Earlier this month, the Federal Circuit rendered a decision on damages in what may be the last of a long-running series of ANDA cases involving AstraZeneca's Prilosec® (omeprazole) franchise.  As set forth in the opinion, AstraZeneca's lawsuit against Apotex was part of the "second wave" of ANDA litigation, wherein the District Court apportioned into two sets of four defendants from the eight ANDA filers sued by AstraZeneca in the Southern District of New York starting at the end of the last century.  The disposition of these cases formed an important part of the Federal Circuit's determination that the District Court properly decided the damages question for all but the final six months of AstraZeneca's exclusive right to market Prilosec®.

There were two patents in suit, U.S. Patent Nos. 4,786,505 and 4,853,230.  Claim 1 of the '505 patent reads as follows:

An oral pharmaceutical preparation comprising:
    (a) a core region comprising an effective amount of a material selected from the group consisting of omeprazole plus an alkaline reacting compound, an alkaline omeprazole salt plus an alkaline reacting compound and an alkaline omeprazole salt alone;
    (b) an inert subcoating which is soluble or rapidly disintegrating in water disposed on said core region, said subcoating comprising one or more layers of materials selected from among tablet excipients and polymeric film-forming compounds; and
    (c) an outer layer disposed on said subcoating comprising an enteric coating.

And claim 1 of the '230 patent reads as follows:

A pharmaceutical preparation comprising:
    (a) an alkaline reacting core comprising an acid-labile pharmaceutically active substance and an alkaline reacting compound different from said active substance, an alkaline salt of an acid labile pharmaceutically active substance, or an alkaline salt of an acid labile pharmaceutically active substance and an alkaline reacting compound different from said active substance;
    (b) an inert subcoating which rapidly dissolves or disintegrates in water disposed on said core region, said subcoating comprising one or more layers comprising materials selected from the group consisting of tablet excipients, film-forming compounds and alkaline compounds; and
    (c) an enteric coating layer surrounding said subcoating layer, wherein the subcoating layer isolates the alkaline reacting core from the enteric coating layer such that the stability of the preparation is enhanced.

The District Court set forth the results of both the first wave (In re Omeprazole Patent Litig., 84 F. App'x 76 (Fed. Cir. 2003) ("Omeprazole I"), and In re Omeprazole Patent Litig., 483 F.3d 1364 (Fed. Cir. 2007) ("Omeprazole II")) and second wave (In re Omeprazole Patent Litig., 536 F.3d 1361 (Fed. Cir. 2008)) of ANDA litigation, wherein in the first wave only Kremers Urban Development Co. and Schwartz Pharma (collectively, "KUDCo") were found not to infringe the patents-in-suit due to changes in the patented omeprazole formulation.  Here, Apotex entered the marketplace while the second wave of litigation was on-going (i.e., an "at risk" launch) and the District Court found (and the Federal Circuit affirmed) that the Apotex formulation infringed the patents in suit.  Additionally, the Federal Circuit affirmed the District Court's determination that Apotex had not shown that the patents-in-suit were invalid.

The District Court determined damages based on calculation of a reasonable royalty, which the parties agreed was the proper basis.  The results of the outcomes of these litigations on the price of omeprazole (branded and generic) is informative, and stands in marked contrast to the perception that generic drug formulations automatically and immediately result in lower drug prices:

The district court found that after those generic manufacturers entered the market, the price of generic omeprazole declined, but not significantly.  However, the court found that the sales of Prilosec, Astra's prescription PPI drug, declined precipitously, both before 2002, when Prilosec was being replaced by Astra's newer prescription PPI drug, Nexium, and after 2002, when the generic manufacturers entered the market.  Nonetheless, Astra continued to reap substantial revenues from Prilosec, which had net sales of $865 million in 2003, and $361 million in 2004.

After surveying the relevant data, the district court concluded that the price of generic omeprazole remained "relatively and uncharacteristically high" as of November 2003, due to the fact that only KUDCo was operating "freely and without the threat of litigation hanging over it."  The district court therefore concluded that if Apotex had obtained a license from Astra in November 2003, it would 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."

Moreover, the District Court found that at the time Apotex began selling its generic product the market for omeprazole had not been completely "genericized," defined as "when [third-party payers] impose a 'maximum allowable cost,' which is the maximum amount they will pay for a particular prescription drug [which is t]ypically, the maximum allowable cost is based on the generic price of the drug."  (The District Court also found that AstraZeneca's introduction of "over-the-counter" Prilosec® did not affect the prescription price of the drug.)  And regarding Apotex's expectations:

[A]s Apotex prepared to enter the market in 2003, it expected to experience roughly $581 million in sales during its first five years on the market, and that in the first year it expected to earn profits of $27 million at a profit margin of 92.5 percent.  Moreover, the court found that Apotex knew that sales of its generic omeprazole would help Apotex sell its other pharmaceutical products.  Accordingly, the court found that because Apotex "expected to (and did) make substantial profits from its sale of omeprazole, it would have been willing to pay a large share of those profits for the right to use [Astra's formulation] patents in 2003."

