By James DeGiulio --
With very little downside and huge upside, exclusivity is the driving force to the huge increase in first-to-file Paragraph IV filings. Adam Greene and D. Dewey Steadman, both at RBC Capital Markets Corp., conducted a recent study where they analyzed over 370 court rulings since the beginning of 2000 to establish the "success rates" of generics (as defined by the authors). Using PACER, company reports, and RBC Capital Markets estimates as their sources, the authors looked at company, district court, and judge, as well as other relevant trends in the industry such as at-risk launches, authorized generics, and the number of patent settlements. The authors hypothesize that, based on the incentives of the Hatch-Waxman first-to-file structure, every patented product would be challenged. As expected, the authors saw an increase in first-to-file lawsuits in each year since 2003, reaching a record high of 65 in 2009 (see chart below).
Perhaps the most intriguing finding of the study, the authors determined the "success rate" of generics for Paragraph IV challenges was a healthy 76% (282/370) (see chart below). Importantly, the authors consider a settlement as a "success" for the generic, as it eliminates uncertainty and expensive legal costs. Dropped cases were also considered a successful outcome for generics, though the reasoning for this is not provided in the study. Thus, as long as settlements and dropped cases are considered a "success" for generics, the study supports the authors' hypothesis that every patent would be challenged by a generic. With a 76% success rate, the potential payoff of a first-to-file Paragraph IV challenge is worth the risk of litigation. However, the study finds generics fare much worse at trial. Of the 171 cases resolved at trial, generics won 82 rulings while losing 89 (48%).
The authors next analyzed the track records of generics with five or more resolved Paragraph IV challenges between 2000 and 2009. Perrigo was found to have a perfect success record, with a single case won and seven settlements, once again reflecting the author's classification of all settlements as a successful outcome. Apotex was found to have the worst success rate at 43%, but was also the least likely to settle or have a case dropped. All company data is presented in the table below.
The authors next evaluated which federal districts and which judges have the best success rates for generics. A few districts have never found against generics, though these districts have not heard many cases. These include the Central District of California (8/8), the Eastern District of New York (2/2), Minnesota (2/2), and the Eastern District of Missouri (1/1). However, the most popular districts (New Jersey, Delaware, and the Southern District of New York), which heard nearly 70% of all generic challenges, resulted in a generic winning percentage of only 36% (see table below). This winning percentage is on par with the authors' analysis of individual judges. For judges who have issued 5 or more decisions, the winning rate for generics is 37%.
The authors noticed a small increase in at-risk launches (defined as any launch without a lower court ruling) and authorized generics. Further, the authors noticed the number of non-authorized generic launches doubled from 2008-2009, from 6 to 12, which the authors hypothesize is due to the increase in settlement agreements a few years ago.
Finally, the authors note a trend of increasing settlements from 2003-2009, reaching an all-time high of 54 in 2009 (see chart below). Teva accounted for nearly one third of all settlements. On the brand side, Glaxo and Novartis have settled the most.
The authors expect settlements to remain fairly common, despite the passing of the Kohl Bill by the Senate Judiciary Committee in October 2009. Their prediction is not surprising, since the authors assume that settlements are always good for the generic company. From an investment perspective, this assumption may have merit, since settlements provide clarity for the company (and shareholders) and avoid the expense and risk of litigation. However, in practice, there will certainly be settlements that would not be considered a success for the generic.
James DeGiulio has a doctorate in molecular biology and genetics from Northwestern University and is a third-year law student at the Northwestern University School of Law. Dr. DeGiulio was a member of MBHB's 2009 class of summer associates, and he can be contacted at email@example.com.