ABA Section of Intellectual Property Law
`
`Landslide Magazine
`
`Thinking Economically about Commercial Success
`
`By R. DeForest McDuff, Ryan C. Andrews, and Matt D. Brundage
`
`R. DeForest McDuff, PhD, is a partner at Insight Economics; he is an expert in applied business
`economics and provides expert witness testimony on intellectual property and other areas. Ryan C.
`Andrews is a former senior associate at Intensity; he has extensive experience evaluating lost profits.
`reasonable royalties, commercial success, and other areas. He is currently pursuing his MBA at The
`Wharton School at the University of Pennsylvania. Matt D. Brundage is an analyst at Intensity; his
`experience includes economic research and analysis for commercial success, reasonable royalties. and
`other economic damages. They may be reached, respectively, at deforest@insighteconomics.com,
`ryanandr@wharton.upenn.edu, and matt.brundage@intensity.com. The opinions expressed are those of
`the authorts) and may not reflect the views of their employers. clients, or any of their respective
`affiliates. This article is for general information purposes and is not intended to be and should not be
`taken as legal advice.
`
`Economic experts frequently evaluate commercial success as a secondary consideration of the obvious-
`ness of a patented invention.l While other common economic inquiries are often based on widely recog-
`nized methodologies (e.g., the Panduit factors for lost profits, the Georgia-Pacific factors for reasonable
`royalties), experts often base analysis of commercial success on a layperson's notion of "success," with-
`out appreciation of its purpose. For example, an expert may conclude that a product is a commercial
`succms because sales and profits are “large" or "substantial,” appealing to preconceived notions of suc-
`cess in other contexts (“sales of $100 million a year? .
`.
`. sounds like a success to me!”).
`
`We should be wary of such simplistic approaches to evaluating commercial success, which often fail to
`ask a fundamental economic question: success compared to what? Just as one individual's success in
`life may differ from another's, commercial success for one product in a particular context may differ
`from commercial success for another product in another context. Improper analysis of commercial suc-
`cess can be particularly problematic in pharmaceuticals, for example, which often require billions of
`dollars in sales for economic incentives to have existed for others to bring the product to market sooner.
`Evaluations of commercial success without proper context (or. for some experts, without any context at
`all) are unhelpful to the role of commercial success in patent litigation.
`
`Recent case law has clarified the purpose of commercial success and what it is intended to demonstrate.
`For example, the Federal Circuit stated in Merck u. Teoa that commercial success is relevant “because
`the law presumes an idea would successfully have been brought to market sooner, in response to market
`forces. had the idea been obviousto persons skilled in the art."2 This makes sense, from an economic
`perspective, because other parties would have economic incentives to commercialize obvious inventions
`
`Published in Landslide Magazine, Volume 9, Number 4. ©2017 by the American Bar Association. Reproduced with
`permission. All rights reserved. 111i; information or any portion thereof may not be copied or disseminated in any form or
`by any means or stated in an electronic database or retrieval system without the express written consenl of the American
`Bar Association.
`
`Page 1 of 7
`
`WATSON LABORATORIES v. UNITED THERAPEUTICS, IPR201T-01621
`
`UNITED THERAPEUTICS, EX. 2078
`
`

