportionment in the reasonable royalty inquiry.

Royalties during pediatric exclusivity following patent expiration

Another issue raised in AstraZeneca v. Apotex is whether the plaintiff was entitled to royalties during the period of pediatric exclusivity period, an extension of time where FDA cannot further approve ANDAs by competing drug suppliers. In this case, the pediatric exclusivity period occurred in the six months following expiration of the asserted patents on April 20, 2007.[23] Royalties during this period of time, if awarded, could be substantial in light of potential royalty rates awarded in the case.

The district court ruled that AstraZeneca was allowed to recover a reasonable royalty on sales made by Apotex in the pediatric exclusivity period, yet Apotex argued that damages following patent expiration ran contrary to Supreme Court precedent. While the Federal Circuit applied different reasoning than the precedent cited by Apotex, it agreed with Apotex that AstraZeneca was not entitled to royalties following patent expiration.

As a practical matter, firms may agree to pay certain post-expiration royalties during this exclusivity period—which was the case for another generic supplier of omeprazole[24] —suggesting that such a royalty might be acceptable to negotiating parties in some situations. Nevertheless, the Federal Circuit stated: “We have long held that ‘there can be no infringement once the patent expires,’ because ‘the rights flowing from a patent exist only for the term of the patent,’… The pediatric exclusivity period is not an extension of the term of the patent.”[25] The court further reasoned: “Therefore, even though a party in Apotex’s position would have agreed to a license covering both the patent term and the pediatric exclusivity period, determining damages adequate to compensate Astra for Apotex’s infringement requires that we focus solely on those activities that constitute actual infringement, i.e., Apotex’s pre-expiration sales.”[26]

Other economic issues

The Federal Circuit addressed several other economic issues that may be of interest to practitioners who evaluate reasonable royalties in a pharmaceuticals context, including:

|Impact of non-infringing alternatives: “There is little incentive in such a situation for the infringer to take a license rather than side-step the patent with a simple change in its technology. By the same reasoning, if avoiding the patent would be difficult, expensive, and time-consuming, the amount the infringer would be willing to pay for a license is likely to be greater.”
|Agreement comparability: “The district court analyzed the pertinent settlement and licensing negotiations in detail and with close attention to the similarities and differences between those negotiations and the hypothetical negotiation in this case. We are satisfied that the court fairly weighed those negotiations in reaching its ultimate determination as to the reasonable royalty rate for damages purposes.”
|Acknowledgement of transition strategies: “Astra’s strategy was to extend the period of market dominance for Prilosec through the strategic use of its patents and to attempt to transition Prilosec patients to Nexium, which was marketed as a superior drug that would offer relief to some patients who failed on Prilosec. Astra believed that patients who remained on Prilosec were more likely to transition to Nexium than patients who switched to generic omeprazole.”

Conclusion

AstraZeneca v. Apotex provides the first example in recent years where the Federal Circuit has applied its recent opinions on patent damages for multi-component products to a pharmaceuticals context. While nuances and industry-specific circumstances require fact-specific analysis, many of the primary concepts remain the same. From an economic perspective, applying sound economic principles to case-specific facts clearly remains the most viable approach to determining a reasonable royalty for patent infringement.

 

The opinions expressed are those of the author(s) and may not reflect the views of Intensity Corporation, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 1 (Fed. Cir. Apr. 7, 2015).

[2] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 1 (Fed. Cir. Apr. 7, 2015).

[3] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 5 (Fed. Cir. Apr. 7, 2015).

[4] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 4–5 (Fed. Cir. Apr. 7, 2015).

[5] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 5 (Fed. Cir. Apr. 7, 2015).

[6] For discussion and references, see: FTC, Authorized Generic Drugs: Short-Term Effects and Long-Term Impact, 8/20/2011, at 4.

[7] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 7–8 (Fed. Cir. Apr. 7, 2015).

[8] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 6 (Fed. Cir. Apr. 7, 2015).

[9] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 6–7 (Fed. Cir. Apr. 7, 2015).

[10] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 6–7 (Fed. Cir. Apr. 7, 2015).

[11] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 13 (Fed. Cir. Apr. 7, 2015).

[12] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 5 (Fed. Cir. Apr. 7, 2015).

[13] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 13 (Fed. Cir. Apr. 7, 2015).

[14] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 13 (Fed. Cir. Apr. 7, 2015).

[15] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 33 (Fed. Cir. Apr. 7, 2015), citing to Aqua Shield, 774 F.3d at 770 (quoting Dowagiac Mfg. Co. v. Minn. Moline Power Co., 235 U.S. 641, 648 (1915).

[16] Warsaw Orthopedic, Inc., et al. v. NuVasive Inc., No. 2013-1576, -1577, at 15 (Fed. Cir. Mar. 2015).

[17] For example, see:

|VirnetX, Inc., et al. v. Cisco Systems, Inc., et al., No. 2013-1489 (Fed. Cir. Sept. 16, 2014).
|Ericsson, Inc., et al. v. D-Link Systems, Inc., et al., No. 2013-1625, -1631, -1632, -1633 (Fed. Cir. Dec. 4, 2014).

[18] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 21-22 (Fed. Cir. Apr. 7, 2015).

[19] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 22 (Fed. Cir. Apr. 7, 2015).

[20] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 22 (Fed. Cir. Apr. 7, 2015).

[21] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 23 (Fed. Cir. Apr. 7, 2015).

[22] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 24 (Fed. Cir. Apr. 7, 2015).

[23] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 28 (Fed. Cir. Apr. 7, 2015).

[24] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 31 (Fed. Cir. Apr. 7, 2015).

[25] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 31 (Fed. Cir. Apr. 7, 2015).

[26] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 33 (Fed. Cir. Apr. 7, 2015).

[27] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 15 (Fed. Cir. Apr. 7, 2015).

[28] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 17 (Fed. Cir. Apr. 7, 2015).

[29] AstraZeneca AB v. Apotex Corp., et al., No. 2014-1221, at 7 (Fed. Cir. Apr. 7, 2015).