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||Neutral Citation Number:  EWHC 2945 (Pat)
||Claim No: HC10C02910
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
THE HON MR JUSTICE FLOYD
|| (1) CEPHALON, INC
(2) CEPHALON FRANCE SAS
(3) CEPHALON (UK) LIMITED
||- and -
||(1) ORCHID EUROPE LIMITED
(2) GENERICS (UK) LIMITED
Trading as MYLAN
Henry Carr QC and Thomas Mitcheson (instructed by Simmons & Simmons) for the Claimants
Michael Tappin QC and Adrian Speck (instructed by Taylor Wessing and Latham & Watkins) for the Defendants
Hearing date: 11 November 2010
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Floyd :
- I have before me an application notice dated 14 September 2010 seeking an order restraining the defendants until judgment or further order from selling or offering for sale modafinil tablets under certain marketing authorisations. The claimants (collectively "Cephalon") are respectively (1) the proprietor, (2) an exclusive licensee in the UK and (3) a sub-licensee of a number of patents related to the drug modafinil. They claim that two of these patents would be infringed if the defendants were to market modafinil in the UK. The third claimant currently markets the drug under the brand name Provigil through its sub-distributor Teva. The drug is prescribed for hypersomnia and narcolepsy.
- The action, as patent actions go, is not a complicated one. The claimants contend that the action could be brought to trial in June 2011. The defendants contend that a trial on an expedited basis in April 2011 is possible. Accordingly, the trial is between six and eight months away.
- The first defendant, Orchid, is the UK subsidiary of an Indian pharmaceutical manufacturer. On 22nd January 2010 it obtained regulatory approval to launch a modafinil product in the United Kingdom. That product has been supplied to Orifarm Generics A/S, a Scandinavian generic company, which subsequently launched the product in Sweden and Denmark. Preliminary injunctions have been sought by Cephalon in those two countries. The Swedish court has recently granted an injunction pending trial.
- The second defendant ("Mylan") is a UK pharmaceutical company. Mylan has also obtained marketing authorisations for a modafinil product in a number of European countries. Its UK marketing authorisation was also granted on 22 January 2010. The Mylan product is manufactured by Orchid. On 4th September 2010 the trade publication Chemist and Druggist announced that Mylan was offering modafinil 100 mg tablets in the UK. That announcement led to the issuing of the application notice which came before Lewison J on 20th September when the defendants gave undertakings until the effective hearing.
- The active substance modafinil was discovered by Lafon in France in 1976. The drug was licensed to Cephalon in the US in 1994. In the course of clinical trials in the United States Cephalon found increased side effects as compared with equivalent doses tested in European clinical trials. The different effect was traced to particle size. It was appreciated that the increased potency of the smaller particle size could reduce the amount administered to the patient.
- In 2005 there was litigation between Cephalon and Teva Pharmaceutical Industries Limited (Teva) in the US and UK which was settled on terms that that the Teva companies could enter the market with their own generic modafinil in October 2012. Given that 698 does not expire until 2015, it would appear that Cephalon were compelled for some reason to accept a considerable inroad into their monopoly in the UK. This is not explained in the evidence, but I am not entitled to infer anything from that, as it may depend in part on the position in the US. Pending October 2012, Teva have an exclusive distribution agreement with Cephalon for modafinil in the UK and elsewhere. It is a term of the settlement agreement that, if another generic product is launched in any territory before that date, the relevant Teva company could terminate the distribution agreement and have a licence so long as that other generic is on the market. Before doing so they are required to negotiate in good faith with Cephalon, but if the parties cannot agree within 30 days the distribution agreement will terminate.
- The two patents of which infringement is alleged are EP (UK) 0 731 698 ("698") and EP (UK) 0 966 962 ("962"). The defendants have counterclaimed for revocation of a third patent, EP (UK) 1 088 549 ("549") which need not be considered further.
- It is sufficient to consider 698 for present purposes. The patent describes the invention at  in the following terms:
"Our invention discloses a pharmaceutical composition comprising modafinil in the form of particles of a defined size, and the use of such composition. We have discovered that the size of modafinil particles is important to the potency and safety profile of the drug."
- The patent tracks the history of the making of the invention, showing how particle size distribution was examined as between the early and late lots of modafinil. In all the experiments in the patent the particle size is measured on the bulk drug substance, even though in some tests the product is incorporated into capsules. The patent explains at  that:
"The size of the particles can be determined, e.g., by the methods provided below, and by other conventional methods known to those of skill in the art".
