(This content was originally issued as a Ravicher Report on July 24, 2012. It is now being made available for free to the public for the first time here.)
As of the close Monday, July 23, 2012, Vivus (NASDAQ:VVUS) was down 23% since last Thursday when a report suggested patent issues may impact sales of the company's recently approved Qsymia brand weight management drug. However, the report is substantially flawed as a matter of law, calling into doubt the legitimacy of the resulting sell-off. Here I will discuss one aspect of the report, namely the risk posed to sales of Qsymia by a specifically identified patent held by Johnson & Johnson's (NYSE:JNJ) Ortho subsidiary.
To start, an opinion about patent infringement or validity is not competent under the law unless it (1) is written by an attorney experienced with patent law, (2) contains an analysis of each claim in the subject patent, and (3) is based on a complete review of all of the necessary facts, including all of the communications between the applicant and the patent office during the patent application process (known as the "file history"). The courts have held that "bald, conclusory and unsupported remarks regarding validity and infringement" are not competent and that, "[t]o reasonably rely on an opinion, it must be authoritative, not just conclusory, and objective."
The report issued last week identifying a purported patent infringement risk to Vivus' Qsymia product concedes, "No one at Citron is a patent attorney," and there is no mention of a patent attorney being consulted by the report's author either. Thus, the report was apparently not written by an attorney or even with the advice of an attorney. Also, the report does not contain an analysis of each claim of the potentially infringed patent and instead appears to be superficial and conclusory. And there is no mention in the report that the author reviewed all necessary facts, including the potentially infringed patent's file history. Therefore, before even getting to various specific statements contained within the report, on its face it lacks any of the requisite elements to be considered competent under the law.
That said, I want to be exceedingly clear with what I am not saying here. I am not personally attacking the author of the report or saying the author of the report is him or herself incompetent. Of course not. I don't know the author, and even if I did think they were incompetent, I would never say that publicly. My comments here are directed solely at the content of the report itself, and specifically only one portion of the report in particular. I'm not even saying the conclusions reached by that portion of the report are necessarily incorrect. Nor could I, as I have not myself yet performed an analysis of the potentially infringed patent. It might be that despite the report's flaws, the predicted outcomes could very well come true. Like in geometry, it's possible to get the right answer even through flawed analysis. What I've intended to do here is merely point out flaws in the report's analysis of the potential risk of infringement by Qsymia on a specifically identified patent. I believe those flaws render the report's opinion on that issue legally incompetent and practically unreliable. Those flaws include the following:
Statement From Report: '[A]ny third parties supplying topiramate to Vivus might be liable for contributory infringement for supplying an Active Pharmaceutical Ingredient -- a risk for any drug supplier who knowingly infringes a patent.'
This statement conflates the three different types of patent infringement defined in Section 271 of the Patent Act. Subsection A defines direct infringement as the making, using, selling, offering to sell, or importing of a patented item. Subsection B defines inducement of infringement as one who "actively" induces another to commit direct infringement. Subsection C defines contributory infringement as the selling, offering to sell, or importing a material component of a patented thing for which there is no substantial non-infringing use and knowing that it will be used to make the patented thing.
A supplier of topiramate to Vivus for use in making Qsymia could only be guilty of contributory infringement if there is no use for topiramate other than in infringing the patent and if they know it will be used by Vivus to infringe the patent. But even the report itself concedes that topiramate is generic, and the drug has been approved by the FDA for uses other than in weight management. Thus, even if there is a patent that might be infringed by Qsymia itself, a supplier of the topiramate component of Qsymia to Vivus could not be guilty of contributory infringement because there are substantial non-infringing uses of it.
It's also unlikely that any such supplier would be found guilty of inducing infringement unless a court held that it was actively encouraging Vivus to use topiramate to infringe a patent, something that only a factual analysis of the relationship between the supplier and Vivus could bear out. The courts have held that "the mere sale, without more, of a device capable of such non-infringing use will not establish liability for inducement," and that "induced infringement ... requires knowledge that the induced acts constitute patent infringement." Thus, so long as a supplier merely sells topiramate to Vivus without more and has no knowledge that Vivus' use of the supplied topiramate will infringe a patent, the supplier won't be guilty of inducing infringement either.
Statement From Report: 'One question that has been hanging over the company for years is the possibility of patent infringement on one of Qsymia's two active ingredients, topiramate, a patent held by Johnson & Johnson, who used to sell the drug as an obesity treatment before it went generic. It affords patent protection until 2017. It originally was filed by a researcher named Shank on June 29, 1996 (U.S. PTO No. 6,071,537).'
In this statement, the report identifies a specific patent that it asserts may be infringed by Qsymia, namely U.S. Patent No. 6,071,537 issued on June 6, 2000 to Richard Shank and owned by Ortho Pharmaceutical Corp., a Johnson & Johnson affiliate. The Shank '537 patent has four claims, each of which are directed to a method of treating obesity by administering topiramate. The patent does not claim topiramate itself. Therefore, a supplier of topiramate to Vivus could not be a direct infringer of the Shank '537 patent.
