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Pentech Pharmaceuticals, Inc. v. Par Pharmaceutical

February 9, 2009


The opinion of the court was delivered by: Morton Denlow United States Magistrate Judge

Magistrate Judge


This case involves a claim for breach of contract and declaratory judgment brought by Plaintiff Pentech Pharmaceuticals, Inc. against Defendant Par Pharmaceutical, Inc., arising out of a contract between them relating to a generic version of Paxil. The Court conducted a bench trial on December 9-12 and 15-16, 2008 and heard closing arguments on December 22, 2008. The Court has considered the testimony of the witnesses who testified at the trial, the deposition excerpts of the witnesses who were not available to testify in person, the parties' trial exhibits, the stipulations made by the parties, the proposed findings and conclusions submitted by the parties, and the closing arguments of counsel.

The following constitute the Court's findings of fact and conclusions of law in accordance with Rule 52(a) of the Federal Rules of Civil Procedure. To the extent certain findings of fact may be deemed conclusions of law, they shall also be considered conclusions of law. Similarly, to the extent matters contained in the conclusions of law may be deemed findings of fact, they shall also be considered findings of fact.


1. Whether Section 2.3 or Section 5.2 of the First Amendment to the Supply and Marketing Agreement applies to the dispute.

ANSWER: Section 2.3.

2. Whether the License and Supply Agreement between Par and GlaxoSmithKline is part of a settlement to which Pentech is a party.


3. How much is owed to Pentech from Par arising out of the First Amendment to the Supply and Marketing Agreement.

ANSWER: $49.5 million.

4. How much prejudgment interest is owed to Pentech from Par. ANSWER: $20,455,476.


A. The Parties

1. Pentech Pharmaceuticals, Inc. ("Pentech" or "Plaintiff") is an Illinois corporation with its principal place of business in Illinois. Pentech is in the business of developing generic pharmaceutical drugs for approval by the United States Food and Drug Administration ("FDA"). Pl. Agreed Facts ¶1, T. 106:22-107:1.*fn1

2. Par Pharmaceutical, Inc. ("Par" or "Defendant") is a Delaware corporation with its principal place of business in New Jersey. Par has, at all relevant times, been engaged in the business of manufacturing, distributing and selling pharmaceutical drugs. Id. ¶2.

3. Par is the operating subsidiary of Par Pharmaceutical Companies, Inc., a publicly traded company listed on the New York Stock Exchange. Id. ¶3.

B. Paxil

4. In order to market a pharmaceutical drug in the United States, a company must first obtain FDA approval. Id. ¶4.

5. FDA approval of pharmaceutical drugs is obtained pursuant to a New Drug Application ("NDA") or an Abbreviated New Drug Application ("ANDA"). The NDA process applies to new or "brand" drugs. The ANDA process applies to drugs that are therapeutically equivalent to existing "brand" drugs. Id. ¶5.

6. Since 1993, SmithKline Beecham Corporation and affiliates ("GSK")*fn2 have manufactured and sold paroxetine hydrochloride ("paroxetine") under the trademark "Paxil" for use in the treatment of depression, among other things. GSK owns patent rights concerning Paxil. Paxil was approved by the FDA pursuant to an NDA, and is sold only in tablet form. Id. ¶6.

7. Paxil was enormously successful for GSK, generating billions of dollars of sales in the United States. In 2000, 2001 and 2002, sales of Paxil in the United States by GSK and affiliates were approximately $1.8 billion, $2.2 billion and $2.2 billion, respectively. Id. ¶7 and Def. Agreed Facts ¶4.

C. Efforts to Develop a Generic Version of Paxil

8. After GSK launched Paxil, several generic drug companies launched efforts to develop a generic paroxetine competitor to Paxil that would not infringe GSK's patents on Paxil. Pentech was one such company. During the 1990s, Pentech worked to develop a formulation of paroxetine that would be therapeutically equivalent to Paxil, but would not violate the Paxil patents. Pentech worked to develop a formulation of paroxetine that would be different from Paxil in several significant respects. First, although Paxil was a hard tablet, Pentech sought to develop its paroxetine product as a soft capsule. Second, the active ingredient contained in Paxil is a hemihydrate (or "crystalline") form of paroxetine. Pentech sought to develop an "amorphous" (i.e., non-crystalline) form of paroxetine, which Pentech believed would not infringe GSK's paroxetine patents. In 1997, Pentech was awarded a patent for a paroxetine composition that differed from GSK's. In 1997, Pentech also submitted applications for two additional patents on paroxetine, and patents on these applications were ultimately awarded in 2003. Pl. Agreed Facts ¶8 and Def. Agreed Facts ¶¶4-5.

