leo ents
Computing Legal Damages in High-Profile Patent Infringement
Nicholas C. Georgantzas, Maria Bavea, Lisa Iacona, Joseph Perekupka, Nicholas Screnci & Andry Argyrides
System Dynamics Consultancy, Fordham University & SSI, New York, NY 10023-7471, USA
Tel.: (+212) 636-6216, Fax: (+212) 765-5573, E-mail: georgantzas@fordham.edu
ABSTRACT
When estimating patent damages, the fundamental task is to construct a “but-for” model
that simulates, as closely as possible, the marketplace absent infringement. ' Calculation of
damages is premised upon four principles. These are: 1) A patent's economic and commercial
value derives largely from the market power it confers to the patent owner; therefore, in
estimating damages from patent infringement, the market power conferred by the patent must be
taken into account; 2) When the price of a good increases, consumption of the good declines, and
vice versa (law of demand); 3) Only costs caused by extra sales should be charged against extra
sales revenues; therefore, incremental costing is the proper approach. Both the technology and
the size of the output increment determine which costs are relevant; 4) Royalties are determined
in hypothetical negotiations in which both the market power flowing from the patent and the
relative bargaining power of the negotiators influence the outcome. In response, this essay's
system dynamics model simulates the BuSpar® market as close as possible, absent infringement.
The modeling process illustrated in this essay accounts for:
The market power that the BuSpar® patent confers to Bristol-Myers Squibb Co. (BMS).
The demand and price relation in the BuSpar® market.
The cost of regaining lost sales by using incremental costing.
The difference between royalty and lost profit damages.
EXECUTIVE SUMMARY
Case History
¢ On November 21, 2000 the Bristol-Myers Squibb’s (“BMS”) patent for BuSpar® expired
¢ On November 21, 2000, BMS lists new patent in FDA’s Orange Book, triggering an
artificial extension of the original patent
* On November 22, 2000, Mylan Pharmaceuticals, a generics drug manufacturer, was
ready to start selling the generic version of Buspar pursuant to a tentative final approval
by the FDA
* On November 22, 2000, upon receiving BMS’s new patent, FDA suspends final approval
of Mylan’s generic version
¢ Mylan and other generic manufacturers challenge FDA’s listing of BMS’s patent because
it did not acclaim a method of use
¢ On November 30, 2000 in response, FDA requests clarification from BMS whether the
new patent claimed only a metabolite of buspirone, which is the active ingredient of
BuSpar.
¢ FDA satisfied with BMS’s response deemed the new patent listed as of 11/21/2000
* On November 30, 2000, instead of following the FDA’s procedural rules, Mylan files
law suit against BMS and the FDA in the District Court for the District of Columbia
* On March 13, 2001, United States District Judge Ricardo M. Urbina orders BMS to
request the FDA to de-list its patent extension from the Orange Book
* On March 28, 2001, the FDA gives Mylan approval to sell its 35 mg generic version of
BuSpar
¢ Subsequently, BMS files an appeal with the US Court of Appeal.
* On June 29, 2001, Mylan is granted final approval to sell its 15 mg generic version of
BuSpar
* On October 12, 2001 Chief Judge Mayer reverses District Judge Urbina’s judgment
against BMS
¢ From March 28, 2001 until present, Mylan continues to sell its generic version despite the
Federal Circuit’s reversal.
Proposed Actions
* Option 1: Stop generic and regain full market power, losing goodwill
* Option 2: Stop generic and sue for infringement damages, including goodwill
* Option 3: Let generic sell and sue for infringement damages
* Option 4: Let generic sell and write off BuSpar®
Actual Economic Damages
Allowing the generic drug to enter the market causes a major revenue loss for BMS. In
fact, from March 2001 until October 2001, BMS lost an estimated total of $289MM.
BuSpar[] sales have dropped off by 85% in just under six months. The net dollar amount
of sales revenue lost is $307MM in first six months alone.
Expected Economic Damages
Option 1 Option 2 Option 3 Option 4
Advantage Damages Right to sue for | Goodwill is not Absolutely no
estimated at both past and damaged; can sue loss of
$1.5 billion future loss of for past and future goodwill; no
revenue losses estimated at battle in court
$177MM plus any
gains from licensing
agreement
Disadvantage | Incremental Could severely | Still lose market Loss of a very
Cost of tarnish share to the generic _| profitable
$95MM; Loss credibility drug product line
of goodwill
Recommendation
Allow generics to remain on the market and sue for patent infringement.
Objective of this Paper
The objective of this paper is to present a system dynamics model that simulates the
BuSpar® market as close as possible, absent infringement.
The modeling process illustrated in this paper will account for:
¢ The market power that the BuSpar® patent confers to Bristol-Myers Squibb Co. (BMS).
¢ The demand and price relation in the BuSpar® market.
¢ The cost of regaining lost sales by using incremental costing.
¢ The difference between royalty and lost profit damages.
System Dynamics
We used system dynamics in this case because it offers a unique approach to answering
several questions that are driving this situation. System Dynamics aids us in deriving the answer
we need because it allows us to interpret multiple variables and known factors through a system
of equations and graphs. This case involves a combination of ongoing events that must be
combined to derive at an answer. You will see the applicability of System Dynamics in the
following sections regarding damages suffered by BMS, and more importantly the quantification
of those damages using System Dynamics.
BuSpar®: A Brief Definition
BuSpar® (buspirone hydrochloride) is a widely prescribed anti-anxiety medication
manufactured by Bristol-Myers Squibb Co. (BMS). More precisely, it is a nonhabit-forming
medication, for the treatment of generalized anxiety disorder. BuSpar® is usually safe and
effective in relieving both the emotional and physical symptoms of generalized anxiety disorder.
Its chemical representation is as follows:
Figure 1
BuSpar® (Buspirone Hydrochloride)
& N
aOR a JO
i's HCl
—(CH2)4—
~ Appearance: a white crystalline powder
fe) Molecular weight: 421.97
Water solubility: soluble in water
A few words on Generalized Anxiety Disorder
Generalized anxiety disorder is a mental illness that causes a person to suffer from
persistent, nagging feelings of worry or anxiety (apprehension or uneasiness triggered by a
threatening situation). These feelings are either unusually intense, or definitely out of proportion
to the real troubles and dangers of the sufferer's everyday life.
There is no clear dividing line between normal worry and a diagnosis of generalized anxiety
disorder. People with the disorder typically experience excessive, persistent worry every day, or
almost every day, for periods of six months or more. In some cases, a person with generalized
anxiety disorder finds it hard to remember a time when he or she was not "always worrying."
In addition to suffering from nagging worries and anxieties, people with generalized
anxiety disorder also have a variety of physical and psychological symptoms that are related to
their anxious feelings. In fact, anxiety-related physical symptoms are so prominent in people
with generalized anxiety disorder that most of these individuals initially seek treatment with a
primary care doctor, cardiologist, pulmonary specialist or gastroenterologist. Stress can also
intensify the anxiety or lead to a situation-specific phobia. Affected individuals may have low
self-esteem or may feel insecure, because they interpret people's intentions or the meaning of
events in negative, intimidating or critical ways.
