Full opinion text
OPINION & ORDER DENISE COTE, District Judge: TABLE OF CONTENTS PROCEDURAL HISTORY.......................................................459 BACKGROUND................................................................461 I.Omeprazole.........................................................461 II. The First Wave Litigation............................................462 III. The PPI market in 2003 .............................................. 463 A. Generic launches.................................................463 B. Astra’s Nexium® strategy........................................465 C. Third Party Payers..............................................467 D. 194333 .........................................................469 E. Status of Market in November 2003 ................................ 473 IV. Atra’s Licensing Practices as of November 2003 .........................474 A. Licenses for other PPIs ..........................................475 B. Prilosec OTC®..................................................476 V. Apotex’s Alternative Formulations.....................................478 A. Changes to Apotex’s formulation...................................480 B. Copying other formulations.......................................481 C. Microtablet formulation...........................................481 VI. The Book of Wisdom: Post-entry Information...........................482 A. Nexium®.......................................................482 B. Prilosec OTC®..................................................485 C. Apotex’s Sales...................................................485 D. Settlements.....................................................486 1. Andrx offer..................................................486 2. Teva settlement..............................................487 E. Infringement Litigation...........................................488 DISCUSSION..................................................................488 I. The Isolated Value of the Subcoating...................................489 II.The Pediatric Exclusivity Period......................'.................490 III. Standing............................................................492 IV. The Reasonable Royalty..............................................496 A. Apotex’s position ................................................497 1. Apotex’s profits..............................................497 2. Apotex’s ability to avoid infringement...........................498 B. Astra’s position..................................................502 C. Two remaining factors: Factors 2 and 14 ...........................505 CONCLUSION.................................................................506 This is the last of several patent infringement actions consolidated before this Court concerning generic production of omeprazole, commonly known by its brand name, Prilosec®. Plaintiffs’ Astrazeneca AB, Aktiebolaget Hassle, KBI-E Inc., KBI Inc., and Astrazeneca LP (collectively, “Astra”) patent on the omeprazole molecule expired in 2001, but several patents covering the formulation of the drug, including the patents at issue in this case, did not expire until 2007. Beginning in 1997, anticipating the expiration of the molecule patent, eight generic drug manufacturers, including defendants Apotex Corp., Apotex, Inc., and TorPharm, Inc. (collectively, “Apotex”), filed Abbreviated New Drug Applications (“ANDAs”) with the FDA, seeking permission to manufacture and sell omeprazole. Infringement litigation ensued. Apotex, Canada’s largest generic pharmaceutical company, began selling its generic omeprazole in November 2003, during the pendency of the litigation, and continued selling until 2007, when it was found to infringe Astra’s patents. The only remaining issue is the measure of damages to which Astra is entitled for over three years of infringing sales. The parties have agreed that these damages are to be based on a reasonable royalty for the use made of the patents, which this Court must set by imagining a successful hypothetical licensing negotiation between Astra and Apotex in November 2003, on the eve of Apotex’s launch. PROCEDURAL HISTORY Fact and expert discovery in this action concluded on August 16, 2013. The parties’ Joint Pretrial Order, proposed findings of fact and conclusions of law, and pretrial memoranda were submitted on September 13. At the time the trial was scheduled, the parties agreed that a bench trial would resolve Astra’s outstanding damages claim. With the parties’ consent, the trial was conducted in accordance with the Court’s customary practices for non-jury proceedings, which includes taking direct testimony from witnesses under a party’s control through affidavits submitted with the pretrial order. The parties also served with the Joint Pretrial Order copies of all exhibits and deposition testimony that they intended to offer as evidence in chief at trial. At trial, Astra called two fact witnesses and five experts. Astra’s fact witnesses were Kenneth E. Graham, Sr. (“Graham”), an Astra employee for 21 years who held the title of Brand Leader for Nexium®, among others; and Mark Uhle (“Uhle”), CFO for AstraZeneca Pharmaceuticals LP. Astra’s expert witnesses were Dr. Martyn Davies (“Davies”), Professor of Biomedical Surface Chemistry at the University of Nottingham in the United Kingdom; Dr. David T. Lin (“Lin”), formerly a Team Leader in the FDA’s Division of Reproductive and Urologic Drug Products; Robert Navarro (“Navarro”), Clinical Professor in the Department of Pharmaceutical Outcomes & Policy at the University of Florida College of Pharmacy; Dr. Gordon Rausser (“Rausser”), Robert Gordon Sproul Distinguished Professor at the University of California, Berkeley; and Dr. Christine S. Meyer (“Meyer”), Vice President at National Economic Research Associates, Inc. Affidavits submitted by Astra constituted the direct testimony of its fact and expert witnesses. Each of these witnesses appeared at trial and was cross-examined. Astra also offered excerpts from the depositions of Dr. Bernard Sherman (“Sherman”), Chairman and CEO of Apotex, Inc.; Beth Hamilton (“Hamilton”), National Sales Director for Apotex Corp.; Gordon Fahner (“Fahner”), Vice President of Business Operations and Finance at Apotex, Inc.; and Tammy Mclntire (“Mclntire”), president of Apotex Corp. Apotex offered counter-designations as to Sherman, Hamilton, Fahner, and Mclntire. During the presentation of its defense, Apotex presented affidavits constituting the direct testimony of two fact witnesses and five experts. Apotex’s fact witnesses were Dr. David Beach (“Beach”), formerly president of TorPharm, a division of Apotex Pharmaceuticals and Bernice Tao (“Tao”), formerly Director of Global Regulatory Operations at Apotex, Inc. Apotex’s expert witnesses were Dr. Stephen W. Schondelmeyer (“Schondelmeyer”), Professor of Pharmaceutical Management and Economics at the University of Minnesota; Roy Weinstein (‘Weinstein”), Managing Director at Micronomics; Dr. Jeffrey Leitzinger (“Leitzinger”), Managing Director at Econ One Research, Inc.; Gordon R. Johnston (“Johnston”), formerly Deputy Director of the FDA’s Office of Generic Drugs; and Dr. Cory Berkland (“Berk-land”), Professor of Pharmaceutical Chemistry and of Petroleum Engineering at the University of Kansas. Affidavits submitted by Apotex constituted the direct testimony of its fact and expert witnesses. Each of these witnesses appeared