Novartis Pharma AG v. Incyte Corp.

• Decision Date: 18 February 2021
• Docket Number: 1:20-cv-00400-GHW
• Citation: 520 F.Supp.3d 514
• Parties: NOVARTIS PHARMA AG, Plaintiff, v. INCYTE CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

520 F.Supp.3d 514

NOVARTIS PHARMA AG, Plaintiff,

v.INCYTE CORPORATION, Defendant.

1:20-cv-00400-GHW

United States District Court, S.D. New York.

Signed February 18, 2021

As Amended February 22, 2021

Sylvia E. Simson, Harold S. Shaftel, Greenberg Traurig, P.A., New York, NY, for Plaintiff.

Daniel Paul Mach, Francis Dominic Cerrito, Richard Irving Werder, Jr., Quinn Emanuel Urquhart & Sullivan LLP, New York, NY, for Defendant

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge:

PlaintiffNovartis Pharma AG("Novartis") and DefendantIncyte Corporation("Incyte") forged an agreement to work together to commercialize a valuable drug compound called ruxolitinib.Incyte had an innovative concept.Novartis provided financing to kickstart its development, and contributed Novartis's global reach and marketing expertise.The agreement formalizing their collaboration established separate sales territories: Incyte was to sell ruxolitinib in the United States, and Novartis everywhere else.The parties agreed to pay each other royalties based on sales in their respective domains and to cooperate on the development of new uses for ruxolitinib.But this fruitful collaboration turned sour in 2019, when Incyte unilaterally decided that it was entitled to reduce its royalty payments to Novartis by 50%, as a result of the loss of some of its regulatory protections for the drug in the United States.

In this action, Novartis challenges Incyte's decision to reduce its royalty payments to Novartis.The case presents a straightforward issue of contractual interpretation, in a not so straightforward contract.Incyte argues that the terms of the agreement unambiguously permitted it to reduce its royalty payments to Novartis.Novartis argues that the agreement is ambiguous because the two parties have each presented plausible interpretations of its provisions.Because the Court concludes that one of the provisions of the parties’ agreement is ambiguous, Incyte's motion to dismiss is DENIED.

I.BACKGROUND¹

A. Novartisand Incyte Collaborate to Develop Ruxolitinib

On November 24, 2009, Novartis and Incyte entered into the Collaboration and License Agreement that is the subject of this dispute.Decl. Daniel P. Mach Supp. Incyte Corp.’s Mot. to Dismiss("Mach Decl.") Ex. 1 (the "Agreement"), Dkt.No. 36-1; Compl.¶ 1, Dkt. No. 1.²The Agreement provided a comprehensive framework for the relationship between the two parties to permit them to "collaborate with respect to the research, development and commercialization of certain pharmaceutical Compounds on a global scale."Compl.¶ 14.Before entering into the Agreement, Incyte had several medicinal compounds in development, but the company did not sell or market any pharmaceutical products in the United States.Id.¶ 1.Incyte could not effectively develop and commercialize its products on its own.Id.The Agreement with Novartis brought Incyte many benefits—the ability to leverage off of Novartis's know-how and global presence, and, not insignificantly, "hundreds of millions of dollars ... in up-front and milestone payments to fund research and development activities relating to certain compounds."Id.

The Agreement established a framework within which Novartis and Incyte could work together to develop and commercialize a number of clinically important medical products.Id.Broadly speaking, pursuant to the Agreement, the parties"agreed to collaborate and share expertise, intellectual property, and decision-making with respect to the development and commercialization of [those products]."Id.

One of the products developed by Incyte as part of its collaboration with Novartis—ruxolitinib—was a great success.Id.¶ 3.Sold in the United States as "Jakafi®,"³ ruxolitinib is a kinase inhibitor used to treat rare blood cancers and to support organ transplants.Id.¶¶ 1, 23–24.Incyte's revenues have skyrocketed as a result of its sales of ruxolitinib."Incyte has gone from approximately $9.27 million in revenues in 2009 to approximately $1.89 billion in revenues in 2018 ...."Id.¶ 1.And their sales are expected to increase.Id.