Although the exact origin of generalized anxiety disorder remains a mystery, several
studies involving close relatives of persons with the illness show that there is some evidence for
a genetic (inherited) tendency toward it. Physiologically, doctors believe that generalized anxiety
disorder involves a disturbance in levels of certain neurotransmitters (chemicals that carry
signals between brain cells), particularly the neurotransmitters gamma aminobutyric acid and
serotonin.
Currently in the U.S., an estimated 3 percent to 8 percent of all Americans suffer from
generalized anxiety disorder, with women affected twice as often as men. Although the illness
can be found in people of all age groups, the average adult patient first seeks medical attention
(usually for physical symptoms) between the ages of 20 and 30. Generalized anxiety disorder has
also been diagnosed in young children, teenagers and elderly individuals, especially in those who
come to a primary care doctor complaining of an unusually large number of physical symptoms.
The illness is the most common anxiety disorder affecting persons age 65 and older.
Of all the psychiatric illnesses, generalized anxiety disorder is the least likely to occur
alone. From 50 percent to 90 percent of persons with the disorder also suffer from at least one
other mental illness, particularly panic disorder, a phobia, depression, dysthymia (a less severe
form of depression), alcoholism or some other form of substance abuse.
Symptoms
According to the definition established by the American Psychiatric Association,
generalized anxiety disorder causes persistent worry or anxiety that lasts for at least six months.
This worry or anxiety is excessive, troubling and hard to control, and it often interferes with a
person's ability to function at home, at work or in social situations.
In addition to causing worry and anxiety, generalized anxiety disorder also produces at least
three of the following groups of symptoms:
¢ Feeling restless, "keyed up" or "edgy"
¢ Becoming tired very easily
¢ Having difficulty concentrating or remembering (your mind "goes blank")
¢ Feeling irritable, "crabby" or "grouchy"
¢ Having tense muscles
¢ Having trouble falling asleep or staying asleep, or not feeling rested after sleep
People with generalized anxiety disorder may also suffer from a wide range of anxiety-
related physical symptoms that may mimic those of heart disease, respiratory illness, digestive
diseases and other medical illnesses.
Regulatory Background
An understanding of the statutory and regulatory framework governing the approval of
generic drugs is critical in understanding the facts and circumstances surrounding the
BMS/Mylan dispute, and the effects of their respective market share.
The Federal Food, Drug, and Cosmetic Act ("FFDCA"), as amended by the Drug Price
Competition and Patent Term Restoration Act of 1984, authorizes the FDA to regulate the
production, distribution, and sale of drugs in the United States. See 2/ U.S.C. § § 321-397. An
applicant seeking to market a new brand-name drug ("a pioneer maker") must prepare a rigorous
New Drug Application ("NDA") for FDA consideration. See 21 U.S.C. § 355. The NDA
contains reports of the drug's safety and effectiveness, a list of the articles used as components in
the drug, a statement of the composition of the drug, a description of the methods, facilities and
controls used in the manufacture, processing and packaging of the drug, samples of the drug or
components, if necessary, and samples of the proposed labeling. See 21 U.S.C. § 355(b)(1). In
addition, the NDA must contain information on any patents that claim the drug or a method of
using the drug and for which a claim of patent infringement could reasonably be asserted against
an unauthorized party. See 27 U.S.C. § § 355(b)(1), (c)(2) . Upon approval of the NDA, the
FDA publishes any claimed patents for the approved drug in "Approved Drug Products with
Therapeutic Equivalence Evaluations," also known as the "Orange Book." See 2/ U.S.C. §
355i 7)ANiii).
Generic drugs are versions of brand-name prescription drugs that typically contain the
same active ingredients but not necessarily the same inactive ingredients as the brand-name
original. See United States v. Generix Drug Corp., 460 U.S. 453, 454-55, 103 S.Ct. 1298, 75
L.Ed.2d 198 (1983); Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1062 (D.C.Cir.1998)
Before 1984, a company that wished to make a generic version of an FDA-approved brand-name
drug ("a generic maker") had to file another NDA. Preparation of the second NDA was as time-
consuming and costly as the original, because the applicant had to include new studies showing
the drug's safety and effectiveness. See Mova, 140 F.3d at 1063. In 1984, however, Congress
enacted the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-
Waxman Act, which simplified the procedure for obtaining approval of generic drugs. See
Pub.L. No. 98-417, 98 Stat. 1585 (1984), codified at 2/ U.S.C. § 355 and 25 U.S.C. § § 156 and
271 (e).
The Hatch-Waxman Act represented Congress's efforts to strike a compromise between
the competing interests of pioneer pharmaceutical companies and generic manufacturers. The
Hatch-Waxman Act “emerged from Congress’ efforts to balance two conflicting policy
objectives: to induce name-brand pharmaceutical firms to make the investments necessary to
research and develop new drug products, while simultaneously enabling competitors to bring
cheaper, generic copies of those drugs to market." Abbott Labs. v. Young, 920 F.2d 984, 991
(D.C.Cir.1990) (Edwards, J., dissenting on other grounds) (citations omitted), cert. denied, 502
U.S. 819, 112 S.Ct. 76, 116 L.Ed.2d 49 (1991).
Under the Hatch-Waxman Act, Congress continues to require the pioneer maker to file an
NDA, complete with safety and effectiveness data. Subsequent applicants who wish to
manufacture generic versions of the original drug, however, are required to file only an
Abbreviated New Drug Application ("ANDA"). See 21 U.S.C. § 355(j). Unlike the stringent
requirements for an NDA, an ANDA applicant need not show independent evidence of the safety
and efficacy of its generic drug, but instead can rely on the FDA's previous determination that
the drug is safe and effective. See 27 U.S.C. § 355(j); 21 CFR. § 314.94(a)(3); Mead
Johnson Pharm. Group v. Bowen, 838 F.2d 1332, 1333 (D.C.Cir.1988). The ANDA innovation
thus allows manufacturers to market generic copies of pioneer drugs without repeating the
expensive and lengthy clinical trials otherwise required by federal law. For this reason, among
others, generic drugs are generally much cheaper to the consumer than brand-name drugs. See
Ben Venue Labs., Inc. v. Novartis Pharm. Corp., 10 F.Supp.2d 446, 449 (D.N.J.1998),; see also
Generix Drug Corp., 460 U.S. at 455 n. 1, 103 S.Ct. 1298.
