Eteboxagu AB v Cycle Pharmaceuticals Ltd
| Jurisdiction | England & Wales |
| Judge | Miss Julia Dias,Julia Dias |
| Judgment Date | 06 March 2023 |
| Neutral Citation | [2023] EWHC 462 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2021-0000303 |
[2023] EWHC 462 (Comm)
Miss Julia Dias KC
SITTING AS A DEPUTY HIGH COURT JUDGE
Case No: CL-2021-0000303
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr N. G. Casey (instructed by Mills & Co.) for the Claimant
Mr Matthew Parker KC (instructed by Goodwin Proctor (UK) LLP) for the Defendant
Hearing dates: 6–8 February 2023
Approved Judgment
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Miss Julia Dias KC
This judgment was handed down by the judge remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be Monday 06 March 2023 at 10:30am.
Julia Dias KC sitting as a Deputy High Court Judge:
INTRODUCTION
Background
Hereditary tyrosinaemia type 1 (“HT-1”) is a genetic disorder which prevents the body from fully metabolising tyrosine and can potentially lead to severe liver disease. The majority of infants born with HT-1 do not survive their first year of life; if they do, they are condemned to endure a chronic lifetime condition. Thankfully, the disease is extremely rare.
Dr Staffan Strömberg is a chemist and chemical engineer by training who has worked for a number of pharmaceutical companies in drug research and development, including Swedish Orphan Biovitrum AB (“SOBI”) where he was head of research and development between 2001 and 2002. While at SOBI, Dr Strömberg dealt with a drug called nitisinone which SOBI had patented under the brand name of Orfadin. Orfadin was the first approved nitisinone drug treatment for HT-1.
Mr James Harrison is the founding shareholder of the Defendant company and Group CEO of its parent company. He has worked in the biotechnology industry for a number of years and first met Dr Strömberg in about 2009.
In around 2010, Dr Strömberg conceived the idea of developing a generic alternative to Orfadin. He was aware that in the case of niche drugs larger pharmaceutical companies very often do not devote their efforts to developing generic alternatives because the patients are few in number and the opportunity for profit commensurately less. He was also aware that SOBI's patents on nitisinone were due to expire from about 2012.
Dr Strömberg approached Mr Harrison with his idea and together they set up a joint venture through the medium of a Swedish company, Rosedale Pharmaceuticals AB, which they owned and funded equally. The company was subsequently renamed Cycle Pharmaceuticals AB but, to avoid confusion with the Defendant, I shall refer to it as “Rosedale”. The company was to work, not just on nitisinone, but also on other “orphan drugs”, i.e., drugs which the original developer was no longer selling for whatever reason. In around 2011, Dr Strömberg accepted a full time post elsewhere and decided not to continue with the joint venture. Mr Harrison therefore sold his stake in Rosedale back to Dr Strömberg for SEK1 and the company was wound up.
Mr Harrison, however, did wish to continue with the project and incorporated the Defendant company, Cycle Pharmaceuticals Ltd (“Cycle”), in the UK on 2 February 2012 for that purpose. Mr Harrison himself provided materially all the funding for the company and was the majority (80%) shareholder. Dr Strömberg held 10% of the shares and the remainder were held by a Professor Thomas Schnitzer.
Cycle likewise worked on projects other than nitisinone, but it was agreed that Dr Strömberg should share in the fruits of any successful development specifically of a nitisinone product, not least since he had been the originator of the idea to develop a generic alternative. Mr Harrison also wanted to avoid Dr Strömberg taking his idea to another better resourced company.
The Original Agreement
After some discussion (including as to a possible profit-sharing arrangement), the parties agreed that Dr Strömberg should be paid a royalty, and an agreement to that effect was concluded in January 2013 (the “Original Agreement”).
The key clauses of the Original Agreement are as follows: 1
“5 Cycle shall pay a royalty to Strömberg of 25% of Relevant Revenues.
6 Relevant Revenues shall be defined as Cycle revenues generated from the sale of the Product to treat HT-1 in any market globally.
