PBL Solutions Limited v AFT Pharmaceuticals Limited
[2022] NZHC 1576
•4 July 2022
THIS IS A REDACTED VERSION OF THE JUDGMENT FOR
PUBLICATION. AN UNREDACTED VERSION HAS BEEN DELIVERED TO THE PARTIES.
CONFIDENTIALITY ORDER AS AT [5] OF JUDGMENT.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000801
[2022] NZHC 1576
BETWEEN PBL SOLUTIONS LIMITED
First Plaintiff
AFT ORPHAN PHARMACEUTICALS LIMITED
Second PlaintiffAND
AFT PHARMACEUTICALS LIMITED
First Defendant
HARTLEY CAMPBELL ATKINSON
Second Defendant
Hearing: 1 July 2022 (teleconference) Appearances:
J Cooper QC, T J Lindsay and C Brownlee for Plaintiffs A Ross QC and Y Lee for Defendants
Judgment:
4 July 2022
REDACTED JUDGMENT OF VENNING J
(Application to adjourn trial)
This judgment was delivered by me on 4 July 2022 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Lindsay & Francis, Auckland
Gilbert Walker, Auckland
Counsel:J Cooper QC, Auckland A Ross QC, Auckland
PBL SOLUTIONS LTD v AFT PHARMACEUTICALS LTD [2022] NZHC 1576 [4 July 2022]
Introduction
[1] The first plaintiff PBL Solutions Limited (PBL) and second plaintiff, AFT Orphan Pharmaceuticals Limited (AFTO) have filed an application seeking to adjourn the three week trial scheduled to commence on 31 October 2022 for a year.
[2] Alternatively, they seek an order that the trial is bifurcated so that only issues of liability are determined at the trial, with quantum reserved for a later hearing.
[3] The plaintiffs say that it is in the interests of justice to adjourn the scheduled trial because recent events have resulted in “significant unanticipated uncertainty” as to the quantum of the plaintiffs’ claim. The application is supported by the exhibits to an affidavit from Marcus Peter Dickey, a solicitor in the employ of the plaintiffs’ firm of solicitors.
[4] The defendants, AFT Pharmaceuticals Limited (AFT) and Hartley Atkinson oppose the interlocutory application by the plaintiffs. The defendants’ opposition is supported by an affidavit of Hartley Campbell Atkinson, the Chief Executive Officer and Managing Director of AFT.
Preliminary matter – confidentiality
[5] The parties agree that the annexures to the affidavit of Mr Dickey are to be treated on a confidential basis, as sought in para 5 of Mr Dickey’s affidavit. The affidavit is to be sealed and not to be searched without leave of the Court after hearing from the parties.
Background
[6] This proceeding concerns whether the defendants have breached contractual and fiduciary duties to the plaintiffs by excluding them from opportunities relating to a drug now known as Pascomer as an “orphan drug” for treatment of indications commencing with the ‘orphan’ indication facial angiofibromas (FA) in tuberous sclerosis (TSC).
[7] Orphan drugs are pharmaceutical products used for rare indications, i.e., medical conditions affecting a small proportion of the population. In some jurisdictions, the governing regulatory authority may grant a period of market exclusivity for orphan drugs. Relevantly, for present purposes in the United States of America (US) the term is seven years, and in Europe, 10 years.
[8] Pursuant to a shareholders’ agreement dated on or about 10 October 2011 (SHA), the first plaintiff PBL Solutions Limited (PBL) and the first defendant AFT Pharmaceuticals Limited (AFT) formed the second plaintiff AFT Orphan Pharmaceuticals Limited (AFTO). The second defendant, Mr Atkinson, is the founder and a director of AFT and at all material times has been a director of AFTO.
[9] AFTO was incorporated to provide orphan drugs in accordance with the shareholders’ agreement.
[10]The plaintiffs say all opportunities relating to Pascomer were for AFTO.
[11] AFT maintains that it, rather than AFTO, has the rights to Pascomer. The defendants’ position is essentially that:
(a)the Pascomer opportunity was a drug development opportunity, whereas AFTO’s business is limited to distribution of already developed orphan drugs;
(b)AFTO’s business is limited to the Asia-Pacific region, and does not include the US and/or European markets;
(c)non-orphan uses of Pascomer – such as PWS – are outside the scope of AFTO’s business.