To receive approval of its ANDA, an applicant must show that its generic drug is
"bioequivalent" to the listed reference drug. See 2/ U.S.C. § 355(j)(4)(F). Bioequivalence
refers to the rate at which, and the extent to which, the body absorbs the active ingredient(s) in
the drug. See id. § 355(j)(8)(A); 21 CF.R. § 320.1(e). In this case, the reference drug is
BuSpar®, the brand of buspirone marketed by Bristol. The applicant must also show that the
generic drug has the same route of administration, strength, and dosage form as the reference
drug. See 21 U.S.C. § § 355(j)(2)A)(iii), GAMD)i)-(ii); see also 21 C.F.R. § 314.92(a)(1)
(1999) (indicating the categories of drug products for which an ANDA may be filed).
In addition, when a generic maker files an ANDA seeking approval of a generic version
of a drug that is listed in the Orange Book, the applicant must certify that any patent information
listed in the Orange Book does not bar FDA approval of a generic version of the drug. See 21
U.S.C. § 355(j)(2)A) (ii); 21 C.F.R. § 314.94(a)(12). The Hatch-Waxman Act provides
ANDA applicants with four certification options: (I) that no patent information on the drug
product that is the subject of the ANDA has been submitted to the FDA; (II) that the patent has
expired; (III) that the patent will expire on a stated date; or (IV) that the patent is invalid or will
not be infringed by the manufacture, use, or sale of the drug for which the ANDA applicant
seeks approval. See 21 U.S.C. § § 355(j)(2)(A)(vii)() to (IV). These are referred to as Paragraph
I, II, Ill and IV certifications, respectively. In the case of a patent that has not yet expired (such
as Bristol’s ‘763 patent and ‘365 patent) the ANDA applicant's only certification options are
Paragraph III or IV certifications.
The timing of FDA approval of the ANDA depends in part on the type of certification.
If the ANDA contains a Paragraph I or II certification, the FDA may approve the ANDA as soon
as it is satisfied that the product is safe and effective. See 21 U.S.C. § 355(j)(5)(B)(i). If the
ANDA contains a Paragraph II] certification, the FDA cannot make the approval effective until
the patent expires. See 21 U.S.C. § 355(j)(5)(B)(ii). If the ANDA contains a Paragraph-IV
certification, the date of approval is determined by a complicated statutory scheme under which
the ANDA applicant must provide notice to each owner of the patent that is the subject of the
certification and to the holder of the approved NDA to which the ANDA refers. See 2/ U.S.C. §
355(j)(2)(B)(i). This notice must include a detailed statement of the factual and legal basis for
the ANDA applicant's assertion that the patent is not valid or will not be infringed by its generic
product.
A Paragraph IV certification has significant legal effects. See Ben Venue Labs., 10
F.Supp.2d at 449. The patent law provides that submitting an application for an infringing
product is itself an act of infringement. See id. (citing 35 U.S.C. § 271(e)(2)(A)). Thus, a
Paragraph IV certification automatically creates a cause of action for patent infringement. See id.
Upon receiving notice of a Paragraph IV certification, the patent holder has 45 days in which to
file suit against the generic manufacturer. See 2/ U.S.C. § 355(j)(5)(B)(iii). If the patent- holder
brings such an action, the FDA is prohibited from approving the generic maker's ANDA for a
period of 30 months. See id. This 30-month stay allows the parties to litigate the patent
infringement action in court. If the court hearing the infringement action decides the patent
would be infringed by the product proposed in the ANDA, the FDA will not approve the ANDA
until the patent expires. If, however, the court hearing the infringement action rules before the
expiration of the 30-month period that the patent is invalid or not infringed, the FDA must
approve the ANDA effective on the date of the court's decision. See id.
Factual Background
Since the mid 80’s, BMS has held a patent for BuSpar® (Patent # 4,182,763) directed to
the treatment of anxiety through the administration of buspirone hyddrochlorite. Bristol’s ‘763
patent was due to expire on November 21, 2000. In anticipation of its expiration, Mylan, a
generic manufacturer, had filed and received tentative approval of an ANDA for its buspirone
product under a Paragraph III certification, certifying that Bristol’s patent ‘763 was set to expire
on November 21, 2000.
On November 21, 2000, 11 hours prior to the expiration of patent ‘763, BMS announced
a scientific discovery that shed new light on the optimal use of an anxiety medication to treat
patients suffering from generalized anxiety disorder (GAD). As a result of this medical advance,
which could provide patients with significant relief of their symptoms and enhance patient
compliance, the company was issued a patent from the U.S. Patent and Trademark Office (PTO).
The new patent (Pat. # 6,150,365) was issued on that same day, November 21, 2000 covered a
method of use of a metabolite* produced by the administration of the medication BuSpar®
(buspirone HCl, USP) tablets.
This discovery pertained specifically to the systemic use of a metabolite, known as 6-
hydroxy-buspirone, which is produced by the body after administration of non-addictive
anxiolytic agents known as azapirones, of which BuSpar® is the most widely prescribed.
Company scientists found that the metabolite, previously not known to be active is, in fact,
largely responsible for the onset of therapeutic relief and may offer improvements in patient
response rates, thereby allowing a greater number of patients to achieve optimal relief from their
anxiety.
Upon receiving the '365 patent from Bristol, the FDA suspended approval of Mylan's
ANDA. Mylan challenged the FDA’s listing of the '365 patent on the grounds that it only
covered a metabolite of buspirone and therefore should not be listed in the Orange Book because
it did not claim the drug, Buspar. Mylan also filed a Section viii Statement that the '365 patent
did not claim a use for which it was seeking approval.
On November 30, 2000, the FDA asked Bristol to clarify whether the ‘365 patent claimed
only a metabolite of buspirone. Bristol responded that the '365 patent did not simply claim a
method of using the metabolite, but also a method of using buspirone itself. Taking Bristol’s
clarification at face value, the FDA found Bristol’s response adequate and listed the ‘365 patent
in the Orange Book. On the same day, instead of filing a paragraph IV certification which
essentially requires Mylan to certify that its ANDA will not be infringing upon Bristol’s ‘365
patent, Mylan sued Bristol and the FDA in the US District Court, for the District of Columbia.
Mylan sought a declaratory judgment that Bristol improperly listed the ‘365 patent, and a
preliminary injuction requiring Bristol to de-list the ‘365 patent and directing the FDA to
approve Mylan’s ANDA.
Mylan’s reasoning for suing Bristol and not filing a Paragraph IV certification was to
avoid being sued by Bristol for patent infringement. Under 35 U.S.C. § 271(e)(2), an applicant,
such as Mylan, infringes a patent if it submits an ANDA "for a drug claimed in a patent or the
use of which is claimed in a patent . . . before the expiration of such patent.". Therefore, Mylan
argued that had it filed an ANDA with a Paragraph IV certification, it would have been charged
with infringing the '365 patent. Mylan further argued that it should not have been required to
file a Paragraph IV certification in the first instance because the '365 patent did not claim BuSpar
or an approved method of using BuSpar, and accordingly, Bristol improperly submitted the '365
patent for listing in the Orange Book.