- Claim 1 is in the following form:
"A pharmaceutical composition comprising a substantially homogeneous mixture of modafinil particles, wherein at least about 95% of the cumulative total of modafinil particles in the said composition have a diameter of less than about 200 micrometers and said composition contains between about 50 milligrams and about 700 milligrams of said modafinil."
- The claim uses the cumulative total measure of particle size. Figure 1 in the patent shows that 95% under 200 microns was the cumulative total demonstrated by the two late samples which had median particle diameters of between 30 and 50 µm. It is on this basis that claim 2 is to
"The composition of claim one wherein said particles have a median diameter of between about 2 micrometers and about 60 micrometers."
- A short question of construction arises. When the claims speak of the particle size, does that mean the particle size (by whatever measurement) in the composition or the particle size of the active ingredient used to make the composition? The claimants contend for the former construction, the defendants for the latter. The point matters because the claimants have performed their measurements of the defendants particles on modafinil extracted from their tablets. It is possible that mechanical shearing and crushing forces experienced by the particles of modafinil during tabletting will alter their size and size distribution.
- Mr Carr QC, who appeared for the claimants with Mr Thomas Mitcheson, submits that as the claim is a product claim, it is natural to suppose that it is the particle size in the product which is intended. That is what the claim says. Moreover, as the benefits of the invention are concerned with the administration of the composition of the claim, it is the particle size in the composition which matters for the purposes of the invention. He says that the specification is written on the assumption that particle size stays the same when the bulk active ingredient is made into tablets or other formulations. But that does not mean that if a tablet in fact contains modafinil with a particle size within the claim, that it does not infringe.
- Mr Tappin QC, who appeared for the defendants with Mr Adrian Speck, submits that the specification is consistent throughout in referring to particle size of the bulk active ingredient. No other method is taught for measuring particle size. The discoveries in question were made by measurements on the bulk active ingredient. He says that it is so clear that that is what the claim means, that I should so decide on this application.
- For present purposes I need to do more than decide whether Mr Carr's construction is arguable. In my judgement it is manifestly so. The two arguments advanced (that the claim is to the composition, and that it is the point at which the drug is administered which is important) seem to me to be more than enough to get him over that hurdle.
Arguable case of infringement?
- Although, for the purposes of determining whether there is an arguable case of infringement, it is the particle size in the tablet which matters, I will first summarise the evidence about the bulk active pharmaceutical ingredient ("API").
- Tests done for the defendants under the supervision of Professor Buckton, who is Professor of Pharmaceutics at the School of Pharmacy in the University of London, showed that the median, mean and mode diameters of the API provided were 218, 235 and 308 microns respectively, and that only 50% of particles were below 200 microns. On this basis the API would not fall within any claim. A sample of the API has been provided to Cephalon, but they have not disclosed the results of any testing on any untreated test sample. Instead they have chosen to question whether the sample provided to them is representative. They have however apparently conducted some tests on the Orchid API, because these are shown in an exhibit to their reply evidence, although not commented on by any of their witnesses. In those tests the API has been treated by sonication (see below), and so the results may not be representative of the untreated API which was tested by Professor Buckton.
- If the claim were to be construed as referring to the API I would have no hesitation in saying that the claimants had not established an arguable case of infringement. Speculation about the sample being unrepresentative cannot carry them home.
- Turning to the tablets, the claimants' evidence in chief explained how Orchid modafinil tablets were first subjected to a process to separate the modafinil from the other ingredients of the composition. Dr Lynn van Campen, the claimants' expert who performed the separation, said in her witness statement that she believed that the protocol was designed in such a way as to extract the modafinil particles without affecting the size of those particles. The protocol involves ultrasound treatment of the sample for three separate periods of five minutes each ("sonication").
- The second stage of the analysis was to measure particle size. The particle size analysis protocol included a further two minute sonication step. The particle size analysis was performed by Mr Bobzien, an independent contract research analyst. The results of the analysis showed that the Orchid 100 and 200 mg tablets fell within the size ranges specified in the claims.