Now, whether Qsymia itself directly infringes the Shank '537 patent is a legitimate question, but not one that can be competently answered by merely looking at the title, as is done in the report. While it is true that, as the report says, "You do not have to be a patent attorney to read the title of the abstract," as discussed above, you do have to be a patent attorney to come to a competent legal conclusion regarding whether the Shank '537 patent is (1) valid and (2) infringed by Qsymia. The report fails to perform a claim-by-claim analysis of the four claims in the Shank '537 patent or confirm that the file history of the Shank '537 patent was reviewed, both of which are required to form a competent patent validity and infringement opinion under the law. Again, I'm not saying the report is necessarily wrong, and that Qsymia has nothing to fear in terms of the Shank '537 patent. It's entirely possible that the Shank '537 patent is valid and infringed by Qsymia. I've put that question on my to-do list and hopefully will be able to spend time looking into it shortly. For now, all I'm saying is that the report's opinion that there is substantial risk Qsymia infringes the Shank '537 patent is not competent or reliable under the law.
I note that, regarding validity of the Shank '537 patent, the report states, "There is no evidence of the validity of this patent ever being challenged," which appears to be true, as I also can find no challenge to the Shank '537 patent's validity. However, I also can't find any record of it being asserted by Ortho against anyone, nor is it listed in the Orange Book. So, there likely hasn't yet been sufficient motive or opportunity for someone to challenge the Shank '537 patent. Thus, I do not interpret the absence of any such challenge to be a "major problem" for Qsymia, as the report concludes. Further still, even if the Shank '537 patent is valid, Ortho would still have to prove that it is infringed by Qsymia, an issue on which Ortho would have the burden of proof in court.
Statement From Report: 'How exactly does Vivus overcome the Shank patent to sell topiramate for weight loss? Citron rates this unresolved question a substantial risk factor.'
There is no evidence that Ortho has asserted the Shank '537 patent against Vivus, or that it ever will, and it is unwise for companies to preemptively disclose how they would defeat allegations of patent infringement before such allegations are even made. It'd be like showing your hole cards when playing poker before it's even your turn to act. The fact that Vivus has not publicly detailed how it would address any accusation of infringing the Shank '537 patent is not, in my opinion, a basis to believe that such accusation is likely to be made or would have any merit.
Furthermore, on this issue, the report cites Vivus' head of corporate development as saying that it received advice from "several patent counsels" and "don't believe there's any issues" (sic). That means the company hired lawyers to look into the matter, which is the right thing to do, and that as a result of consulting with its attorneys, it came to the opinion that the referenced patent is not a concern. At this point, I'd actually think worse of Vivus if it did say more than that. I'd never let my client do so, as it could seriously jeopardize their legal interests. If and when the time comes for Vivus to defend itself from an accusation of infringing the Shank '537 patent, or any other patent, I see no evidence to suggest it won't be able to do so. The report does not state the company would be unable to afford competent patent attorneys to defend it, and I personally know plenty of such attorneys who are dying for work these days.
Statement From Report: "It is impossible to assess the market value of Qsymia to Vivus until this issue is fully disclosed and resolved."
I disagree with this statement because it uses the phrase "impossible to assess." The word "assess" means to evaluate or estimate, and it is entirely possible to estimate the risk that the Shank '537 patent poses to Qsymia without the situation being "fully ... resolved." As the report itself states, and does not dispute, Ortho does not currently have an obesity drug using topiramate. As such, it would have no motivation to shut down sales of Qsymia. Rather, Ortho would want to negotiate a favorable royalty payment from Vivus and then encourage lots of sales of the drug to maximize its own revenue stream. Unless/until Ortho exploits the Shank '537 patent itself, or licenses it to someone else, why on earth would it want to shut down Qsymia, when it can instead use the Shank '537 patent as a basis to make easy money from the drug?
Even if Ortho was not willing to strike a deal with Vivus, under Section 284 of the Patent Act, because Ortho does not have a competing product itself, it would not have any lost profits and, thus, the most Ortho could recover from Vivus even assuming the Shank '537 patent is valid and infringed would be a reasonable royalty, an amount to which a willing licensee and a willing licensor would agree. While Ortho could try to get triple damages from a court if Qsymia is held to infringe the Shank '537 patent, to do so it would have to prove Vivus committed willful infringement, which Vivus could defeat by showing that it consulted with patent attorneys and reasonably believed it was not infringing the patent (which, as discussed above, it has already said publicly it has done). An injunction is unlikely to be granted because Ortho does not have a competitive product and the availability of Qsymia to help patients manage their weight provides a substantial public benefit.
Thus, even if the Shank '537 patent is valid and even if it is infringed by Qsymia, a court would likely only order Vivus to pay a reasonable royalty, which would be an amount that allows it to still sell the drug and make profits. The report does not discuss these issues regarding the calculation of damages that Vivus would in the worst-case scenario be forced to pay or the fact that an injunction would not likely be granted. The report also does not mention the time it would take for Ortho to sue Vivus for infringing the Shank '537 patent and receive a favorable verdict, which would likely take several years. Thus, for these reasons alone, before even analyzing the validity and infringement questions, I see no immediate term risk to launch of Qsymia based on the Shank '537 patent and think the report's conclusion that it is impossible to asses the value of Qsymia to Vivus is flatly wrong.
There are other issues mentioned in the report, including those related to Vivus' own patent protection for Qsymia. I hope to have time in the near future to address that issue.
Disclosure: I am long VVUS.
Disclaimer: I was not compensated by any party to write this article.