at trial and was cross-examined. Apotex also offered excerpts from the depositions of Lisa Schoenberg (“Schoenberg”), Vice President of Sales and Marketing for AstraZeneca Pharmaceuticals LP; and Jeanette Tremayne (“Tremayne”), Director of Alliance Management Finance for Merck Sharpe & Dohme, the parent of defendant KBI Inc. Astra offered counter designations as to both Schoenberg and Tremayne. The nonjury trial was held in this action from November 4 to 19, 2013. This Opinion presents the Court’s findings of fact and conclusions of law. The findings of fact appear principally in the following Background section, but also appear in the remaining sections of the Opinion. This Opinion concludes that Astra is entitled to a reasonable royalty for Apotex’s infringement of the Patents in the amount of 50% of Apotex’s profits on its infringing sales or $76,021,994.50, plus pre-judgment interest. BACKGROUND The evidence at trial has emphasized several key areas of dispute between the parties that would have been crucial in a November 2003 licensing negotiation. First, Apotex’s evaluation of the value of a license to sell omeprazole would have been largely shaped by the condition of the market in November 2003 for the class of drugs in which omeprazole belonged. This class was called proton pump inhibitors or PPIs. PPIs address problems associated with gastric distress related to the production of gastric acid. Entry into the PPI market, the evidence has shown, remained an extremely valuable opportunity in November 2003, despite the presence of several branded PPIs, three other generic manufacturers of omeprazole, an over-the-counter PPI branded as Prilosec OTC®, and the increasing importance of Astra’s next generation branded PPI, Nexium®. Second, Apotex would have been acutely aware, as it approached the negotiating table in November 2003, of the difficulties it faced if it attempted to develop a new, non-infringing alternative formulation. While one other generic manufacturer had already shown that it was indeed possible to commercialize omeprazole without infringing Astra’s formulation patents, Apotex did not have a non-infringing formulation ready in November 2003 and would have had little confidence that it could develop one without substantial delay. Since earlier generic products have a significant advantage over later entrants, Apotex would have been keenly motivated to avoid that delay of entry. Astra too would have had a core set of concerns as it approached a hypothetical negotiation. While its patent on the omeprazole molecule had expired and it was in the midst of executing a strategy to promote Nexium®, Astra still earned substantial profits on sales of Prilosec®. Moreover, the price of generic omeprazole had not been substantially eroded by the entry of three generic omeprazole products in the months leading up to November 2003, and Astra would have been concerned that Apotex, with a license in hand, would have cut prices to gain market share, further eating into Astra’s profits on Prilosec®. Of perhaps even more concern to Astra was the impact the Apotex sales might have had on the growth of Nexium®. Astra offered aggressive rebates on Nexium® to ensure that its cost to Third Party Payers (“TPPs”), such as pharmacy benefit managers (“PBMs”), did not rise relative to its principal competitors, which included not only the other branded PPIs but also generic omeprazole. It believed that without a competitive price, Nexium® would fall out of favor with the various entities that help determine how commonly various drugs are dispensed, and at what cost to consumers. Astra also did not have a practice of licensing its branded products to generic manufacturers, and would have wanted to maximize its profit on any license it granted to Apotex. These would have been the key motivations and concerns of the parties as they approached a November 2003 negotiation, and they have been the key areas of dispute at trial. I. Omeprazole Omeprazole is in a class of drugs called proton pump inhibitors or PPIs. PPIs, which are indicated for many gastrointestinal conditions, work by reducing the production of gastric acid. Omeprazole proved to be a difficult drug to formulate, chiefly because it degrades in acidic environments like the stomach and yet is most effective when it passes through the stomach and is absorbed in the small intestine. In re Omeprazole Patent Litig., 222 F.Supp.2d 423, 434-35 (S.D.N.Y.2002) (“Omeprazole I”). Astra’s scientists also found that omeprazole had stability issues, and had difficulty developing a formulation with an adequate shelf-life. Id. Astra ultimately solved these problems with a formulation that combined three key elements: (1) a core combining the active pharmaceutical ingredient with an Alkaline Reacting Compound or “ARC”, which provided the necessary stability; (2) an outer, enteric coating that protected the drug from the acidic environment of the stomach but degraded in the intestine, and (3) a water soluble inert subcoating to separate the core from the enteric coating. Id. at 393. These elements are combined in small spheres, which are inserted into capsules of 10, 20, and 40 milligram strength. In 1987, Astra applied for patents on this formulation, and received the patents-in-suit (the “Patents”). Both the '505 and '230 patents claim these three elements. The '505 patent includes the formulation and the omeprazole compound; the other patent covers a class of benzimidazole compounds, including omeprazole, and their salts, rather than just omeprazole itself. Id. at 445. When Astra received FDA approval to sell omeprazole in the United States in 1989 it was the first PPI on the market. Astra considered omeprazole, sold under the brand name Prilosec®, the “new global standard in the short and long term treatment of acid related diseases,” and doctors similarly regarded it as the gold standard among PPIs until Astra’s next PPI, Nexium®, entered the market in 2003. Prilosec® was a blockbuster drug, with extraordinary sales success. As of 2001, Prilosec® was the “most-prescribed anti-secretory product in the U.S. and in the world, and ... the largest prescription pharmaceutical product ever in terms of sales.” II. The First Wave Litigation Anticipating the expiration of Astra’s patent on the omeprazole molecule, which occurred on October 5, 2001, generic drug companies began filing ANDAs for omeprazole in 1998. These were accompanied by “Paragraph IV” certifications challenging the validity of the '505 and '230 patents and/or asserting noninfringement. Between May 1998 and April 2001, Astra filed lawsuits against eight generic drug companies, and the lawsuits were assigned to the Honorable Barbara S. Jones of this district. Judge Jones divided the defendants into two groups. The First Wave defendants were Andrx Pharmaceuticals, Inc. (“Andrx”); Genpharm Inc. (“Genpharm”); Kremers Urban Development Co. and Schwarz Pharma, Inc. (collectively, “KUDCo”); and Cheminor Drugs, Ltd., Reddy-Cheminor, Inc., and Schein Pharmaceutical, Inc. (collectively, “Cheminor”). The Second Wave defendants were Impax Laboratories, Inc. (“Impax”); Mylan Laboratories Inc., Mylan Pharmaceuticals Inc., Esteve Química, S.A., and Laboratorios Dr. Esteve, S.A. (collectively, “Mylan”); Lek Pharmaceuticals d.d. and Lek Services, Inc. (collectively, “Lek”), and Apotex. On October 16, 2002, Judge Jones issued an Opinion finding that the Patents were not invalid and