Pharmaceutical Industry Litigation Funding: What You Should Know

Litigation related to pharmaceutical and biotechnological products is not uncommon. The attorney’s fees and costs associated with this litigation are not inexpensive; however, there are ways to mitigate these expenses. One mitigation strategy that companies are increasingly turning to is litigation funding. In this article, we’ll explore the fundamentals, evaluation criteria, and benefits of litigation funding for pharmaceutical and biotechnology companies involved in complex and expensive intellectual property disputes.

What You Should Know About Litigation Funding

Litigation finance (also known as litigation funding) involves a financial arrangement where a funder provides capital to pay for the legal proceedings of a company in exchange for a share of any recovery from the financed litigation. Typically, litigation funders provide capital to pay for attorney’s fees and other costs associated with a lawsuit. The costs, for example, usually relate to experts and vendors required for the litigation. In some cases, funders may provide capital to support the ongoing operation while the litigation is pending which is also secured by the outcome of the funded litigation. Even though the funder may be providing capital for all or a significant portion of the attorney’s fees and costs for litigation, the funder does not control or have decision rights in the litigation. In fact, the capital is provided on a non-recourse basis, which means that the funder only recovers its investment return from the outcome of the financed litigation and not from any other corporate assets. The funder’s recovery is based on receiving a portion of the monetary damages recovered from the funded litigation. Generally, the basic structure is as follows - a court might decide that a company is entitled to $100 million in damages and the funder would recover its investment from part of the $100 million damages award. This arrangement allows companies to mitigate the financial risks associated with litigation, enabling them to pursue litigation against infringers or defend their patents without conserving capital for other corporate purposes.

This basic structure for litigation funding is often used by plaintiffs in standard commercial litigation, like breach of contract or theft of trade secrets, and patent litigation in the high-technology sector. Likewise, pharmaceutical and biotechnology companies increasingly are using litigation funding to enforce their patents against alleged infringers. One emerging area for litigation funding is for defendants in the Hatch-Waxman litigation. Briefly, the Hatch Waxman Act provides a framework for generic drugs to be commercialized before certain patents that cover the branded drug expire. This may occur when a generic company files an Abbreviated New Drug Application (or “ANDA”) for a generic version of a pharmaceutical and the ANDA is accompanied by a Paragraph IV certification to the patents that are listed in the FDA’s Orange Book for that drug. A Paragraph IV certification is a statement from the generic company that it intends to market it generic product before the Orange Book-listed patent expires because the generic company alleges that the Orange Book-listed patents are not infringed, invalid, or unenforceable. The branded company may sue the generic company with the goal of resolving the patent dispute prior to the approval of the generic drug for sale. If the generic company wins the litigation, it could sell its product before the relevant patents expire. If the generic company loses, it is obligated to wait until the relevant patents expire before it can sell its generic product.

In nearly all Hatch-Waxman cases, no generic product has been approved or sold by the generic company when the suit is initially filed or even once it has ended. This means that the court does not determine whether the branded company is entitled to monetary damages. Consequently, there is no award of damages, like the $100 million example above, for a litigation funder to recover its investment. In the Hatch Waxman context, a litigation funder, however, can still recover from the outcome of the litigation – the commercialization of a product. In the case of a defendant ANDA filer, a litigation funder provides capital to pay for attorney’s fees and costs necessary for the ANDA applicant to pay for the Paragraph IV litigation. In exchange, the funder would recover its investment as a portion of the sales of the product described in the ANDA that was the subject of Paragraph IV litigation. Both the funder and generic company would share in the successful outcome of the litigation – commercialization of the generic product described in the ANDA.

Like the basic framework, the capital from a funder is always provided on a non-recourse basis in the Hatch Waxman framework. The funders would only be paid back from the commercialization proceeds of the generic product. In this case, the funder is taking on more than just legal risk. For example, a generic application may have difficulties or delays in obtaining FDA approval, which may mean that the launch of the product is delayed or never occurs. If this is the case, the litigation funder’s returns likewise would be delayed or never occur. Thus, the funder shares in the upside and downside risk related to the litigation and all other aspects of the product including regulatory approval, manufacturing, and commercial sales.

What to Expect From a Litigation Funding Evaluation

The process for obtaining litigation funding is straightforward. First, the funder and company will enter into a nondisclosure agreement that has unique protections for both parties related to the sharing of litigation-related materials. Subject to the terms of the agreement, the funder would begin an initial assessment to better understand the nature of the opportunity. Funders evaluate the challenges to the relevant patents, including the likelihood that the patents are invalid, not infringed, or unenforceable. If the litigation has started, the funder would want to understand aspects of the case, including the schedule and counsel, especially the counsel’s record of success with these legal issues and experience before the particular judge.