- The defendants say that the "sonication" treatment would be likely to alter the particle size. Their evidence included an expert report from Professor Buckton. Professor Buckton had already made a number of declarations in the Swedish proceedings, where corresponding issues were raised. In his report here he said:
"One particular concern was the effect of the sonication employed in the procedure. In my first declaration, I explained my concerns that sonication was breaking up the particles. The results of tests on Orchid's API attached to my second declaration confirmed my concerns about sonication. The tests showed that particles in the API were broken up by sonication, and by shorter periods of sonication than those used in the extraction procedure used by Dr Van Campen. I concluded that the methods of testing and analysis employed by Cephalon were not appropriate and led to inaccurate results."
- The table of results which Professor Buckton produced showed that the majority of the change in particle size occurred in the first 1-2 minutes of sonication. The values of median diameter in microns plotted against time in seconds look like this:
- Cephalon's response was to repeat their original analysis but with varying periods of sonication at each sonication step. Thus at each of the three steps, periods of 30 seconds, 2 minutes and 5 minutes sonication were used. Mr Bobzien then did his particle size analysis, this time using 1 minute rather than 2 minutes of sonication in his protocol. Consequently the least sonication to which a sample was subjected was 2.5 minutes (3x30 seconds plus 1 minute). Mr Bobzien concludes as follows:
"The results appear to indicate that there is a small reduction in particle size when a longer period of sonication is used during the separation procedure. However, the particle size results obtained for the sample that had the least amount of sonication applied to it (30 seconds in the separation procedure and one minute in my procedure) still fell well within the particle size range that I understand is being claimed by Cephalon. It is therefore possible to infer that even if sonication used during the separation procedure is reducing the size of the particles, the original size of the particles in the tablets is well within the range that Cephalon claims."
- It is not clear on what scientific basis Mr Bobzien is projecting back the figures he obtained to the case where there is no sonication. The case of least sonication to which he refers is in fact a total of 2.5 minutes (3 x 30 seconds plus 60), well into the flatter part of Professor Buckton's curve. The values he obtains for median diameter at that period, 43-47 microns, match quite well the values obtained by Professor Buckton for the median diameter: Professor Buckton's measurements at 2 and 3 minutes were 50 and 35 microns respectively. So, far from contradicting Professor Buckton's results, it remains entirely plausible that the active ingredient in the Orchid tablet had a very much greater diameter when not subjected to sonication. What Mr Bobzien has done is look only at times from 2.5 minutes onwards, where the curve is fairly flat. In the light of Professor Buckton's evidence, the inference he seeks to draw in the final paragraph of the passage from his second witness statement which I have quoted above, is not a permissible one.
- Included in the same test results are the tests on Orchid API which I have already referred to. These are, as I have said, nowhere discussed in Cephalon's evidence. Three samples of Orchid API are tested. They are differentiated as "30 seconds", "2 minutes" and "5 minutes". If these identifications were interpreted in the same way as for the tablets, then one would assume that they represented, in accordance with the separation protocol, 1.5 minutes, 6 minutes and 15 minutes sonication because of the three separate sonication steps. However Mr Carr told me, on instructions, that these were single periods of sonication. The results show that sonication for these periods is not having an appreciable effect on particle size.
- These results on API are directly in conflict with those of Professor Buckton, who showed that substantial reduction in size of particles in the API was occurring in the period between 30 seconds and 2 minutes. Moreover the values obtained, around 100 microns, are around half those obtained by Professor Buckton. The glaring omission from the data submitted by Cephalon is the analysis of an unsonicated sample, which would allow a determination of what is happening in the first 30 seconds of sonication.
- These API results appear to have been included in the claimants' evidence by chance, a suggestion made by Mr Tappin which Mr Carr did not seek to correct. They are not supported by an explanation as to how they were performed. Moreover Mr Bobzien does not say that he has relied upon them in any way: indeed the tables he includes in his witness statement exclude the figures for the API. If Mr Bobzien is not prepared to rely on the results then it seems to me that it would be wrong for the court to do so, even at the interim stage.
- The final matter to refer to concerns the effect of the tabletting procedure. The claimants have not adduced any evidence about this at all. Professor Buckton said this in his declaration for the Swedish proceedings, which included photomicrographs of the Orchid API:
"The photomicrographs demonstrate that the [Orchid Swedish] modafinil API consists of aggregates made up of hexagonal crystals, which are fragile and break into debris even after a short period of sonication. It is unthinkable that this API would withstand the process of tabletting without damage to these fragile hexagonal crystals and I believe that it is impossible to extract material from a tabletted product that will be representative of the input API."
