Global Arbitration Review The Guide to Damages in International Arbitration Editor John A Trenor Fourth Edition © Law Business Research 2021 The Guide to Damages in International Arbitration Fourth Edition Editor John A Trenor Reproduced with permission from Law Business Research Ltd This article was first published in January 2021 For further information please contact [email protected] ga r ©© Law Law Business Business Research Research 2021 2021 Publisher David Samuels Account Managers Marta Jurkowska and Samuel Romp Editorial Coordinator Gavin Jordan Production Operations Director Adam Myers Head of Content Production Simon Busby Copy-editor Caroline Fewkes Proofreader Emily Casswell Published in the United Kingdom by Law Business Research Ltd, London Meridian House, 34-35 Farringdon Street, London, EC4A 4HL, UK © 2020 Law Business Research Ltd www.globalarbitrationreview.com No photocopying: copyright licences do not apply. 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Enquiries concerning editorial content should be directed to the Publisher – [email protected] ISBN 978-1-83862-212-1 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112 © Law Business Research 2021 Acknowledgements The publisher acknowledges and thanks the following for their learned assistance throughout the preparation of this book: ALIXPARTNERS A&M GMBH WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT BDO LLP BERKELEY RESEARCH GROUP CEG EUROPE CET GROUP OF COMPANIES CHARLES RIVER ASSOCIATES CORNERSTONE RESEARCH FRONTIER ECONOMICS LTD FTI CONSULTING HABERMAN ILETT UK LTD HOMBURGER KING & SPALDING LLP LONDON BUSINESS SCHOOL MCDERMOTT WILL & EMERY UK LLP NERA ECONOMIC CONSULTING ONE ESSEX COURT i © Law Business Research 2021 ORRICK HERRINGTON & SUTCLIFFE LLP OXERA CONSULTING LLP SECRETARIAT THE BRATTLE GROUP THREE CROWNS LLP VICTORIA UNIVERSITY, FACULTY OF LAW WHITE & CASE LLP WILMER CUTLER PICKERING HALE AND DORR LLP WÖSS & PARTNERS © Law Business Research 2021 Preface This fourth edition of Global Arbitration Review’s The Guide to Damages in International Arbitration builds on the successful reception of the earlier editions. As explained in the introduction, this book is designed to help all participants in the international arbitration community understand damages issues more clearly and to communicate those issues more effectively to tribunals to further the common objective of assisting arbitrators in rendering more accurate and well-reasoned awards on damages. The book is a work in progress, with new and updated material being added to each successive edition. In particular, this fourth edition incorporates updated chapters from various authors and contributions from new authors, including a chapter on damages issues in light of covid-19. This fourth edition seeks to improve the presentation of the substance through the use of visuals such as charts, graphs, tables and diagrams; worked-out examples and case studies to explain how the principles discussed apply in practice; and flow charts and checklists setting out the steps in the analyses or the quantitative models. The authors have also been encouraged to make available online additional resources, such as spread- sheets, detailed calculations, additional worked examples or case studies, and other materials. We hope this revised edition advances the objective of the earlier editions to make the subject of damages in international arbitration more understandable and less intimidating for arbitrators and other participants in the field, and to help participants present these issues more effectively to tribunals. We continue to welcome comments from readers on how the next edition might be further improved. John A Trenor Wilmer Cutler Pickering Hale and Dorr LLP November 2020 vii © Law Business Research 2021 Part IV Industry-Specific Damages Issues © Law Business Research 2021 29 Damages in Life Sciences Arbitrations Gregory K Bell, Andrew Tepperman and Justin K Ho1 Introduction At a conceptual level, many of the methodologies discussed elsewhere in this guide apply equally to arbitrated disputes in the life sciences sector. The goal of the damages inquiry in this sector is the standard one: to restore the claimant to the financial position it would have achieved had the improper conduct not occurred. Standard approaches are used to attain this goal, namely determining the claimant’s ‘but for’ profits at each point in time during the damages period and subtracting from these the claimant’s actual profits (if any). The differences between these amounts are then brought forward (in the case of past damages) or discounted back (in the case of future damages) to the relevant date (often the date of the hearing, or the expected date of the award), using appropriate interest and discount rates. As we articulate in this chapter, however, there are some complexities to damages calculations in the life sciences industries that are worthy of further discussion. The chapter is organised as follows. The first section provides a brief overview of salient characteristics of the life sciences sector, with a focus on the biopharmaceutical industry. We then outline some of the main types of disputes that are heard in life sciences arbitrations. Following this, we discuss some of the aspects of common analyses specific to life sciences that are used to determine damages in these types of disputes. Industry overview Many of the companies in the life sciences industries are multinationals, operating on a global scale with respect to the discovery, production, marketing and sale of products promoted for human health. These products are generally grouped as diagnostics, medical 1 Gregory K Bell, group vice president, leads Charles River Associates’ global life sciences practice, Andrew Tepperman is a vice president in the practice and Justin K Ho is a principal in the practice. 424 © Law Business Research 2021 Damages in Life Sciences Arbitrations devices and pharmaceuticals. Our discussion focuses on prescription pharmaceuticals and the biopharmaceutical industry; many of the insights, however, are equally applicable with respect to damages issues involving diagnostics or medical devices. Research and development The value chain for the biopharmaceutical industry is composed of three principal func- tions: research and development (R&D), manufacturing, and sales and marketing. A prin- cipal characteristic of the industry is the long-term, high-cost, high-risk endeavour that is R&D. It is suggested that it takes more than seven years for a new drug to be discovered and brought to market, that only one in 10,000 substances that begins the development journey emerges as a marketed pharmaceutical and that only one in five marketed pharma- ceuticals earn enough to cover the hundreds of millions of dollars that tend to be associated with the R&D costs of new pharmaceuticals.2 The R&D function tends to extend from the basic and applied laboratory research relating to identifying a potential pharmaceu- tical compound, to pre-clinical testing and development work, through to clinical trials in human beings. Before product approval, the last step in the development process involves an exten- sive and exhaustive summary of the development work and results, which is packaged as submission dossiers for regulatory approval to market the product in different coun- tries. Regulatory approval leads to indications and usage instructions on country-specific product labels.3 Additionally, there may be negotiations on price and regarding reimburse- ment by the country’s public health system or private insurers. Launch of the product, however, does not necessarily mean the end of R&D focused on the product. There may be continuing efforts to explore new indications, address significant side effects and develop new formulations. R&D is the primary value driver of the pharmaceutical industry. Products are the scarce resource and thus it is the intellectual property developed through the R&D process that captures the residual profits generated by sales. Manufacturing capacity and sales represent- atives may be contracted, and thus only need to be rewarded with normal profit margins; any margin that remains accrues to the intellectual property that led to the product in the first place. Manufacturing In broad terms, two types of manufacturing processes characterise the production of phar- maceuticals. Most pharmaceuticals are pills or tablets, taken orally and generally dispensed at a retail pharmacy. For these products, manufacturing tends to be relatively well under- stood: there is primary manufacturing of the active pharmaceutical ingredient and then 2 Hay et al., ‘Clinical development success rates for investigational drugs’, Nature Biotechnology, 32:1, 2014, pp. 40 to 51; Joseph DiMasi and Henry Grabowski, ‘The Cost of Biopharmaceutical R&D: Is Biotech Different?’ in Managerial and Decision Economics, 25 (2007), pp. 469 to 479; Vernon et al., ‘Drug Development Costs When Financial