9. In March of 2000, Pentech filed an ANDA with the FDA, seeking FDA approval to manufacture and distribute Pentech's form of paroxetine as a generic competitor to Paxil for the treatment of depression. Specifically, Pentech sought FDA permission to manufacture and distribute paroxetine capsules in doses of 10 mg and 20 mg, whereas, Paxil was available in 10 mg, 20 mg, 30 mg and 40 mg dosages. Pl. Agreed Facts ¶9 and Def. Agreed Facts ¶¶6-7.

10. Another company, Apotex, had previously filed an ANDA for a generic tablet version of paroxetine. Under 21 U.S.C. § 355(j)(5)(B)(iv) ("Hatch-Waxman Act"), Pentech's ANDA had "first-to-file" status with respect to a capsule form of generic paroxetine. Pl. Agreed Facts ¶10 and Def. Agreed Facts ¶8. As a consequence of its first-to-file status, Pentech had a potential opportunity to be the sole generic alternative to Paxil on the market for at least 180 days after the FDA approved its ANDA. The filing of this "first filed" ANDA meant, under the rules of the Hatch-Waxman Act, that if Pentech could actually succeed in (i) manufacturing the amorphous capsule product specified in its ANDA, (ii) defeating any patent-infringement challenges from GSK, and (iii) gaining FDA approval, Pentech could be entitled to a 180-day "exclusivity period" after the launch of its product during which no other company would be permitted to bring a similar paroxetine capsule product to market as a generic competitor, although this would not prevent a generic tablet paroxetine competitor from entering before or during this 180-day period. T. 107:17-108:5; 124:10-125:6. See, e.g., Mylan Pharm., Inc. v. U.S. Food and Drug Admin., 454 F.3d 270, 273 (4th Cir. 2006) (describing significance of first-to-file status).

11. Because it had not received an "AB rating" from the FDA, without which it could not be automatically substituted by pharmacists for a Paxil prescription, the success of the Pentech capsule product would be largely dependent on Pentech being first to enter the market against GSK's branded Paxil. DX 81 at 3; DX 72 at W462; T. 307:14-21, 308:9-14.

D. The GSK Litigation Against Pentech

12. On May 11, 2000, shortly after Pentech filed its paroxetine ANDA, GSK commenced suit against Pentech in the United States District Court for the Northern District of Illinois, Case No. 00 C 2855. On September 22, 2000, GSK commenced a second suit against Pentech in the same court (Case No. 00 C 5831), and the cases were consolidated. The two cases (collectively, the "GSK Litigation" or "Paragraph IV Litigation") asserted patent infringement claims relating to Pentech's ANDA for paroxetine. In each of the cases, GSK alleged that it was the owner of a patent (Patent Nos. 4,721,723 and 6,080,759), and, in each case, GSK sought orders prohibiting any approval by the FDA of Pentech's paroxetine hydrochloride drug product, and enjoining Pentech from the commercial manufacture, use or sale of its paroxetine hydrochloride drug product. Pl. Agreed Facts ¶11, Def. Agreed Facts ¶9. This was Pentech's first involvement in Paragraph IV litigation. T. 344:20-24.