`

`ABA Section of Intellectual Property Law
`
`landslide Magazine
`
`if there were economic incentives to do so. However. based on our experience evaluating dozens of
`expert reports on commercial success. all too often experts fail to provide relevant context and/or tie
`any alleged success back to the fundamental purpose outlined by the courts.
`
`This article summarizes challenges and shortcomings with common approaches to evaluating commer-
`cial success. and offers guidance for providing appropriate economic analysis. We draw upon numerous
`expert evaluations of commercial success. with a focus in pharmaceuticals and electronics, to provide
`practical insights on commercial success for both plaintiffs and defendants.
`
`Overly Simplistic Analysis of Commercial Success
`Overly simplistic evaluations of commercial success frequently fail to provide suflicient information and
`analysis to conclude that economic incentives existed to bring the product to market sooner. Such
`analysis often simply tabulated; sales. profits, and market shares, followed by some grand conclusion on
`whether those constitute commercial success. Very little is said for whether sales are sufficient to com-
`pensate for the economic costs needed to develop the product and bring it to market. Experts often fail
`to compare sales and profits from the product in question to other comparable products in the industry.
`even though millions of dollars in one market might be successful in one industry and an utter failure in
`another.
`
`In our experience. this kind of analysis is too often set forth as alleged evidence of commercial success.
`This overly simplistic approach to evaluating commercial success often misses the economic purpose of
`commercial success in informing on obviousness. Analyses rooted in a layperson's notion of success are
`not necessarily unscientific or false—rather. they simply fail to connect with the purpose of the commer-
`cial success established by the courts.
`
`
`
`Overtime. courts have clarified the purpose of commercial success in evaluating a patent‘s obviousness.
`Dating back to Smith v. Goodyear Dental (1376), the Supreme Court grappled with how to determine
`whether a new product was a legitimately novel invention.3 The Court indicated what might be learned
`from one product displacing others previously used fur the same purpose. establishing the relevanCe of
`a product's market performance. but provided no clear economic standard for what kind of displace-
`ment would be informative.4 The Supreme Court later identified commercial success as a secondary
`consideration for nonobviousness in Graham v. John Deere (1966).5 a role that was strengthened upon
`establishment of the Federal (fircuit in 1982.6 One scholar suggested that commercial success was
`transformed “from a tiebreaker to a virtual trump card.” Most recently. the Federal Circuit stated in
`Merck u. Tenn (2005) (citing to Graham 1;. John Deere) that '[c]ommercial success is relevant because
`the law presumes an idea would successfully have been brought to market sooner. in response to market
`forces. had the idea been obvious to persons skilled in the art."8
`
`Merely reporting sales or market shares in a vacuum misses the point of a commercial success analysis
`as explained by the courts. Net sales or market shares in isolation tell us very little about whether mar-
`ket forces would have existed for other companies to have responded by bringing the product to market
`sooner. As one author noted: "For commercial success to be persuasive, a patentee must do more than
`show sales or market share data for her patented product. (Although. under some older cases, this was
`
`Published in landslide Magazine. Volume 9. Number 4. @017 by the American Bar Association. Reproduced with
`pcrmission. All rights reserved. 'l11is information or any portion thereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system without the express written consent of the American
`Bar Associlnion.
`
`UNITED THERAPEUTICS, EX. 2078
`WATSON LABORATORIES v. UNITED THERAPEUTICS, |PR2017-01621
`Page 2 of 7
`
`

