AstraZeneca AB v. Apotex Corp.
In the context of a hypothetical negotiation, the court found that AstraZeneca would be entitled to 50% of Apotex’s profits resulting from its infringing at-risk launch of generic omeprazole from November 2003 until October 2007.
Case Name: AstraZeneca AB v. Apotex Corp., Civ. No. 01-9351-DLC, 2013 U.S. Dist. LEXIS 170188 (S.D.N.Y. Dec. 3, 2013) (Cote, J.) (In the context of a hypothetical negotiation, the court found that AstraZeneca would be entitled to 50% of Apotex’s profits resulting from its infringing at-risk launch of generic omeprazole from November 2003 until October 2007.)
Drug Product and Patent(s)-in-Suit: Prilosec® (omeprazole); U.S. Patent Nos. 4,786,505 (“the ’505 patent”) and 4,853,230 (“the ’230 patent”)
Nature of the Case and Issue(s) Presented: AstraZeneca’s patents on the omeprazole molecule expired in 2001, but several patents covering the formulation of the drug, including the patents-in-suit, did not expire until 2007. Beginning in 1997, eight generic drug manufacturers, including Apotex Corp., filed ANDAs with the FDA, seeking permission to manufacture and sell omeprazole. AstraZeneca filed suit. Apotex began selling its generic omeprazole in November 2003, during the pendency of the litigation, and continued selling until 2007, when it was found to infringe AstraZeneca’s patents. Thus, the only remaining issue was the measure of damages to which AstraZeneca is entitled for over three years of infringing sales. The court’s job was to come up with a reasonable royalty for the use made of the patents, which it set by imagining a successful hypothetical licensing negotiation between AstraZeneca and Apotex in November 2003, on the eve of Apotex’s launch. The court concluded that AstraZeneca was entitled to a reasonable royalty for Apotex’s infringement of the patents in the amount of 50% of Apotex’s profits on its infringing sales or $76,021,994.50, plus pre-judgment interest.
Why AstraZeneca Prevailed: The following facts shaped the market and the parties’ respective positions before their successful hypothetical licensing negotiation. The condition of the proton pump inhibitor (or PPI) market in November 2003 was such that entry into that market remained an extremely valuable business opportunity, despite the presence of several branded PPIs, three other generic manufacturers, an over-the-counter PPI branded as Prilosec® OTC, and the increasing important of Nexium®, AstraZeneca’s next generation branded PPI. Prilosec was a blockbuster drug, with extraordinary sales success. There were three generics on the market before November 2003. Kudco, which was marketing a non-infringing product, was the first generic. Lek and Mylan launched their products at risk. Kudco kept its prices high, and because Lek and Mylan were at-risk, they did the same. A fourth generic entrant, with a license, would therefore have had a “golden opportunity” to take significant market share away from both other generic manufacturers and perhaps even branded PPIs by launching at a lower price.
AstraZeneca’s Nexium played a key role in the market at that time. AstraZeneca needed to prove that Nexium was clinically superior to Prilosec and needed to convert the Prilosec business to Nexium before the entrance of more generic competitors. It succeeded based on the Nexium clinical trials and by introducing Prilosec OTC into the market. Prilosec OTC resulted in a substantial drop in the market share of generic omeprazole and a further drop in the market share of Prilosec. On the other hand, the presence of Prilosec OTC did not have any effect on omeprazole pricing, because the systems through which prescription and OTC drugs are paid for are largely separate. The emergence of generic omeprazole increased pressure on AstraZeneca to pay larger rebates to maintain a favorable formulary position for Nexium. These rebates kept the effective price of Nexium comparable to that of omeprazole.
