Case Name: AstraZeneca AB v. Apotex Corp., 2014-1221, 2015 U.S. App. LEXIS 5543 (Fed. Cir. Apr. 7, 2015) (Circuit Judges O’Malley, Clevenger, and Bryson presiding; Opinion by Bryson, J.) (Appeal from S.D.N.Y., Cote, J.)
Drug Product and Patent(s)-in-Suit: Prilosec® (omeprazole); U.S. Patents Nos. 4,786,505 ("the '505 patent") and 4,853,230 ("the '230 patent")
Nature of the Case and Issue(s) Presented: The omeprazole molecule can be unstable in certain environments. In particular, it is susceptible to degradation in acidic and neutral media. Its stability is also affected by moisture and organic solvents. The inventors of the patents-in-suit solved that problem by adding a water-soluble, inert sub-coating that separates the drug core, and thus the alkaline material, from the enteric coating. The resulting formulation, consisting of an active ingredient core with alkaline reacting compounds (“ARC”), a water-soluble sub-coating, and an enteric coating, provides a dosage form of omeprazole that has both good storage stability and sufficient gastric acid resistance to prevent the active ingredient from degrading in the stomach.
In a first litigation, the district court found that the patents-in-suit were valid and that three of defendants—all except Kremers Urban and Schwarz Pharma—infringed the patents. The Federal Circuit affirmed. In a second litigation, the district court issued an opinion holding that the generic version of omeprazole manufactured by Mylan and Lek did not infringe the patents. But it also held that the generic version of omeprazole manufactured by Apotex did infringe. The Federal Circuit affirmed the judgment of infringement against Apotex. Apotex started selling its generic omeprazole product in November 2003, during the pendency of the second-wave litigation. It continued selling its generic product until 2007, when the district court held that Apotex’ formulation infringed the patents. After the Federal Circuit affirmed the district court’s judgment of liability against Apotex, the district court held a bench trial to determine AstraZeneca’s (“AZ”) damages.
The parties agreed that damages were to be assessed based on a reasonable royalty theory. The district court concluded that the parties would have settled on a royalty rate of 50 percent of Apotex’ gross margin from the sales of its omeprazole product in view of the following: (i) in November 2003 Apotex expected a gross margin on sales of its omeprazole product more than twice as large as the average gross margin on other generic products that it sold in the US; (ii) Apotex’ prospects of finding a non-infringing omeprazole formulation were not good; (iii) AZ did not license generic manufacturers of prescription omeprazole, and it would have been especially reluctant to license Apotex in 2003, because Apotex’ entry would have altered the dynamics of the PPI market, damaged AZ financially and disrupted its long-term PPI strategy; and (iv) other licenses and settlements entered into by AZ relating to omeprazole supported a 50 percent royalty rate. Judgment was entered against Apotex in the amount of $76,021,994.50 plus pre-judgment interest. Apotex appealed and the Federal Circuit affirmed-in-part, reversed-in-part, and remanded.
Why AZ Prevailed: The issue before the Federal Circuit was whether the district court committed legal or factual error in concluding that, in a hypothetical negotiation, AZ and Apotex would have agreed on a license to AZ’s patents in exchange for a royalty rate of 50 percent of Apotex’ profits from the sales of its infringing omeprazole product during the period of its infringement, 2003 to 2007. According to Apotex, the court’s analysis (i) improperly discounted evidence that by November 2003 the market for omeprazole was “well on its way to full genericization”; (ii) placed undue emphasis on AZ’s ability to keep Apotex temporarily off the market by refusing to grant a license; and (iii) gave “short shrift to contemporaneous licensing agreements that AZ entered with other companies” for royalty rates lower than 50 percent.
The Federal Circuit first found that even after a 50 percent royalty payment to AZ, Apotex would be left with a profit margin of 36 percent, which was “solidly in the range of 31 to 48% margins [Apotex] typically earned on its products at the time.” Moreover, the district court’s finding that Apotex would have faced substantial technical and practical obstacles to marketing a non-infringing generic omeprazole formulation suggests that it was proper for the court to hold that the difficulties Apotex would have encountered in attempting to enter the omeprazole market with a non-infringing product are relevant to the higher royalty rate.
Next, Apotex’ reliance on an AZ/Procter & Gamble (“P&G”) license related to over-the-counter Prilosec, which included a blended rate of approximately 20 percent of P&G's net sales, or 23 percent for the first three years of the license, counting P&G’s initial payment, was improper: the over-the-counter drug market was largely distinct from the prescription drug market. Settlement agreements and offers with other defendants constituted persuasive evidence that a royalty rate of 50 percent of net sales was reasonable. AZ’s settlement with Teva represented 54 percent of Teva’s net profits on its omeprazole sales, and Andrx’ settlement proposal—which AZ declined—represented 70 percent of Andrx’s profits on the 40 mg omeprazole dosage and 50 percent of its profits on the 20 mg and 10 mg dosages.
Apotex further argued that the district court improperly based its damages calculation on the value of the omeprazole product as a whole instead of calculating damages by apportioning the relative contribution of value between the active ingredient and the “inventive element” of the patents, i.e., the sub-coating. Apotex predicates its argument on Federal Circuit cases’ applying the “entire market value rule.” The Federal Circuit found that “[w]hile we do not hold that the entire market value rule is per se inapplicable in the pharmaceutical context, we concur with the district court that the rule is inapplicable to the present case.” It held that the entire market value rule applies when the accused product consists of both a patented feature and unpatented features; the rule is designed to account for the contribution of the patented feature to the entire product. AZ’s formulation patents claim three key elements—the drug core, the enteric coating, and the sub-coating. The combination of those elements constitutes the complete omeprazole product that is the subject of the claims. Thus, AZ’s patents cover the infringing product as a whole, not a single component of a multi-component product. The issue is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone. Ultimately, the Federal Circuit decided that the district court did not clearly err in concluding that the sub-coating was so important to the viability of the commercial omeprazole product that it was substantially responsible for the value of the product. A commercially viable omeprazole drug requires both storage stability and gastric-acid resistance.
Finally, Apotex argued that the district court erred in its decision to award damages for sales of its generic omeprazole during the “pediatric exclusivity” period of the asserted patents. AZ obtained the right to a six-month pediatric exclusivity before the district court’s liability decision. Thus, although the asserted patents expired on April 20, 2007, the district court ordered that the effective date of Apotex’ ANDA approval be set six months later. The Federal Circuit agreed with Apotex on this issue. Under established Federal Circuit jurisprudence, there can be no infringement once the patent expires because the rights flowing from a patent exist only for the term of the patent. For that reason, Apotex did not infringe AZ’s patents during the exclusivity period, since those patents had expired; if Apotex had launched its generic product during the exclusivity period, Astra could not have sued Apotex for patent infringement based on those sales. Given the failure to support AZ’s claim for royalty payments on Apotex’ post-expiration sales, the Federal Circuit reversed only that portion of the district court’s damages award relating to the pediatric exclusivity period, and remanded for a recalculation of damages.
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