- That evidence was of course directed to establishing that the patent was directed to the particle size of the API. It does show that the particle size in the composition is likely to be less than the particle size in the API. By how much is a matter of speculation at this stage. No witness has opined that it is possible that the tabletting procedure could be sufficient to bring the particle size within the claims. Nevertheless, if the particles are susceptible to size reduction by sonication from 200 microns to less than 50 microns, as Professor Buckton has shown, then it is at least plausible that that reduction is occurring during tabletting and not during sonication.
- On the basis of all this material Mr Tappin submits that there is simply no reliable evidence of particle size in the Orchid tablet. He said that the inference Mr Bobzien seeks to draw concerning the particle size in the composition is obviously flawed and that the court is entitled to disregard it notwithstanding that it is the stated opinion of an expert.
- Mr Carr submits that the defendants are indulging in a mini trial of an issue, contrary to the guidance given by the House of Lords in American Cyanamid v Ethicon. The court should accept the evidence of Mr Bobzien as indicating that the claimants have a sufficiently arguable case to merit a trial.
- The evidence thus far adduced by the claimants falls a long way short of persuading me on the balance of probabilities that the particle size within the composition is within the claimed range. However, that is not their task at this stage. It is only necessary for them to establish that they have a realistic prospect of succeeding on the issue. That test has been interpreted to mean that a claimant must adduce "sufficiently precise factual evidence to satisfy the court that he has a real prospect of succeeding in his claim to a permanent injunction" and "[i]f the facts adduced by him in support of his motion do not by themselves suffice to satisfy the court as to this, he cannot ... expect it to assist him by inventing hypotheses of fact upon which he might have a real prospect of success": see re Lord Cable  1 WLR 7 at 20-21. Beyond that, "it is no part of the court's function at this stage to "try to resolve conflicts of evidence" (per Lord Diplock in American Cyanamid v Ethicon  AC 513 at 541 line 15).
- The evidence on which the claimants initially asked the court to infer that the particle size requirement was satisfied was that their measurement procedure was having no effect on particle size: see Dr van Campen's first witness statement. Mr Bobzien has now retreated from this position in his reply evidence, accepting that the procedure is having an effect. Their case now depends on his attempted inference, based upon an unstated assumption about the linearity of the relationship in the first 2.5 minutes.
- Viewed in this way, this evidence is very weak. But to an extent that is a function of the stage of the proceedings we have reached. At trial there will have been disclosure of the defendants' tabletting procedure, and the experts will accordingly be able to come to a concluded view as to whether the size reduction which is undoubtedly occurring in the tabletting procedure is sufficient to bring the particle size within the claim. That is something which to date the defendants have not focussed on because that is not their construction of the claim, and the claimants have not been able to determine as they do not yet have the details of that procedure.
- In the end, and not without difficulty, I have concluded that the evidence just about clears the threshold of establishing that there is a serious question to be tried.
- The defendants also contend that the claimants have no arguable case on the validity of the patent. Although a number of defences are advanced, Mr Tappin identified obviousness over WO 94/21371 (Lafon) as his best case.
- Lafon is principally concerned with an extrusion and freeze-drying method for preparing particles containing an active ingredient. The invention is illustrated by reference to a number of examples which use different drugs. Examples 16 and 17 illustrate the invention by reference to the preparation of microbeads of modafinil. The particle size of the modafinil used to prepare the microbeads is said to be 2-5 microns.
- It is common ground that Examples 16-17 are not novelty destroying: they do not specify the dosage of the composition. The defendants seek to bridge the gap between Lafon and the invention by adducing evidence of the recommended dosage of modafinil at the priority date. They submit that there is no inventive step in taking Examples 16 and 17 and choosing the recommended dose, as one would have to do to test it. The case is undoubtedly a superficially attractive one.
- Mr Carr had a number of answers to this. Firstly he submitted that the case advanced by the defendants is not supported by any expert evidence, despite the fact that a relevant expert had been instructed by the defendants. Secondly he submitted that it is not necessarily the case that the skilled person reading Lafon would consider it worthwhile to make a dosage for human administration. To do so the skilled person would have to consider Lafon to be a worthwhile starting point, and there was no evidence that he would so consider it. Indeed Lafon was concerned with a wholly different problem to that of the patents. Lastly, he submitted that the relevant material about dosage had been assembled by the defendants' solicitors, and it did not appear that it was, or was all, common general knowledge.
