The Importance of Pipefill Adjustments in Patented Medicines Litigation

November 15, 2018

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Pharmaceutical drug manufacturers are entitled to an upward adjustment in respect of pipefill on their but-for world (BFW) lost sales under Section 8 of the Patented Medicines [Notice of Compliance (NOC)] Regulations.

This was confirmed in an early 2018 decision by Justice John Laskin of the Federal Court of Appeal in the matter of Eli Lilly Canada Inc. v. Teva Canada Limited 2018 FCA 53. Pipefill refers to shipment of drugs from the manufacturer’s factory into the distribution network up to but not including sales to end users (patients). As such, pipefill adjustment represent sales made by pharmaceutical drug manufacturers to wholesalers that have not yet been purchased by end users.

In Section 8 cases, the plaintiff is usually a generic company that believes it was improperly prevented from selling its version of the drug on the market. In this article, we will assume the plaintiff is a generic drug manufacturer and the defendant or patent holder is a brand name drug manufacturer.

Under the regulations, plaintiffs can claim damages for being kept out of the market due to a regulatory stay triggered by the patent holder. A regulatory stay is achieved when the patent holder submits a prohibition application against the generic company to the Minister of Health. This restriction lasts up to the date when either the Minister of Health grants the generic company a NOC or the prohibition application is dismissed, withdrawn, or discontinued. The number of months it takes for the Minister of Health to issue a resolution on the prohibition application is referred to as the liability period.

Section 8 regulations extends a pharmaceutical manufacturer’s entitlement to compensation to “any loss suffered during the [liability] period” caused by being kept out of the market. As such, lost sales are recoverable for any “sale that can be shown to have been lost within the [liability] period.” Determining what sales were lost during the liability period is dependent on how sales are made by generic companies and how such sales are ultimately reported in the health care industry.

How are sales made?

Pharmaceutical manufacturers sell their products to wholesalers or distributors, who in turn sell to pharmacies, hospitals, or other retailers. In summary, the selling channels consist of three layers:

  • products sold by manufacturers to wholesalers;
  • products sold by wholesalers to retailers; and
  • products sold by retailers to retail customers (end users).

In Justice Laskin’s view and taking into consideration the above selling channels, to recognize a lost sale during the liability period it has to be “one level down the distribution stream”. That means a sale from generic companies to wholesalers or to retailers (if wholesalers were by-passed) would constitute a lost sale during the liability period under Section 8. Therefore, Justice Laskin concluded “…lost sales for which damages are recoverable by the generic company are sales that it would have made, not sales made by wholesalers or distributors or retailers.”

Previously, lost sales were considered to be compensable under Section 8 only if such sales were made to retail customers and such sales are not compensable under Section 8 if they fall outside of the liability period. According to Justice Laskin, “product leaving the manufacturer’s factories…and moved into the distribution stream” represent products that are sold by the generic companies. Therefore, if a sale occurs during the liability period, then it is compensable under Section 8.

How are sales reported?

To understand the pipefill issue, it is useful to examine why a pipefill adjustment is necessary in the first place, which is related to how drug sales are reported in the health care industry.

For the purpose of Section 8 litigation, sales data is usually extracted from prescriptions filled by pharmacies and hospitals. Economic loss experts recognize the discrepancies that exist between the sales data reported by the IMS Brogan Canadian Drug Store and Hospital Purchases Audit (CDH) and ex-factory sales. CDH sales data is derived from surveys and estimations of the number of prescriptions sold for a certain drug. On the other hand, the ex-factory sales data represents sales made by pharmaceutical manufacturers to wholesalers, distributors, or retailers.

CDH sales data consists of an estimate of the number of prescriptions written by hospitals and pharmacies, while ex-factory sales data represent the sales data recorded in the pharmaceutical manufacturer’s accounting records. Therefore, CDH sales data are usually lower than ex-factory sales data. In quantifying the lost sales, economists usually rely on CDH sales data and apply certain volume adjustments.

As such, economic experts quantify the BFW lost sales by taking CDH sales data with proposed volume adjustments as a proxy to what a pharmaceutical manufacturer would have sold during the liability period. Justice Laskin recognized that the issue of pipefill adjustment stems from lack of adequate ex-factory sales data. Therefore, relying on CDH data makes it necessary to include the pipefill adjustment in compensating for the damages entitled under Section 8.

Historically, courts have been reluctant to award the pipefill adjustment to plaintiffs. However, when awarded, it’s not clear how it is incorporated in the damages calculations. For instance, some judges have accepted the pipefill adjustment with the condition that it is not compensating the plaintiff for a double ramp-up. Ramp-up is known as the period it takes for generic companies to enter the market and achieve normal level of sales after being granted approval. It is not clear how generic companies received the benefit for this form of pipefill adjustment.

Prior court decisions on pipefill have been “somewhat ambiguous on the issue...in none of them was the issue seriously contested or a quantum specifically calculated.” Therefore, previous judgments would only include losses for sales made to end users during the liability period as the only sales that are compensable under the regulations.

According to Justice Laskin, plaintiffs remain undercompensated in their Section 8 claim if the overall BFW lost sales do not consider the number of pills that were sold to the wholesalers and have not yet been sold by wholesalers to the retailers, but will eventually be sold to retailers/end users after the liability period. As such, Justice Laskin has set a precedent for plaintiffs to claim losses that are inclusive of a pipefill adjustment for the volume sold to wholesalers that have not yet been purchased by end users during the liability period in their claim against the patent holder under Section 8 of the regulations.

Bob Ferguson is a partner at BDO Canada LLP in the Toronto office. Since 1989, he has specialized exclusively in forensic accounting, corporate investigations and economic loss quantifications. Bob has been retained by plaintiffs and defendants in intellectual property disputes including section 8 pharmaceutical litigation.

Mohamad Hussein is a senior consultant at BDO Canada LLP in the Toronto office. Since 2014, he has specialized exclusively in forensic accounting, corporate investigations and economic loss quantifications. Mohamad has played major role in expert reports involving intellectual property disputes including section 8 pharmaceutical litigation.

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