Merck & Co., Inc. v. Canada (Attorney General), docket T-398-99

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docket T-398-99

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Text of decision

Date:19991206

Docket: T-398-99

IN THE MATTER OF Sections 18, 18.1 and 18.2 of the Federal Court Act, R.S.C. 1985, Chapter F-7.

AND IN THE MATTER OF the Food and Drugs Act, R.S.C. 1985, Chapter F-27 and Division 8 of the Regulations thereunder.

AND IN THE MATTER OF Section 55.2(4) of the Patent Act and the Patented Medicines (Notice of Compliance) Regulations, SOR/93/133.

BETWEEN:

MERCK & CO., INC. and

MERCK FROSST CANADA & CO.

Applicants

- and -

THE ATTORNEY GENERAL OF CANADA

THE MINISTER OF HEALTH

and NU-PHARM INC.

Respondents

REASONS FOR ORDER

MCGILLIS J.

[1] The respondent Nu-Pharm Inc. ("Nu-Pharm") has applied, on an urgent basis, for a stay of my Judgment dated November 23, 1999. In that Judgment, I allowed the application for review brought by Merck & Co., Inc. and Merck Frosst Canada & Co. ("Merck"), and quashed the decision of the Minister of Health ("Minister") to issue a notice of compliance to Nu-Pharm for the drug Nu-Enalapril, a generic version of Merck's patented drug VASOTEC. In my decision, I concluded, on the basis of my construction of subsection 5(l) of the Patented Medicines (Notice of Compliance) Regulations, SOR/93-133 as amended, that the Minister had erred in law in issuing the notice of compliance before Nu-Pharm had complied with the provisions of the regulations. The central issue in the case was the proper interpretation to be accorded to subsection 5(1) of the Patented Medicines (Notice of Compliance) Regulations. Although Nu-Pharm intends to appeal my Judgment, it has not yet filed a Notice of Appeal in the Court of Appeal. Under Rule 398 of the Federal Court Rules, 1998, 1 therefore have jurisdiction to entertain the motion for a stay. Given the urgency and the importance of this matter to all of the parties, it is necessary for me to render my decision on the motion for a stay as quickly as possible. At the conclusion of the hearing, I advised counsel for the parties that the time constraints would prevent me from summarizing in my decision all of the extensive evidence adduced on the motion for a stay. However, in arriving at my decision, I have carefully reviewed and considered all of the evidence in the record, as well as the very able submissions made by counsel.

[2] Counsel for Merck and Nu-Pharm Intend to request an expedited hearing in the Court of Appeal. They have agreed to co-operate with a view to having the appeal heard within the next three months, assuming that their request for an expedited hearing will be granted.

[3] In order to obtain a stay of a judgment pending appeal, Nu-Pharm must satisfy all three branches of the test applicable for the issuance of an interlocutory injunction. In other words, Nu-Pharrn must establish that there is a serious issue to be tried on appeal, that it will suffer irreparable harm if a stay is not granted, and that the balance of inconvenience lies in its favour. [See RJR-Macdonald Inc. v. Canada (Attorney-General), [1994] 1 S.C.R. 311; Manitoba (Attorney General) v. Metropolitan Stores (MTS) Ltd., [1987] 1 S.C.R. 110; Merck & Co., Inc. v. Apotex Inc. (1995), 60 C.P.R. (3d) 31 at 39 (F.C.T.D.)].

i) serious issue

[4] The central issue addressed on the application for review was the proper construction of subsection 5(l) of the Patented Medicines (Notice of Compliance) Regulations. In his draft notice of appeal, counsel for Nu-Pharm has outlined various grounds of appeal. I am satisfied that the issues to be raised by counsel for Nu-Pharm on the appeal of my decision are not frivolous and vexatious. In the circumstances, Nu-Pharm has met the low threshold test prescribed in the jurisprudence and has established that there is a serious issue to be tried on appeal.

ii) irreparable harm

[5] Prior to the hearing of the motion for a stay, Merck gave an undertaking to "compensate Nu-Pharm for any and all reasonable and provable financial losses that it may suffer" in the event that the motion for a stay is dismissed and my Judgment is subsequently reversed by the Court of Appeal.

[6] In his submissions on the question of irreparable harm, counsel for Nu-Pharm focussed on two areas: the financial consequences to Nu-Pharrn in the period of time pending the disposition of the appeal and the consequences in the marketplace.

