4/4/22, 6:50 PM
`
`Record: 1
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`Discovery Service for The Brattle Group
`
`Source:
`
`Title:
`Authors:
`
`Thinking Economically about Commercial Success
`McDuff, R. DeForest
`Andrews, Ryan C.
`Brundage, Matt D.
`9 Landslide 37 (2016-2017) / Landslide, Vol. 9, Issue 4 (March/April
`2017), pp. 37-40
`Publication Year:
`2017
`Original Material:
`9 Landslide 37 (2016-2017)
`Subject Geographic:
`Illinois
`Document Type:
`article
`Language:
`English
`ISSN:
`1942-7239
`Availability:
`https://heinonline.org/HOL/Page?handle=hein.journals/lndslid9&div=57
`Accession Number:
`edshol.hein.journals.lndslid9.57
`Database:
`HeinOnline
`THINKING ECONOMICALLY ABOUT COMMERCIAL SUCCESS
`Economic experts frequently evaluate commercial success as a secondary consideration of the obviousness of
`a patented invention.[1] While other common economic inquiries are often based on widely recognized
`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," without appreciation
`of its purpose. For example, an expert may conclude that a product is a commercial success because sales
`and profits are "large" or "substantial," appealing to preconceived notions of success in other contexts ("sales
`of $100 million a year? (cid:0) 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 success 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 v. Teva 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 obvious to persons skilled in the art."[2] 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
`
`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 1/7
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`Regeneron Exhibit 1242.001
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`Discovery Service for The Brattle Group
`4/4/22, 6:50 PM
`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 commercial
`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 sufficient information and analysis
`to conclude that economic incentives existed to bring the product to market sooner. Such analysis often simply
`tabulates 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 compensate 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 commercial
`success established by the courts.
`
`Over time, courts have clarified the purpose of commercial 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.[3] The Court indicated what might be learned from one product
`displacing others previously used for the same purpose, establishing the relevance of a product's market
`performance, but provided no clear economic standard for what kind of displacement 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 Circuit in
`1982.6 One scholar suggested that commercial success was transformed "from a tiebreaker to a virtual trump
`card."[7] 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 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 market 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 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 others 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.[10] Said another way, ideas are brought to market when
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 2/7
`
`Regeneron Exhibit 1242.002
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`Discovery Service for The Brattle Group
`4/4/22, 6:50 PM
`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) comparisons 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 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 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.[11] Economic research examining
`drugs by decile (i.e., 1st decile from 90th percentile to 99th percentile, 2nd decile from 80th percentile to 89th
`percentile) often provides additional context for where a drug fits into the broader industry.[12] Notably,
`research indicates that only the top three deciles of drugs tend to be economically profitable, and that an
`average drug tends to yield close to break-even or even negative profits.[13] All else equal, it is unlikely that a
`drug with sales below an average drug would be a commercial successs.[14]
`
`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 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 and profits 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 could in principle be defined by a single criterion: 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
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 3/7
`
`Regeneron Exhibit 1242.003
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`Discovery Service for The Brattle Group
`4/4/22, 6:50 PM
`recent products).[16] 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 evaluating products in the pharmaceutical industry.[17] If a drug product does
`not earn revenues and profits that sufficiently compensate pharmaceutical companies for significant economic
`costs in bringing a product to market, that product will tend not to be a commercial success, all else being
`equal.[18]
`
`Despite the economic foundation and connection to material economic incentives, experts frequently fail to
`take into account the costs of development and commercialization when evaluating commercial success.[19]
`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 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 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? 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 commercially 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 revenue share but a very low quantity share due to factors 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 success is a futile exercise.[20] Experts
`often disagree about market definition -- i.e., which products define competition and which do not -- yet the
`market definition and market share are interrelated. 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 inform on incentives to bring a
`product to market sooner when other information is less concrete.