that three of the First Wave Defendants — all except KUDCo — infringed the Patents. Of particular importance to Apotex, Judge Jones held that the Andrx product infringed the Patents based on the presence in the Andrx product of an inert subcoating that formed in situ rather than being applied. Omeprazole I, 222 F.Supp.2d at 528. More specifically, Judge Jones concluded based on testimony by Astra’s expert that Andrx’s formulation led to the creation, in situ and thanks to a chemical reaction, of a microscopically thin salt layer between the core and the enteric coating, and that this layer was a “subcoating” within the meaning of the Patents, since it was inert, water-soluble, and formed an isolating barrier between the core and the enteric coating. Id. at 538-41. Later, during the Second Wave litigation, Judge Jones would conclude that Apotex’s product also infringed the Patents due in part to the in situ formation of a subcoating underneath the enteric coating. III. The PPI market in 2003 A. Generic launches Three generics launched between the issuance of Judge Jones’s First Wave Opinion in October 2002 and Apotex’s launch in November 2003: KUDCo, Mylan, and Lek. KUDCo, whose formulation had been found to be non-infringing, id. at 433, launched its omeprazole product in December 2002. KUDCo was the first generic on the market, and enjoyed a 180 day period of exclusivity in that role. Despite this advantage, however, KUDCo did not have the manufacturing capacity to supply the full needs of the market immediately. For this and the reasons that commonly apply to generics selling during the exclusivity period, KUDCo kept the price of its omeprazole product high. Lek and Mylan, on the other hand, were in the same position as Apotex. They were Second Wave defendants and the court had not yet ruled on Astra’s infringement claims against them. Nevertheless, Lek and Mylan made the decision to launch their products in August 2003, knowing they were “at risk” of later being held to infringe. Facing the uncertainty of potential liability to Astra, they did not cut prices aggressively. As both Dr. Rausser and Dr. Schondehneyer explained at trial, the uncertainty about infringement that accompanies an at-risk launch makes an at-risk generic drug manufacturer hesitant to cut prices. The parties vigorously dispute the degree to which these three prior launches impacted the market. Astra suggests that all three kept their prices high relative to Prilosec® and that Apotex, if it had obtained a license from Astra, would have transformed the generic market by launching at a significantly lower price. Apotex argues that prices for generic omeprazole were already beginning to erode, and that the competition among the three generics would have continued to erode prices even without the entry of a licensed fourth product. The record suggests that both are right to a degree. The prices of generic omeprazole had declined, but not significantly. An Astra review of the market in October 2003 noted that with Mylan and Lek having launched and KUDCo no longer “restrained” by problems with its production capacity, “price pressures” were increasing and “Managed Care formularies are in a state of flux.” The report went on to conclude, however, that thus far, the “high price of generics has limited therapeutic substitution.” Similarly, an Astra email dated October 29, 2003 noted that “price competition in the generic market has increased and both Mylan and KUDCo are offering steeper discounts,” but then observed that “this has not caused a change in [managed care] behavior.” The entry of generic competition for Prilosec®, however, had a profound impact on the sale of Prilosec®. The market share of Prilosec®, as measured by the total number of prescriptions written, had been steadily , declining since at least 2001, when Nexium® was introduced. It dropped precipitously, however, in late 2002 as KUDCo’s generic omeprazole product came on the market, before settling back into a steady decline in 2003. The following graph from Astra’s quarterly performance review in April 2004 illustrates the shifting market shares of Prilosec®, branded PPIs and generic omeprazole from March 2001 through early 2004. While Prilosec® begins with the highest market share in the prescription PPI market, it has the lowest by the end of the period. Conversely, Nexium® steadily gains market share, ending the period as the product with the second largest share, trailing Prevacid®, a branded PPI competitor. Generic omeprazole, which entered the market in late 2002, quickly took market share from Prilosec®, rising to nearly 15% market share for a period of time. Taken as a whole, the evidence regarding the omeprazole market as of November 2003 indicates that generic drug prices remained relatively and uncharacteristically high. This was due to the fact that only one generic drug company was operating freely and without the threat of litigation hanging over it. A fourth generic, entering the market with a license in hand, would therefore have had a golden opportunity to take significant market share away from both other generic manufacturers and perhaps even branded PPIs by launching at a lower price. B. Astra’s Nexium® strategy Anticipating the expiration of its patent on the omeprazole molecule and an inevitable decline in its sales of Prilosec®, Astra had long been planning the introduction of a new branded drug that it hoped would take Prilosec®’s place as the gold standard in the PPI market. This drug became Nexium®, which launched in March 2001, about six months before the expiration of the omeprazole molecule patent. In 1998, Astra summarized its strategy as the following. Predicting that Prilosec® could lose up to 80% of its sales volume within six months of the introduction of generic omeprazole, it hoped to extend the period of market exclusivity for Prilosec® through the strategic use of patents and to transfer the maximum amount of Prilosec® business to a new patent-protected product that would be introduced before the patent protection for omeprazole expired. It wanted that new product to be differentiated from Prilosec® as a superior drug. That new product was Nexium®. Astra identified several challenges in implementing this strategy. They included the need to prove that Nexium® was clinically superior to omeprazole and the need to convert the Prilosec® business to Nexium® before the entrance of generic competitors for the Prilosec® business. Astra achieved the first of these goals. Astra was ultimately able to emphasize Nexium’s clinical advantages over omeprazole as part of a campaign to encourage physicians and patients to see Nexium® as the most effective PPI on the market. The FDA-approved label for Nexium® indicated it for “treatment of Gastroesophageal Reflux Disease (GERD),” including healing erosive esophagitis (for which it was indicated for one or possibly two courses of short-term treatment of 4 to 8 weeks), maintenance of healing of erosive esophagitis, and treatment of symptoms associated with GERD, including heartburn. The label reports that Nexium® 40mg is more effective and faster at achieving sustained symptom resolution for patients with erosive esophagitis than omeprazole 20mg. At its launch, Astra announced that Nexiumt 40mg demonstrates higher healing rates in erosive esophagitis than Prilosec® 20mg (the approved dose for this indication). In three studies, Nexiumt 40mg consistently