`

`r,__._
`
`ABA Section of intellectual Property Law
`
`Landslide Magazine
`
`enough)."9 Rather, commercial success should inform on whether sales and profits provide objective
`evidence on whether material economic incentives (i.e., “market forces”) would have incentivized oth-
`ers to bring the product to market, had the invention been obvious. Other economists and scholars
`agree that this is, in essence. the fundamental purpose of commercial success analysis."1| Said another
`way. ideas are brought to market when there is a profit opportunity, not merely when sales or market
`shares are “high” or “substantial” in some abstract sense.
`
`Economic Analysis of Commercial Success
`A better approach to evaluating commercial success focuses on factors that are economically relevant
`for its purpose. While each analysis will be unique and specific to the facts of the particular case, some
`principles can provide guidance to improve putting forth or rebutting evidence of commercial success.
`This section elaborates on several such factors: (1) comparisons to relevant benchmarks, (2) compar-
`isons to commercialization costs, (3) evaluation of market shares, and (4) evaluation of the inferential
`limitations of any alleged commercial success.
`
`Comparisons to Relevant Benchmarks
`One useful measure in evaluating commercial success is a comparison of sales to relevant benchmarks
`in the industry—for example: average product sales, sales of competitors, and projectioas of potential
`sales. This provides guidance on what level of sales or revenues in the field are typical, sought. and
`expected, and would yield an economic profit for a particular industry at a particular point in time.
`
`In the pharmaceutical industry, for example, economic literature provides context on the range of drug
`sales by drug type [e.g., cardiovascular, neurologic, etc.) and time period. For drugs launched from 1990
`to 1994, anesthetic drugs earned $556 million over the product life cycle, on average, compared to more
`than $2 billion for anti-infective drugs and more than $3 billion for cardiovascular drugs." Economic
`research examining drugs by decile (i.e., lst docile from goth percentile to ggth percentile, 2nd decile
`from 80th percentile to 89th percentile) often provides additional context for where a drug fits into the
`broader industry.l2 Notably. research indicates that only the top three deciles of drugs tend to be eco-
`nomically profitable. and that an average drug tends to yield close to break-even or even negative prof-
`its.'3 All else equal, it is unlikely that a drug with sales below an average drug would be a commercial
`success."
`
`All too often, experts assert that sales are “high” in some abstract sense (even with little or no profit).
`without evaluating what sales might have been expected or what sales have been earned by competitor
`products. By adding comparisons to the types of benchmarks described herein. sales can be evaluated in
`proper context and better inform whether material economic incentives for development existed.
`
`Comparisons to Commercialization Costs
`Another useful but often overlooked measure in evaluating cammercial success is a comparison to com-
`mercialization costs for a product. Properly evaluated, including economic costs associated with actual
`expenditures, costs of capital, risk, and uncertainties, comparisons to commercialization costs can pro-
`vide information for whether sales and profits are sufficient to generate an economic return on invest-
`ment—in other words. a material economic incentive for others to bring the product to market. For
`
`Published in Landslide Magazine. Volume 9. Number 4. ©2017 by Ihe American Bar Association. Reproduced with
`penuission. All fights reserved. ‘ihis information or any portion thereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system without the express written consent of the American
`Bar Association.
`
`WATSON LABORATORIES v. UNITED THERAPEUTICS, IPR2017-01621
`Page 3 of 7
`
`UNITED THERAPEUTICS, EX. 2078
`
`

`

`ABA Section of Intellectual Property Law
`
`,
`
`Landslide Magazine
`
`example, some economists argue that "commercial success could in principle be defined by a single cri-
`' teriou: Does the patented invention earn a positive net return (risk-adjusted) on invested capital after
`accounting for all relevant costs associated with developing and commercializing the patent as well as
`any alternatives available to the patent holder?"15 Techniques such as net present value analysis can be
`helpful for comparing sales over time with costs associated with commercialization.
`
`In the pharmaceutical industry. a number of authors have determined that the cost of bringing a new
`pharmaceutical product to market exceeds $1 billion (and more than $2 billion based on estimates for
`more recent products).'6 These costs include out-of-pocket expenses of development and clinical trials,
`the cost of capital over time, and the risk of nonapprova] (in which case all expenditures would be
`wasted), all of which are expected and considered when evaluating products in the pharmaceutical
`industry.” If a drug product does not earn revenues and profits that sufficiently compensate pharma-
`ceutical companies for significant economic costs in bringing a product to market, that product will tend
`not to he a commercial success, all else being equal.13
`
`Despite the economic foundation and connection to material economic incentives, experts frequently
`fail to take into account the costs of deveIOpment and commercialization when evaluating commercial
`success.‘9 By adding comparisons to potential costs of commercialization described herein, sales and
`profits can be evaluated relative to the expense and investment required to bring the product to market.
`providing further evidence on material economic incentives for commercialization.
`
`Evaluation ofMorket Shores
`Market shares are a factor frequently considered by experts in evaluating commercial success. because
`they provide implicit comparisons to competitor products. However. the interpretation of market shares:
`can be difficult. For example. experts are often pressed at deposition to define what market share would
`provide a global cutoff for a commercially successful product (e.g.. "Is it 5 percent? to percent? 25 per-
`cent? 50 percent”). The answer, because of how market shares are defined, is often: it depends.
`
`For example, a 5 percent share of one market might be commercially successful. whereas a 20 percent
`share of another market might not be. The former market might be significant and commercialization
`costs may below. whereas the second market might be smaller and commercialization costs may be
`high. As another example, a product may have a very high revenue share but a very low quantity share
`due to factors like patent protection of competitors (e.g.. branded versus generic pharmaceuticals}. Try-
`ing to define an absolute cutoff for what market share. in the abstract, denotes a commercial success is a
`futile exercise.” Experts often disagree about market definition—ta. which products define competi-
`tion and which do not—yet the market definition and market share are interrelated. It is the overall con-
`text. rather than a particular market share per se. that defines whether market shares are interpreted as
`persuasive evidence of commercial success.
`
`Unlike the other economic factors described thus far. market shares are less directly connected to
`whether material economic incerrtives existed to bring the product to market sooner. Yet they can. at
`times. provide insight on the market opportunity for an invention and. in that sense. may inform on
`incentives to bring a product to market sooner when other information is less concrete.
`
`Published in landslide Magazine, Volume 9. Number 4. ©2017 by the American Bar Association. Reproduced with
`permission. All rights reserved. This information or any portion Ihereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system without the express written consent of the American
`Bar Association.
`
`Page 4 of 7
`
`UNITED THERAPEUTICS, EX. 2078
`WATSON LABORATORIES V- UNITED THERAPEUTICS, |PR2017-01621
`
`