In addition to the legal aspects of the case, the funder would take into consideration the status of the generic company’s ANDA for a generic drug, such as the stage of development, filing status, and approval status. Because returns are based on commercialization proceeds, the funder would need to understand the commercial dynamics of the product like whether the generic company has sole or shared generic exclusivity, how many other generic competitors are expected, and when are the sales likely to occur. The initial assessment generally can be completed in a few weeks. Once the initial assessment is complete, the parties would negotiate a term sheet that would eventually be memorialized in the definitive agreement. The funder and the company may also take a few weeks to negotiate the term sheet depending on the complexity of the litigation and the product. When the term sheet is in place, the funder will confirm and finalize the initial assessment in the due diligence phase.

The due diligence phase would involve a deeper analysis of all aspects of the product. For the litigation, the funder may hire its own attorney to evaluate the litigation and the merits of the Paragraph IV challenge. Related to the generic product, the funder also may hire its own outside technical experts to evaluate the product development plans and portions of the ANDA where available. A technical expert may join the funder in visits to research and development and manufacturing facilities to ensure that the facility complies with regulatory standards. Finally, the generic company is the subject of due diligence, too. The funder would meet principals and key employees, visit the facilities, understand the company’s track record in getting products approved and commercialized, and their plans for the funded product. Funders also consider the financial health of the company and assess whether the company has sufficient sources of other capital to get the generic product approved and commercialized. As the due diligence proceeds, the funder and the company would negotiate and draft transaction documents that would memorialize the items from the term sheet as well as the roles and responsibilities, covenants, representations, and warranties of both parties to the transaction.

Finally, after negotiating and executing the transaction documents, the investment begins and the funder receives regular updates about the litigation and the FDA’s review of the ANDA. As the time to launch the generic product approaches, the funder will also be updated on the launch plans, go-to-market strategy, and forecasting for the product’s commercialization.

Optimal Timing to Approach Litigation Funders

Funders have a lot of flexibility around where and when they can execute transactions in the lifecycle of a drug product. It is not unusual that they are approached for requests for funding at an early stage in development. In some cases, the development of the generic product is at the early stages. Approaching a funder at this early stage may provide the generic company with more confidence in its invalidity or noninfringement challenges. The funder would also provide feedback about the company’s strategy and timing to prove equivalence to the branded product. At the other end of the spectrum, funders are approached after a suit has been filed and even when the case is on appeal.

Even though there is flexibility for when to approach a funder, there is, however, an optimal window. The best time to approach a funder is during product development. Specifically, once any bioequivalence studies, if required, have been completed and before the ANDA is filed with the FDA. If no bioequivalence studies are required, a company might consider approaching a funder once registration batches and analytical methods have been completed and before filing the ANDA. This time is optimal because the product has been fully developed, but the company may still be finalizing its litigation strategy, counsel selection, and litigation budget. To the extent there are any decisions to be made regarding further development activities or additional legal theories, this is often the last time to decide before the suit is filed.

Benefits of Litigation Finance for Pharmaceutical and Biotechnology Companies

The obvious benefit to the company is access to capital and the use of limited corporate resources for other purposes. In many instances, the budget for the litigation never accrues to the company and therefore does not negatively impact the company’s earnings. Another advantage is that the capital is non-dilutive to current equity owners. The funder is not taking equity in the company as a means for investment recovery. This allows smaller companies to gain access to external capital and not dilute existing shareholders. As mentioned above, the funder’s investment is dependent on the commercialization of the generic product in the litigation. No other corporate assets are used to secure the funder’s investment.

By reducing or removing the financial burden from costly litigation, a company might have more options in selecting counsel. In some cases, a company can avoid having to choose between the lowest price for litigation over the highest quality counsel. Another benefit may be the ability to add products to its development pipeline and expand its commercial portfolio. This expansion could include adding additional ANDAs that would require Paragraph IV litigation to its portfolio. Therefore, litigation funding can be a corporate finance tool to help the company improve its commercial offerings and revenues.

Finally, it’s important not to overlook the expertise and experience of the litigation funders themselves. Funders are usually former litigators and in-house lawyers who have managed a significant number of these cases. Their expertise comes to bear in managing the litigation, specifically in working with external counsel as well as recommendations on hiring counsel, developing budgets, and staffing. To the extent needed, funders can help guide a company through the litigation process. For these reasons and more, litigation finance can work for the right companies in the right situations.

Conclusion

Over the past several years, litigation funding has emerged as a strategic tool for pharmaceutical and biotechnology companies navigating the complex terrain of intellectual property litigation. As the industry continues to evolve, the dynamics and evaluation criteria for litigation funding will play an increasingly important role in shaping the legal strategies of companies seeking to protect their intellectual property or to challenge the intellectual property of its competitors.

Author Details

Jamison Lynch and Dr. Lauren Rabinovic - GLS Capital

Jamison Lynch: [email protected]

Dr. Lauren Rabinovic: [email protected]

For more information please visit www.glscap.com.

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