[12] AFT is currently seeking to commercialise Pascomer in conjunction with its partners in the US (Timber Pharmaceuticals LLC (Timber)) and the EU (Desitin Arzneimittel GmbH (Desitin)).
[13] The plaintiffs claim the defendants have breached the fiduciary duty owed to them under the shareholders’ agreement. They also alleged misuse of confidential information, breach of the shareholders agreement, breach of equitable obligations, knowing assistance, and, in the case of the claim against Mr Hartley, breach of director’s duties. In each case they claim, inter alia, an account of profits in relation to Pascomer, including future profits.
[14] The key value drivers for Pascomer will be whether it can gain orphan exclusivity in the US and/or EU markets and/or whether it can be used for a commercially viable treatment for PWS.
[15] The trial date of 31 October 2022 was allocated by Associate Judge Bell on 23 April 2021. Formal timetable directions to ready the case for hearing were made by Associate Judge Andrew on 23 February 2022 following a joint memorandum from counsel.
Plaintiffs’ reason for the application
[16] The plaintiffs say that shortly thereafter, a significant but unexpected development occurred – one that is relevant to an assessment of the quantum of the plaintiffs’ claims:
(a)on or about 22 March 2022, the US Federal Drug Administration (FDA) granted Japanese company Nobelpharma Co., Ltd (NobelPharma) orphan exclusivity in the US for 7 years its drug Hyftor, which has the same active ingredient as Pascomer and which is also used for the treatment of FA in TSC;
(b)until that time, whilst aware of the potentially competing NobelPharma treatment, AFT and its US partner Timber had been confident that Pascomer would gain orphan exclusivity in the US for the treatment of FA in TSC.
(c)Hyftor’s orphan exclusivity can be challenged if the FDA accepts that another drug – say Pascomer – is clinically superior. AFT/Timber are
in the process of completing their Phase IIb clinical trial for Pascomer, the results of which AFT says are due in late June 2022. The results of that trial will be relevant to assessing any claim to clinical superiority.
(d)in December 2021, NobelPharma filed an application for orphan designation in the EU. That application has not been approved. AFT/Desitin have not yet filed an application to the EU authorities for orphan designation for Pascomer. December 2022 is the earliest they can do so. Notwithstanding NobelPharma filed for EU orphan designation for Hyftor in December 2021 AFT remains confident that it will gain orphan exclusivity in the EU and not NobelPharma.
[17] The plaintiffs say the unexpected NobelPharma developments in the US in particular introduce significant unanticipated uncertainty as to the value of Pascomer and the plaintiffs’ claims at this time.
[18] The plaintiffs consider that the above issues will not be resolved until after the currently scheduled trial. While the Phase IIb trial may be completed by time the plaintiffs’ evidence is due on 18 July 2022, it is unlikely to be available in sufficiently reasonable time for the plaintiffs’ quantum expert to opine on the implications of the results for the value of Pascomer.
[19] The plaintiffs say they will be prejudiced in their ability to prove the quantum of their claims due to the uncertainty created by the above recent events. They say the parties and the Court will be in a better position to assess quantum issues after an adjournment of 12 months. Practically, adjourning the trial now may avoid wasted costs for all parties, and wasted judicial resources if, in the passage of time, the plaintiffs’ claim proves to be practically worthless (as the defendants assert it is), and the plaintiffs determine not to proceed to trial.
Defendants’ opposition
[20] The defendants oppose the adjournment or bifurcation of the trial on the grounds:
(a)the orphan exclusivity grant obtained by Nobelpharma Co., Ltd Nobelpharma) for its competing drug (Hyftor) from the US Federal Drug Administration has not introduced additional unexpected uncertainty. To the contrary, the issue of which market participant would be the first to obtain FDA approval, and consequently exclusivity in the US market, has now been resolved.
(i)the orphan drug development market for topical rapamycin has multiple competitors vying for orphan designation for their drug in the key jurisdictions, with the first to register obtaining an exclusivity period and locking out competitors.