On March 13, 2001, United States District Court Judge Ricardo M. Urbina found in favor
of Mylan and ordered BMS to request the FDA to de-list its patent extension. Judge Urbina also
ordered the FDA to approve Mylan’s application to market a generic version of BuSpar®. On
March 28, 2001, the FDA gave Mylan approval to sell its generic version of 15mg. On June 29,
2001, the FDA also approved Mylan’s generic version of 35 mg.
Bristol appealed the District Court’s order. On October 12, the US Court of Appeals
reversed the District Court’s decision, holding that Mylan’s claim — that is, that the ‘365 patent
was imporperly listed — does not constitute a recognized defense under the patent infringement
laws or the Hatch-Waxman Amendements to the FFDCA.
It is crucial to note that the filing of Paragraph IV certification would have stayed the
listing of Bristol’s ‘365 patent for 30 months until it was determined whether Mylan did or did
not infringe upon Bristol’s patent. If the court determined that Mylar did infringe prior to the 30-
month stay, then Mylan’s ANDA would have be rejected effective on the court’s ruling. Mylan,
however, did not follow the procedure of filing a Paragraph IV certification, as promulgated in
the Hatch-Waxman Amendments, and therefore Bristol is denied its 30-month stay under the
law.
At present, Mylan’s approval to sell its generic version has not been stayed nor has it
been forced out of the market by Bristol. Bristol’s patent remains de-listed. Meanwhile,
Bristol’s infringement law suit in the Southern Disctirct of New York is on-going. If Bristol
successfully proves the validity and applicability of its new patent, then its damages would be the
lost profit on every pill Mylan has ever sold. Bristol also has an extremely good chance to
collect treble damages if it is deemed that Mylan's infringement was willful. There is a high
likelihood that it was since Mylan tried cleverly to circumvent the law.
This essay calculates the economic damages suffered by Bristol as a result of Mylan’s
approval by the FDA to sell its generic version of BuSpar since March 28, 2001. The economic
damages calculated here are based on the assumption that the resolution of Bristol’s patent
infringement case against Mylan will last at least 2.5 years, the estimated length of time it takes
to litigate a patent case, absent legal complications requiring further extension. Assuming
December 1, 2000, Bristol filed its law suit against Mylan, as indicated in Judge Mayer’s
decision, then the cutting point for the sake of calculating total damages will be July 15, 2003.
Moreover, the actual damages began accruing on March 28, 2001, the day the FDA gave Mylan
final approval to start selling the drug.
Patent Infringement Damages
When estimating patent damages, the fundamental task is to construct a “but-for” model
that simulates, as closely as possible, the marketplace absent infringement. ' Calculation of
damages is premised upon four principles. These are: 1) A patent's economic and commercial
value derives largely from the market power it confers to the patent owner; therefore, in
estimating damages from patent infringement, the market power conferred by the patent must be
taken into account; 2) When the price of a good increases, consumption of the good declines, and
vice versa (law of demand); 3) Only costs caused by extra sales should be charged against extra
sales revenues; therefore, incremental costing is the proper approach. Both the technology and
the size of the output increment determine which costs are relevant; 4) Royalties are determined
in hypothetical negotiations in which both the market power flowing from the patent and the
relative bargaining power of the negotiators influence the outcome.
BuSpar’s History
* Original patent issued Feb 20, 1973 was to expire on Feb. 20, 1990
* Second patent issued Jan 8, 1980 was set to expire Jan. 8, 1997
* Patent was extended under provisions of the GATT treaty to May 22, 1998
* Patent was extended again uinder provisions of the Hatch-Waxman Act to May 22, 2000
* The BSM market exclusivity was then extended under provisions of the Pediatric
Studies law to Nov. 22, 2000
* The new Metabolite patent obtained on Nov. 21, 2000, asbsent de-listing, will expire on June
6, 2020
Financial impact of the BuSpar® ordeal on BMS and Mylan
The FDA’s March 28, 2001 approval to Mylan to sell its generic version of BuSpar® has
certainly had an impact on the sales, profit and stock prices of both BMS and Mylan from the
March 28 date up until the present time.
In fact, it is important to remember that BuSpar® had been BMS’ most profitable drug in
recent years since it offered the company the highest profit margin of all its drug portfolio,
yielding almost an 85-90% profit per dollar of sales. BuSpar® indeed generated almost $200
million dollars in revenue for BMS per quarter, and $750 million annually as of 2000.
BMS’s financial results for the 2" and 3" quarters of 2001 in regards to BuSpar® stand
in stark contrast to the above mentioned financial figures of the recent past. In fact, during the 2"¢
quarter of this year, sales of BuSpar® declined to $89 million from $194 million during the 3
quarter of 2000 mostly due to generic competition by Mylan. During the ae quarter of this year,
sales of BuSpar® declined 84% to $28 million from $175 million in the same period of 2000,
once again due to generic competition, mostly generated by Mylan.
In contrast to the above results for BMS, Mylan’s 2" and 3" quarter results for 2001
seems to present a trend opposite to that of BMS. In fact, Mylan’s generic net revenues for the
on quarter of 2001 were $209.8 million compared to $132.5 million for the prior year quarter, a
$77.3 million increase or 58.3 % increase. New products launched subsequent to June 30, 2000
resulted in increased net revenues for the quarter of $37.6 million, primarily Buspirone, which
contributed $33.7 million. Also, Mylan generic net revenues for the quarter ended September 30,
2001 (3 quarter) were $252.8 million compared to $168.9 million for the prior year quarter, an
$83.9 million or 49.7% increase, mostly due to the sales of Buspirone, whose net revenues for
the 3“ quarter 2001 were $36.8 million.
A close look at the common stock prices of BMS and Mylan over the past year (Jan 2001
to present) also shows the impact that the March 28, 2001 FDA decision has had on the stocks of
the two companies considered. In fact, BMS started the year (Jan. 2, 2001) at a per-share value
of $71.50 and has a current per-share price of $50.00. In contrast, Mylan’s share price on January
2, 2001 was $24.69 while its current share price is $36.06. The below graph clearly depicts the
stock price trend over during 2001 for both BMS and Mylan (where BMY and MYL are the
trading symbols for BMS and Mylan, respectively).
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Patent Infringement Damage Calculation 4-Point Test
The 1978 Panduit Corp. vs Stahlin Bros. Fibre Works, Inc. case turned patent
infringement damage calculation into all or naught. In fact, according to the Panduit 575 F.2d
1152, 1164, 197 USPQ 726, 736 (6th Circuit, 1978) four-point test, BMS must show the
following in order to qualify for entitlement damages based on lost profit:
As opposed to the traditional royalty damages calculations, Panduit introduced two
significant breaks from past reasoning: (1) it ruled that the Hypothesis of voluntary negotiations
between willing parties was intolerable; and (2) it furthered the Court’s reliance on market-based
analyses by providing a market-based test with which a patent holder could prove entitlement to
lost-profit. The Panduit approach to royalties, therefore, suggests that an analyst should consider
patentee and licensee relative bargaining power and profit expectations at the time of the
infringement. In addition, the patentee must be made whole regardless of whether or not the
infringer earned ex post profits. In other words, the royalties may exceed the maximum amount
the infringer may have been willing to pay at the time of the hypothetical negotiation.