demonstrated higher healing rates than Prilosec® 20mg and two of these studies were statistically significant. Healing rates achieved for Nexiumt 20mg were between those achieved with Nexiumt 40mg and Prilosec® 20mg. In the 1990s, Astra developed another tactic as well to help encourage the transfer of Prilosec® patients to Nexium®. Astra planned to help Nexium® gain PPI market share by introducing an over the counter version of omeprazole called Prilosec OTC®. In 2001, Astra predicted that PBMs would quickly implement a maximum allowable cost (or “MAC”) after two to three generic omeprazole products had entered the market. A MAC limits the amount that a pharmacy will be reimbursed for a drug; it is tied to the price of a low-priced generic version of the drug, as further described below. Astra expected a MAC to be implemented even sooner where the branded drug is a blockbuster, as was true in the case of Prilosec®. As a result, Astra anticipated that any patients who remained loyal to Prilosec® would incur substantial out-of-pocket costs in meeting the co-pays imposed by their insurance plan. Astra expected approximately half of the PBMs to adopt mandatory generic substitution with the advent of a single generic, and for most PBMs to do so as soon as the second or third entrant appeared. Thus, as of July 2001, Astra expected the “full effects of genericization of omeprazole to have occurred in the fall of 2003.” This expectation was based on research suggesting that approximately 40% of HMO enrollees would be impacted by mandatory generic substitution during KUDCo’s exclusivity period, while 100% would be impacted after the expiration of KUDCo’s exclusivity period, starting seven months after patent expiration. Based on this expectation, Astra timed the introduction of Prilosec OTC® for the Fall of 2003. Astra believed before the launch of Prilosec OTC® that the over-the-counter (“OTC”) and prescription markets were fundamentally different. In an internal analysis dated July 9, 2003, Astra examined the launch of Claritin as an over-the-counter product and concluded that the OTC and prescription markets were “distinct,” in part because physicians tend not to push OTC products, and OTC products tend not to appear on the drug formularies of insurance providers. Nevertheless, Astra believed that Prilosec OTC® could help promote Nexium®, because Prilosec OTC® would be viewed as similar to prescription omeprazole. In other words, Astra believed that patients who failed on Prilosec OTC® would proceed straight to Nexium®, because it was “the only PPI proven better than Prilosec.” Astra thus thought that it could “position OTC as a reason to discourage prescribing of omeprazole and encourage prescribing of the superior brand, Nexium®.” The parties hotly debated at trial the degree to which the appearance of Prilosec OTC® actually affected the prescription PPI market. The evidence shows that the advent of Prilosec OTC® caused a substantial drop in the market share of generic omeprazole and a further drop in the market share of Prilosec®. Indeed, Prilosec’s net sales dropped from roughly $67 million in September 2003 to roughly $28 million in October 2003 and $17 million in November 2003. On the other hand, the presence of Prilosec OTC® in the marketplace did not have any effect on omeprazole pricing, because the systems through which prescription and OTC drugs are paid for are largely separate, as will be explained in more detail below. As of November 2003, Astra’s overall plan regarding the transfer of the Prilosec® business to Nexium® appeared to be working. Nexium’s percentage of the prescription PPI market continued to grow after the introduction of Prilosec OTC®. C. Third Party Payers Despite Astra’s strategy of promoting Nexium® as clinically superior to other PPIs on the market, it nevertheless faced significant price pressure as it promoted the new drug. This was in part due to the nature of prescription drug pricing and the ways in which various entities other than the manufacturer and the patient influence which drugs are sold, and at what prices. Some background is useful in understanding the complex process by which drug prices are set. In the decades following the popularization of health insurance after the Second World War, insurers had little role in the dispensing of prescription drugs. During this period, a doctor would prescribe a drug to a patient, the patient would take the prescription to a pharmacy, the pharmacy would fill the prescription as written, and the patient would then submit the bill to her insurer, which would pay the bill, often minus a 20% patient portion or co-pay. This system gave little room for insurers to affect the cost of drugs. By the early 1990s, this had changed, as managed care organizations began to aggressively manage prescription drug costs. Managing such costs has two central components. First, the organizations seek to control or at least influence the choice of drugs made by doctors, patients and even pharmacies, and second, using that control as leverage, they extract discounts for prescription drugs from drug manufacturers. One methodology that third party payers or TPPs have adopted for managing their reimbursement of prescription drug costs is the creation of a “formulary,” or list of covered drugs. During the time at issue in this litigation, formularies often placed drugs into three tiers. Tier I was generally reserved for generic drugs and required the patient to pay nothing or the smallest co-pay. Tier II usually contained the preferred branded drug and required a higher co-pay by the patient. Tier III usually included non-preferred branded drugs and required the highest co-pay. “Closed” formularies excluded certain drugs altogether. Managed care health plans and PBMs often use formularies to encourage doctors and pharmacists to provide a patient with a generic in place of the brand name drug or to prefer one branded drug over another. Health plans and PBMs can exert influence over physicians by contractually requiring them to adhere to the formulary policies, by educating them about the drugs on the formulary, or by requiring pharmacists in a network to call physicians to ask them to alter prescriptions that are inconsistent with formulary policies. Health plans and PBMs may also have contractual arrangements with network pharmacies that reimburse them only for the less expensive generic on the formulary even if the pharmacy dispenses a branded drug. When there is widespread acceptance of a generic drug and confidence in its supply, health plans and PBMs may impose a MAC or maximum allowable cost. When a MAC is imposed, the pharmacy will only receive reimbursement for a drug at the MAC price, regardless of the pharmacy’s actual acquisition cost for the product. A market is considered “genericized” at that point; prices often fall by about 80% and the sales volume of the branded drug collapses. The MAC price may be chosen from the federal Medicare program’s price for the drug or some other data source. Similar pressure is placed on a patient’s choice of a drug therapy when the patient is required to pay a higher co-pay when she obtains a non-preferred drug. When negotiating prices with a pharmaceutical manufacturer, a health plan or PBM can threaten to exclude a drug it considers overpriced from a closed formulary or to move the drug to a less preferred position on a formulary in order to secure a discount. As a