E. Negotiations Leading up to the 2001 Supply and Marketing Agreement

13. Par is a major generic drug company that has marketed a number of highly successful generic drugs. T. 721:15-722:13. As an important part of its business plan, Par frequently entered into agreements with third parties with respect to the development of new products and technologies. Def. Agreed Facts ¶10. In particular, Par was interested in acquiring the opportunity to market a version of paroxetine hydrochloride that would not infringe GSK's patents and which would enable it to enter the generic Paxil market before other generic makers came to market. Pl. Agreed Facts¶12. In 1998, Par had entered into a contract with Genpharm that gave Par the exclusive right to market a paroxetine tablet that Genpharm was working to develop, should Genpharm ever succeed in developing and obtaining FDA approval for that product. DX 59; T. 648:16-649:13. As explained by Par Chief Executive Officer Scott Tarriff ("Tarriff"), Par had significant experience in partnering with ANDA filers and conducting the related patent litigation, which was an important part of Par's "business plan." PX 43, p. PH 41781; T. 509:25-512:5. Tarriff made it a point to keep himself informed and personally involved in Par's litigation matters. T. 512:6-20.

14. By late summer 2001, Pentech was in need of additional cash to fund its substantial ongoing litigation and development expenses. T. 282:9-285:22; DX 62. Pentech sought a partner who could provide financial support for its ANDA. DX 72; T. 128:4-129:19; 287:8-12; 298:16-21; 304:15-306:5. In addition, as a product development company, Pentech did not have any marketing or sales capability and had never manufactured a commercial product or marketed a pharmaceutical product. T. 180:20-181:5; 306:6-12. Pentech did not have a commercially reliable manufacturing source. T. 298:1-21. There were three primary stages to the manufacturing process: 1) receipt of the active pharmaceutical ingredient ("API"); 2) encapsulation of the API; and 3) filling the capsule.

T. 176:21-177:21.

15. Given Pentech's financial situation and its lack of marketing capability, Pentech began looking for a top-tier generic company that could provide financial support and the ability to successfully market and sell generic products. DX 72; DX 81; T. 285:18-286:23; 309:2-310-11. The speed at which Pentech could bring its products to market was very important to its financial success. T. 308:5-309:12; DX 81.

16. In September 2001, Tarriff and Pentech's President Albert Hummel ("Hummel") began negotiating the business terms of a potential agreement under which Par would make an investment in Pentech's ANDA. Pl. Agreed Facts ¶13. Because airline travel was difficult in the wake of September 11, 2001, initial negotiations were by telephone. T. 129:13-19; 159:21-23. Pentech provided Par with a confidential memo outlining its business and litigation strategy regarding Pentech's ANDA. DX 73; T. 130:7- 135:11; 324:8-326:19. Because Pentech's ANDA covered only capsules, the initial scope of the proposed relationship was limited to capsules. The primary goal of that relationship was to bring Pentech's product to market either through a victory or favorable settlement in the ongoing Paragraph IV Litigation with GSK. DX 1 at 1 (recitals); T. 348:17-349:7; 380:2-14; 758:13-20.

17. On September 24, 2001, Tarriff sent a letter to Hummel proposing the following:

Par provides $200,000 at contract signing, $200,000 at final FDA approval, and $200,000 at a successful lower court (District Court) decision for a total of $600,000 in payments. Par will be responsible for all legal costs up to the first $2,000,000 associated with supporting the paragraph IV litigation. In the event legal costs exceed $2,000,000 the expenses will be shared 70% by Par and 30% by Pentech. The case will be transferred to Frommer, Lawrence and Haug. Par will not reimburse Pentech for previous litigation costs.

Par will be responsible for all sales, marketing, shipping, distribution, billing and pricing of the product.

Par will receive 70% of gross profit generated by the sale of the product. In the event Par/Pentech is marketing the only generic version of paroxetine the profits will be split equally.

PX 20; T. 145:4-147:7; 152:6-152:17. Tarriff viewed Paxil as a big business opportunity worth potentially $100 million to which Par would provide several million dollars and excellent sales and marketing capability. T. 720:14-722:2.

18. While these negotiations were in progress, Tarriff disclosed to Hummel that Par was under a contractual obligation with another company to sell a generic paroxetine tablet that was the subject of an ANDA, should that tablet ever be approved by the FDA. T. 162:24-164:10; 310:12-311:3; 723:3-7. At some point much later, in or around 2003, Pentech learned the name of the company was Genpharm. T. 164:11-21.

