A Bitter Pill to Swallow

By Aaron Wood on Thursday 30th January 2014.

How does one calculate the value of a cross undertaking in damages in relation to launch of a pharmaceutical where the effect was to deprive the defendant of “first-mover” advantage? Friday’s decision in Astrazeneca AB & anr v KRKA d.d. Novo Mesto & anr goes a very long way to helping one assess this, and provides a number of comments which may chill those who seek to use injunctions strategically. The facts of the case were that Astrazeneca marketed a protein pump inhibitor (PPI) under the name NEXIUM for which they held a patent for the active ingredient esomeprazole. The patent was set to expire in 2014. Whilst most protein pump inhibitors were of moderate cost, a proportion of patients only reacted favourably to NEXIUM’s active ingredient and so could not be switched from other PPIs. KRKA had developed a product which contained esomeprazole which it believed did not infringe Astrazeneca’s patent and was to be a branded generic (bearing the name EMOZUL rather than just esomezole). They launched this product in Denmark in the face of objection from Astrazeneca, and then sought to launch in the UK. Astrazeneca successfully obtained an injunction to prevent the launch of the product in the UK in October 2010. At the time the injunction was obtained, Astrazeneca’s patent was under challenge by Ranbaxy who were seeking to launch a generic esomeprazole product. On 15 July 2011 Ranbaxy’s product was ruled not to infringe the Astrazeneca patent – Ranbaxy (UK) Limited v Astrazeneca AB [2011] EWHC 1831 (Pat) (see here). The outcome of the decisions was that KRKA’s product would not infringe and the injunction was lifted. This allowed KRKA to launch in September 2011, but into a very different commercial environment. By this point Ranbaxy had launched its generic in early September. In November another generic was launched, this time by Mylan. In December, Teva launched their generic. It may also be noted that on 17 July 2011 (just 2 days after the Ranbaxy decision) Astrazeneca launched a generic with Arrow (a generics company) which was packaged as an equivalent to a branded generic tablet. The entry of all these generics onto the horizon had a significant effect on the launch of KRKA’s product. Mr Justice Sales accepted the evidence of KRKA regarding the state of the market for pharmaceuticals and preferred the explanations of the witnesses of KRKA pertaining to the workings of the market for the purchase of pharmaceuticals in the UK and the likelihood of consumers switching from Astrazeneca’s drug to KRKA’s drug if it had launched in 2010. In 2010 there was significant pressure on primary care trusts (PCTs) in the UK to reduce the spending on pharmaceuticals. Briefly explained, the UK National Health Service reimburses local pharmacies and dispensing doctors according to a set of tariffs. Drugs which are covered by a patent are reimbursed at the rate agreed with the pharmaceutical company; where there are generics the amount reimbursed is based upon market averages which are re-set as the market changes. A generic manufacturer can increase its market share in the short term by selling to the pharmacist or dispensing doctor below the tariff, since the pharmacist or dispensing doctor keeps the difference and is incentivised to prescribe the lower priced generic. A generic up against a patented product has relative freedom on price; where there are multiple generics, the price is largely dictated by the other generics. The PCTs employ medicine managers whose job it is to watch for cost savings which can be made by switching from one drug to another, and where there are significant savings to be made the managers promote the switch to GPs in order to reduce the overall drugs bill. Sometimes switching can be difficult for medical reasons, whilst at other times it is straightforward. In the present case there seemed to be no obvious medical reasons not to switch patients. It was accepted that managers scan the horizon for products and so where generics were in the pipeline, a switch to a branded generic may not be promoted as a greater saving might be made by awaiting the greater competition ahead and it would be troublesome to switch a second time in short succession. Sales J also accepted that the evidence was clear that KRKA had engaged with groups of medicine managers and that a great many had shown an interest in switching once the KRKA product came on the market. KRKA in fact had a number of medicine managers as witnesses and these were credible witnesses of fact as to the likely success of KRKA’s product. In 2011 there was a major re-organisation in the NHS system and the judge found that this had a major negative effect on the medicine managers, meaning that the likelihood of switching was lower. This reduced the ability of KRKA to have effective entry into the market. Further, the market conditions in 2011 were such that KRKA’s product was far less attractive to medicine managers