Hatch-Waxman litigation: How legal finance supports brands and generics even when monetary damages aren’t at stake

Pharmaceutical and life sciences businesses of all types, including smaller or cost-constrained corporates and those with larger budgets, are increasingly familiar with legal finance. It is an essential tool in high-value patent infringement cases in which plaintiffs whose patents have been infringed protect their rights and seek significant damages against one or more defendants, with funding used to cover legal fees and expenses or to accelerate expected damages attributable to asserted patents. More recently, funding has also begun to play a role in patent monetization in many forms, including outright sale of patents, litigation-less licensing, settlement through applied litigation pressure or final non-appealable judgment and collection after years of litigation. As my colleagues wrote last quarter, 73% of in-house lawyers report that revenue from patent monetization has increased over the last 10 years.[1]

But there is another less well-known context in which pharmaceutical companies—including makers of branded as well as generic products—can use legal finance to optimize business outcomes even when monetary damages are not the primary goal: Hatch-Waxman litigation. Legal finance from Burford can benefit both branded and generic drug companies—although of course never in the same matter.

Background

The Drug Price Competition and Patent Term Restoration Act (known colloquially as the Hatch-Waxman Act) sets out a balance between brand and generic pharmaceutical manufacturers —that of innovation and affordability. Innovative pharmaceutical manufacturers are given market exclusivity for their branded products protected by robust patents; generic manufacturers are given limited exclusivity to swiftly bring safe and effective cost-competitive and fully-substitutable products to the market as soon as the patent protection expires (whether naturally—via patent expiration, through settlement, or final judgment in litigation).

In the Hatch-Waxman context, monetization arises from the patent owner’s ability to capitalize on product revenues by excluding competitors from a given market, or a generic’s ability to traverse the patent hurdles and launch an inexpensive product to those in need post haste. Monetary damages are typically unavailable to the patent owner, and settlements for meaningful value beyond saved litigation expenses are considered anticompetitive. This absence of damages creates both challenges and opportunities for funders. Evaluating these cases requires weighing not only traditional patent law risks, but also regulatory and market risks.

Generic patent litigation presents unique and particularized incentives

The generic pharmaceutical context flips the usual dynamic of patent owner versus alleged infringer. Here, the value lies in a defendant “breaking” patents—demonstrating invalidity or avoiding infringement—to gain market entry (including time-limited generic exclusivity). As a result, generic drug companies devote significant resources to the complicated game of exclusivities and drug patents, with the average cost of a successful defense around $3.5 million.[1]  Beyond litigation, R&D and other necessary development activities total about $3 million for a small molecule generic to $10 million for a higher-value product (excluding far costlier biosimilars that can cost several hundreds of millions of dollars to develop).[2]

Given these pressures, it is unsurprising that generic companies seek to minimize litigation costs and preserve as much of the upside as possible in the form of increased revenue or extended market entry. At first glance, this may seem misaligned with legal finance, which carries a cost of capital. But that cost can easily enable opportunities that far exceed it.

Case study: Generic company employs legal finance at scale to unlock unrealized value

Let’s consider a hypothetical case study. Assume the cost of capital is repayment of the investment amount plus 3x that amount, meaning that if a generic patent litigation succeeds and the drug enters the market, the company retains its revenue on that drug after deducting 4x the amount invested in the case.

Now let’s say that the company can develop a simpler small molecule generic for $3 million, with potential revenue of $50 million—or a higher-value generic for $10 million, with potential revenue of $300 million. While the return on investment is clearly greater for the higher-value generic, in either instance, legal finance extends the company’s resources, enabling it to pursue more ambitious opportunities and make solid revenue-generating investments in its business.

Where Burford funds a single case, the savings on legal spend free the company to pursue an additional small-molecule generic. Even after accounting for the cost of capital, the company realizes substantial incremental value.

The power of legal finance becomes even more evident when Burford funds litigations at scale. For example, funding three cases can generate enough savings for the company to pursue a high-value generic—capturing its outsized revenue even after accounting for the cost of capital on all three litigations. That value continues to grow as additional funding enables investment in more areas and additional generics. At the same time, the funder obtains some diversification across a portfolio which mitigates against regulatory and market execution risk tied to a specific product.