19. During these negotiations, the parties exchanged drafts of a Supply and Marketing Agreement for review and comment by the parties and their respective outside counsel. T. 158:21-159:6; 397:12-17; DX 33 at 14 (interrog. 2); DX 77; DX 80.

20. Both parties and their counsel are sophisticated and experienced with contracts. Par has entered into many licensing agreements with companies other than Pentech. Pentech's CEO Hummel, and its Chairman, James D. Lumsden ("Lumsden"), are experienced in contracting, pharmaceutical investment, and corporate relationships. T. 104:10-24; 110:22-111:11; 794:1-8; 810:8-15.

21. According to Hummel, Tarriff assured him that Genpharm's paroxetine tablet was stuck in litigation, was behind a "first to file" ANDA filed by Apotex, and that Pentech's capsule product would get to market earlier. T. 164:22-165:6; 170:4-171:24. When Hummel learned of Par's tablet agreement, he asked Tarriff to add a provision to the prospective contract between Pentech and Par that would entitle Pentech to a share of any sales of Genpharm's tablet in the event the Pentech capsule was on the market and Par thereafter started to market the tablet. T. 162:24-165:20.

F. The 2001 Supply and Marketing Agreement

22. On or about November 19, 2001, Pentech and Par entered into an agreement titled Supply and Marketing Agreement Between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. ("the 2001 Agreement"). Pl. Agreed Facts ¶14; PX 29; DX 1. By this time, Pentech had invested approximately $7 million in the paroxetine capsule project. T. 144:12-15.

23. Under the 2001 Agreement, Par received the exclusive right to distribute Pentech's paroxetine capsule, should Pentech ever obtain FDA approval for the product, and agreed to purchase all of its requirements for paroxetine capsules from Pentech, to the extent Pentech was able to meet its supply needs. DX 1 § 3.1.

24. Pentech maintained the responsibility under the agreement for completing the development and regulatory approval process and for ensuring the manufacture and supply of paroxetine capsules to Par. DX 1 § 3.1; T. 315:20-316:19.

25. The 2001 Agreement incorporated each of the terms outlined in Tarriff's September 24 letter. It provided, among other things, for Par to pay up to $600,000 in three incremental "milestone" payments to Pentech upon Pentech achieving certain benchmarks. DX 1, § 2.1. In addition, Par agreed to finance part of the cost of Pentech's paroxetine project and the defense of the GSK Litigation. Id. § 2.2. In exchange, Par received the exclusive right to sell, market and distribute Pentech's capsule, and the right to control the defense of the GSK Litigation. Id. §§ 2.1 and 2.2. Pentech's principal obligation under the 2001 Agreement was to manufacture paroxetine capsules and sell them to Par. Id.

26. The parties understood that Par's primary contribution to the project would be Par's marketing and distribution efforts. Under the 2001 Agreement, Pentech would develop and supply the product, and Par would market it. T. 321:14-322:8; 721:15-722:2.

27. The 2001 Agreement included the following provisions, among others:

(a) The "Product" was defined by reference to Exhibit A to the agreement, which included four references to a "capsule" product and none to a "tablet" product. PX 29, Article 1 & Ex. A.

(b) Section 2.2 provided that Pentech's defense in the GSK Litigation would be conducted under the guidance of new counsel designated by Par: Frommer, Lawrence & Haug, LLP ("FLH"). Pl. Agreed Facts ¶15. Section 2.2 further provided that Par would have ultimate decision-making authority with respect to the GSK Litigation. PX 29, § 2.2.

(c) The 2001 Agreement made no provision for the consequence of a settlement of the GSK Litigation. Section 2.3 provided, however, that Pentech and Par would both need to agree to any such settlement. Specifically, Section 2.3 provided:

Any Paragraph IV Litigation or any other litigation regarding the ability of Par to market the Product brought by a third-party against Par or Pentech shall only be settled upon the mutual satisfactory approval of Par and Pentech. Each of Par and Pentech hereby agree that it will not unreasonably withhold such approval if such approval is requested by the other party.

PX 29, § 2.3.