`
`Economic Relevance of Commercial 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 market 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 informative 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 relevance 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 v. Teva, the plaintiff argued that Fosamax, the patented
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 4/7
`
`Regeneron Exhibit 1242.004
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`Discovery Service for The Brattle Group
`4/4/22, 6:50 PM
`product in question, was commercially successful.[21] The Federal Circuit agreed, but found that Merck's
`earlier patent (a so-called "blocking patent" that blocked others from commercializing 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.[22] The court stated: "Because market entry by others was precluded on
`those bases, the inference of non-obviousness (cid:0) 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 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 if it exists, is relevant 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 vacuum,
`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 market 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 success is one of several secondary considerations intended to inform on whether a particular
`technology is obvious -- i.e., 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, commercial success can play an
`important role. For discussion and references, see Andrew Blair-Stanek, Profits as Commercial Success, 117
`YALE L.J. 642, 646 (2008); and Rebecca S. Eisenberg, Obvious to Whom? Evaluating Inventions from the
`Perspective 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 v. 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 sought to be patented. As indicia of obviousness
`or nonobviousness, these inquiries may have relevancy.").
`6. Blair-Stanek supra note 1, at 647-48; see Graham, 383 U.S. at 11.
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 5/7
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`Regeneron Exhibit 1242.005
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`4/4/22, 6:50 PM
`Discovery Service for The Brattle Group
`7. Robert P. Merges, Commercial Success and Patent Standards: Economic Perspectives 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: Economic Principles Applied to Patent
`Litigation, in ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY: POLICY, LITIGATION, AND
`MANAGEMENT 196-99 (Gregory K. Leonard & Lauren J. Stiroh eds., 2005) ("A patented invention should
`be considered 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
`development and commercialization (cid:0)."); 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 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 of earlier?'"); Rahul Guha et al., The Economics of
`Commercial Success in Pharmaceutical Patent Litigation, 1 LANDSLIDE, no. 5, May/June 2009, at 8 ("From
`an economic perspective, commercial success supports a conclusion of nonobviousness because it
`suggests that an economic incentive existed to produce the invention.").
`11. Joseph DiMasi et al., R&D Costs and Returns by Therapeutic Category, 38 DRUG INFO. J. 211, 219
`(2004).
`12. Henry Grabowski et al., Returns on Research and Development 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 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 & Stewart, supra note 10, at 196.
`16. For sources and discussion, see Joseph DiMasi et al., Innovation in the Pharmaceutical Industry: New
`Estimates of R&D Costs, 47 J. HEALTH ECON. 20 (2016). For a variety of other sources and references
`over time, see JORGE MESTRE-FERRANDIZ ET AL., OFFICE OF HEALTH ECON., THE R&D COST OF
`A NEW MEDICINE 1-86 (2012); Joseph A. DiMasi & Henry G. Grabowski, R&D Costs and Returns to New
`Drug Development: A Review of the Evidence, in THE OXFORD HANDBOOK OF THE ECONOMICS OF
`THE BIOPHARMACEUTICAL INDUSTRY 29 (Patricia M. Danzon & Sean Nicholson eds., 2010); Joseph A.
`DiMasi et al., The Price of Innovation: New Estimates of Drug Development 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 ET AL., supra note 16; DiMasi et al., Innovation in the Pharmaceutical
`Industry, supra note 16; DiMasi et al., The Price of Innovation, supra note 16; Grabowski et al., supra note
`12.
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 6/7
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`Regeneron Exhibit 1242.006
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`4/4/22, 6:50 PM
`Discovery Service for The Brattle Group
`18. Interestingly, some authors have argued that pharmaceutical products may be commercially successful
`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 al., 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 discovery and
`development, even if 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 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 commercialization
`costs, accounting for time of launch, therapeutic category, and the actual duration of clinical costs.
`20. See, e.g., David & 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 & Co. v. Teva Pharm. USA, Inc., 395 F.3d 1364, 1376 (Fed. Cir. 2005).
`22. Id. at 1376-77.
`23. Id. at 1377.
`
`~~~~~~~~
`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 author(s) 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.
`
`Source: Landslide, , Vol. 9 Issue 4, p37, 4p
`Item: edshol.hein.journals.lndslid9.57
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`https://eds.s.ebscohost.com/eds/delivery?sid=b5ffc471-5545-4c27-9101-840733dc9888%40redis&vid=4&ReturnUrl=https%3a%2f%2feds.s.ebscohost… 7/7
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`Regeneron Exhibit 1242.007
`Regeneron v. Novartis
`IPR2021-00816
`
`