Finally, the District Court found that Apotex would not have been able to develop its own non-infringing omeprazole formulation "within a reasonable period of time" or copy others' formulations.

Taking these considerations into account, the District Court applied the factors relating to determining a reasonable royalty from Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), to arrive at a royalty rate of 50% of gross margins of its omeprazole sales.  Included in these calculations was Apotex's expectations that it could expect a gross margin for omeprazole more than twice that of its other generic products, and that this expectation would be even higher if Apotex had licensed AstraZeneca's patents (which the Court found AstraZeneca would have been "especially reluctant" to do).  This resulted in a damages judgment of $76,021,994.50 (plus prejudgment interest).  Not surprisingly, this appeal followed.

The Federal Circuit affirmed in large part and reversed with regard to damages incurred during AstraZeneca's pediatric exclusivity period, in an opinion by Judge Bryson joined by Judges O'Malley and Clevenger.  In doing so, the Court reviewed the damages award itself for clear error, and its methodology for abuse of discretion, citing Aqua Shield v. Inter Pool Cover Team, 774 F.3d 766, 770 (Fed. Cir. 2014), and Ferguson Beauregard/Logic Controls, Div. of Dover Res., Inc. v. Mega Sys., LLC, 350 F.3d 1327, 1345 (Fed. Cir. 2003).  The Court rejected many of Apotex's arguments in view of the "many of the detailed findings made by the district court in support of the court's determination of the reasonable royalty in this case," and for making arguments directed to lost profits rather than a reasonable royalty.  Also:

[T]he benefits to Apotex, and the costs to Astra, of a license to the formulation patents would have been considerable.  For its part, Apotex stood to (and did) garner immense profits from selling its generic omeprazole product.  The district court found that even after a 50 percent royalty payment to Astra, 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."

The inability for Apotex to "design around" AstraZeneca's patents was also a factor properly considered by the District Court according to the Federal Circuit.  "When an infringer can easily design around a patent and replace its infringing goods with non-infringing goods, the hypothetical royalty rate for the product is typically low" said the panel, citing Grain Processing, 185 F.3d at 1347; see also Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1312 (Fed. Cir. 2002).  The panel also credited with approval the District Court's consideration of licenses between AstraZeneca and Andrz (50-70% royalty) and Teva (54% royalty).

The Federal Circuit rejected Apotex's application of the "entire market value rule," wherein the generic company argued that damages should only be determined by that portion of the claimed invention what distinguished it from conventional components (in this case, the omeprazole molecule comprising the claimed formulation for which patent protection had expired).  The panel stated that this rule applied "when small elements of multi-component products are accused of infringement . . . where the patented feature creates the basis for customer demand or substantially creates the value of the component parts," citing Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011).  The District Court had found that "there is little reason to import [the entire market value] rule for multicomponent products like machines into the generic pharmaceutical context."  While not willing to make a per se rule, the Federal Circuit concurred that the rule was not applicable here, because "Astra's patents cover the infringing product as a whole, not a single component of a multi-component product."

The Federal Circuit did agree with Apotex that the District Court erred in assessing damages using its reasonable royalty calculation for the period after the patents-in-suit expired, based on AstraZeneca's pediatric exclusivity period.  The District Court had based its decision on its conclusion that, had Apotex obtained a license providing AstraZeneca with a reasonable royalty, that license would have applied to sales made during this period.  The District Court erred, according to the panel, because the basis for royalties was AstraZeneca's patent exclusivity, not its regulatory exclusivity.  The Federal Circuit did not, as Apotex urged, base its decision on purported violation of the Supreme Court's decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), because in that case the public has the right to practice the patented invention because the patent had expired, and a license extending past patent expiry impermissibly and wrongfully leveraged the patent right.  Congress had authorized the extended exclusivity period; what Congress had not authorized was using the provisions of 35 U.S.C. § 284 as the basis for such damages.  On this basis the Federal Circuit reversed this portion of the District Court's damages determination and remanded for recalculation.

AstraZeneca AB v. Apotex Corp. (Fed. Cir. 2015)
Panel:  Circuit Judges O'Malley, Clevenger, and Bryson
Opinion by Circuit Judge Bryson