…
8 Relevant Revenues shall be Cycle's gross income from the sale of the Product excluding VAT and transport costs. However, should Cycle outsource the selling of the Product to a distribution partner recognising the revenues from the sale of the Product and then sharing those revenues with Cycle, then the Relevant Revenues, for the purposes of this agreement, shall be the distribution partner's gross income from the sale of the Product excluding VAT and transport costs.
9 No royalty shall be payable if the gross margin from the Relevant Revenues is negative. The gross margin shall deduct only Cycle's direct product development costs, and Cycle's costs directly related to the manufacturing and selling of the Product to treat HT-1. For the avoidance of doubt, no administrative or management salaries, or discretionally [sic] spending, shall be deducted from the gross margin.
10 Once Relevant Revenues commence, Cycle shall prepare monthly management accounts of the Product including the calculation of Relevant Revenues…
…
13 Should a dispute arise regarding the calculation of Relevant Revenues (or gross margin) this matter will be referred to an independent accountant, whose opinion shall be binding on the parties…”
At this stage of course the parties had no idea what course the development would take and whether any product which emerged would simply be a generic copycat of Orfadin, or whether a different branded drug might be developed, or indeed whether nitisinone might be used to treat other conditions. While they intended to market any product wherever there were patients to be found, they were also aware that their major market was likely to be in the United States.
The US pharmaceutical market
It was common ground that the US pharmaceutical market for specialist drugs such as nitisinone operates in a unique, and uniquely complicated, way. In essence:
i) Importation, storage and distribution of drugs in the United States requires a distribution licence. Distribution licences are managed at state level and can only be obtained by companies with a US presence. The requirements may vary from state to state. A UK pharmaceutical company without a US presence cannot therefore itself import and sell drugs into the United States but has to use an importer. Such importer could be a distributor in its own right which undertakes the marketing of the drug in return for a profit share of typically 30%-40%, or simply a third party logistics provider responsible only for the importation, onward sale and shipment of the product as directed by the pharmaceutical company, with the latter remaining responsible for any marketing and sale arrangements.
ii) Specialist drugs are not available at ordinary pharmacies. A pharmaceutical company supplying specialist drugs will therefore enter into an agreement with one or more specialty pharmacies for the supply of the drug to the pharmacy at a particular price. The pharmacy will then dispense the drug to patients with the necessary prescription.
iii) The price to be paid by the specialty pharmacy to the pharmaceutical company is based on the company's published Wholesale Acquisition Cost (“WAC”).
iv) There is no equivalent of the NHS in the United States. Most citizens have private health insurance, although some assistance is provided to those without insurance by the government backed schemes, Medicare and Medicaid. The cost of drugs will therefore typically be covered by a patient's health insurance (or “Health Plan”), but only where the drug has been approved by the Health Plan. Approval is negotiated on behalf of Health Plans by pharmacy benefit managers (“PBM”s) who enter approved drugs on to a list known as a “formulary”.
v) Inclusion on a formulary is a matter for negotiation between the pharmaceutical company and the individual PBMs acting on behalf of Health Plans. Negotiations depend on many factors, including the amount of competition, the effectiveness of the drug, its differences from any competitors and the price charged, and it is frequently necessary for the company to offer a rebate on the price of the drug in order for it to be included on the formulary. Where there are competing drugs on the market, a rebate is in practice a commercial necessity. The level of rebate will be affected by whether the drug in question is a generic copy or a branded product. A higher rebate may also be paid to secure exclusivity or a more favourable position or “tiering” on the formulary. Rebates are mandatorily required by law at a fixed rate in the case of the government backed schemes, Medicare and Medicaid.
vi) Any rebate is paid to the PBM on behalf of the Health Plan in respect of each supply of the drug. The amount of rebate paid is commercially sensitive information which is kept confidential and is not publicly available.
vii) Where a drug on a formulary list is dispensed by a specialty pharmacy, the relevant PBM acting on behalf of the Health Plan will reimburse the pharmacy for all or part (depending on the level of cover available under the particular plan) of the cost of the drug paid by the latter to the pharmaceutical company. The precise amount reimbursed to the pharmacy by the PBM is a matter for confidential negotiation and is not made public.
viii) The balance of the price which is not covered by insurance is paid by the patient him/herself by way of...
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