‘THINKING
`ECONOMICALLY
`ABOUT
`COMMERCIAL
`UCCESS
`
`By R. DEFOREST MCDUFF,
`RYAN C. ANDREWS, AND MATT D. BRUNDAGE
`
`conomic experts frequently evaluate commercial success as a secondary consideration
`of the obviousnessof a patented invention.' While other common economicinquiries
`are often based on widely recognized methodologies (e.g., the Panduit factors for lost
`profits, the Georgia-Pacific factors for reasonableroyalties), experts often base analysis of com-
`mercial success on a layperson’s notion of“success,” without appreciation ofits purpose. For
`example, an expert may conclude that a productis a commercial success because sales andprofits
`are “large” or “substantial.” appealing to preconceived notions of success 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 oftenfail 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. Improperanalysis of commercial success can be particularly problematic in
`pharmaceuticals, for example, which often require billions ofdollars 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 contextatall)
`are unhelpful to the role of commercial success in patent litigation.
`Recent case law hasclarified the purpose of commercial success and whatit is intended to
`demonstrate. For example, the Federal Circuit stated in Merck v. Teva that commercial suc-
`cessis 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.’ This makes sense, from an economic perspective, because other parties would have
`economic incentives to commercialize obvious inventions if there were economic incentives
`to do so, However, based on our experience evaluating dozens of expert reports on com-
`mercial success, all too often experts fail to provide relevant context and/ortie any alleged
`success back to the fundamental purpose outlined by the courts.
`This article summarizes challenges and shortcomings with common approachesto evalu-
`ating commercial success, and offers guidance for providing appropriate economic analysis.
`We draw upon numerous expert evaluations of commercial success, with a focus in phar-
`maceuticals and electronics, to provide practical insights on commercial success for both
`plaintiffs and defendants,
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`Overly Simplistic Analysis of Commercial Success
`Overly simplistic evaluations of commercial success frequently
`fail to provide sufficient information and analysis to conclude
`that economicincentives existed to bring the product to mar-
`ket sooner. Such analysis often simply tabulates sales, profits,
`and market shares, followed by some grand conclusion on
`whetherthose constitute commercial success. Very little is said
`for whethersales are sufficient to compensate for the economic
`costs needed to develop the product and bringit 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 ofthe
`commercial success established by the courts.
`Overtime, courts have clarified the purpose of commer-
`cial success in evaluating a patent’s obviousness. Dating
`back to Smith v. Goodyear Dental (1876), the Supreme Court
`grappled with how to determine whether a new product was
`a legitimately novel invention.* The Court indicated what
`might be learned from one product displacing others previ-
`ously used for the same purpose, establishing the relevance
`of a product’s market performance, but provided noclear
`economic standard for what kind of displacement would be
`informative. The Supreme Courtlater identified commer-
`cial success as a secondary consideration for nonobviousness
`in Grahamy. John Deere (1966),° a role that was strength-
`ened upon establishment ofthe Federal Circuit in 1982.° One
`scholar suggested that commercial success was transformed
`“from a tiebreaker to a virtual trump card.” Most recently,
`the Federal Circuit stated in Merck v. Teva (2005) (citing to
`Graham v. 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 obviousto personsskilled in the art."
`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 sharesin isolation tell us very litle
`about whether market forces would have existed for other compa-
`nies 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 showsales or market share data for
`her patented product. (Although, under some oldercases, this was
`enough).”” Rather, commercial success should inform on whether
`
`sales and profits provide objective evidence on whether material
`economicincentives (i.e., “market forces’) would have incen-
`tivized others to bring the product to market, had the invention
`been obvious. Other economists and scholars agree that thisis. in
`essence, the fundamental purpose of commercial success analy-
`sis."” Said another way, ideas are brought to market whenthere 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 par-
`ticular 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) comparisons to commercialization
`costs, (3) evaluation of market shares, and (4) evaluation ofthe
`inferential limitations of any alleged commercial success.
`
`Comparisons to Relevant Benchmarks
`One useful measure in evaluating commercial success is a
`comparisonof sales to relevant benchmarks in the industry—
`for example: average productsales, sales of competitors, and
`projections 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 pointin time.