(d) Section 3.1 set forth terms governing the manufacture and supply of the Product "[u]pon final FDA regulatory approval granting Pentech the right to manufacture, sell and distribute the Product." Pentech agreed to supply Par's reasonable requirements for the Product. Pl. Agreed Facts ¶15(c).

(e) Section 3.5, titled "Sales and Marketing," provided that, "[s]ubject to Section 3.1, Par shall be the exclusive seller of the Product to third-parties in the Territory." PX 29, § 3.5.

(f) Article 5 was entitled "PAYMENT FOR THE PRODUCT." That Article began with Section 5.1, which provided: "Payment for the Product shall be made by Par, on the terms and conditions set forth herein, and shall consist of (i) the Transfer/Contract Price for the quantity of Product delivered by Pentech to Par pursuant to a Firm Order (the "Transfer/Contract Price Payment") and (ii) as more fully described in Section 5.2 hereof, a percentage of the Gross Profit generated from the sale by Par of any Product (the "Profit Payment"). Section 5.1 defined the "Transfer Contract Price" as "Pentech's actual cost of manufacture plus Pentech's internal burden rate." PX 29, § 5.1.

(g) Section 5.2 provided that "[i]n addition to the Transfer/Contract Price Payment and subject to Section 3.1," Par would pay Pentech "Profit Payments" on sales of the "Product" at varying percentages of "Gross Profits," depending on whether there was generic paroxetine competition on the market. PX 29, § 5.2(A), (B).

(h) Subsection 5.2(C) addressed Hummel's concerns expressed to Tarriff about the possibility that Par would sell both the Pentech capsule and a competing generic tablet form of paroxetine, stating:

To the extent that Par is marketing both a capsule and tablet generic version of the Product, the Profit Payment on the capsule version of the Product shall be as set forth in Subsection 5.2(B) above. In addition, a Profit Payment on the tablet version of the Product shall be paid by Par to Pentech in an amount equal to 15% of Par's gross profit generated by the sales of the tablet version of the Product.

PX 29, § 5.2(C) (emphasis added). Pentech sought to protect itself against the possibility that Par would shelve Pentech's capsule product and come to market with the tablet product also under development. T. 162:24-165:20; 1080:4-1085:8.

(i) Section 5.3 provided that the initial Profit Payment would be paid within 75 days "after the launch of the Product by Par," and that "[t]hereafter, payment of the Profit Payment for the Product and the tablet version of the Product, if applicable, shall be made within ten (10) days of the end of each calendar month." PX 29, § 5.3(B) (emphasis added).

28. There is some dispute as to whether the defined term "Product" refers specifically to Pentech's capsule version of paroxetine. The parties agree that the capsule form of paroxetine was the only form covered by Pentech's ANDA. T. 168:2-15; 541:16-18.

Numerous provisions throughout the 2001 Agreement make sense only if the "Product" is understood to refer to the Pentech capsule. (E.g., PX 29 (third, fourth and fifth "whereas" clauses), § 4.1.) In several places, the agreement refers to the tablet "form," or tablet "version" of the "Product." The Court finds, based on the text of the agreement and the circumstances surrounding its execution, that the defined term "Product" referred to Pentech's capsule except in those instances in which the Agreement expressly provides otherwise through use of the phrase "the tablet version [or "form"] of the Product."

G. Circumstances Leading to the 2002 Amendment

29. The parties entered into discussions starting in the summer of 2002 to amend the 2001 Agreement. As with the 2001 Agreement, the essential business terms of the amendment were negotiated by Tarriff and Hummel. At some point, Par's Vice President Paul Campanelli ("Campanelli") became involved in the efforts to draft an agreement consistent with those negotiated terms. T. 210:18-211:7; 887:20-22.

30. By April 2002, Pentech had made requests to Par to increase its financial commitment to the project. In particular, Hummel asked Tarriff to provide an additional $5 million of funding from Par to Pentech. DX 177 at FS38; T. 455:15-456:6; 825:2-7. Those efforts by Hummel were unsuccessful. Par did not commit to invest any additional money in the project in April, May, or June of 2002. T. 824:7-826:4.

31. Meanwhile, in May 2002, Pentech began discussions with GSK to settle the Paragraph IV Litigation. DX 158 at ...

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