- Mr Carr also pointed to the specification of 698 at  to . Those paragraphs disclose narrower ranges of size which would potentially exclude Lafon whilst still including the defendants. It would be open to Cephalon, he submitted, to formulate an amended claim, and thus expand the gap which the obviousness case would have to bridge.
- Some of these points are not very promising. The point about whether Lafon is a realistic starting point might have some force if a prolonged research project were in view: but all that is necessary is making up the very microbeads described in Lafon and testing them. Secondly, I do not think it is realistic to suggest, even at this stage, that the dosage of modafinil was not common general knowledge, or at least knowledge that the skilled person would immediately acquire on deciding to test the example.
- Nevertheless the burden of establishing lack of inventive step lies on the defendants. Experience teaches that the most unpromising-looking claim at the interim stage may turn out to be valid. The evidence here is incomplete and inconclusive, and Mr Carr is right that he may be able to amend his claim so as to avoid the effect of Lafon. I am not persuaded that the claimants have no arguable case on validity.
Should I take the merits into account?
- Mr Tappin also submitted that this is a sufficiently clear case to allow me to take the merits into account in relation to the balance of convenience. Jacob J was asked to do that, but declined, in SKB v Generics. He said:
"The decision in American Cyanamid made it plain that the court should not enter into a balancing exercise as to who was to win or more likely to win.
I have always, myself, found the decision in Cyanamid, if generalised, to cause difficulties. Hoffmann J. once spoke of "the balance of the risk of injustice" to one party or the other. To ignore the balance of who was likely to win in assessing the balance of risk has always seemed to me to be a strange thing to do in principle. It is not a course which is followed in most jurisdictions around the world with which I am familiar; for instance, Germany, France, Holland and the United States.
Of course, if the case is one in which an assessment of the likelihood of prospects of success is, itself, going to be long, protracted and involved, then one is really saying that one cannot make a proper assessment of risk in that regard. Such was the case in American Cyanamid itself where the argument in the Court of Appeal alone took eight days.
In principle the Cyanamid rules make particular sense when one cannot reasonably assess the prospects of success on either side. There may come a time when the extension of the Cyanamid principle to cases where the court can make a reasonable assessment of the prospects of success should be re-examined by the House of Lords. That is not this case."
- In the American Cyanamid case Lord Diplock did indicate that there were circumstances where "it may not be improper" to take account of the relative strengths of the parties' cases:
"..if the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party's case as revealed by the affidavit evidence produced on the hearing of the application. This, however, should be done only where it is apparent upon the facts disclosed by evidence as to which there is no credible dispute that the strength of one party's case is disproportionate to that of the other party. The court is not justified in embarking upon anything resembling a trial of the action upon conflicting affidavits in order to evaluate the strength of either party's case."
- Reliance was also placed on the decision of Laddie J. in Series 5 Software v Clarke  FSR 273. But that case only goes as far as to suggest that the court may take into account any clear view which the court may reach as to the strength of a party's case, and without attempting to resolve any issue of disputed fact: see the test suggested by Laddie J. at page 286, paragraphs 3 and 4.
- The present case is in my judgment not one where one can say on facts about which there is no credible dispute that the strength of the defendants' case is disproportionate to that of the claimants. Both sides have a realistic prospect of establishing that the particle size in the composition is inside/outside the claim. The evidence is far from complete. This is not a case in which that particular exception could apply.
Balance of convenience
- There is no dispute as to the approach which I should apply. I must weigh the likely injustice of granting an injunction which it later turns out should not have been granted against the injustice of withholding one which should.
- Both sides accept that the other has the ability to pay any likely award of damages. So the case turns on which side, on the evidence before me, is likely to suffer the most irreparable harm.
- There have been a number of cases where interim injunctions have been granted in cases concerning patented pharmaceuticals and generic competition where the court has concluded that the loss likely to be suffered by the patentee would be larger and more unquantifiable than the loss to the generic. Mr Carr reminded me of SKB v Generics (23rd October 2001) at 11 lines 7-10; SKB v Apotex  FSR 30 and Abbott v Ranbaxy (19th November 2004). In each case a significant factor has been the fact that the generic competition was likely to produce price cutting, and that restoring those prices to the full monopoly level after success at trial could cause the patentee to lose goodwill.