[7] In order to place the submissions concerning the financial consequences to Nu-Pharm in some context, it is necessary for me to outline briefly some of the facts established in the evidence adduced on the motion for a stay.

[8] Nu-Pharm. is a relatively small generic drug company, with sales revenues approximately one-twentieth or one-twenty-fifth the size, respectively, of the generic drug companies Apotex Inc. and Novopharm Ltd. In contrast, Merck & Co., Inc. is one of the largest pharmaceutical companies in the world. In its 1998 Annual Report, Merck & Co., Inc. and its subsidiaries had annual sales revenues of $26.9 billion U.S. and cash equivalents of $2.6 billion U.S. Nu-Pharm sells approximately 70 generic drug products in Canada. Although Nu-Pharm sells a relatively large number of products, its sales

revenues are comparatively small, given its size and strength in relation to its competitors Apotex Inc. and Novopharm Ltd. Prior to the period in April 1999 when it began to sell Nu-Enalapril under the notice of compliance, Nu-Pharm's average sales were approximately $17,000,000 per year. From April 1999 until the issuance of the Judgment on November 23, 1999, the sale of Nu-Enalapril represented a significant proportion of all of Nu-Pharm's revenues. Nu-Enalapril competes directly with Merck's VASOTEC tablets. Nu-Pharm prices its tablets approximately 18 per cent below the price of VASOTEC.

[9] On September 11, 1997, Nu-Pharm applied for a notice of compliance for Nu-Enalapril tablets by filing an abbreviated new drug submission with the Minister, under the provisions of the Food and Drug Regulations, C.R.C., c. 870 as amended. As a result of the Order issued by Cullen J. on November 19, 1998, the Minister was required to process that abbreviated new drug submission, in which Nu-Pharm had compared Nu-Enalapril with another generic drug, Apo-Enalapril, and not Merck's patented drug VASOTEC. On February 25, 1999, the Minister issued a notice of compliance to Nu-Pharm. for its Nu-Enalapril tablets. From that date until the date of my Judgment, Nu-Pharm was lawfully entitled to sell its Nu-Enalapril tablets in Canada. Nu-Pharm made a very substantial investment in Nu-Enalapril in an attempt to generate the maximum possible sales revenue from this lucrative product. Nu-Pharm was selling Nu-Enalapril in all provinces, save and except for Nova Scotia and Ontario. It expected to be listed in the Ontario formulary in January 2000. As of November 23, 1999, the date of my Judgment, Nu-Pharm was immediately required to stop selling Nu-Enalapril in Canada.

[10] Nu-Pharm presently has raw material inventory on hand valued at $2,151,000 U.S., (approximately $3,500,000 Can.), an inventory of finished Nu-Enalapril tablets valued at $4,200,000 and in-process, unfinished tablets worth $1,300,000. Those figures represent direct costs and do not include any indirect or overhead costs. Finally, Nu-Pharm has approximately $14,000,000 worth of Nu-Enalapril tablets currently on hand in the marketplace for sale by pharmacies, distributors, wholesalers and hospitals.

[11] In the event that Nu-Pharm is prevented from continuing to sell Nu-Enalapril pending the appeal, the in-process tablets valued at $1,300,000 will spoil and be useless. With respect to the finished inventory valued at $4,200,000, each batch of Nu-Enalapril tablets has a shelf life of 24 months. However, Nu-Pharm must provide between at least six and 12 months of unexpired shelf life in order to sell its tablets. The current finished inventory has an unexpired shelf life ranging from 15 to 21 months. Unless Nu-Pharm can continue to sell Nu-Enalapril pending the appeal, some of that inventory will become

unsaleable. Finally, in relation to the $14,000,000 worth of inventory currently in the marketplace, as a matter of practice in the pharmaceutical industry, all manufacturers accept the return of unsaleable products. Nu-Pharm will have to take back all of those tablets, or it would suffer a complete loss of goodwill with its customers. As a result, in the event that a stay is not granted pending appeal, Nu-Pharm will be required to take back Nu-Enalapril tablets having a sale value of $14,000,000. Returned inventory may be re-sold in some limited circumstances, depending on a wide variety of factors, including

the condition of the packaging on return, the results of quality testing and the remaining shelf life. However, a portion of the returned inventory will not be re-saleable for many reasons.