general matter, the more costly a drug is to a third party payer, the more likely the payer is to develop a strategy to reduce costs. If it does take steps that disadvantage the drug, those steps may lead to a reduction in the sales of the more costly drug compared to lower cost drugs in the same class of pharmaceuticals. As a result, branded drugs often have an incentive to offer rebates to TPPs, either to ensure placement on Tier II of a formulary or to ensure that they are not excluded from a formulary altogether. These rebates can vary from 3% to 25% or more off the drug’s WAC or wholesale acquisition cost. If the branded drug offers favorable rebates, it may be cheaper from the TPP’s perspective than a generic equivalent, in which case the TPP is less likely to take adverse action against the branded drug. There are other ways a TPP can disadvantage a branded drug, beyond simply changing its formulary status. A “step therapy” or “step edit” requirement mandates that patients first try a certain preferred drug, like generic omeprazole, before doctors can prescribe a disfavored, more expensive drug, like Nexium®. If step therapy is imposed, the doctor must determine that the patient is not responding adequately to the preferred drug before the patient can move on to the disfavored drug. Another tactic, known as a “prior authorization requirement,” mandates that doctors receive authorization from the TPP before they prescribe the disfavored drug to a particular patient. Generic versions of drug products are typically cheaper for most third party payers, and TPPs generally attempt to drive a culture of generic substitution across a formulary. Even if a generic is not cheaper than a branded drug for a third party payer, it may be more profitable for pharmacies to dispense the generic version. Since TPPs cannot require pharmacies to dispense a generic from a particular manufacturer, pharmacies decide which manufacturer’s generic will be dispensed. Pharmacists customarily stock a single generic product. Pharmacies are thus able to negotiate significant discounts off the published average wholesale price or AWP, and in some cases these may be as steep as an 80% discount. These financial realities have a significant impact on the pharmaceutical market. Generic drugs are filling a growing share of outpatient prescriptions. They rose from roughly 30% of the prescriptions filled in 1990 to over 70% in 2010. Astra’s own files provide an example of how formulary policies can drive sales. In 2001, Astra tried to understand how the entry of generics had led to the rapid erosion of the sales of another branded drug — Prozac®. This study emphasized the role of pharmacists in driving the “aggressive conversion” to the generic drug. The research identified the most influential factor as the restrictions placed by managed care institutions on pharmacy practices, either by requiring a higher co-pay for the brand, refusing to include the brand on their formularies, or imposing step-therapy. D. Price Comparison of Nexium® and Omeprazole: December 2002 to November 2003 This system by which TPPs influenced drug prices had a significant effect on the drugs at issue here. Most importantly for Astra, the emergence of generic omeprazole placed increasing pressure on Astra to pay larger rebates to maintain a favorable formulary position for Nexium®. These rebates kept the effective price of Nexium® comparable to that of omeprazole. Indeed, there is evidence that the effective cost of Nexium® therapy was, perhaps remarkably since Nexium® was the most recently patented PPI, lower than the cost of omeprazole therapy during the period from December 2002 through November 2003, at least from the perspective of certain major TPPs. This was due to several factors, which included the relatively small difference between the wholesale prices of the Nexium® and omeprazole products, the manufacturer rebates Astra provided for Nexium®, and the fewer number of pills necessary for a successful course of treatment when Nexium® is prescribed. Each of these factors merits some further discussion. The difference or spread between the wholesale price of Nexium® and generic omeprazole in the interval between December 2002 (when the first generic as introduced) and November 2003 (when the hypothetical negotiation occurred) appears to have been roughly a dollar or less. The spread between the wholesale acquisition cost or WAC, which is the price wholesalers pay to pharmaceutical manufacturers like Astra, for these two products ranged during that time frame from $0.66 to $1.05. Similarly, the spread during this time frame of the average wholesale price or AWP of these two products was relatively small. This is not surprising since during that time the AWP was typically equal to 120% or 125% of the WAC. Neither the WAC nor the AWP, however, necessarily provides a complete measure of the relative prices between Nexium® and generic omeprazole, since Astra paid significant discounts and rebates to TPPs that had a significant impact on the actual prices they paid. Nexium® rebate data for 13 major third party payers shows an average rebate of 14% of their gross sales in the fourth quarter of 2002, rising to 17% in the fourth quarter of 2003. Another feature of any price comparison is the need to consider the cost of a successful course of treatment. One tool that is commonly used for such a comparison is the Daily Average Consumption or DA-CON. On average, as of November 2003, omeprazole patients consumed 0.12 pills more per day than patients using Nexium®. At this rate, if a third party payer’s cost per pill of Nexium® were 13.9% higher than for omeprazole, the true cost of treatment would be equal for the two drugs. A study by Astra’s expert Dr. Rausser of pharmacy log data from sixteen pharmacies in California and fourteen in Massachusetts for all prescription PPI purchases demonstrated that the effective cost of Nexium® therapy for those TPPs to whom Astra offered rebates was often less than omeprazole therapy during the period between December 2002 and November 2003. When DACON and rebate data were factored in, the median third party payment for Nexium® was lower than that for omeprazole in 78% of the cases in California, and 89% in Massachusetts. Combining the data from the two states, there were 149 instances in which matching sales appeared in the same month for the same third party payer, which allows a direct comparison of that TPP’s cost of Nexium® with omeprazole. In 125 of those instances, or 84%, the median effective third party payment for Nexium® was lower than that for omeprazole. For twelve out of the thirteen third party payers, Nexium® was less expensive than omeprazole in at least half of the months for which there was sufficient data to make a comparison. While Astra would not have had access to the pharmacy log data Dr. Rausser used in November 2003, his study corroborates Astra’s own contemporaneous internal analysis. A July 9, 2003 Astra analysis indicates that the net cost to a TPP of a 30 day Nexium® prescription was over $18 less than the net cost of a .generic omeprazole prescription, i.e., $73.74 versus $91.90. Astra attributes this differential to the closeness in the list prices of the products and the co-pay differentials and rebates provided by Astra. The following table from Astra’s report presents this data. Apotex has challenged the reliability of the California and Massachusetts