SAN FRANCISCO ­— A $400 million pharmaceutical brawl lands in the First District Court of Appeal this month with the chance to make new law on lost profits, punitive damages and tortious interference in the context of a corporate acquisition.
Asahi Kasei Pharma Corp. of Japan scored the nine-figure win in 2011 when its lawyers at Morgan, Lewis & Bockius persuaded a jury that Actelion Ltd. acquired an Asahi business partner in order to shut down its development of Asahi’s potentially life-saving drug, fasudil.
Actelion, based in Switzerland, sells a competing drug for pulmonary arterial hypertension for $80,000 a year and wanted to protect its monopoly position, Asahi argues, so it paid a 70 percent market premium to acquire CoTherix Inc. and—in the words of one Actelion executive—”painstakingly kill” fasudil. Morgan Lewis partner Christopher Banks quotes the phrase “painstakingly kill” 11 times in his opening brief for Asahi.
But Actelion’s lawyers at Mayer Brown and Cotchett, Pitre & McCarthy have their own powerful catchphrase: Sargon Enterprises v. University of Southern California. That’s a 2012 California Supreme Court ruling that tightened the standard for proving lost profits. Under Sargon, Asahi cannot reap $358 million in lost profits for a drug that hadn’t even obtained FDA approval, let alone generated a single dollar in revenue, Mayer Brown partner Donald Falk emphasizes in his brief for Actelion.
“Sargon makes clear that ‘speculative projections of future spectacular success’—which aptly describes Asahi’s theory of lost profits here—are insufficient to support such an award,” he writes. Falk also argues that fasudil was a failed drug with toxic side effects that no other company was interested in developing.
Asahi says it didn’t pull the profit numbers out of thin air. They were the same financial projections CoTherix presented to Actelion during merger negotiations, and which Actelion in turn touted to its investment bankers. Actelion dismisses this argument, suggesting CoTherix was inflating the figures to make the company as attractive a target as possible, and that Actelion executives never believed the numbers.
Also at stake at the Nov. 21 arguments will be a combined $30 million in punitive damages against three individual Actelion executives—even though none was assessed against the corporation. “Punitive awards in favor of large corporations against individuals are virtually unheard of in California (and elsewhere),” Ropers, Majeski, Kohn & Bentley partner Susan Handelman writes on their behalf.
If the punitive award stands, it would be the third largest to survive appeal in California history, according to one expert on punitive damages. But Morgan Lewis’ Banks wants more: He’s asking for a new trial on punitive damages against Actelion Corp., arguing that Cotchett Pitre partner Joseph Cotchett Jr. committed intentional misconduct during closing argument.
Just for good measure, the parties also dispute a discovery sanction that allowed Morgan Lewis to argue at trial that Actelion had been concealing the deaths of patients taking Actelion’s competing drug, Tracleer.
But all the squabbling over lost profits, punitive damages and sanctions could be rendered moot if the First District agrees with Actelion’s primary contention: that an acquiring company cannot be liable for intentional interference with the contracts of the target company. Once the acquisition of CoTherix was consummated, Actelion was no longer a “stranger” to CoTherix’s deal with Asahi. “That fact,” Falk writes, “definitively precludes liability for tortious interference.”
a cure for competition
Fasudil has been around for almost 30 years. It’s used in Japan and China to treat stroke victims, but because of the potential for kidney damage it’s limited to short-term, intravenous use. About a decade ago, Asahi discovered that the drug might help treat stable angina and pulmonary arterial hypertension. The latter, known as PAH, is a life-threatening cardiovascular condition that causes 20,000 deaths a year in the United States.
Asahi struck a deal with South San Francisco-based CoTherix in 2006 to seek FDA approval of oral fasudil and market it in North America and Europe. CoTherix had experience developing a similar drug, called Ventavis. It paid Asahi $8.5 million upfront and promised $770 million in royalties by 2019 if all went as planned. In case of a company buyout, CoTherix promised either to continue fasudil’s development or give Asahi 30 days notice before closing the deal.
To compete in the market for stable angina, the companies planned to sell fasudil for no more than $5,000 a year—far below the price of medicine for pulmonary artery hypertension.
These developments caused a stir at Actelion, which had marketed the only oral PAH treatment, Tracleer, since 2001. Martine Clozel had helped create Tracleer in 1990 when she and her husband, Jean Paul, worked at Hoffman-LaRoche. The two licensed it from Roche and co-founded Actelion, building a $1.8 billion company around Tracleer.
“Central to Tracleer’s ‘great success’ was Actelion’s ability to raise prices on sick and dying patients,” Morgan Lewis’ Banks contends before the First District. Tracleer’s price rose from $40,000 a year in 2006 to $80,000 a year by 2010, according to his brief. Tracleer also was vulnerable on the issue of side effects—the FDA requires a “black box” warning for potential liver injury and birth defects.
Asahi and Morgan Lewis characterize Actelion as obsessed with competitive threats. Just weeks after Asahi and CoTherix announced their partnership, Actelion’s board president circulated an email urging management to buy out CoTherix and “kill” another competitor “on the beach.”
Actelion announced its $420 million acquisition of CoTherix on Nov. 20, 2006, touting the benefit of combining Ventavis with Tracleer.
The company was coy about fasudil’s future. “For now, the message to them has been that it is business as usual at CoTherix for Fasudil,” Actelion’s chief of business development, Simon Buckingham, advised the Clozels. When Asahi requested reassurances by videoconference, Buckingham encouraged the Clozels to participate, even though “this may be a bit of a waste of time.”