[12] In short, Nu-Pharm's "total out-of-pocket cost" is $19,500,000, plus its $2,151,000 U.S. raw material inventory. Nu-Pharm will lose all or a large portion of that substantial investment as a result of the waste of the in-process inventory, the stale-dating of some of its finished inventory and the return by its customers of its marketplace inventory. Such a loss will place Nu-Pharm's continued viability in jeopardy, and it will be required to terminate some of its sales representatives.

[13] A pro forma balance sheet of Nu-Pharm's assets and liabilities, as of September 30, 1999, was filed in evidence on a confidential basis. The balance sheet indicates that Nu-Pharm's accounts receivable and inventory constitute well over 90 per cent of its current assets. However, a substantial portion of the accounts receivable, approximately 85 per cent, represents the $14,000,000 of receivables for the Nu-Enalapril inventory in the marketplace. Furthermore, the Nu-Enalapril raw material and the finished inventory (totalling $8,600,000) constitutes approximately 45 per cent of the inventory specified in the current assets. Nu-Pharm's liabilities are substantial, and include a large bank loan and significant accounts payable, representing payments owed to suppliers and trade creditors.

[14] The balance sheet also includes two notes, one of which contains a section bearing the heading "cash flow issues over the next three months". That note indicates that Nu-Pharm must make substantial payments in the next three months in "trade payables and other liabilities". Furthermore, its receivables for drugs other than Nu-Enalapril constitute a very small proportion of its accounts receivable in the next three months, something in the range of approximately 15 per cent. As a result, in the event that Nu-Pharm is unable to collect on the $14,000,000 of receivables for Nu-Enalapril, it will face a very substantial cash shortfall over the next three months. Finally, Richard Benyak, President of Nu-Pharm, testified during his cross-examination on his affidavit that Nu-Pharm was "...into the bank for large sums of money", and that the bank wanted to know, following the release of the Judgment, how Nu-Pharrn was going to pay back the funds owed. His evidence that the refusal of a stay pending appeal would place Nu-Pharm's continued viability in jeopardy was not undermined in cross-examination.

[15] Prior to the issuance of the notice of compliance for Nu-EnalapriI, Nu-Pharm was a profitable company. Its precarious financial position arises directly as a result of its substantial investment in Nu-Enalapril and the fact that it may not be able to remain in the market pending the disposition of the appeal.

[16] Nu-Pharm estimates that Merck would suffer lost sales revenues in the amount of approximately $5,000,000, resulting in a loss of approximately $500,000 (at a 10 per cent profit rate), in the event that an expedited appeal is heard before the end of January 2000.

Merck did not challenge that assertion either by cross-examination or by adducing any evidence to the contrary. According to Mr. Benyak, Nu-Pharm. would "easily" be able to reimburse Merck for profits lost during the period of a stay pending appeal.

[17] At the hearing on the motion for a stay, counsel for Nu-Pharm made very compelling submissions that the financial harm to Nu-Pharm during the next three months would be so severe as to place its continued viability in jeopardy.

[18] Following the luncheon recess and at the outset of his submissions, counsel for Merck referred to the undertaking previously given by Merck to reimburse Nu-Pharm for reasonable damages, should Nu-Pharm succeed on its appeal. He also advised the Court that Merck Frosst was now prepared to provide the following second undertaking:

In the event that Nu-Pharm experiences cash flow problems and is unable to obtain further financial support from its shareholders or any affiliated companies, Merck Frosst is prepared to guarantee a loan with Nu-Pharm's bank, hopefully with some sort of security, up to the level of the shortfall over a three month period, pending the decision of the Court of Appeal.

[19] Given the timing involved in the making of the second undertaking, I can only conclude that Merck Frosst tendered its proposal in an attempt to address the very compelling arguments made by counsel for Nu-Pharm concerning the demonstrable and irreparable harm to be suffered by Nu-Pharm in the period pending appeal. In making its second undertaking, Merck Frosst clearly attempted to take steps to ensure that Nu-Pharm's continued viability would not be threatened as a result of the short-term cash flow problems it would suffer from its inability to remain in the market with its Nu-Enalapril tablets pending appeal. However, the second undertaking is contingent upon the co-operation of a third party, namely Nu-Pharm's bank. As a result, the failure of the bank to provide Nu-Pharrn with a very substantial loan, in addition to its current indebtedness, would render the second under-taking meaningless and ineffective. Furthermore, it is difficult to envisage how such an undertaking could be enforced by the Court. I am therefore not satisfied that the second undertaking is adequate. Furthermore, in the rather unique circumstances of the present case, the first undertaking is also not adequate to address the irreparable harm claimed by Nu-Pharm. In particular, the evidence in the record establishes that the continued viability of Nu-Pharm is in jeopardy if the status quo is not maintained pending the disposition of the appeal. In other words, if Nu-Pharm is unable to meet its obligations in the next three months, any compensation by Merck at a later date would be too late to remedy the problem.