The court next turned to the parties’ licensing practices as of November 2003 and found that there was no evidence that AstraZeneca would have initiated or encouraged licensing discussions with Apotex. AstraZeneca had been defending its patents for more than five years, and would continue to do so for another ten. It did, however, enter into four agreements concerning the patents-in-suit. In 1994, AstraZeneca entered into an agreement with Takeda, which required Takeda to pay AstraZeneca a small royalty (2.5%) for its U.S. sales, but that agreement did not permit Takeda to sell omeprazole. In 1996, AstraZeneca entered into an agreement with Byk, which granted Byk a royalty-free worldwide license under the patents-in-suit to make, use, and sell Protonix®, another PPI. This agreement also did not permit Byk to sell omeprazole. In 1996, Eisai and AstraZeneca entered into an agreement concerning the PPI Aciphex®. Eisai agreed to pay AstraZeneca a royalty on its U.S. net sales of Aciphex. Like the previous two agreements, Eisai was not permitted to use the patents-in-suit to make or sell omeprazole. Finally, AstraZeneca and P&G entered into an agreement that established the framework for the cooperative development, AstraZeneca’s supply, and P&G’s marketing of Prilosec OTC. Under that agreement, P&G paid AstraZeneca a base royalty of 7% of net sales for the first twenty years, to be increased based on sales volume to a royalty as high as 40% in the first three years after launch and 20% thereafter. P&G also paid up-front milestone payments of $56 million and invested hundreds of millions to develop and market the product.
Another key factor in any November 2003 licensing negotiation would be the amount of potential revenue Apotex stood to lose by walking away from the negotiating table. The court held that because Apotex did not have a non-infringing alternative formulation ready for a November 2003 launch, “any decision to forgo a license would have necessitated a return to the drawing board, delay, and uncertainty.” This was evidenced in three ways: first, Apotex began working on a formulation for omeprazole as early as 1996, and by 2003, had developed only an infringing product; second, Apotex had not chosen to demonstrate the ease with which it could have developed a non-infringing bioequivalent, and stable version of omeprazole by actually manufacturing and testing such a formulation; and third, not one of the three first-wave infringers of the patents-in-suit were able to develop and launch a non-infringing alternative at any time before the expiration of the patents in 2007.
There were two additional sets of negotiations that occurred after November 2003 that the parties raised as potential benchmarks for the royalty rate between AstraZeneca and Apotex: the 2005 settlement offer from Andrx; and the 2010 settlement with Teva. In exchange to end all litigation, Andrx offered AstraZeneca to purchase a license for 70% of its profits from the sale of the 40 mg tablet, or in the alternative, Andrx would license the 10, 20, and 40 mg tablets at a rate of 70% of its profits for the 40 mg strength, but only 50% of its profits on the 10 and 20 mg strengths. That offer was not accepted. Teva settled AstraZeneca’s outstanding damages claim for a lump-sum payment of less than $10 million. This settlement represented 54% of Teva’s profits on its infringing sales.
The court next characterized what it expected Apotex’s positions would be at the hypothetical negotiation. From November 2003 through October 2007, the time period covered by the hypothetical license, Apotex made a lot of money on generic omeprazole. While it experienced a gross margin from 31% to 48% for most of the generic products it sold in the US, it estimated that its gross margin on generic omeprazole would easily double that. Apotex would therefore have been willing to pay a substantial royalty for the right to sell omeprazole. In light of the above, Apotex would not have had any confidence that it could create a non-infringing product. Moreover, given the existing generic presence in the market, time was not on Apotex’s side. In contrast to Apotex’s eagerness to obtain a license from AstraZeneca, AstraZeneca would have had no desire to issue a license to Apotex. AstraZeneca had no program to license its patents in connection with generic omeprazole, and had no interest in doing so. If that were not the case, as one must assume, AstraZeneca would want to ensure that the license would adequately compensate it for any economic harm it would suffer as a result of Apotex’s entry into the market, and it would want to maximize the licensing fee based on its understanding of how much Apotex would be willing to pay.
The court held that under this context, it is reasonable to conclude that AstraZeneca would not have licensed Apotex for anything less than 50% of Apotex’s profits. This rate fits “comfortably” in connection with benchmarks that the court discussed earlier for the patents-in-suit. Because Apotex had not shown that any of the cross-licensing agreements or other settlements that did not involve the sale of omeprazole would provide a relevant marker, its licensing rate proposal of 7% was dismissed “out of hand.”
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