Branded patent litigation presents unique and particularized opportunities

The branded pharmaceutical company finds itself in a unique, monopolistic posture in Hatch-Waxman litigation, pursuing infringement against a defendant who has not commercially sold any product yet. Here, the value lies in a patent owner “defending” its patents—proving infringement and avoiding invalidity—to retain market exclusivity until the last-to-expire patent expires. As a result, branded drug companies devote astounding resources to maintaining their monopolies through patent litigation, with budgets that could make even the most hardened litigator do a double take. Beyond litigation, drug development costs and clinical timelines are enormous—estimated at more than $800 million and 10 years on the low end.[1]  Those high development costs (including the risk of failure) are offset by several years of market exclusivity.

Given monopolistic marketplace, it is unsurprising that branded companies seek to extract every possible additional day of exclusivity for themselves—and often have the revenue stream(s) to do so. At first glance, this too may seem misaligned with legal finance, which carries a cost of capital. Ongoing branded sales provide a meaningful revenue stream for the patent owner, but its ability to pay exorbitant fees for litigation does not equate to its desire or enthusiasm to do so. A new company reliant on sales of a single commercial product—or an established company with a diversified portfolio and desire to allocate resources more efficiently or minimize P&L impact—can benefit from non-recourse capital and budget certainty to support ongoing litigation.

Case study: Branded company employs legal finance to derisk operations

The versatility of legal finance is one of the greatest assets available to a branded pharmaceutical company’s operations. Companies of varying sizes and needs can derisk operations to ensure a single case moves forward in the face of budget overages, or to have the entirety of uncertain (but certainly large) fees and expenses of a single case covered, or even the entire litigation department’s Hatch-Waxman spend across multiple cases at various stages.

Addressing a hypothetical single case, assume the innovator has at least two patents, one expiring much later in time than the other. The innovator may feel confident in its ability to stave off generic competition though expiry of the first patent (though not a guarantee with litigation) but less confident on maintaining exclusivity through the very last date of patent life. There’s a chance the patent owner can win litigation and keep generics off until the very end of the last-to-expire patent’s natural life; there’s a chance the generics invalidate the patent and launch a commercial product perhaps as early as the first patent’s expiry; and there’s a chance the parties can settle for a guaranteed launch date in between the patent expirations.

Every day of exclusivity beyond the first patent’s expiration can be a lucrative win for the brand. Burford can provide non-recourse, non-dilutive capital to fund all or part of litigation to ensure corporate legal budgets stay within boundaries and meritorious cases are fully supported. Tens of millions of dollars otherwise spent on a single litigation can be put to better use throughout the company to focus on next generation therapies. The cost of capital for this opportunity is tied to a share of future exclusive sales earned in the window between the first patent’s expiry and the actual generic launch—whether that launch occurs immediately after a generic litigation win, several years later through settlement, or at the very end of the patent term following a litigation victory.

Legal finance drives positive outcomes and corporate freedom of choice

These are only some of the ways legal finance can benefit each of branded and generic drug companies—again, of course, never in the same matter. In practice, there are many variations and alternatives depending on entitlements, expenses and potential revenues. Burford prides itself on our ability to provide creative solutions to match the specific needs and goals of our counterparties. In addition, pharmaceutical companies can use Burford’s funding to:

• Undertake more costly development efforts;
• Support and de-risk product launches;
• Share the duration and legal risk in instances where they have already made significant investment and face cost pressures and/or fatigue;
• Pursue higher-value or more strategic legal matters that they might not otherwise be able to pursue considering existing cost constraints; or
• Weather existing litigations and avoid accepting non-ideal settlement offers due to cost or timing limitations.

Ultimately, legal finance gives drug companies freedom of choice—the ability to leverage their expertise to take bigger risks and grow on their own terms. 

 [1] See id. See HHS Report dated October 2, 2024, at p. 1, 29, available at https://aspe.hhs.gov/reports/drug-development.

 [2] See id. See HHS Report dated December 31, 2021 at 26, available at https://aspe.hhs.gov/reports/cost-generic-drugs.

 [3] See id. at Table 4; https://www.mckinsey.com/industries/life-sciences/our-insights/three-imperatives-for-r-and-d-in-biosimilars 

 [4] See id. See HHS Report dated October 2, 2024, at p. 1, 29, available at https://aspe.hhs.gov/reports/drug-development.