CITATION: Apotex v. Nordion, 2017 ONSC 1323

COURT FILE NO.: CV-08-00365958

DATE: 20171222

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

APOTEX INC.

Plaintiff

– and –

NORDION (CANADA) INC., NORDION INC., NORDION (US) INC., MDS (CANADA) Inc., MDS INC., MDS PHARMA SERVICES and MDS PHARMA SERVICES (US) INC.

Defendants

Daniel S. Murdoch and James S. F. Wilson, for the Plaintiff

John A. Campion, Antonio Di Domenico and Stephanie Clark, for the Defendants

HEARD: February 21, 22, 23, 24, 27, 28, March 1, 2, 3, 6, 7, 8, 9 and 10 and May 8 and 9, 2017

l. a. pattillo j.:

Introduction

[1] In the spring of 2003 and again in mid 2004, Apotex Research Inc. (“Apotex Research”) entered into three separate agreements with the defendant MDS Pharma Services (“MDS”) to carry out clinical bioequivalent studies to support the plaintiff, Apotex Inc.’s (“Apotex”) submission to the United States Federal Drug Administration (“FDA”) for approval for sale of the two generic drugs in the United States (“U.S.”).

[2] In due course, Apotex, or agents on its behalf, submitted applications to the FDA for approval of the two drugs for sale in the U.S. The applications were supported by the three bioequivalence studies carried out by MDS.

[3] In January 2007, following protracted dealings between the FDA and MDS concerning MDS’ compliance with FDA regulations, the FDA refused to accept the MDS studies done by it at its facility between 2000 and 2004, including the three studies done for Apotex Research.

[4] As a result, Apotex was required to repeat the studies and/or have them certified by an independent expert resulting in delay in bringing the two drugs to market in the U.S.

[5] In this action, Apotex claims that as a result of its issues with the FDA, MDS was in breach of its contracts and/or negligent and seeks damages it alleges it suffered as a result (the “Action”).

[6] For the reasons that follow, I have concluded that MDS did breach the agreements in question. I also conclude that as a result of the breaches, Apotex suffered damages both in respect of the cost of remedying MDS’s breaches and loss of profits arising from the delay occasioned in being able to bring the two drugs to market.

The Parties

a) Apotex

[7] Apotex is an Ontario corporation with its head office in Weston, Ontario. Apotex conducts research and development, manufactures and sells pharmaceutical products to its affiliates and customers around the world. Apotex’s business has been traditionally focused on generic drug products. Apotex is the main operating company within the Apotex corporate group.

[8] Apotex is wholly owned by Apotex Pharmaceuticals Holdings Inc. (“Apotex PHI”) which in turn is owned by Apotex Holdings Inc. (“Apotex HI”). Both Apotex PHI and Apotex HI are holding companies.

[9] Apotex Research is an Ontario company which is also wholly owned by Apotex PHI. Apotex Research carried out bioclinical work for Apotex up until approximately 2006 when it ceased to operate and Apotex conducted all the bioclinical work directly. Apotex Research continues to exist as a shell company which does not carry on business. Apotex Research is also wholly owned by Apotex PHI.

[10] Apotex Corp. is a U.S. company with its head office in Weston, Florida. Apotex Corp. is wholly owned by Aposherm Inc. which is in turn wholly owned by Apotex HI. Apotex Corp. carries on the marketing and selling of Apotex’s products in the U.S.

b) MDS

[11] The defendant, MDS Inc., was a global life sciences company headquartered in Mississauga, Ontario, which provided products and services used by its customers for the development of drugs and diagnosis and treatment of disease.

[12] MDS Inc. is the parent company of the defendant MDS Canada Inc., which carried on business as MDS Pharma Services (“MDS”).

[13] In 2000, MDS Inc. acquired all of the shares of Phoenix International Life Sciences Inc. (“Phoenix”). Phoenix was a Contract Research Organization (“CRO”) which conducted clinical research trials for pharmaceutical companies in support of their filings with various regulatory agencies.

[14] MDS consisted of various CRO’s that came together after MDS Inc.’s acquisition of Phoenix. MDS was a full-service pharmaceutical CRO which owned and operated research facilities, including at sites in Ville St. Laurent (the “Montreal Facility”) and Blainville, Quebec.

[15] From at least 1990, MDS and before it, Phoenix performed bioequivalent studies for Apotex.

[16] At the outset of the trial I was advised by counsel for the defendants that subsequent to the Action being commenced, MDS’s Canadian companies have been subsumed by Nordion (Canada) Inc. and MDS Pharma Services (US) Inc. has been subsumed by Nordion (US) Inc. As a result, on consent, the style of cause was amended to add the Nordion companies as defendants.

[17] As was done at trial, I will refer to the defendants collectively as “MDS” in these reasons, unless specific identification is required.

Facts

i. Introduction

[18] At the trial, all of the fact witnesses concerning the issues raised were called by Apotex. MDS called no fact witnesses to explain what occurred at MDS. It relies on the documents and the cross-examination of the Apotex witnesses.