data drawn from Dr. Rausser’s study of data from thirty pharmacies. Most of the thirty pharmacies which supplied the data were parts of large chains or a mass merchandiser: Wal-Mart, Longs and CVS in California; Wal-Mart, CVS and Target in Massachusetts. The logs typically include the date of the transaction, the name and dosage of the drug, the number of pills sold, any co-pay paid for insured transactions, and the name of and the amount paid by any third party payer. Dr. Rausser calculated the third party payment per pill by dividing the dollar amount of the recorded third party payment by the quantity of pills sold. Dr. Rausser next identified the twenty largest third party payers responsible for the largest share of Nexium® sales and was able to obtain rebate data for thirteen of the twenty. These thirteen TPPs were significant participants in the market. They represented 82% of the insured omeprazole transactions, and over 95% of the Nexium® rebates paid by Astra. Apotex complains that the data is not drawn from a statistically reliable sample. It comes from only two states, comes from only large volume buyers of Nexium®, and then only those to which Astra paid rebates, and omits the mail order segment of the market. The data also has gaps, including a lack of data from months for which no data existed for both drugs. With these and other similar arguments, Apotex argues that Dr. Rausser’s conclusion — that for many major third party payers during the period from December 2002 through November 2003 the cost of generic omeprazole therapy was greater than the cost of Nexium® therapy — is “invalid”. While Apotex has correctly pointed out that there are limitations in the pharmacy log data, and that there is a need to be careful in drawing lessons from it, it has not shown that the data is unreliable or, to use its phrase, invalid. In part because it is so costly and time-consuming to procure and analyze, it is unusual to have access to this rich vein of information about third party payer and pharmacy pricing of the relevant drugs during the relevant time period. Astra has succeeded in showing that this pharmacy data, particularly when combined with other trial evidence, supports a conclusion that for many TPPs during the period in which the hypothetical negotiation was occurring, the cost of Nexium® therapy remained quite close to that of treatment with generic omeprazole. It must be remembered, however, that the proximity in price to generic omeprazole was only one component in Astra’s overarching strategy for promoting Nexium® and maintaining its favorable formulary position. Astra continued to position Nexium® as a clinically-superior, next generation drug relative to all of the other PPIs on the market, including the other branded PPIs. In a mid-2003 Nexium® Strategic Plan document, Astra described its pricing strategy for Nexium® as follows. The pricing strategy for Nexium has been one of premium price due to its clinical differentiation and heritage within the PPI class. The product has been strategically priced at a discount to Prevacid and branded Prilosec to help add incentive for conversion from other PPIs once the clinical rationale for utilizing the product has been established. Nexium continues to rank third in listed WAC price with Aciphex, generic omeprazole and Protonix rounding out the class. [Astra] has continued to take nominal price increases to keep in step with the competition. Unlike Protonix, Aciphex and at times Prevacid, [Astra] has not chosen to deep discount the product to Managed Care. Indeed, from the point of view of the consumer, Nexium® was more expensive than generic omeprazole in 2003, reflecting its higher co-payment requirements. A majority of consumers paid $10 or less for generic omeprazole and $20 or more for Nexium®. This reflects the fact generic omeprazole had a preferred formulary position. Nevertheless, Astra’s official rebate policies support Dr. Rausser’s overarching hypothesis that Nexium® rebates were to some degree responsive to the price of generic omeprazole. Following the entry of generic omeprazole, Astra increased its rebates on Nexium® and included the generic product in calculations of market share for rebates that were determined on that basis. E. Status of Market in November 2003 As of the date of the hypothetical negotiation of a license for Apotex to sell generic omeprazole using the formulation covered by the Patents, the PPI market was a huge, lucrative, and competitive market. As Dr. Sherman, Apotex’s CEO, noted in a memo to Dr. Beach, Prilosec® was the “largest selling drug in the U.S., with U.S. annual sales approaching $2 billion.” In planning for the expiration of the omeprazole molecule patent in 2001, Astra itself noted that “Prilosec® is the most attractive market for generics ever.” In projections dated June 18, 2003, Apotex estimated that the prescription omeprazole market would be worth a total of roughly $2.6 billion over the course the year, and $1.4 billion in 2004. Because the other branded PPIs had launched much later than Prilosec®, generic omeprazole was the only generic PPI on the market and would be for years. As of November 2003, Astra had two branded PPI products, Prilosec® and Nexium®, introduced in 1989 and 2001, respectively. Three other branded PPIs were also successful market participants and generic omeprazole had been on the market for about a year. Most recently, Prilosec OTC® had entered the scene. As of November 2003, pharmacies would have felt free to dispense generic omeprazole instead of Prilosec® when filling Prilosec® prescriptions, since generic omeprazole was an AB-rated substitute for Prilosec®. Prilosec®W s share of the market had dropped precipitously with the advent of generic omeprazole, but Astra continued to support Prilosec® sales through a rebate program and Prilosec® continued to provide a significant stream of income to Astra. In 2003, Astra sold $1.3 billion worth of Prilosec® with $437 million in net sales adjustments (which includes rebates), leading to $865 million in net sales. In that same year, Astra sold $3.2 billion worth of Nexium®, with $770 million in net sales adjustments and $2.5 billion in net sales. Although three generic pharmaceutical manufacturers had begun selling omeprazole, generic prices remained high. No MAC had been imposed by a health plan or PBM, a phenomenon which would have led to a crash in omeprazole prices. This led Astra to conclude that it had not yet seen significant price erosion and had not yet felt the full effects of cheap generic omeprazole. It was of course unclear-how much longer these three generics would maintain their high prices. Nonetheless, Astra had every reason to expect that the launch of a fourth generic, particularly for a licensed product, would swiftly accelerate the decline in omeprazole prices and lead to the destruction of the remaining Prilosec® market. The launch of Prilosec OTC® in September 2003 was having a significant impact on the overall PPI market as well. As will be discussed in more detail below, Astra calculated internally that Prilosec OTC® had taken roughly 30% of the generic omeprazole market. Indeed, Astra documents show that the total number of omeprazole prescriptions, which declined sharply just after Prilosec OTC®’s launch, did not begin to recover until the Fall of 2004, around the time Teva- — the fifth generic pharmaceutical manufacturer to enter the market — launched