- A second theme which has emerged from the cases is that a factor in the balance of convenience may be that the generic company which is threatening to come on the market has taken no steps to "clear the way". Given that the launch of a pharmaceutical cannot be achieved overnight, and requires the obtaining of marketing approval after the submission of data, it has been said that a generic company which does not also take steps to ensure that it is not arguably infringing the relevant patents should not be able to rely subsequently on the resulting uncertainty. This was said in SKB v Apotex (above) at  –  and on appeal by Aldous LJ at  FSR 31 at -.
- These are certainly considerations which, depending on the evidence, may be material in particular cases. There is a danger however in treating them as principles of law. Whether they apply at all in any given case and whether, if they do, they outweigh other factors is to be decided on the evidence.
Loss to Cephalon
- The evidence as to the effect of generic competition on the claimants is given by Mr Bromley, who is Head of Business Services for Cephalon (UK) Limited. He explains that when a generic product enters the market, the prices charged to pharmacies fall rapidly. 100% of prescriptions for modafinil are written generically, meaning that the whole of Cephalon's UK market is exposed to generic competition. Although a first generic tends not to have this effect, the effect of a second generic on the market is to cause a rapid downward price spiral.
- Mr Bromley draws attention to the fact that when Teva attempted to enter the market the price offered to Cephalon's UK customers was 40% less than the NHS list price. He said that he would expect Mylan to do the same, and given that there is no response to this in Mylan's evidence, I think he is right.
- One point taken by the claimants is the impact that competition will have on research into other products if profits are lost. I am not persuaded that competition from the defendants would be likely to divert resources from research into other products in the short period until trial.
- Mr Bromley also considers that the presence of a generic entrant, even pending a trial in April or July next year would be likely to cause Teva to want to launch its own generic product. He points out that Teva already have a UK marketing authorisation, regular contact with Cephalon's customers and, presumably, a source of supply. Other generic companies would be likely to follow Mylan and Teva into the market, although Efarmes, at one point mentioned as a threatened entrant, has given an undertaking not to launch until after the trial.
- I think it is most unlikely that Teva would decide to terminate its exclusive distributorship pending trial. Its ability to be on the market under the terms of its settlement with Cephalon would depend on the presence of a generic competitor. If Teva decided to launch relying on these terms, and the defendants (and any other generics) were to be removed from the market at trial, Teva would be excluded from the market altogether between trial and October 2012. Moreover, even if Teva were to terminate the distribution agreement on the day Mylan enters the market, they will still have to go through the 30 day negotiation period. If good faith negotiations fail, there is no evidence as to whether or how quickly they could reactivate the source of supply which they had in 2005. But all this is most unlikely in any event.
- Nevertheless I accept that it is possible that other generic competition could emerge, although none has been identified.
- Mr Bromley also deals in his evidence with the possibility of a change in the drug pricing category:
"The Drug Tariff for England and Wales stipulates the re-imbursement paid for drugs and other services provided to the NHS. Part VIII of the Drug Tariff provides the basic prices for generic drugs. These prices are split into 5 categories of which Categories C, A and M are relevant to the present case.
Drugs in Category C are drugs where the price is based on the list price of a particular branded product, and is used for drugs were generic versions are not generally available. Modafinil is currently in Category C.
Drugs in Category A are drugs which are readily available and the prices for those drugs are calculated from the list prices of a basket of distributors (until April 2005, this was the main category for drugs where generic versions were applicable). Category A prices are generally updated and published every six months.
Drugs in Category M are drugs which are readily available, whose price is calculated by the Department of Health from information of actual prices charged for drugs supplied by generic manufacturers using a volume weighted average selling price (this category was introduced in April 2005 for more popular drugs where the NHS wanted to keep a closer watch on prices). Category M prices are updated and published every quarter.
Category M prices can change significantly from quarter to quarter as the Drug Tariff response to market changes. Category A prices, on the other hand, are generally less volatile.
The Department of Health will move modafinil from category C to one of categories A or M at some stage following the launch of a generic version. The decision as to which category, and the timing, will depend primarily on the speed and extent of the market price drop; the reliability and substantiality of the generic source(s) of supply is also a relevant factor. Based on my experience with Zanaflex (see below), a drug with a similar market profile to that of modafinil, I would expect modafinil to be moved to Category M within six months.
