A recent decision of the Federal Court of Australia  has demonstrated that the launch of a pharmaceutical product by a generic company even after expiry of the standard term of the relevant patent, in circumstances where there is still a possibility of patent term extension, can entail significant risk if that extension of term is subsequently granted.
H Lundbeck A/S (Lundbeck A/S ) was the patentee of Australian Patent No. 623144 (the Lexapro Patent), which covered escitalopram, the active ingredient in the antidepressant medicine Lexapro. Lundbeck Australia Pty Ltd (Lundbeck AU) as licensee of the Lexapro Patent, was the sponsor in Australia of Lexapro. CNS Pharma, a subsidiary of Lundbeck AU, sold a “Lundbeck” generic escitalopram (Esipram) from mid 2009.
The Lexapro Patent was the subject of extensive proceedings in respect of Lundbeck A/S’s application for a patent term extension. Following the first Full Court decision, in H Lundbeck A/S v Alphapharm Pty Ltd  FCAFC 70, which found that the claimed extensions of terms  (as they then were) were invalid and that the patent expired, Sandoz Pty Ltd (Sandoz), among other generic companies, began to market generic escitalopram in Australia. However, as a result of further proceedings, including a second Full Court decision (Aspen Pharma Pty Ltd v H Lundbeck A/S  FCAFC 129), the Commissioner granted an extension of term in 2014 to the Lexapro Patent until 9 December 2012. Appeals against that decision, including ultimately Alphapharm Pty Ltd v H Lundbeck A/S  FCAFC 138, were unsuccessful.
Immediately following the grant of an extension of term, Lundbeck A/S and Lundbeck AU (collectively Lundbeck) commenced patent infringement proceedings against each of Alphapharm, Apotex, Aspen and Sandoz in respect of their sales of generic versions of Lexapro from mid-June 2009 and 9 December 2012. Ultimately, Lundbeck settled with all parties other than Sandoz.
Sandoz did not challenge the validity of the Lexapro Patent, but asserted non-infringement based on a number of grounds, each of which was rejected (and for the purpose of this note, not discussed here).
Having found that Sandoz had infringed the Lexapro Patent, that Sandoz’s defences were not made out and that Lundbeck’s claim for additional damages was “unpersuasive”, Justice Jagot considered the question of damages. As a starting point, she noted that damages based on lost sales involve the lost opportunity to make those sales at the price the patentee would have sold them for, but for the infringing conduct. Their assessment involved “reference to the degree of probabilities or possibilities” involved in the hypothetical counterfactual scenario where there was no infringement by Sandoz. Justice Jagot then considered a number of issues concerning the quantum of damages, including the following:
Lundbeck’s claim for damages was based on the assumption that every Sandoz escitalopram product sold was a lost sale of the (cheaper) Esipram product. While her Honour treated 1:1 substitution as the starting point for analysis, she noted that the market in mid 2009 included multiple generic escitalopram products, and for that reason, Sandoz should have a discount to account for the probability that some of Sandoz’s sales would have been made by one of the other generic companies. Justice Jagot made a deduction of 25% to account for the fact that not every sale made by Sandoz would necessarily have been a corresponding loss to Lundbeck.
Losses incurred by CNS Pharma
CNS Pharma was the sponsor of the Esipram product, but as it was neither the patentee nor the exclusive licensee of the Lexapro Patent, it could not (and did not) claim damages for patent infringement. CNS Pharma’s lost sales were instead the subject of Lundbeck A/S’s claim because these lost sales ultimately meant that less money was transferred to Lundbeck A/S through intragroup transfers. Those intragroup transfers were designed to give CNS Pharma (and Lundbeck AU which was subject to the same arrangement) a 3% return on sales. The vast majority of the relevant sales were attributable to escitalopram. The accounting experts agreed that if Sandoz had not infringed the patent, the adjustments necessary to ensure the subsidiaries had a 3% return would have been different.
Her Honour held that to the extent that any double claiming could have occurred as between losses claimed by Lundbeck A/S and Lundbeck AU, the losses claimed by Lundbeck A/S would prevail as an award of damages for those losses would best reflect the position that would have existed but for the Sandoz infringement.
As a part of the calculation of damages, the position as it affected overheads was also considered. Lundbeck ultimately asserted a figure of $48.751 million should be deducted from the overall loss suffered by it. Sandoz asserted that the figure should be between $62.924 and $66.557 million. Justice Jagot preferred Lundbeck’s approach to the overheads for a number of reasons, including the “unreasonable” rejection by Sandoz’s expert of Lundbeck’s 2009/2010 budget, which had been prepared before any generics had entered the market, as a starting point for the analysis. Sandoz’s assumption that significant structural change to the business would have occurred but for the infringement, with consequent effects on overheads was also found to be unwarranted. Previous growth in escitalopram sales had been dealt with organically in the past by Lundbeck, and there was no reason to assume that any growth in a non infringement scenario would have been dealt with differently.
Notwithstanding her findings on the issue of overheads, her Honour awarded a further 5% discount on damages for risk that structural change might have occurred, which together with the discount awarded in respect of the substitution issue referred to above led to an overall discount of 30%.
Given the original Lexapro was a blockbuster drug, the damages payable by Sandoz, notwithstanding the discount are likely to be significant.
 Also referred to in the judgment as Lundbeck DN.
 There were two alternative dates: the first was to 9 December 2012 and the second was to 13 June 2014.
 Lundbeck simplified its damages claim by asserting that lost sales were lost sale of the cheaper Esipram only and not a combination of lost sales of Lexapro and Esipram.