`In the pharmaceutical industry, for example, economiclit-
`erature provides context on the range ofdrug sales by drug type
`(e.g., cardiovascular, neurologic, etc.) and time period. For drugs
`launched from 1990 to 1994, anesthetic drugs earned $556 mil-
`lion over the productlife cycle, on average, compared to more
`than $2 billion for anti-infective drugs and more than $3billion
`for cardiovascular drugs.'' Economic research examining drugs
`by decile (i.e., Ist decile from 90th percentile to 99th percentile,
`2nd decile from 80th percentile to 89th percentile) often pro-
`vides additional context for where a drug fits into the broader
`industry.'* Notably, research indicates that only the top three
`deciles of drugs tend to be economically profitable, and that an
`average drug tendsto yield close to break-even or even negative
`profits.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 withlittle or no profit), without evaluat-
`ing what sales might have been expected or what sales have
`been earned by competitor products. By adding comparisons
`to the types of benchmarksdescribedherein, sales can be
`evaluated in proper context and better inform whether mate-
`rial economic incentives for development existed.
`
`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.Andrewsis a former senior associate at Intensity; he has extensive experience evaluating lost profits,
`reasonable royalties, commercial success, and otherareas. He is currently pursuing his MBA atThe Wharton Schoolat the University of Pennsylvania.
`Matt D. Brundageis an analystat 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@
`ff BXHGRppspective
`intensity.com.The opinions expressed are those of the author(s) and may notreflect the viewsof their employersgi
`affiliates.This article is for general information purposes andis not intended to be and should notbe taken aslegal advice.
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`Comparisons to Commercialization Costs
`Another useful but often overlooked measure in evaluating
`commercial success is a comparison to commercialization
`costs for a product. Properly evaluated, including economic
`costs associated with actual expenditures, costs of capital,
`risk, and uncertainties, comparisons to commercialization
`costs can provide information for whether sales andprofits
`are sufficient to generate an economic return on investment—
`in other words, a material economic incentive for others to
`bring the product to market. For example, some economists
`argue that “commercial success couldin principle be defined
`by a single criterion: Does the patented invention earn a
`positive net return (risk-adjusted) on invested capital after
`accounting forall relevant costs associated with developing
`and commercializing the patent as well as anyalternatives
`available to the patent holder?”!° Techniques suchas net pres-
`ent value analysis can be helpful for comparing sales over
`time with costs associated with commercialization.
`In the pharmaceutical industry, a numberof authors have
`determinedthat the cost of bringing a new pharmaceutical
`product to market exceeds $1 billion (and more than $2 bil-
`lion based on estimates for more recent products).'° These
`costs include out-of-pocket expenses of development and
`clinical trials, the cost of capital over time, and the risk
`of nonapproval (in which case all expenditures would be
`wasted), all of which are expected and considered when eval-
`uating products in the pharmaceutical industry.'’ If a drug
`product does not earn revenues and profits that sufficiently
`compensate pharmaceutical companies forsignificant eco-
`nomic costs in bringing a product to market, that product will
`tend not to be a commercial success,all else being equal."
`Despite the economic foundation and connection to material
`economic incentives, experts frequently fail to take into account
`the costs of development and commercialization whenevaluat-
`ing commercial success.’ By adding comparisonsto potential
`costs of commercialization describedherein, sales and profits
`can be evaluatedrelative to the expense and investment required
`to bring the product to market, providing further evidence on
`material economic incentives for commercialization.
`
`Evaluation of Market Shares
`Market shares are a factor frequently considered by experts in
`evaluating commercial success, because they provide implicit
`comparisons to competitor products. However, the interpre-
`tation 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 success-
`ful product(e.g., “Is it 5 percent? 10 percent? 25 percent? 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 com-
`mercially successful, whereas a 20 percent share of another
`market might not be. The former market might be significant
`and commercialization costs may be low, whereas the second
`market might be smaller and commercialization costs may be
`high. As another example, a product may have a very high rev-
`enue share but a very low quantity share due tofactors like
`patent protection of competitors (e.g., branded versus generic
`
`pharmaceuticals). Trying to define an absolute cutoff for what
`market share, in the abstract, denotes a commercial successis
`a futile exercise.” Experts often disagree about market defi-
`nition—i.e., which products define competition and which do
`not—yet the marketdefinition and market share are interre-
`lated. It is the overall context, 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
`incentives 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 informon incentivesto bring a
`product to market sooner whenotherinformationis less concrete.