The day after the deal closed in January 2007, Actelion notified Asahi that it was discontinuing development of fasudil and offered to give back the rights.
Asahi instead threatened to enforce its contract. Actelion responded with a threat of its own, explaining that Martine Clozel’s due diligence had uncovered new concerns about fasudil’s toxic side effects. Those concerns might warrant notifying Japanese regulatory authorities, Jean-Paul Clozel warned, or putting out a press release “to explain the rationale for our decision.”
A few months later, Actelion’s business development director, Luca Bolliger, sent a colleague an email he now surely regrets. In it he refers to a product that “would have been complementary to the Rho kinase (fasudil) that we painstakingly killed … [o]ops trying to kill. … ;-)” Bolliger has said it was a sarcastic reference to Asahi’s claims, but that hasn’t stopped Asahi from making it a centerpiece of its tort suit.
The trial was stormy. Originally scheduled for seven days, it lasted three months. San Mateo County Superior Court Judge Marie Weiner, a former law partner of Cotchett’s, instructed the jury that Actelion had withheld discovery about deaths caused by Tracleer. Morgan Lewis’ trial attorneys accused Cotchett and co-counsel at Baker Botts of “yelling, finger-pointing, and screaming” at Weiner. Cotchett accused Banks of being “continuously disrespectful to defendants’ female counsel.”
The jury lowered the boom on Actelion. Its initial $547 million award caused the company’s market cap to plunge $800 million, about 9 percent. Weiner would later reduce the award to about $377 million. Jurors also tacked on $20 million in punitive damages against Jean-Paul Clozel, $9 million against Martine Clozel, and $1.2 million against Buckingham—10 percent each of their net worth.
The picture turned brighter for Actelion last fall, when the California Supreme Court clamped down on lost profits evidence in Sargon.
Sargon was a small dental supply company that claimed it would have earned up to $1.18 billion from a revolutionary new design for dental implants. Justice Ming Chin compared it to a first-time author claiming that her novel, if published, “would have become a national bestseller, won the Pulitzer Prize, and spawned a megahit movie with several blockbuster sequels.”
Actelion and Asahi had filed competing amicus curiae briefs in Sargon, and Falk now argues that the holding fits his case perfectly. Oral fasudil “cannot generate its first dollar of revenue unless and until it completes each stage of the FDA-required development process with favorable results in human trials that have never occurred,” he writes.
But Asahi argues its expert didn’t just make up the lost profit numbers. Based on CoTherix’s data, Lehman Brothers had told Actelion’s board of directors that fasudil would earn $300 million to $600 million a year. And CoTherix’s CEO and other medical experts testified that FDA approval was very likely. “These were not ‘dreams,’” Banks writes, “but the conclusions of a publicly traded company built on a year of due diligence, two decades of fasudil development and commercial sales, and the conclusions of leading medical experts.”
Falk dismisses the Lehman Brothers numbers as “pro forma projection that CoTherix created in October 2006, when CoTherix was trying to persuade Actelion to pay a higher purchase price for CoTherix stock.”
The Clozels and Buckingham argue separately that they can’t be hit with punitive damages for corporate actions in the ordinary course of business. Besides, Ropers’ Handelman writes, the awards make no sense.
“When, as here, the defendants are individual executives and the plaintiff is a massive, multi-national conglomerate,” she writes, “it should be a foregone conclusion that punitive damages are warranted only in the most exceptional circumstances.”
Horvitz & Levy partner Curt Cutting, author of a blog on punitive damages, says the size of the punitive award alone suggests something went awry during trial.
“When you add that the plaintiff is a big corporation and the defendants are individuals, things start to sound really fishy,” he says. Cutting pegs it as the third largest punitive award in California history if it survives appeal.
Asahi wants more punitive damages, not less. Banks argues the jury would have awarded punitives against Actelion as well, but for misconduct by Cotchett.
Actelion’s American subsidiary is based in San Mateo County, and Cotchett argued that punitive damages would ultimately come out of the pockets of shareholders, including teacher and police officer pension funds. “Juror 5 was a teacher who shared expenses with her policeman-boyfriend,” Banks writes. This “improperly appealed to juror self-interest and hometown sensibilities.”
Falk argues that Asahi failed to properly object and opened the door by arguing that Actelion should be punished for scheming to inflate its stock value.
A killer argument
Falk and his Mayer Brown partner Evan Tager, who will argue for Actelion, won’t have to worry about lost profits or punitive damages if the First District accepts their primary argument, which is that Actelion could not commit the tort of intentional interference against a company it owned.
Asahi has already recovered $91 million in arbitration for breaching the contract. It cannot now be held liable in tort because California limits intentional interference to “interlopers” who have no interest in the contract’s performance. “That is fatal to Asahi’s claim,” Falk writes.
Asahi argues that long before Actelion gained corporate control, Martine Clozel was drawing up phony due diligence on fasudil while other executives were drafting a budget that eliminated the drug. “Substantial evidence shows defendants decided to ‘kill’ fasudil, extort Asahi and disparage fasudil before acquiring CoTherix,” Banks writes, quoting the Bolliger email again. “The entire purpose of their acquisition was to ‘kill’ fasudil.”
In the end, Actelion says fasudil simply never was the gold mine Asahi described. Asahi has introduced fasudil to more than 25 companies since the acquisition, but none has licensed it, Falk contends.
“If fasudil was the wonder drug that Asahi makes it out to be,” he writes, “it would have been irrational for Actelion to hand back the drug rather than reap the windfall.”
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