`

`
`
`ABA Section of Intellectual Property Law
`
`Landslide Magazine
`
`Economic Relevon cc of Com mercial Success
`Finally, a thoughtful analysis of commercial success may consider whether any alleged success, if it
`exists, is relevant for evaluating the existence of material economic incentives to bring a product to mar»
`ket sooner. There are circumstances where even sales and profits that might normally be sufficient to
`generate economic interest in the product (e.g., a potential commercial opportunity) might not be infor-
`mative on obviousness at the time of the invention because of other factors.
`
`For example, the presence of blocking patents or regulatory exclusivity often limits the economic rele-
`vance of commercial success. In this case, incentives for development may only exist for the party with
`that exclusivity and not for the market more generally. In Merck 1:. Terra, the plaintiff argued that Fos-
`amax, the patented product in question, was commercially successful.m The Federal Circuit agreed. but
`found that Merck’s earlier patent (a so-called “blocking patent” that blocked others from commercializ-
`ing a Fosamax product) limited the economic relevance of commercial success because other parties in
`the market could be blocked from bringing the product to market.“ The court stated: "Because market
`entry by others was precluded on those bases, the inference of non-obviousness .
`.
`. from evidence of
`commercial success, is weak."23
`
`As another example, there may be contemporaneous evidence around the time of the invention that
`shows a lack of commercial interest, even if the product later turns out to be commercially successful. In
`such a situation, sales and profits may provide limited evidence on whether material economic incen-
`tives existed to bring the product to market sooner, above and beyond the contemporaneous evidence
`already demonstrating this directly.
`
`In summary, experts can often benefit from asking whether commercial success, even if it exists. is rele-
`vant in evaluating the existence of material economic incentives around the time of the invention and,
`in turn, in evaluating obviousness of a particular patent at issue.
`
`Conclusion
`
`.
`
`While the purpose of commercial success has been established for some time, too often we see basic
`principles being misapplied, misunderstood. or not acknowledged at all. Evaluating "success" in a vac-
`uum. without proper context or benchmarks for comparison, can result in a flawed and misguided
`analysis. There is, of course, no single set of factors that are dispositive on commercial success in every
`situation. but providing additional context relating to the purpose of commercial success (i.e.. whether
`sales and profits demonstrate material economic incentives existed to have brought the product to mar-
`ket sooner) appears to be a step in the right direction. Success, both in business and in life, requires an
`understanding and appreciation for what is meant to be achieved.
`
`Endnotes
`
`1. Commercial sucmss is one of several secondary considerations intended to inform on whether a
`particular technology is obvious—Le, whether it differs enough from prior art in order to qualify as a
`patentable invention—which are often evaluated when defendants challenge a patent's validity in patent
`litigation. Because obviousness is the most common basis for finding that a patent is invalid, commer—
`
`Published in landslide Magazine. Volume 9. Number 4, ©2017 by the nmerican Bar Association. Reproduced with
`permission. All rights reserved. This informalion or any portion thereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system without the express written consent of the American
`Bar Association.
`
`WATSON LABORATORIES V. UNITED THERAPEUTICS, IPR2017-01621
`Page 5 of 7
`
`UNITED THERAPEUTICS, EX. 2078
`
`