its generic omeprazole. An Astra “Prilosec OTC Update” dated October 21, 2003 reported that TPPs were beginning to take action against omeprazole in light of Prilosec OTC®. These actions included, in certain cases, discontinuing reimbursements of prescribed omeprazole, sending OTC coupons to PPI users, and moving PPIs to the third tier of formularies. While the principal impact of Prilosec OTC® was on Prilosec® itself and generic omeprazole, it also had an impact on the entire PPI market. An outside report later commissioned by Astra calculated that Prilosec OTC® resulted in a 3% decline in Nexium® sales. The Astra document cited earlier in this paragraph anticipated that Prilosec OTC®, combined with multiple generics, would affect Nexium® by reducing gross sales by $55 million in 2003 and $398 million in 2004. Finally, as of November 2003, Astra remained committed to an expensive rebate program to support Nexium® prices, in the hope that this price support would preserve Nexium’s favorable formulary status and avoid implementation of step therapy or other adverse actions. Since formulary decisions are made in the context of an entire class of drugs, the prices, supply and therapeutic profile of each drug in the class are in play. Astra’s rebate strategy was therefore aimed directly or indirectly at all of its PPI competitors and the interrelated and evolving positions of those competitors regarding supply, price, and any other competitive advantage. But, since the only new competitor in the prescription PPI market in 2003 was generic omeprazole, a principal consideration in Astra’s adjustment of its rebate strategy was the impact that the entry of generic omeprazole was having on drug formulary practices and pharmacies. Thus, as of November 2003, any new entrant that altered that competitive landscape in a material way would impose upon Astra the burden of increasing its effort to compete for favorable formulary treatment. Astra’s primary tools in that effort would have been its hefty rebate program and its ongoing effort at drug differentiation. IV. Atra’s Licensing Practices as of November 2003 There is no evidence that Astra would have initiated or encouraged licensing discussions with Apotex. Astra had been defending the Patents for more than five years, and would continue to do so for another ten years. It had no active program for licensing any of its patented prescription drugs to generic pharmaceutical companies or history of doing so. Astra traditionally markets its brand name prescription drug products to doctors and third party payers by explaining that it is the sole source of the product. Its general policy is not to license others to use its inventions to sell products that will be sold in direct competition with its patented products. While Astra’s patent for omeprazole had expired in 2001, its formulation patents for Prilosec® did not expire until 2007. In any hypothetical negotiation of a license to a generic manufacturer, Astra would have considered the opportunity in terms of its expected net present value. In other words, in making such judgments it discounts future cash flows to what they would be worth presently, taking into account the probability of receiving the future cash flows. Astra would also consider the anticipated cannibalization of the revenues from the branded product and other Astra products. If the expected net present value of a license is above zero, Astra’s financial team recognizes that it is up to management to determine whether that value is sufficient in light of the potential impacts of the license, the expected return on investment and other financial metrics, as well as the license’s overall alignment with corporate strategy. A. Licenses for other PPIs Apotex has emphasized, however, that Astra did enter licensing agreements that encompassed the Patents, and that it did license a compound that used the valuable Prilosec® trademark and that competed directly with Prilosec®. Thus, while Astra never licensed the Patents to a company selling generic prescription omeprazole products, between 1994 and 1998, Astra had entered into four agreements that involved the Patents. The most significant of these for the purposes of these proceedings — the license for Prilosec OTC® — will be discussed last. In 1994, Astra entered into an agreement with Takeda Chemical Industries, Ltd. (“Takeda”), the maker of the PPI Prevacid®, that included the licensing of the '230 patent. The agreement resolved legal proceedings in a number of countries in which the two companies had accused each other of infringing the other’s PPI patents and provided cross-licenses to those patents. Takeda was required to pay Astra a small royalty for its U.S. sales — 2.5%—which was cut to 1% after the expiration of the patent on the omeprazole molecule. The agreement did not permit Takeda to sell omeprazole. In 1996, Astra entered into an agreement with Byk Gulden Lomberg Chemische Fabrik GmbH (“Byk”), which had developed the PPI Protonix®. The agreement resolved infringement actions Astra had brought against Byk in several countries, as well as proceedings Byk had brought seeking to invalidate Astra patents. The agreement granted Byk a royalty-free worldwide license under certain patents, including the patents-in-suit, to make, use, and sell Protonix®. Byk agreed to drop all proceedings in which the validity of an Astra patent was called into question. The agreement did not permit Byk to sell omeprazole. In 1996, Astra also entered into an agreement with Eisai Co. Ltd. (“Eisai”), which had developed the PPI Aciphex®. Under the agreement, both parties agreed to drop challenges to each others’ patents and exchanged cross-licenses allowing the use of their patents (including, in Astra’s case, the patents-in-suit) in connection with the manufacture and sale of their respective PPIs. Eisai agreed to pay Astra a royalty of .1% on its U.S. net sales of Aciphex®. Eisai was not, however, permitted to use the Patents to make or sell omeprazole. B. Prilosec OTC® Prilosec OTC® was launched in September 2003, two months before the hypothetical negotiation, pursuant to a six year old licensing agreement between Astra and Procter & Gamble (“P & G”). The parties hotly contest whether the licensing terms for this product provide an appropriate benchmark for the hypothetical license between Astra and Apotex. The product Prilosec OTC® arose from a November 20, 1997 agreement between Astra and P & G, an agreement that was amended in August of 1999. Their agreement established a framework for the cooperative development, Astra’s supply, and P & G’s marketing of Prilosec OTC®. Under the agreement, P & G paid Astra a base royalty of 7% of net sales for the first twenty years, to be increased based on sales volume to a royalty rate as high as 40% in the first three years after launch and 20% thereafter. Astra expected these sales targets to be met and they were, meaning that P & G indeed paid Astra 40% on a portion of its net sales on Prilosec OTC® for three years. For example, in October 2003, Astra reported that P & G had not changed its expectations for the first year sales, which stood at between $200 to $400 million. P & G also paid up-front milestone payments of $56 million and invested hundreds of millions of dollars to develop and market the product, although Astra was also required to shoulder certain development costs. In addition, Astra allowed its highly valuable