(ii)this has been a known uncertainty affecting the prospects of Pascomer from the outset. AFT has drawn the plaintiffs’ attention to this risk repeatedly in correspondence, including in the letter serving its statement of defence in November 2020.
(iii)this uncertainty has now been resolved in the US market with Hyftor’s registration.
(b)The other uncertainties present remain unchanged:
(i)the orphan drug development market, by its nature, is uncertain. Key uncertainties have always included the outcome of clinical trials and being the first to market. Potential developments in these areas during the course of the proceeding and subsequently were always likely.
(ii)with respect to the EU market, AFT and other competitors are vying for exclusivity. Details of which participant will obtain approval first, and when, remain unknown.
(iii)the fact that AFT’s Phase IIb clinical trial results are expected at the end of this month is not new. The trial results are expected
in advance of when the plaintiffs are required to provide their briefs of evidence on 18 July 2022. In any event, the plaintiffs also have the opportunity to file reply briefs of evidence on 12 September 2022 and will therefore have ample opportunity to reflect on and adduce evidence on the point.
[21] The defendants say the plaintiffs’ proposed 12-month adjournment will not resolve all other uncertainties. Significant uncertainties will remain whenever a trial is held. There is no impediment to the parties’ and the Court’s ability to determining the plaintiffs’ claims and quantum of any loss or damages arising from the Pascomer orphan drug opportunity on the information currently available. The plaintiffs have not suggested that the trial cannot proceed.
[22] The FDA approval for Nobelpharma has reduced the value of the Pascomer product and accordingly the potential value of the plaintiffs’ claim. The defendants say that it appears, including from paragraphs 17(c) and (d) of the application, that the plaintiffs’ desire is to stall matters in the hope that their claim becomes more commercially attractive in the future.
[23] Overall, the defendants submit that it is contrary to the interests of justice to indulge the plaintiffs’ commercial motives and give them a “free option” to stop and start their proceedings at their convenience while requiring the respondents to:
(a)remain on standby until the plaintiffs make up their mind on whether they consider it commercially attractive to resume their claim;
(b)be deprived of their rights to a just, speedy and inexpensive determination of the proceeding, including by the duplication of time involved with counsel coming up to speed again 12 months later;
(c)continue to conduct their business as a publicly listed entity under the shadow of the plaintiffs’ claim, noting that the claim concerns a live product development not entirely historical events;
(d)sustain incurring time and cost to meet their continuing discovery obligations;
(e)be subject to the risk of the recollections of witnesses becoming stale, with relevant events in this proceeding stemming as far back as 2011; and
(f)defer the final resolution of the claim the opportunity to take stock of the outcome of the proceedings and structure its future business direction accordingly.
[24] The defendants say they have been put to considerable time and expense and are entitled to have the dispute finally resolved in accordance with the agreed timetable.
[25]They do not support bifurcation of the trial.1
Principles
[26] The application is made in reliance of rr 10.2 and 10.15 of the High Court Rules; Commentary to Rules 10.2 and 10.15 in McGechan on Procedure; and Body Corporate 348047 v Auckland Council and Shanghai Neuhof Trade Co Ltd v Zespri International Ltd.2
[27] Ms Cooper QC argued that the plaintiffs had acted reasonably throughout the course of the proceeding and that this case had been advanced responsibly and expeditiously by both parties to date. She noted that when agreeing the timetable directions in February 2022 it was anticipated the clinical trial results would be available late June.
1 Minister of Education v H Construction North Island [2017] NZHC 3228; and Turners & Growers Ltd and Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV-2009-404-4392, 5 May 2010.
2 Body Corporate 348047 v Auckland Council [2019] NZHC 1738; and Shanghai Neuhof Trade Co Ltd v Zespri International Ltd [2019] NZHC 1176.
[28] Ms Cooper relied on the case of Body Corporate 348047 v Auckland Council3 and submitted that an adjournment would allow the plaintiffs time to evaluate and prove their case which will lead to a more just outcome.