`
`Economic Relevance of Commercial Success
`Finally, a thoughtful analysis of commercial success may
`consider whetherany alleged success,if it exists, is relevant
`for evaluating the existence of material economic incentives
`to bring a product to market sooner. There are circumstances
`
`where evensales and profits that might artes be sufficient
`commercial opportunity) might not be informative on obvi-
`
`to generate economicinterest in the product (e.g., a potential
`
`ousness at the time of the invention because ofotherfactors.
`For example, the presence of blocking patents or regu-
`latory exclusivity often limits the economic relevance of
`commercial success. Inthis case, incentives for development
`may only exist for the party with that exclusivity and not
`for the market more generally. In Merck v. Teva, the plaintiff
`argued that Fosamax, the patented product in question, was
`commercially successful.?! The Federal Circuit agreed, but
`found that Merck’s earlier patent (a so-called “blocking pat-
`ent” that blocked others from commercializing a Fosamax
`product) limited the economic relevance of commercial suc-
`cess because otherparties in the market could be blocked
`frombringing 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.”
`As another example, there may be contemporaneousevi-
`dence aroundthe time of the invention that showsa 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
`incentives 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 ifit exists, is relevant in evaluating
`the existence of material economic incentives aroundthe 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 misap-
`plied, misunderstood, or not ackmyAytaer Bx] BB4ating
`“success” in a vacuum, without prea SOTS9benchmarks
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`for comparison, can result in a flawed and misguided analysis.
`There is, of course, no single set of factors that are disposi-
`tive on commercial success in every situation, but providing
`additional context relating to the purpose of commercial suc-
`cess (1.e., whether sales and profits demonstrate material
`economic incentives existed to have brought the product to
`market sooner) appears to be a step in the right direction. Suc-
`cess, both in business andin life, requires an understanding and
`appreciation for what is meant to be achieved. m
`
`Endnotes
`
`1. Commercial success is one of several secondary consider-
`ations intended to inform on whethera particular technologyis
`obvious—i.e., whetherit differs enough frompriorart in order to
`qualify as a patentable invention—whichare often evaluated when
`defendants challenge a patent’s validity in patent litigation. Because
`obviousness is the most commonbasis forfinding that a pat-
`ent is invalid, commercial success can play an important role. For
`discussion and references, see AndrewBlair-Stanek, Profits as Com-
`mercial Success, 117 YALEL.J. 642, 646 (2008); and RebeccaS.
`Eisenberg, Obvious to Whom? Evaluating Inventions fromthe Per-
`spective of PHOSITA, 19 BERKELEY TECH. L.J. 885, 885 (2004).
`2. Merck & Co. v. Teva Pharm. USA, Inc., 395 F.3d 1364, 1376
`(Fed. Cir. 2005).
`3. Smith v. Goodyear Dental Vulcanite Co., 93 U.S. 486, 495 (1876).
`4, Id. at 495-96,cited in Blair-Stanek, supra note 1, at 647,
`5. Graham y. John Deere Co., 383 U.S. 1, 17-18 (1966) (“Such
`secondary considerations as commercial success, long felt but
`unsolved needs, failure of others, etc., might be utilized to give light
`to the circumstances surrounding the origin of the subject matter
`soughtto be patented. As indicia of obviousness or nonobviousness,
`these inquiries may have relevancy.”).
`6, Blair-Stanek, supra note |, at 647-48; see Graham, 383 U.S, at 11.
`7. Robert P. Merges, Commercial Success and Patent Standards:
`EconomicPerspectives on Innovation, 76 CAL. L. REV, 803, 827 (1988).
`8. Merck & Co. v. Teva Pharm. USA,Inc., 395 F.3d 1364, 1376
`(Fed. Cir. 2005).
`9. Merges, supra note 7, at 823.
`10. Jesse David & Marion B. Stewart, Commercial Success: Eco-
`
`nomic Principles Applied to Patent Litigation, in ECONOMIC APPROACHES
`TO INTELLECTUAL PRopPERTY: PoLicy, LITIGATION, AND MANAGEMENT
`
`196-99 (Gregory K. Leonard & LaurenJ. Stiroh eds., 2005) (“A patented
`invention should be considered a commercial successifit can be shown
`
`to have earned, or can reasonably be expected to earn, a positive net return
`oninvested capital after accounting forall relevant costs associated with
`development and commercialization .
