A federal court found Eli Lilly in breach of a royalty agreement with an Arizona company, likely sending the case — which deals with Lilly’s blockbuster diabetes drugs — to a trial.
The Arizona District Court ordered Lilly to pay the royalties to Tucson, AZ-based Research Corporation Technologies, per an opinion delivered Tuesday, stemming from a 1990 agreement involving materials used in manufacturing Lilly’s insulin products. Lilly had agreed to pay a 2% royalty on worldwide sales, and the exact amount of damages will be determined in a trial, Judge Scott Rash wrote.
In response to the news, a Lilly spokesperson sent Endpoints News the following statement: “We strongly disagree with the decision and vigorously continue to defend our positions. The suit does not affect Lilly’s ability to continue manufacturing and distributing Humulin (human insulin), Humalog (insulin lispro injection) or r-glucagon.”
Back in 1990, Lilly entered into an agreement with the now-defunct oil company Phillips Petroleum to utilize the latter’s yeast expression technology for making reagents, agreeing to pay royalties in exchange for any product resulting from the tech. Phillips sold the technology to RCT in 1993 and Lilly continued the agreement.
One of the yeast strains and four expression vectors from this technology ended up comprising key aspects of Lilly’s insulin products, along with a separate E. coli expression system and other materials. Though Lilly and RCT don’t dispute the contract’s language and that none of these platforms individually make up the drugs’ active pharmaceutical ingredient, they interpreted the language differently and disagreed over whether the elements from RCT’s tech help make up the resulting drug.
The court was tasked with determining if Lilly’s diabetes drugs constitute an “end product,” or a therapeutic product sold to consumers. RCT argued the original contract states any element “produced by” the technology that ends up in an end product falls under the royalty agreement, which would include the yeast strain and four expression vectors.
Lilly’s defense, however, centered on a bit of linguistic sleight of hand, claiming nothing in the drugs contains anything “expressed by” the specific yeast and vector technology. As such, Lilly argued, the diabetes and insulin drugs it has sold for billions of dollars cannot be considered “end products.”
Rash sided with RCT’s interpretation, noting both sides agreed the contract’s language is unambiguous. “To adopt Lilly’s interpretation would render the royalty terms and definitions of ‘End Product’ and ‘Reagent’ ineffective and meaningless,” Rash wrote in his opinion.
He later added:
Under Lilly’s definition, where “produced by” means “expressed by,” an End Product could never be made under the Agreement, because, as set forth above, expression systems produce proteins — not APIs … As such, under Lilly’s definition, much of the contract would be rendered superfluous.
On top of this, Rash found Lilly in breach of another part of the agreement, saying it failed to notify RCT that it had begun receiving materials from elsewhere to produce its diabetes drugs. In 2001, Lilly granted Novartis’ Sandoz unit a sublicense of the RCT tech but didn’t tell RCT until 2015. Had RCT known sooner, it would have acted to renegotiate the royalty agreement and instead was forced to litigate, the company argued.
Though Lilly will have to pay damages about the failure to notify, Rash noted the big drugmaker did not provide Sandoz with any confidential information. Further proceedings will take place regarding a three-month period in 2016 over a dispute regarding when the royalty agreement ended.
Royalties have been a constant part of court fights in the drug development world, with several companies butting heads over potentially massive sums. For example, in December 2019, a jury held Gilead liable for 27.6% of royalties in a patent case against Bristol Myers Squibb and Sloan Kettering. And earlier this year, Novartis was ordered to pay Daiichi Sankyo royalties on the cancer drug Tafinlar.