In regards to the four-point test mentioned above, the patent owner must demonstrate: (1)
demand for the patented product (2) an absence of acceptable non-infringing substitutes (3) the
marketing and manufacturing capability to exploit demand (4) the amount of profit it would have
been made in absence of the infringement. With this test, damage calculation is an all or nothing
issue. If all four points are proven, lost-profit damages may be awarded; If any one of the four
points is not proven, damages are limited to a reasonable royalty-the statutory floor.
Figure 2
How the 1978 Panduit Corp. vs Stahlin Bros. Fibre Works, Inc. case turn patent infringement damage
calculation into an all or naught decision situation
7 The Panduit 575 F.2d 1152, 1164,
; Yes 197 USPQ.726, 736
< hae (6th Circuit, 1978)
four-point test
N
Substitutes? °
en M Yes
Entitlement
Capacity? to
Yes damages
. rosy I ag
on
No lost
No profit
Reasonable, statutory floor royalty
BMS is entitled to patent infringement damages under Panduit because its satisfies the
four-point test. In detail:
(a) BuSpar® Demand
BuSpar® has generated exceptional demand ever since its launch on the market. In fact,
as mentioned earlier, BuSpar® indeed generated almost $200 million dollars in revenue for BMS
per quarter, and $750 million annually as of 2000. Also, BuSpar® has been BMS’ most
profitable drug in recent years since it offered the company the highest profit margin of all its
drug portfolio, yielding almost an 85-90% profit per dollar of sales.
(b) Substitutes
There are no true substitutes for BuSpar®, which is considered the best prescribed anti-
anxiety medication. In fact, other “possible” substitutes, represented by the Benzodiazepines
family of anti-anxiety drugs (such as Xanax, Klonopin, and Ativan) carry a significant risk for
drug dependence and are prescribed by doctors only for the first two or three weeks of treatment.
In contrast, BuSpar® is a nonhabit-forming medication, and is usually safe and effective in
relieving both the emotional and physical symptoms of generalized anxiety disorder.
(c) Marketing and Manufacturing (M&M) Capacity
BMS, through its divisions and subsidiaries, is a large producer and distributor of
consumer medicines, pharmaceuticals, nutritionals, medical devices & beauty care products. As
a large multi-million dollar corporation, with current market capitalization of $96.7 billion,
BMS certainly has all the necessary M&M to support BuSpar®.
(d) Profit Loss
As mentioned earlier, BMS has sustained significant revenue losses due to Mylan’s
launch of Buspirone, as BMS’s financial results for the 24 and 34 quarters of 2001 in regards to
BuSpar® illustrate. In fact, during the aM quarter of this year, sales of BuSpar® declined to $89
million from $194 million during the 3“ quarter of 2000 mostly due to generic competition by
Mylan. During the 3" quarter of this year, sales of BuSpar® declined 84% to $28 million from
$175 million in the same period of 2000, once again due to generic competition, mostly
generated by Mylan.
These revenue losses are certainly reflected in BMS’ current and future profits, due to
importance of BuSpar® to BMS. In fact, from the below table, one can see the below table that
BMS’s 2002 estimated earnings growth rate will be practically one-half of that of 2001, with the
decline in profits of BuSpar® playing a major role in such earnings estimate.
“Eamings Growth Rates shastSyrs.| FY.2001, FY 2002
[BMS 10.30% 14.60% 7.50%
[Industry I 21.90%| 15.50%| 26.60%|
S&P 500 8.40% -20.40% 14.20%
(e) Reasonable statutory-floor royalty
The general royalty rate in the pharmaceutical industry is 50%
Conclusion
Based on the above points (a) through (d), BMS satisfies all the necessary criteria to be
entitled to damages based on lost profit. Bristol has the right to sue Mylan for patent
infringement damages for the whole thirty month period of the ‘365 patent expansion, which
covers from March 14 2001 when Mylan’s generic Buspirone was launched in the market until
May 21 2001 (‘365 patent expiration date)
Punitive damages may also apply for Mylan’s misuse of its legal rights to sue, however
this paper does not address this issue in the damages calculation.
Decision Choices
Due to the recent court ruling in favor of Bristol-Myers Squibb, the company is faced
with several possible choices regarding how they should proceed. The following four choices
are discussed below:
0 = Stop generic and regain full market power, losing goodwill
Stopping the production of the generic drug is one of the more simple scenarios and, most
likely, one of the most profitable options. However, the loss of goodwill could be severely
detrimental. In a press release dated December 12, 2001, it was stated that Attorney General
Hardy Myers had joined 29 other states and Puerto Rico in suing Bristol-Myers Squibb Company
for allegedly making false statements to a federal agency concerning its patent of BuSpar® in
order to prevent manufacturers of generic drugs from marketing it. The multi-state lawsuit was
filed in the U.S. District Court for the Southern District of New York. Therefore, simply
preventing the generic from being produced might be a difficult option to execute under the
current circumstances.
1 = Stop generic and sue for damages, including goodwill.
This option, if successful, could be more favorable to Bristol-Myers Squibb. If the
company could convince a court that they were correct in suing the maker of the generic drug, it
would be highly unlikely that the aforementioned lawsuit would come to fruition. The company
would remain the market leader without any damage to its reputation.
2 = Let generic sell and sue for infringement damages
Although this scenario is damaging to Bristol-Myers Squibb’s future revenue, there will
be minimal loss of goodwill. This choice mainly depends on Bristol’s belief that they can prove
that the infringement did occur. It also depends on the products that are currently in the pipeline
and whether or not they can afford the significant loss of revenue that will be incurred by
allowing the generic to sell.
3 = Let generic sell and write off BuSpar®
Again, this option will damage future revenue, but will in no way create a loss of
goodwill. If the company is most concerned with the overall image they are trying to protect and
maintaining its customer base, this may be the most viable option. As stated above, this will
depend on the impact the severe loss of revenue will have on the overall outlook for the company
and the success rates of the products in the pipeline.
Figure 3
Decision choices
0 = Stop generic and regain full market power, loosing goodwill
1 = Stop generic and sue for damages, including goodwill
2= Let generic sell and sue for infringement damages
3 = Let generic sell and write off BuSpar®
2:
———
2:nomal sales
3:sales revenue 2
ooo 600 1200 1800 2400 3000
‘Time (moths)
EXPECTED ECONOMIC DAMAGES EXPLAINED
System Dynamics for Damages
Utilizing System Dynamics specifically for determining economic damages offers an
easy way to calculate all the damages necessary. Rather than having to separately calculate
every potential damage and then combine them for a total, System Dynamics allows you to
create a model that addresses every potential situation and then calculates the damages
automatically. With system dynamics you create a model that includes all variables and then
graphs the desired results.