and it was less likely that PCTs would switch to it. KRKA argued, and it was accepted, that if the injunction had not been granted and the other generics had come onto the market almost a year later (after the Ranbaxy decision) then the likelihood is that KRKA would have lowered its prices and retained the market share since whilst it was more expensive than the other generics, it was not so much greater that the medicine managers would have promoted switching from its products to the other generics. Moreover, having switched to KRKA there would have been resistance to switching again. Sales J rejected two lines of argument from Astrazeneca. The first of these was that the level of switching would have been lower than KRKA claimed, citing evidence of the introduction of generics to the market for an antidepressant. In his view, there were differences due to the tendency to stay with existing antidepressants that were working due to (amongst other things) the placebo effect amongst patients. The second was an argument that Astrazeneca would have dropped its prices in the UK to compete with KRKA and so less (or no) switching would have occurred. Sales J rejected this on the basis that there was evidence that in order to drop the cost Astrazeneca would have needed Europe-wide approval from the business as the UK price is a “reference price” for the price in other countries. There was a clear possibility that Astrazeneca would have decided that there was a benefit in “sacrificing” the UK market to maintain price levels elsewhere, and since Astrazeneca did not adduce evidence in relation to this relevant matter, the judge drew a negative inference ie. that they would not have dropped their prices. As a result, he concluded that a substantial percentage of the PCTs and dispensing doctors would have switched, accepting the switching figures given by KRKA subject to a drag factor of 20% for exaggeration by medicine managers in how successful they would have been in promoting the switching, and with a simple cut off to the damages in 2015. Since the number of prescriptions made are published, the judge held that the calculation can be easily assessed (and will be subject to agreement by the parties). He also made a number of points regarding the legal framework, reminding us of a number of points from Les Laboratoires Servier v Apotex [2008] EWHC 2347: • The approach is compensatory and not punitive • The existence of contingencies makes calculation difficult, but not impossible • The profits that [KRKA] would have made depend on the actions of third parties and how [Astrazeneca] would have responded • The award is one of equitable compensation and not damages strictly so called • It may be appropriate to consider the compensation according to common law rules applying to contract or those applying to tort • If those applying to tort apply, there may be a difference in the case of aggrevated or exemplary damages for blatent or cynical interference • Restitutionary damages may be appropriate where the benefit to the patent holder outstrips the loss to the generic company • One should not be overeager in scrutiny of evidence of loss or overcritical of the methodology as 1) the patent owner will have had to argue that [KRKA’s] losses were easy to calculate whilst their own were not in order to obtain the injunction; and that the concept of “liberal assessment” is carried over from the context of calculating damages for patent infringement, ie. the claimant has the burden of proving loss, but (subject to the proviso that damages should compensate not punish) the damages should be liberally assessed. In the present case, one wonders whether restitutionary damages might have been allowed. Astrazeneca’s behaviour seems to suggest that it had knowledge of the weakness of its patent (ie. launching the generic 2 days after the finding in the Ranbaxy case) and the subsequent drop in the price of their NEXIUM product may well have led them to retain much of the business which otherwise might have switched. Pre-empting a decision to switch to a generic after the Ranbaxy decision, Astrazeneca seemed to have established first mover advantage by launching with Arrow 2 days after the decision and so will have obtained/retained a proportion of the generic market. I also wonder whether as a strategy it may have urged medicine managers to consider switching to the Arrow product immediately following the Ranbaxy decision - if they chose to switch then they would switch to Arrow and were then unlikely to switch to Teva or the other generics which subsequently launched, and if they decided not to then they would stay with NEXIUM. If they immediately dropped the price of NEXIUM to make the differential less then this might have decided the matter immediately for medicine managers.

If you have any questions concerning this case, please get in touch with your usual contact at Swindell & Pearson Ltd or Aaron Wood at [email protected]

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