[29] Ms Cooper submitted the plaintiffs would be prejudiced if the fixture was not vacated. They would be denied the opportunity to prove their case on a more solid evidential footing. Ms Cooper argued that the plaintiffs’ right to a fair trial supported an adjournment. They had one chance at proving their claim. If the case proceeds and AFT subsequently successfully challenged the FDA’s decision the plaintiffs would not be able to come again.
[30]In support of her submissions, Ms Cooper noted:
(a)US market: AFT’s current position is that the US market for FA from TSC is effectively foreclosed. The plaintiffs disagree. US market potential may be influenced by the current Phase IIb trial (due to conclude at the end of June 2022), and decisions flowing from those results (including, for example, whether to challenge Hyftor’s orphan designation).
(b)EU market: Despite NobelPharma having filed for EU orphan designation in December 2021, and the fact that AFT/Desitin will not file until December 2022 at the earliest, AFT remains confident that Pascomer will gain orphan exclusivity in the EU. It is not known what influence the granting of US orphan designation may have on the EU authorities.
(c)the plaintiffs also suggest the possible use of Pascomer as a non-orphan drug to treat Port Wine Stains (PWS): AFT’s progress with clinical trials for PWS has been hampered by COVID and those trials have not yet commenced.
[31]On the other hand, the defendants will not be prejudiced by an adjournment as:
3 Body Corporate 348047 v Auckland Council, above n 2.
(a)AFT has – since mid-2014 – treated Pascomer as its own business opportunity and no doubt will continue to do so;
(b)the Financial Statements to AFT’s Annual Reports (including its most recent 2022 report) do not make any contingency in relation to this litigation or the plaintiffs’ claims to Pascomer. This litigation is not therefore impacting AFT’s financial position or the market’s perception thereof;
(c)the trial was scheduled at an early stage of proceedings and no special considerations were taken into account in assigning a trial to commence on 31 October 2022. In those circumstances, it would not be unreasonable or unfair to adjourn the trial to the first available date from 31 October 2023.
[32] Ms Cooper observed that the plaintiffs had acted reasonably in bringing the application at the present time. It would allow the Court time to reschedule work in the three weeks allocated to this case.
[33] For the above reasons Ms Cooper submitted the adjournment should be granted.
Analysis
[34] The principal reason advanced by the plaintiffs to support the adjournment is the uncertainty associated with the value of their claim given the FDA decision of 22 March 2022 to grant NobelPharma orphan exclusivity in the US for seven years for its drug Hyftor, which has the same active ingredient as Pascomer and which is used for the treatment of FA in TSC.
[35] The major difficulty with the plaintiffs’ application for vacation of the fixture is that it is based on uncertainty concerning the defendants’ ability to use Pascomer as an orphan drug in the US. But the difficulty in valuing the potential profits (including future profits) from the commercialisation of Pascomer was always going to be an issue, even from the outset of the proceeding.
[36] That is underlined by the fact that over six years has passed since PBL became aware of AFT’s involvement with Pascomer on 1 December 2015 (the initial joint venture between AFT and its partner in relation to Pascomer was earlier in June 2015). The possibility of another drug beating the defendants proposed use to the market was always a possibility that would have had to have been factored into any estimate of damages for loss of profit (including future profit). The defendants advised the plaintiffs that Pascomer had several competitors in November 2020.
[37] The plaintiffs’ claim would always have been based on an expert’s estimate of the potential for profit from the commercialisation of Pascomer. If the fixture is maintained the plaintiffs’ expert(s) will have to estimate the potential profit on the basis of the situation now known by them to exist, including the possibility of any successful challenge to the FDA decision. The claim for damages remains an estimate based on a chance or opportunity. The value of the chance or opportunity may now be less, but it is not a fundamentally different exercise.
[38] An adjournment for 12 months (even if that was possible) would not address the inherent and ongoing uncertainties associated with valuing the plaintiffs’ claim. On Mr Atkinson’s evidence, whatever the outcome of the clinical trials, Pascomer will not be ready to launch commercially until mid-2024.
[39] It is also relevant that an adjournment will affect other litigants.4 As this Court observed in Kean v Hayward it is now settled that the interests of justice require the Court to take into account, not only the interests of the parties to the particular case, but also the interests of other parties who are litigants before the Court in other proceedings. That is particularly so, given the pressure on Court resources, following the interruption to the Court sitting by Covid-19, and the consequence backlog in both criminal and civil cases.