Patent Life Remainin,
As mentioned in the statement of facts, on November 21, 2000 BMS sued and received a
30-month patent extension for BuSpar® as set forth in the Hatch-Waxman Act. This would have
allowed BMS patent exclusivity for selling BuSpar until May 21, 2003. Unfortunately, Judge
Urbina decided on March 14, 2001 that BMS de-list its patent for BuSpar[] , which would allow
the FDA to review generic versions of buspirone. On March 28, 2001 Mylan was approved to
sell its generic version of buspirone. BMS then appealed the ruling and Chief Judge Mayer
reverses the order of District Judge Urbina, stating that the judge went beyond the scope of his
power.
BMS in essence should never have lost the right to sell BuSpar® with patent exclusivity
until May 21, 2003. Due to the over zealousness of District judge Urbina, BMS lost patent
exclusivity only four months into the 30-month extension. With the October 12 reversal BMS
has approximately 19 months left to the original 30-month extension. BMS loses those seven
months of patent, even though they were unable to sell their product exclusively because
generics entered the marketplace. BMS is now faced with a difficult choice in moving forward.
Table 1. Timeline of events and corresponding effects on Sales Revenue.
_____ Revenue 44 Mar. 2001
(in millions of US Dollars) District Judge Urbina:
1. Grants Mylan's request for a preliminary
360 4 injunction,
2. Orders BMS to have FDA delist BuSpar®
patent extension from Orange Book, and
300 + 3. Orders FDA to approve Mylan’s abbreviated
new drug application (ANDA) to market
generic BuSpar® version
240 4
180 4
120 =| 21 Nov. 2000
BuSpar®
patent ends; 12 Oct. 2001
60 4 BMS files for Chief Judi
30-month Mayer
extension reverses
oO TTTTTTT TIT TTT TTT TT TTT tt TIT TT rrr err
9 13 17 21 25 29 3 37 4
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 "Peoogf. 2003
Time (Quarters)
Lawsuit
Trial Date
The chart below shows the difference in revenues BMS was generating for BuSpar
leading up to the first quarter 2001 and subsequent quarters.
Chart 1
240 -
200 *
ib
g 120 Se Buspar
| 80
40 >
0 oo So oo. = a a
ag 8s 28 8 28 8 85
Go Co Go oC ao o
ao
Time Period
As you can clearly see from the chart above BMS suffered dire losses due to the entrance
of generic buspirone. In fact, from the period between March 2001 and October 2001, BMS lost
an estimated total of $289MM. This revenue loss is gone and can never be regained.
Let us look at a projected trend over the next thirty months, if Mylan was never allowed
to introduce its generic buspirone.
Chart 2 BuSpar[] sales without generic competition.
300 5
200 e~ pe Se
oe RSE \
150 BuSpar
50 l aN
/ Y
%
LOS ISIS ESE
Chart 2 provides an overview of potential sales revenues for BuSpar{] following a past
trend of an average 10-12% growth annually. Had Mylan not been allowed to produce generic
buspirone until May 21, 2003, BMS would have been able to generate an additional $1.75bn in
gross sales revenue.
Moreover, there is no certainty as to when BMS would have lost the actual patent. The
30-month cooling off period occurred because BMS sued Mylan for patent infringement, this 30
months of patent extension is simply for BMS to put together its case. At the end of the thirty
months if BMS proves that a further extension of patent is warranted they could be awarded up
to an additional 14 years. This is why this has been a very difficult position for BMS.
Infringement Damages
The damages assessed become very difficult to accurately measure. It is very easy to see
how much revenue has been lost since Mylan launched its generic (Chart 3). But the tricky part
comes into play when you need to figure out how to assess for the patent infringement and future
value of sales revenues (Chart 4&5).
Chart 3. BuSpar[] Revenue comparison with and without Generic competition.
300
250
ob A
—¢— BuSpar
=— BuSpar after generics
150
100 al \
50 \f A
y el
0
PP SSH OME HS
= fF FS ¢ & oS &
&
This chart demonstrates the severity of the intrusion of generic buspirone on the market.
As the chart clearly shows BuSpar[] sales have dropped off by 85% in just under six months.
The net dollar amount of sales revenue lost is $307MM in first six months, but overall the net
revenue loss would be greater than $1.45bn over the course of the next 24 months. This will
cause a significant impact on the bottom line of the entire company.
When you look at charts 4 and 5 you will notice the many categories associated with
patent infringement damages. This is where System Dynamics truly proves its value. To
calculate the damages we must look at Past Profit loss, Future profit loss, Profit loss if generic
stops, Incremental cost, Profit loss, and then we must calculate the future values and present
values of all those mentioned variables. It seems challenging, but with system dynamics it
becomes manageable.
(See next page for chart 4 and the next page for chart 5).
Chart 4. Infringement Damages with regards to Generic Buspirone
tutor quarterty but-for
revenue cash in
4
But-for +
accounting A:
sector
—, But-For if .
GJ 5 heme 4
Payable
? quasterly but-for
tC) profit sargin payments
Chart 5. Dollar value Bar chart of Infringement Damages
Infringement Damages in millions of US Dollars
$500 448,59455.34
$400
317.24324.42
278.31
5300 271-56
222.57229.04
$200 177.03177.03
94.67 95.38
$100
° ° o |
$0 Rs ’
& & ‘
e a Category °
Infringement Damages in millions of US Dollars
‘Adjusted ProftLoss
45000 5
ProftLoss
400.00
350.00
‘Adjusted ProftLoss Generic Stops
ProftLoss Wf Ganerie Stops
300.00
FVPastProftLoss)
2 Past Proft Loss
250.00
FVPast Profit Loss If Gonere Stops)
PastProfLossIfGener Stops
200.00
PVFutue Proft Loss)
+ Future ProftLose
150.00
100.00 FUineremental ost)
o> Incremental Cost
50.00
0.00 =F os PV Future Proft Loss If Genere Stops)
“4 a2 4k BSS BY Futro Protoss Gono Stops |
Damage Category
Total Damages
Total Damages are determined by assessing the real damages, the actual loss of sales
revenue due to generic competition, and another variable determined by the company’s course of
action. BMS has basically four choices to make and they are outlined in the following.
L Stop generic and regain full market power, loosing goodwill.
As explained earlier, BMS would request removal of the generic products from the shelf
and they would then replace the shelves with the branded BuSpar[] product. This poses a slight
problem: What damages does the company sue for?
First, the firm has to account for the incremental cost it will incur to get operations up to
full speed to regain market power. This is best illustrated in Graph # 9 from the model. The
graph shows the calculations over a period of quarters that it would take to get back to full
market power. Total incremental cost to regain full market power is $95MM. Incremental cost is
only one portion of the equation; we must also look at lost revenues throughout the entire period.