The Agreement establishes separate territories for Novartis and Incyte to sell products that are licensed under the Agreement.In essence, the two companies have divided the world into two spheres: "Novartis holds the rights to develop and commercialize any Licensed Products containing the Compounds outside the U.S. and Incyte holds the rights to market and sell products containing those same Compounds within the U.S."Id.¶ 2.⁴

The division of the companies’ territories into these two geographic spheres is important in the analysis of the parties’ royalty obligations.That is because each party pays royalties to the other "based on defined percentages of annual sales of Licensed Products in its respective territory."Id.Section 8.3(a) of the Agreement provides for the payment of royalties by Novartis to Incyte.Agreement§ 8.3(a)("Novartis shall pay to Incyte royalties on aggregate Net Sales of each License Product on a Licensed-Product-by-Licensed Product basis, at the followings rates: ....").Section 8.3(b) of the Agreement provides for the payment of royalties by Incyte to Novartis.Agreement§ 8.3(b)("Incyte shall pay to Novartis a royalty, on a JAK Licensed Product-by-JAK Licensed Product basis, on annual Net Sales of such JAK Licensed Product in the JAK Field in the Incyte Territory at the following rates ....").The royalty rate that Incyte must pay Novartis varies based on the aggregate annual net sales of a "JAK Licensed Product"—ranging from 2% for the first $100,000,000 in sales to 5% on annual net sales in excess of $300,000,000.Id.While the rates are relatively low, when applied to a base of sales in the billions, the amount of the annual royalty payments is significant.

The obligations of the parties to pay royalties under the Agreement are not indefinite.Section 8.3 of the Agreement describes circumstances in which the parties’ obligations to pay royalties either terminate entirely or "step down" to a lower rate.This provision is at the heart of this dispute.It reads in full as follows:

Royalties payable under this Section 8.3 shall be paid by the applicable Party on a Licensed Product-by-Licensed Product and country-by-country basis from the date of First Commercial Sale of each Licensed Product with respect to which royalty payments are due for a period which is the longer of: (i) the last to expire of any Valid Claim of Licensed Patent Rights Covering such Licensed Product in such country; (ii) ten (10) years following the date of First Commercial Sale in such country; and (iii) the expiration of Regulatory Exclusivity for such Licensed Product in such country (each such term with respect to a Licensed Product and a country, a "Royalty Term").Notwithstanding the foregoing, in the event that either (A) the Royalty Term continues solely due to clause (ii)(i.e. in a specific country the Licensed Product is neither Covered by a Valid Claim of Licensed Patent Rights nor is such Licensed Product subject to Regulatory Exclusivity) or (B) Generic Competition exists with respect to a Licensed Product in a country with respect to a royalty-reporting period, then the royalty rates in such country for such Licensed Product (for such royalty-reporting period, if applicable) will be reduced to fifty percent (50%) of the applicable rate in Section 8.3(a) or 8.3(b), based on the weighted average annual royalty rate in the Novartis Territory or the Incyte Territory, as the case may be, beginning on January 1st of the Calendar Year following the first Calendar Year in which there exists a situation described in (A) or (B) of this sentence in the applicable country.

Agreement§ 8.3(c).

The first sentence of Section 8.3(c) describes the circumstances in which the parties’ royalty obligations for a given product will terminate entirely.The obligation to pay royalties for a "Licensed Product" remains in effect from the date of its "First Commercial Sale" in a country until the last of one of the three contingencies identified in clauses (i), (ii), and (iii) occurs.Those contingencies are "(i) the last to expire of any Valid Claim of Licensed Patent Rights Covering such Licensed Product in such country; (ii) ten (10) years following the date of First Commercial Sale in such country; and (iii) the expiration of Regulatory Exclusivity for such Licensed Product in such country ...."Id.

The second sentence of Section 8.3(c) is the "step down" provision."Step down" because it provides that under certain circumstances the royalty rate steps down to 50% of the rate that would otherwise be applicable.Id.("[I]n the event that ... the Royalty Term continues solely due to clause (ii) ... then the royalty rates in such country for such Licensed Product (for such royalty-reporting period, if applicable) will be reduced to fifty percent (50%) ....").As relevant here, the step down provision applies if royalties remain payable solely because of the circumstances described in clause (ii) of the first sentence of Section 8.3(c)—that is, if the product is still within the 10 year period following the "First Commercial Sale" of the product within a given country.⁵Put differently, the step down only applies if there is no continuing obligation to pay royalties under either clause (i) or (iii) of the first sentence of Section 8.3(c)—"i.e. in a specific country the Licensed Product is neither Covered by a Valid Claim of Licensed Patent Rights nor is such Licensed Product subject to Regulatory Exclusivity."

Id.The parties’ disagreement in this case turns on whether such an obligation persists under either of those clauses—and, thus, requires a close reading of them.

Like much of the Agreement, Section 8.3 uses a number of capitalized words for which the Agreement provides precise definitions.Seeid.art. I.It is impossible to understand the meaning of Section...