[40] If the current trial is vacated the Court will not be able to allocate a further three week hearing until mid to late 2024. As substantive fixtures are being allocated so far in the future, timetables are now fixed to enable preparation for future trials. It would not be possible, at this stage, to allocate another three week trial into the dates
4 Kean v Hayward [2022] NZHC 1437.
allocated to this trial. While no doubt some short cause work could be allocated the Court would not clear the lists of substantive long-running fixtures. Rather, this trial would be added to the list of substantial fixtures awaiting hearing. That impact on the allocation of the Court’s resources and other litigants is a relevant consideration. I accept it is, however, only one of the factors for the Court to consider.
[41] I am satisfied that, despite Ms Cooper’s submission, in the circumstances of this case, to maintain the fixture and require the plaintiffs to proceed to trial is not to deny them their fair trial rights. It is entirely speculative whether the position will be any more certain in a year from now.
[42] Against that, the defendants are entitled to certainty and to have the merits of the plaintiffs’ claim against them determined. The defendants should not have to wait for the plaintiffs to decide whether they wish to pursue their claim. The shareholders’ agreement in issue was entered over 10 years ago now.
[43] While AFT may not list the claim as a contingent liability, as Mr Atkinson has confirmed, it has had to be disclosed to the market and is a major and ongoing distraction for him and AFT’s CFO.
[44] I also accept, as Mr Ross QC submitted, that to the extent the plaintiffs have referred to a claim for the possible use of Pascomer as a non-orphan drug to treat PWS, the existing pleadings do not address such a claim.
Split trial
[45] Neither party was enthusiastic about the possibility of a split trial. Ms Cooper accepted it would not be in the parties’ or the Court’s interests for the following reasons:
(a)whichever parties succeed at trial, if Pascomer turns out to be practically worthless, then in financial terms the liability phase will have resulted in significant wasted costs for both parties;
(b)this would also result in an unnecessary waste of judicial resources;
(c)these points would be compounded by any appeals on liability, if they were heard prior to the quantum hearing; and
(d)if the plaintiffs succeed at trial, but quantum issues are bifurcated, then until those quantum issues are resolved the defendants will be faced with significant uncertainty as to the size of their liability.
[46] The issues of liability and quantum are linked and key witnesses would be required for both trials. A split liability/quantum trial is not a realistic option.
[47] For the above reasons I am satisfied that the application for adjournment (and the alternative application for split trials) must be declined.
[48] However, I accept that an extension to the existing timetable is appropriate, to provide the plaintiffs with further time to address the issue they now face.
[49] [REDACTED] In light of that information it is appropriate to extend the time for the plaintiffs to file their evidence, and to vary the existing timetable, to give the plaintiffs as much time to prepare their evidence as possible.
Timetable
[50] I vary the existing timetable fixed by Associate Judge Andrew on 23 February 2022 as follows:
(a)the close of pleadings date is extended to 18 July 2022;
(b)the plaintiffs are to serve their written statements of proposed evidence- in-chief (except for any quantum evidence) by 25 July 2022;
(c)the plaintiffs are to serve their written statements of proposed evidence in relation to calculation of quantum by 1 August 2022;
(d)the defendants are to serve their written statements of proposed evidence-in-chief by 5 September 2022;
(e)the plaintiffs are to serve any reply evidence by 19 September 2022;
(f)the plaintiffs’ chronology is to be filed and served by 26 September 2022, and together with that the plaintiffs are to nominate documents for the common bundle;
(g)the defendants’ response to the chronology and additions to the common bundle are to be filed and served by 3 October 2022;
(h)an experts’ joint report is to be filed and served by 10 October 2022;
(i)the plaintiffs are to file and serve a hyperlinked common bundle by 17 October 2022;
(j)the plaintiffs’ opening submissions are to be filed and served by 26 October 2022.
Result/costs
[51]The plaintiffs’ application for an adjournment of the fixture is dismissed.
[52] The plaintiff is to pay the defendants’ costs on a 2B basis for the application and hearing.
Venning J
2
3
0