A change in the drug tariff category will usually involve a fall in the drug tariff price (I have seen the Drug Tariff price fall by 40% when a drug was placed in category M). Since pharmacies make a profit based on the difference between the market price - the price actually paid for a drug - and the NHS drug tariff price – the price at which they are reimbursed - they look to maintain their margins by paying less for drugs as the price tariff falls."
- Thus Mr Bromley's evidence is that a change would be far from immediate. Under the heading "Irreversible price erosion" Mr Bromley makes the following points:
i) He states his belief that the market would be unsympathetic to an attempt to raise prices. There will have been a change in customers' mindset as to what a fair price would be.
ii) Other generics are likely to have entered the market and are likely to remain on the market after judgment. (He goes on to say that even if they had been removed at the same time, apportionment of damage would be difficult. That is a separate point, but not one which goes to the difficulty of assessing the overall damage to Cephalon).
iii) If modafinil has been moved from Category A to Category M Cephalon may be prevented from raising the price. As is clear from the passage above, this is not something which Mr Bromley anticipates happening immediately. Indeed if a trial is held in April rather than June and his estimate is right, then it will be after and not before the trial.
- The second and third points are therefore points about risk of damage, rather than certainty. As to the loss of goodwill, it is credible that Cephalon's decision to restore their monopoly price after success at the trial will be unpopular with their customers. The way it is put by Mr Bromley in reply is as follows:
"Cephalon UK has commercial arrangements with some pharmacies in relation to other products in its portfolio where those pharmacies could in fact get that product cheaper elsewhere – it is the goodwill between the companies, arising from the way we treat them, such as helping them in forecasting (for example when we expect surges in demand), being willing to accommodate issues such as buying back short-dated stock, and managing their concerns when there are changes in reimbursement prices - that maintain such arrangements. There are other companies in the industry which have a reputation for being more hard-nosed and customers are not prepared to agree with them the sort of favourable deals that we can negotiate. If we are as aggressive in forcing back up the price of PROVIGIL®, as Mr Manson says we could be, we would be in danger of losing favourable contracts in the future, and such losses are likely to be difficult to quantify and could be significant."
- It does not seem to me that this evidence comes anywhere near establishing that the claimants could not raise their prices to their former levels. At the most it establishes a risk that there may be some knock-on effect of doing so. As to that, as Mr Bromley makes clear in his evidence, the claimants are able to hold onto business, even when the product can be obtained cheaper elsewhere, by their approach to doing business generally. Their ability to do so would not be affected by the availability of generic modafinil for a short period.
- To describe the impact on the claimants as irreversible price erosion therefore puts the case too high. I am not persuaded that for a drug which forms a very substantial part of the overall business of Cephalon, it is established that these considerations would outweigh the need to get the maximum return from sales of modafinil by raising the price to the monopoly level.
- Mr Tappin said that there was a point of principle here. Cephalon could choose not to lower their prices at all. They could then raise them again after trial and rely on their monopoly to regain all the market share. The only reason, he submitted, that Cephalon were contemplating lowering their prices at all was in order to protect themselves in the event that they lost the action. That he submitted was not a head of loss of which the court should take into account.
- I do not think this is really an answer to the point made by the claimants. If Cephalon do not lower their prices, their customers will leave them for the generic product. Those customers will experience a price rise when the defendants' product is removed from the market, which may have the knock-on effect of which complaint is made. Nevertheless, the fact remains that the evidence about this knock-on effect of raising prices has not impressed me greatly.
- One reason why this is so arises out of evidence given by Mr Bromley about parallel imports of modafinil. In 2009 parallel trade accounted for 18% of the total (both 100 mg and 200 mg) UK modafinil cash sales and 29% of the 100 mg cash sales. In the year to July 2010 these figures are 19% and 31%. Parallel importers offered discounts of up to about 35% of the NHS list Price to major pharmacy chains, and discounts of up to about 18% to individual pharmacies. Mr Bromley's answer is:
"Cephalon UK gives extra discounts to pharmacy chains from time to time to compete with the parallel importers, although the discounts are less than those offered by the parallel importers because Cephalon UK can offer consistency of supply."