trademarked Prilosec® brand name to be used for Prilosec OTC®, and P & G was required to use its “best efforts” to market and sell Prilosec OTC®. Astra was also required to supply the drug to P & G essentially at cost. At trial, Uhle explained that the royalty payments made by P & G ended up amounting to a blended rate of approximately 20% of its net sales over the course of the first three years Prilosec OTC® was on the market, or 23% of net sales if the upfront milestone payments are included. As its name suggests, Prilosec OTC® does not require a prescription. In contrast to the active ingredient in Prilosec®, omeprazole, the active ingredient in Prilosec OTC® is omeprazole magnesium. Prilosec OTC® is indicated for 14 days of treatment of heartburn, which is an approved indication not shared by the other PPIs discussed here. Nexium® and Prilosec® were both indicated for four to eight weeks’ treatment of GERD. Prilosec OTC® is only available in a 20mg formulation, while Prilosec® is available in 10, 20 and 40mg formulations and Nexium® in 20 and 40mg formulations. The broader strategic underpinnings of Prilosec OTC® from Astra’s perspective and the eventual fate of Prilosec OTC® and its effects on the PPI market are of crucial importance to the parties for two reasons. First, Astra’s expectations about Prilosec OTC® help determine how comparable its license with P & G was to the license at issue in this case. In other words, if Astra expected Prilosec OTC® to directly compete with prescription Prilosec®, or with Nexium®, then the terms of its license are more helpful in analyzing a license with Apotex. Second, Astra’s strategy for Prilosec OTC® says a lot about how it evaluated the prescription omeprazole market in the mid to late 1990s and how it expected that market to fare over the coming years. Thus, even independent of the precise royalty rate Astra negotiated with P & G, Astra’s plans for Prilosec OTC® help shed light on what it would have viewed as the risks of granting a license to Apotex. As already noted, within the pharmaceutical industry the OTC and prescription markets are usually viewed as distinct consumer markets. The industry assumes that physicians tend “not to push” OTC products, and it was rare in 2003 for health plans and PBMs to provide insurance reimbursement for OTC products. Prilosec OTC® was priced at $0.71 per pill, which made it a more expensive treatment option for most consumers than generic omeprazole, which was often available to insured patients at a co-pay of $10 or less for a month’s prescription. As a consequence, Astra initially thought that Prilosec OTC® would target “self-treaters” who pay cash for their medicine and that it would compete against other OTC heartburn products called histamine antagonists. Nevertheless, Astra felt that Prilosec OTC® could help it promote Nexium®. More specifically, Astra’s plan was to “position OTC omeprazole as a reason to discourage prescribing of omeprazole and encourage prescribing of the superior brand, NEXIUM.” “If Prilosec is available OTC,” Astra observed in a 2002 Product Strategic Plan for Prilosec®, after a person has used Prilosec OTC® and failed to get the relief she needs, “physicians will want to write Nexium more because it is the only PPI proven better than Prilosec.” As of 2002, of course, Prilosec® was still providing “significant revenue” to Astra and was viewed as “the launch platform for Nexium.” Astra therefore expected Prilosec OTC® to cause significant erosion of the prescription omeprazole market, and it positioned the product accordingly. Prilosec OTC® was marketed to both consumers and physicians as an equivalent to omeprazole. Indeed, Prilosec OTC®’s label explained that 20.6mg of Prilosec OTC® was “equivalent to” 20mg of omeprazole. As Graham explained at trial, these efforts were part of Astra’s broader strategy of cannibalizing Prilosec® to promote Nexium®. In October 2003, about a month after launch, Astra estimated that Prilosec OTC® had captured 30% of the omeprazole prescription market, including both generic omeprazole and Prilosec®. Nexium® and Protonix® had gained market share in the prescription PPI market as a result, and generics had increased their price competition with each other. There had been little or no change, however, in the treatment of PPIs on formularies and by PBMs generally. Astra viewed these developments as “more or less as expected.” These market dynamics help place the Prilosec OTC® license in proper perspective. Astra’s strategy, conceived in the 1990s, at a time when it thought that the omeprazole market would be “genericized” during 2003 and that Prilosec® would be having great difficulty remaining competitive with generic omeprazole, was to introduce Prilosec OTC® as a potent competitor to generic prescription omeprazole and as a driver of Nexium® sales. For reasons already discussed, however, the price of generic omeprazole had remained unexpectedly and unusually high, and Prilosec® had retained a footing in the market. Astra was not surprised, therefore, in the Fall of 2003 to see Prilosec OTC® take market share from both Prilosec® and prescription omeprazole. Like the entry of generic omeprazole, the entry of Prilosec OTC® further eroded Prilosec®’s volume. Astra remained optimistic because it regarded Nexium® as the future of its business in the PPI market, and Prilosec OTC® was expected to help encourage the growth of Nexium®, not hinder it. This is the environment in which Astra would have been negotiating a license with Apotex. The advent of a licensed generic omeprazole would have been a very different phenomenon than the introduction of Prilosec OTC®. While Prilosec OTC® had not caused any substantial change in TPP behavior, Astra would have expected a licensed generic omeprazole to use price to take market share from its three generic predecessors. Any material decrease in the price of generic omeprazole would cause all TPPs to reconsider their strategies for the PPI market and would likely place pressure on Nexium®, causing Astra to increase its rebate program in a way that Prilosec OTC® did not. V. Apotex’s Alternative Formulations Another key factor in any November 2003 licensing negotiation would have been the amount of potential revenue Apotex stood to lose by walking away from the negotiating table. Because Apotex did not have a non-infringing alternative formulation ready for a November 2003 launch, any decision to forgo a license would have necessitated a return to the drawing board, delay, and uncertainty. Just how much of its profits over three and a half years of sales Apotex would have sacrificed by attempting to develop an alternative formulation is thus a key issue. As it prepared to enter the market in 2003, Apotex developed a series of projections of the market share it expected to gain and the profits it expected to earn. In June 2003, Apotex projected its market share as 5% at launch, 15% in 2004, and 25% from 2005 to 2007, for a total of roughly $581 million in sales over its first five years on the market. In November 2003, Apotex prepared another set of projections covering the period through the end of its fiscal year, June 2004. Apotex forecast that it would capture 7% of the generic market over that time, leading to roughly $27 million in profits at a 92.5% profit margin. Apotex argues that it could have avoided infringement by changing its omeprazole product in three ways. It could have made cer