`

`ABA Section of Intellectual Property Law
`
`Landslide Magazine
`
`cial success can play an important role. For discussion and references. see Andrew Blair-Stanek, Profits
`as Commercial Success, 1 17 YALE LJ. 642. 646 (2008); and Rebecca S. Eisenberg. Obvious to Whom?
`Evaluating Inven tions from the Perspective ofPHOSITA. 19 BERKELEY TECH. 1...]. 885, 885 (2004).
`2. Merck 8: Co. v. Teva Pharm. USA. Inc.. 395 F.3d 1364, 1376 (Fed. Cir. 2005).
`3. Smith v. Goodyear Dental Vulcanile Co.. 93 0.8. 436. 495 (1876).
`4. Id. at 495—96, cited in Blair-Stanelc, supra note 1, at 647.
`5. Graham v. John Deere (20.. 383 U.S. 1, 17—18 (1966) ("Such secondary considerations as commer—
`cial success. long felt but unsolved needs. failure of others. etc.. might be utilized to give light to the cir-
`cumstances surrounding the origin of the subject matter sought to be patented. As indicia of
`obviousness or nonobviousness, these inquiries may have relevancy.").
`6. Blair~Stanek. supra note 1. at 647—48; seeGraham. 383 US. at 11.
`'7. Robert P. Merges. Commercial Success and PatentStondara‘s: Economic Perspectives on Innova-
`tion. 76 CAL. L. Rev. 803. 827 (1988).
`_
`B. Merck 8: Co. v. Teva Pharm. USA, Inc.. 395 F.3d 1364, 1376 (Fed. Cir. 2005).
`9. Merges. supra note 7, at 823.
`10. Jesse David 8: Marion 3. Stewart. Commercial Success: Economic Principles Applied to Patent
`Litigation, inEconomc APPROACHES TO lmuscruat PRorr-zmv: Poucv. Lineman, AND MANAGE—
`MENT 196—99 (Gregory K. Leonard 8: Lauren J. Stiroh eds., 2005) ("A patented invention should be con-
`sidered a commercial success if it can be shown to have earned, or can reasonably be expected to earn, a
`positive net return on invested capital after accounting for all relevant costs associated with develop-
`ment and commercialization .
`.
`. 3'); Blair-Stanek. supra note 1. at 649 (“The potential for commercial
`success presumably provides incentives for others to try to perfect the invention. and the failure of oth-
`ers to do so suggests nonobviousness. Put most simply, the classical theory-based argument goes. ‘if an
`invention is both obvious and lucrative, why wasn't it thought of earlier?"): Rahul Guha et al.. The Eco—
`nomics ofCommerciai Success in Pharmaceutical Patent Litigation, 1 LANDSLIDE, no. 5, Manyune
`2009, at 8 (“From an economic perspective. commercial success supports a conclusion of nonobvious-
`ness because it suggests that an economic incentive existed to produce the invention”).
`11. Joseph DiMasi et al.. RM) Costs and Returns by Therapeutic Category. 38 DRUG INFO. J. 211, 219
`[2004)-
`12. Henry Grabowslti et al.. Returns on Research and Development for 19903 New Drug Introduc-
`tions. 20 PHARMACOECONOMICS 11. 17. 22 (Supp. 3 2002).
`13.1o‘. at 17. 23; Ernst R. Berndt et al.. Decline in Economic Returnsfrom New Drugs Raises Ques-
`tions about Sustaining Innovations, 34 HEALTH AFF. 245. 245, 252 (2015).
`14. Skeptics might question why so many unprofitable drugs are brought to market. Reasons may
`vary. of course. but one impactful factor is the uncertain process of clinical trials and FDA approval
`occurring over many years. Once a company incurs sunk costs of development and clinical trials, it may
`be worthwhile to proceed to the market, even if the product never recoups all of those sunk costs.
`15. David 82 Stewart. supra note 10. at 196.
`16. For sources and discussion, see Joseph DiMasi et al.. Innovation in the Pharmaceutical Industry.-
`New Estimates of12er Costs, 47 J. HEALTH Econ. 20 (2016). For a variety of other sources and refer
`811685 over time. see JORGE MES'I'RE-MRANDIZ ET AL, OFFICE OF HEALTH ECON., THE REID COST OF A
`New MEDICINE 1-86 (2012}; Joseph A. DiMasi 8: Henry G. Grabowski. R&D Costs and Returns to New
`Drug Development: A Review of the Evidence. inTHE OXFORD HANDBOOK OF THE ECONOMICS OF THE
`Bloruamaceuncar. INDUSTRY 29 (Patricia M. Danzon 3: Sean Nicholson eds, 2010); Joseph A. DiMasi
`
`Published in Landslide Magazine, Volume 9. Number 4. ©2017 by the American Bar Association. Reproduced with
`permission. All rights reserved. This infonnation or any portion thereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system without the express written consent of the American
`liar Association.
`
`Page 6 of 7
`
`UNITED THERAPEUTICS, EX. 2078
`WATSON LABORATORIES v- UNITED THERAPEUTICS, IPR201T-01621
`
`