- This plainly suggests that Cephalon are able to raise their prices in relation to modafinil after lowering them temporarily. Mr Bromley does not suggest that Cephalon experience any significant loss of goodwill when they do so. Mr Carr suggested that it would be very different if there were a prolonged period of lower prices to meet competition from a generic supplier who would be able to offer consistency of supply. As to that, I am not persuaded that the period for which lower prices would be offered by Cephalon need be very long. I am also not satisfied that the discounts offered need be very much greater than those currently offered to meet parallel competition.
- Mr Bromley also seeks to suggest that the existence of generic competition would cause an increase in the amount of parallel imports of modafinil after judgment. He explains this at  to  of his second witness statement. At - he says that generic versions have been launched in three European countries. He says that if Cephalon is not able to obtain injunctions in those countries prices will fall and this will give parallel importers the opportunity to increase sales in the UK. To the extent that leads to more parallel imports after judgment, it has nothing to do with the defendants having been on the market on the UK. At  he says that a fall in the reimbursement price in the UK would lead to a fall in the prices in other countries such as Spain and Ireland where parallel importers source their products. That point is however premised on a fall here which Mr Bromley does not expect to occur for six months. I therefore do not think that the presence of a generic competitor will lead to an increase in the amount of parallel imports faced by the claimants after trial.
Loss to the defendants
- The most important point taken in relation to loss to the defendants is the loss of the benefit of being the first generic manufacturer to market. Mr Munson, who is the Marketing Director of Mylan in the UK, puts it in this way:
"Being first to market with a generic product is a key strategy for generic companies including Mylan. Being first with a product enables us to establish supply to key customers. When further generics come onto the market, as the incumbent supplier we will usually be given first option to keep the supply (albeit at a lower price). This is a huge advantage for us particularly because it allows us to maintain our market share, but it also allows us to manage our stock and so reduce the possibility of write-off costs. The generic pharmaceutical market is highly competitive and it is within the first few weeks or months of launch that the bulk of profits on a product can be made, particularly where a company is the only generic on the market for a period. If a number of generics then enter the market and compete on price, the profit margins reduce. Successful generic companies rely on the strategy of first market entry as it is a key factor for profitability."
- Mr Munson points out that at present Mylan is placed to be the first generic to market with modafinil. No other generic is as far advanced as Mylan. By contrast, after judgment the way will be clear for other generics to enter. Mylan will have lost the first to market advantage.
Holding the balance
- The principal factors affecting the balance of convenience are these:
(i) Both sides are able to identify heads of unquantifiable loss. On the claimants' side there is a risk that there will be some damage to their goodwill when prices come back to their former levels, as I believe they are likely to do if the claimants succeed at trial. On the defendants' side, if they are injuncted and win at the trial, there is a strong likelihood that they will lose the position of being the first generic to market – the loss of a unique market opportunity.
(ii) The market for modafinil is a relatively mature one, allowing one to assess at the inquiry as to damages what profits the claimants would have made absent competition. By contrast one has no yardstick by which to judge how much of that market the defendants would have taken if allowed to compete instead of being enjoined.
(iii) I am not persuaded the damage to the claimants is on this evidence likely to be greater and more unquantifiable than that to the defendants, the conclusion reached in the line of cases I have referred to above. In the present case I think the evidence establishes that the loss to the defendants is the more likely to occur, the more likely to be substantial and will be the more difficult to quantify.
- Against this it is true that the defendants have failed to take any steps to clear the way, or give any explanation in the evidence as to why they have not. Mr Tappin suggested that there may be many reasons why a defendant might choose not to show his hand to the claimant, such as alerting other generics to the market opportunity. That would be an inevitable consequence of becoming involved in litigation. However there is no support for this in the evidence.
- I must take this factor into account, but I am not obliged to give it so much weight that it necessarily swamps all the others. Here, I do not think it does.
- There is a strong case here for an expedited trial. A change in price category could occur in six months. Moreover the longer the period until trial the more time there is for a second generic to emerge and start the price spiral the claimants fear. The parties clearly need business certainty as soon as possible.
- I am in principle prepared to give directions to allow the case to come to trial on an expedited basis in April 2011. That is less than six months away. Mr Carr wanted more time but did not explain why. The case is sufficiently straightforward to allow a trial in April to occur without injustice to either side.
- In the end I have concluded that this is not a case in which I should grant interim relief. The balance of convenience comes down in favour of allowing the defendants to take advantage of their market position for the short period until trial. I propose to order an expedited trial in April 2011.
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