[20] Having considered all of the evidence in the record, I am of the opinion that Nu-Pharm has established, by clear and compelling evidence, that the financial consequences arising from its inability to remain in the market in the period pending appeal constitute irreparable harm, as defined in RJR-Macdonald v. Canada (Attorney-General), supra, at 341. Clearly, in the event that it is unsuccessful on appeal, Nu-Pharm will be required, at that point in time, to suffer the consequences of its investment in Nu-Enalapril.

[21] Given my conclusion that Nu-Pharm would suffer irreparable harm by reason of the financial consequences pending appeal, it is unnecessary for me to consider the second branch of the argument advanced by counsel for Nu-Pharm, namely that the consequences in the marketplace constitute irreparable harm.

iii) balance of inconvenience

[22] In assessing the balance of inconvenience, I have considered all of the relevant factors, including the nature of the relief sought, the harm claimed by the two companies, the nature and purpose of the legislation involved and the public interest [See RJR Macdonald v. Canada (Attorney- General), supra, at 342-347 and 350-351.] In my opinion, on the basis of the evidence in the record, Nu-Pharm would suffer greater harm from the refusal of the stay pending a determination of the appeal on its merits. Having considered all of the relevant factors, including those outlined above, I have concluded

that the balance of inconvenience lies in favour of Nu-Pharm.

iv) Conclusion

[23] Having considered all of the evidence in the record, I have concluded, in the exercise of my discretion, that it is in the interests of justice to grant a stay of my Judgment pending the disposition of the appeal on its merits.

[24] The Motion for a stay is therefore granted with costs. My Judgment dated November 23, 1999 is stayed pending the final disposition of the appeal.

"D. McGillis"

Judge

Toronto, Ontario

December 6, 1999

FEDERAL COURT OF CANADA

Names of Counsel and Solicitors of Record

COURT NO: T-398-99

STYLE OF CAUSE:

IN THE MATTER OF Sections 18,18.1 and 18.2
of the Federal Court Act, R.S.C. 1985, Chapter F-7.

AND IN THE MATTER OF the
Food and Drugs Act, R.S.C.
1985, Chapter F-27 and Division 8
of the Regulations thereunder.

AND IN THE MATTER OF
Section 55.2(4) of the Patent Act and
the Patented Medicines (Notice of
Compliance) Regulations,
SOR/93/133.

MERCK & CO., INC. and

MERCK FROSST CANADA & CO.

Applicants

-and --

THE ATTORNEY GENERAL OF CANADA

THE MINISTER OF HEALTH

and NU-PHARM INC.

Respondents

DATE OF HEARING: FRIDAY, DECEMBER 3, 1999

PLACE OF HEARING: OTTAWA, ONTARIO

REASONS FOR ORDER BY: MC GILLIS J.

DATED: MONDAY, DECEMBER 6, 1999

APPEARANCES: Mr. G. A. Macklin

Ms. Jane Clark

Mr. Emmanuel Manolakis

Ms. Carina Pelligrin

For the Applicant

Mr. H. B. Radomski Ms. Daniela Bassan

For the Respondent, Nu Pharm

Mr. F. B. Woyiwada

For the Respondent, Minister

SOLICITORS OF RECORD: Gowling, Strathy & Henderson

Barristers & Solicitors

2600-160 Elgin Street

Ottawa, Ontario

K1P 1C3

For the Applicant

Goodman, Phillips & Vineberg

Barristers & Solicitors

2400-250 Yonge Street W.

Box 24

Toronto, Ontario

M5B 2M6

For the Respondent, Nu Pharm

Department of Justice

East Memorial Building

284 Wellington Street, 2nd Floor

Ottawa, Ontario

K1A OH8

For the Respondent, Minister

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Merck & Co., Inc. v. Canada (Attorney General), docket T-398-99

Citationsdocket T-398-99

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Citations
docket T-398-99