`.
`. °°); Blair-Stanek, supranote |, at
`649 (“The potential for commercial success presumably provides incen-
`tives for others to try to perfect the invention, and the failure of others 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 ofearlier?’”’); Rahul Guhaetal., The Economics of
`Commercial Success in Pharmaceutical Patent Litigation, | LANDSLIDE,
`no. 5, May/June 2009, at 8 (“From an economic perspective, commercial
`success supports a conclusion of nonobviousness becauseit suggests that
`an economicincentive existed to produce the invention.”).
`1. Joseph DiMasiet al., R&D Costs and Returns by Therapeutic
`Category, 38 DruG INFo. J. 211, 219 (2004).
`
`12. Henry Grabowskietal., Retns on Research and Develop-
`ment for 1990s New Drug Introductions, 20 PHARMACOECONOMICS
`11, 17, 22 (Supp. 3 2002).
`13. Id. at 17, 23; Ernst R. Berndt et al., Decline in Economic
`Returns from New Drugs Raises Questions about Sustaining Innova-
`tions, 34 HEALTH AFF. 245, 245, 252 (2015).
`14. Skeptics might question why so many unprofitable drugs are
`brought to market. Reasons mayvary, of course, but one impactful
`factoris the uncertain processofclinical trials and FDA approval
`occurring over many years. Once a company incurs sunk costs of
`developmentand clinicaltrials, it may be worthwhile to proceed to
`the market, even if the product never recoupsall of those sunk costs.
`15. David & Stewart, supra note 10, at 196.
`16. For sources and discussion, see Joseph DiMasietal., Jnnova-
`tion in the Pharmaceutical Industry: New Estimates ofR&D Costs,
`47 J. HEALTH Econ. 20 (2016). For a variety of other sources and ref-
`erences over time, see JORGE MESTRE-FERRANDIZ ET AL., OFFICE OF
`
`HEALTH Econ., THE R&D Cost oF A NEW MEDICINE I-86 (2012);
`Joseph A. DiMasi & Henry G. Grabowski, R&D Costs and Returnsto
`New Drug Development: A Reviewof the Evidence, in THE OXFORD
`HANDBOOK OF THE ECONOMICS OF THE BIOPHARMACEUTICAL INDUS-
`
`TRY 29 (Patricia M. Danzon & Sean Nicholson eds., 2010); Joseph A.
`DiMasi et al., The Price ofInnovation: NewEstimates of Drug Devel-
`opment Costs, 22 J. HEALTH Econ. 151, 151 (2003); Joseph A.
`DiMasi & Henry G. Grabowski, The Cost of Biopharmaceutical
`R&D;Is Biotech Different?, 28 MANAGERIAL & DECISION Econ, 469,
`477 (2007); and Grabowski et al., supra note 12.
`17. See MESTRE-FERRANDIZ ETAL., supra note 16; DiMasiet al.,
`Innovation in the Pharmaceutical Industry, supra note 16; DiMasietal.,
`The Price ofInnevation, supra note 16; Grabowski et al., supra note 12.
`18. Interestingly, some authors have argued that pharmaceuti-
`cal products may be commercially successful even whenthey do
`not generate a positive return on investment, because there maystill
`be some therapeutic value associated with their use. See, e.g., Guha
`et al., supra note 10, at 11-12 n.10 (“[A] lack ofpositive return on
`capital investment should not necessarily undermine a conclusion of
`commercial success. A few ‘blockbuster’ drugs generate the major-
`ity ofprofits 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 discovery and development, evenif they have proven
`therapeutic value.”). However, products may be therapeutically
`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 non-
`specific attribution ofcosts to a particular product, we have had
`success linking the facts and circumstancesof a particular product
`to peer-reviewed published literature on commercialization costs,
`accounting for time oflaunch, therapeutic category, and the actual
`duration of clinical costs.
`
`20. See, e.g., David & Stewart, supra note 10, at 196 (“However,
`undercertain circumstances, rapid sales growth and gains in market
`share will not necessarilyreflect a profitable underlying invention.”).
`21. Merck & Co. v. Teva Pharm. USA, Inc., 395 F.3d 1364, 1376
`(Fed. Cir. 2005).
`22, Id. at 1376-77.
`23. Id. at 1377.
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