`

`
`
`ABA Section of Intellectual Property Law
`
`Landslide Magazine
`
`at al.. The Price ofInnovation : New Estimates ofDrug Development Costs, 22 J. HEALTH Econ. 151, 151
`(2003); Joseph A. DiMasi 8: Henry G. Grabowski, The Cost of Biopharmaceutical RM): ls Biotech Dif-
`ferent?, 28 MANaGERtAL 81 DECISION Econ. 4159, 477 (2007); and Grabowski et al., supra note 12.
`17. SeeMEsrRE-FERRANDIZ Er AL, supra note 16; Biblical et al.. Innovation in the Pharmaceutical
`Industry, supra note 16; DiMasi et al., The Price oflnnouation, supra note 16; Grabowski et al., supra
`note 12.
`
`18. Interestingly, some authors have argued that pharmaceutical products may be commercially suc-
`cessful even when they do not generate a positive return on investment, because there may still be some
`therapeutic value associated With their use. See,e.g., Guha et 31., supra note 10, at 11—12 n.10 (“[A] lack
`of positive return on capital investment should not necessarily undermine a conclusion of commercial
`success. A few 'blockbuster' drugs generate the majority of profits for the drug companies. That means
`the majority of smaller drugs may ,not be profitable in the sense of recouping all the costs of their dis-
`covery and development, even it' they have proven therapeutic value“). However. products may he ther—
`apeutically valuable or desirable Without being commercially successful and sufficient to provide
`incentives to bring products to market sooner.
`19. While the costs of commercialization are often not available in historical records, either due to the
`passage of time or nonspecific attribution of costs to a particular product, we have had success linking
`the facts and circumstances of a particular product to peer-reviewed published literature on commer-
`Cialization costs, accounting for time of launch, therapeutic category, and the actual duration of clinical
`costs.
`
`20. See, e.g., David 8: Stewart, supra note 10, at 196 ('However, under certain circumstances. rapid
`sales growth and gains in market share will not necessarily reflect a profitable underlying invention").
`21. Merck 8: Co. v. Teva Pharm. USA. Inc., 395 F.3d 1364, 1376 (Fed. Cir. 2005).
`22.1d. at 1376—77.
`23.1ci. at 1377.
`
`Published in Landslide Magazine. Volume 9. Number 4. ©2017 by the American Bar Association. Repioduced with
`tnrmission. All rights reserved. This iniomiation or any portion thereof may not be copied or disseminated in any form or
`by any means or stored in an electronic database or retrieval system willnout the express written consent of 1 he American
`Bar Association.
`'
`
`UNITED THERAPEUTICS, EX. 2078
`
`
`
`WATSON LABORATORIES v. UNITED THERAPEUTICS, IPR2017-01621
`
`Page 7 of 7
`
`
`
`