This is best explained by Graph # 10 in the Systems Dynamic model. You will notice the
chart demonstrates the sales revenue generated prior to generics, then shows the rapid decline of
revenue after generics. What is most important is the return curve upward; this illustrates the
period of time it will take to get BuSpar[] back to full manufacturing capacity. This chart forms
a teacup illustration; this teacup represents all damages the firm would be eligible to receive.
This graph approximates the damages at $1.5bn, for revenues lost during the period generics
were on the market.
IL. Stop generic and sue for damages, including goodwill.
This option presents the greatest challenge to BMS. Stopping generics and suing for
damages, including goodwill but not replacing BuSpar[] to market, could severely tarnish the
credibility of the firm. As it stands there are no safe alternatives to BuSpar{] on the market and
if the firm pulls generic without replacing BuSpar{] the consumer will have to do without the
benefits the product provides.
BMS would then sue to acquire real sales loss and future sales loss. Best illustrated by
Graphs 1,5&6. BMS would have to calculate actual revenue lost, future revenue lost, past and
future profit lost.
Ii. —_ Let generic sell and sue for infringement damages.
This represents one of BMS greatest alternatives. This option allows them to keep the
goodwill of its customers in tact, by allowing generics to remain on the market, but also provides
them an avenue to regain its corporate stature, by suing Mylan for infringement damages.
The course of action BMS would take here is best illustrated by Graph # 5 & 6. Graph 5
calculates past profit loss, the future value of past profit loss and the change in future value of
past profit loss. In other words, even though the firm has lost sales in the past and presently, that
loss affects future earnings for BMS. You not only account for those real revenue losses, but
what each dollar would have been worth in the future.
Secondly, the company must account for future profit loss, as described by Graph # 6.
Here the graph accounts for Future Profit loss, the present value of that future profit loss and the
change in present value of the future profit loss. Again, you not only need to account for the real
losses but also the impact of those losses both in the present and the future. For every dollar
BMS losses today it has a greater loss tomorrow and conversely, for every dollar they lose next
year it has a significant impact on the firm today. According to the calculations the PV of future
profit loss will equal $177MM.
The last part of this calculation would be the addition of a licensing agreement. In
essence when Mylan sued for the right to sell generics they infringed upon the patent that BMS
held for BuSpar[]. When the Federal appeals court overturned it, Mylan had involuntarily
entered into a licensing agreement with BMS. The licensing agreement would most likely be a
profit sharing agreement. BMS would take 50% of the profits generated by Mylan for the 26
months it sold generic buspirone in the period of patent infringement. This would then be added
to the adjusted profit loss of $455.34MM.
IV. Let generic sell and write off BuSpar[]
This option is self-explanatory, BMS would just write off the product looking forward for new
opportunities for investment. In an effort to repair any damage suffered to the reputation and
goodwill of the firm, BMS would choose to not sue either. They in essence recoup zero dollars
in damages.
Conclusion
Taking all things into consideration it appears BMS has only one course of action, to let
generics remain on the market and sue them for patent infringement. Any other option would
place BMS’ reputation at risk. From the data it is easy to see that the possibility of gaining full
market power in the remaining time left on patent would be more costly than profitable, both
monetarily and professionally. By leaving generics on the market BMS can retain its reputation
and avoid certain public pitfalls, but at the same time allow them to recoup losses suffered by
suing Mylan.
' Rapp, Richard T., Patent Damages: Updated Rules on the road to Economic Rationality, Patent
Litigation 1999.
Appendix: The Math
Adjusted losses
profit_loss_without_stay = Past_Profit_Loss + Future_Profit_Loss
profit_loss_with_stay = Past_Profit_Loss_with_Stay + Future_Profit_Loss_with_Stay + Incremental_Cost
Loss With Stay Sector
Future Profit Loss with Stay(t) =Future_Profit_Loss_with_Stay(t - dt) + (future_profit_loss_w_stay_\_q) * dt
INIT Future_Profit_Loss_with_Stay = future_profit_loss_w_stay_\_q
INFLOWS:
future_profit_loss_w_stay_\_q = IF (TIME > trial_date)
THEN (net_profit_margin * revenue_loss_w_stay_\_q)
ELSE (0)
FV_Past_Profit_Loss_with_Stay(t) = FV_Past_Profit_Loss_with_Stay(t - dt) + (fv_past_profit_loss_w_stay_\_q) *
dt
INIT FV_Past_Profit_Loss_with_Stay = fv_past_profit_loss_w_stay_\_q
INFLOWS:
fv_past_profit_loss_w_stay_\_q=MAX<(0, past_profit_loss_w_stay_\_q * (1 +real_quarterly_prime) * (trial_date -
TIME))
FV__Incremental_Cost(t) = FV__Incremental_Cost(t - dt) + (change_in_FV_of _incremental_cost) * dt
INIT FV__Incremental_Cost = change_in_FV_of_incremental_cost
INFLOWS:
change_in_FV_of_incremental_cost = MAX(0, quarterly_incremental_cost * (1 + real_quarterly_prime)
(trial_date - TIME))
Incremental_Cost(t) = Incremental_Cost(t - dt) + (quarterly_incremental_cost) * dt
INIT Incremental_Cost = quarterly_incremental_cost
INFLOWS:
quarterly_incremental_cost = IF (TIME >= 44) AND (TIME <= 47)
THEN (incremental_cost_margin * revenue_w_stay_\_q)
ELSE (0)
Past_Profit_Loss_with_ Stay(t) = Past_Profit_Loss_with Stay(t - dt) + (past_profit_loss_w_stay_\_q) * dt
INIT Past_Profit_Loss_with_Stay = past_profit_loss_w_stay_\_q
INFLOWS:
past_profit_loss_w_stay_\_q = IF (TIME <= trial_date)
THEN (net_profit_margin * revenue_loss_w_stay_\_q)
ELSE (0)
PV_Future_Profit_Loss_with_Stay(t) =PV_Future_Profit_Loss_with_Stay(t - dt) +
(change_in_PV_of_future_profit_loss__with_stay) * dt
INIT PV_Future_Profit_Loss_with_Stay = change_in_PV_of_future_profit_loss__with_stay
INFLOWS:
change_in_PV_of_future_profit_l with_stay = MAX(0, future_profit_loss_w_stay_\_q * (1/(1+
real_quarterly_discount) * (TIME - trial_date)))
Revenue_Loss_with_Stay(t) = Revenue_Loss_with_Stay(t - dt) + (revenue_loss_w_stay_\_q) * dt
INIT Revenue_Loss_with_Stay = revenue_loss_w_stay_\_q
INFLOWS:
revenue_loss_w_stay_\_q = max(0, revenue_forecast_absent_infingement - revenue_w_stay_\_q)
incremental_cost_margin = NORMAL(0.3848, 0.0127, 321)
revenue_for | absent_infingement = GRAPH(TIME)
(1.00, 52.5), (2.00, 48.9), (3.00, 55.8), (4.00, 62.8), (5.00, 50.8), (6.00, 47.3), (7.00, 54.0), (8.00, 60.8), (9.00, 57.2),
(10.0, 53.3), (11.0, 60.9), (12.0, 68.5), (13.0, 67.5), (14.0, 62.9), (15.0, 71.8), (16.0, 80.8), (17.0, 74.4), (18.0, 69.3),
(19.0, 79.1), (20.0, 89.1), (21.0, 88.2), (22.0, 82.2), (23.0, 93.8), (24.0, 106), (25.0, 106), (26.0, 98.4), (27.0, 112),
(28.0, 127), (29.0, 145), (30.0, 84.0), (31.0, 138), (32.0, 164), (33.0, 132), (34.0, 132), (35.0, 155), (36.0, 186),
(37.0, 163), (38.0, 194), (39.0, 175), (40.0, 177), (41.0, 203), (42.0, 224), (43.0, 204), (44.0, 200), (45.0, 220), (46.0,
250), (47.0, 234), (48.0, 236), (49.0, 241), (50.0, 283)
revenue_w_stay_\_q= GRAPH(TIME)
(1.00, 52.5), (2.00, 48.9), (3.00, 55.8), (4.00, 62.8), (5.00, 50.8), (6.00, 47.3), (7.00, 54.0), (8.00, 60.8), (9.00, 57.2),
(10.0, 53.3), (11.0, 60.9), (12.0, 68.5), (13.0, 67.5), (14.0, 62.9), (15.0, 71.8), (16.0, 80.8), (17.0, 74.4), (18.0, 69.3),
(19.0, 79.1), (20.0, 89.1), (21.0, 88.2), (22.0, 82.2), (23.0, 93.8), (24.0, 106), (25.0, 106), (26.0, 98.4), (27.0, 112),
(28.0, 127), (29.0, 145), (30.0, 84.0), (31.0, 138), (32.0, 164), (33.0, 132), (34.0, 132), (35.0, 155), (36.0, 186),
(37.0, 163), (38.0, 194), (39.0, 175), (40.0, 177), (41.0, 203), (42.0, 89.0), (43.0, 28.0), (44.0, 20.0), (45.0, 28.0),
(46.0, 89.0), (47.0, 234), (48.0, 236), (49.0, 241), (50.0, 283)
Loss without stay sector
Future_Profit_Loss(t) = Future_Profit_Loss(t - dt) + (quarterly_future_profit_loss) * dt
INIT Future_Profit_Loss = quarterly_future_profit_loss
INFLOWS:
quarterly future_profit_loss = IF (TIME > trial_date)
THEN (net_profit_margin * quarterly_revenue_loss)
ELSE (0)
FV_of__Past_Profit_Loss(t) = FV_of_ Past_Profit_Loss(t - dt) + (change_in_FV_of_past_profit_loss) * dt
INIT FV_of__Past_Profit_Loss = change_in_FV_of_past_profit_loss
INFLOWS:
change_in_FV_of_past_profit_loss = MAX(0, quarterly_past_profit_loss * (1 + real_quarterly_prime) “ (trial_date -
TIME))
Past_Profit_Loss(t) = Past_Profit_Loss(t - dt) + (quarterly_past_profit_loss) * dt
INIT Past_Profit_Loss = quarterly_past_profit_loss
INFLOWS:
quarterly_past_profit_l IF (TIME <= trial_date)
THEN (net_profit_margin * quarterly_revenue_loss)
ELSE (0)
PV_of Future_Profit_Loss(t) = PV_of Future_Profit_Loss(t - dt) + (change_in_PV_of_future_profit_loss) * dt
INIT PV_of_Future_Profit_Loss = change_in_PV_of_future_profit_loss
INFLOWS:
change_in_PV_of_future_profit_l
(TIME - trial_date)))
Revenue_Loss(t) = Revenue_Loss(t - dt) + (quarterly_revenue_loss) * dt
INIT Revenue_Loss = quarterly_revenue_loss
INFLOWS:
quarterly_revenue_loss = max(0, revenue_forecast_absent_infingement - actual_quarterly_revenue)
net_profit_margin = NORMAL(0.2632, 0.0159, 123)
MAX<(0, quarterly _future_profit_loss * (1 / (1 + real_quarterly_discount) “
actual_quarterly_revenue = GRAPH(TIME)
(1.00, 52.5), (2.00, 48.9), (3.00, 55.8), (4.00, 62.8), (5.00, 50.8), (6.00, 47.3), (7.00, 54.0), (8.00, 60.8), (9.00, 57.2),
(10.0, 53.3), (11.0, 60.9), (12.0, 68.5), (13.0, 67.5), (14.0, 62.9), (15.0, 71.8), (16.0, 80.8), (17.0, 74.4), (18.0, 69.3),
(19.0, 79.1), (20.0, 89.1), (21.0, 88.2), (22.0, 82.2), (23.0, 93.8), (24.0, 106), (25.0, 106), (26.0, 98.4), (27.0, 112),
(28.0, 127), (29.0, 145), (30.0, 84.0), (31.0, 138), (32.0, 164), (33.0, 132), (34.0, 132), (35.0, 155), (36.0, 186),
(37.0, 163), (38.0, 194), (39.0, 175), (40.0, 177), (41.0, 203), (42.0, 89.0), (43.0, 28.0), (44.0, 20.0)
Rates sector
quarterly_discount = annual_discount / quarters_per_year
quarterly_inflation = annual_inflation / quarters_per_year
quarterly_prime = annual_prime / quarters_per_year
quarters_per_year =
real_quarterly_discount = MAX(0, (quarterly_discount - quarterly_inflation) / (1 + quarterly_inflation))
real_quarterly_prime = MAX(0, (quarterly_prime - quarterly_inflation) / (1 + quarterly_inflation))
annual_discount = GRAPH(TIME)
(40.0, 0.06), (41.0, 0.0511), (42.0, 0.0383), (43.0, 0.0306), (44.0, 0.0247), (45.0, 0.0235), (46.0, 0.0229), (47.0,
0.0227), (48.0, 0.022), (49.0, 0.0223), (50.0, 0.0223)
annual_inflation = GRAPH(TIME)
22
(40.0, 0.0315), (41.0, 0.0266), (42.0, 0.0266), (43.0, 0.0266), (44.0, 0.0266), (45.0, 0.0263), (46.0, 0.0263), (47.0,
0.0263), (48.0, 0.0263), (49.0, 0.0262), (50.0, 0.0262)
annual_prime = GRAPH(TIME)
(40.0, 0.095), (41.0, 0.0862), (42.0, 0.0734), (43.0, 0.0657), (44.0, 0.0598), (45.0, 0.0602), (46.0, 0.0624), (47.0,
0.0636), (48.0, 0.0652), (49.0, 0.0648), (50.0, 0.0649)
' Rapp, Richard T., Patent Damages: Updated Rules on the road to Economic Rationality, Patent Litigation 1999.
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