[19] Both parties called expert evidence dealing primarily with damages. I will deal with that evidence later when I address damages. The one non-damage expert was Ms. Clarissa Crain from CIS by Deloitte who was called by Apotex to give evidence in respect of, among other things, the U.S. regulatory framework for generic drugs in place at the time. At the outset of her testimony, based on her experience and the agreement of the parties, I qualified Ms. Crain as an expert in:

1. Compliance with U.S. laws and regulations in the conduct of clinical studies for use in applications to the FDA;

2. The development and evaluation of compliance programs in the pharma industry concerning U.S. laws and regulations; and

3. Responding to quality and control aspects of inspections and enforcement by the FDA in the pharma industry.

[20] Apotex’s fact witnesses, all of whom were employed by Apotex at the relevant times and had some involvement with MDS and the contracts, were: Ms. Sheila Marner, Vice President-New Product Launch and Commercial Products Management; Sandra Macokati, Global Manager of Research and Development and Quality Assurance; Ms. Bernice Tao, who was head of U.S. Regulatory Affairs at Apotex Corp. from 2002 to 2009 and then Director of Global Regulatory Affairs from 2009 to 2012 and Ms. Beth Hamilton, Vice-President of Marketing and Portfolio Strategy for Apotex Corp.

[21] Apotex also called Mr. Gorden Fahner, its senior Vice-President of Global Finance to testify in respect of both Apotex’s financial matters and the corporate structure of the Apotex group.

[22] For the most part I accept the evidence of all of Apotex’s fact witnesses. They gave their evidence in a direct and forthright manner and were not argumentative. I found their evidence to be credible and consistent with the documentation. To the extent that I have any issues with their evidence, I will raise them specifically as I deal with the facts in this judgment.

[23] I also accept Ms. Crain’s evidence which I found very helpful in understanding the U.S. laws and regulations and the requirements of the FDA concerning clinical studies and the pharma industry. She demonstrated a great deal of knowledge of those areas and gave her evidence in a very neutral and professional manner.

[24] I reserve my comments on the damage experts for later.

[25] Based on the above, therefore, the following are my findings of fact from the evidence which I accept.

ii. Background

a) Generic Drugs

[26] A generic drug is a pharmaceutical product which is equivalent to a previously patented drug which has come “off-patent” either because the patent has expired or has been held to be invalid.

[27] The FDA is responsible for protecting U.S. public health in the U.S. It does that through the enforcement of the Federal Food, Drug, and Cosmetic Act, 21 USC Chapter 9 (“FD&C Act”) and other federal laws enacted by Congress, which it then has organized into a series of regulations to which the pharmaceutical manufacturers must adhere.

[28] Approval for the sale of pharmaceutical products falls under the purview of the FDA. To obtain approval to sell a generic drug in the U.S., generic drug manufacturers are required to submit an “abbreviated new drug application” (“ANDA”) to the FDA.

[29] The ANDA is abbreviated because the generic applicant/sponsor does not have to file studies establishing the safety and effectiveness of the drug because the original manufacturer has already submitted those studies and established those requirements. Instead the generic manufacturer/sponsor must establish, among other things, that its generic product is pharmaceutically and clinically bioequivalent to the patented drug.

[30] ANDAs have five “modules”: Module 1 contains administrative information, including labelling requirements; Module 2 contains an overall quality summary as well as clinical and non-clinical summaries, as required; Module 3 contains “the chemistry, manufacturing and controls around the manufacturing of the drug product, testing of it, specifications and methods and stability data”; Module 4 contains non-clinical data; and Module 5 contains the bioequivalence study information.

[31] Bioequivalence means that the generic drug contains the same active ingredient as the patented drug and delivers the active ingredient into the body at the same rate and to the same extent as the patented drug, all as required by specified guidelines.

[32] Bioequivalence is established through data generated in clinical (human) trials of the drug to be approved.

[33] The FDA communicates “deficiencies” to the sponsor during the course of the review process and the sponsor responds to each of the deficiency notices. The nature of the response varies depending on the magnitude of the deficiency identified. It could take the form of a major amendment, a minor amendment or a telephone amendment to the ANDA. A major amendment serves to reset the time for approval from the date of submission. Minor and telephone amendments are more routine and do not reset the time for the review and approval process.

[34] At the relevant times, Apotex’s bioclinical group had the in-house capability to conduct some bioequivalence studies internally. When it could not conduct the study, it contracted with an external independent laboratory or CRO.

[35] In order to be able to perform a bioequivalence study, the laboratory, either at Apotex or a CRO, must have an “assay” for the drug in question. An assay is the chemical method of measuring the drug or its metabolite in the blood sample being tested.

b) Regulating Laboratory Standards

[36] Any laboratory conducting bioequivalence studies for FDA submission must comply with the Code of Federal Regulations (“CFR”) made by the FDA under the FD&C Act. The CFR specifically contemplates the use by manufacturers/sponsors of CROs to conduct clinical research and specifically outlines the FDA’s expectations of CROs to uphold the same regulatory requirements that the manufacturer/sponsor have.

[37] The CFR encompasses good clinical practices (“GCP”) and the requirements for bioequivalence. GCPs are the guidelines provided to manufacturers/sponsors and their associated third parties on how to perform appropriate clinical trials for safety and efficacy of a new product. Additionally, the FDA looks for laboratories to align with Good Laboratory Practices, which are how laboratories involved in the pursuit of trials should conduct themselves and the standards they need to uphold.

[38] Further, the FDA issues sub-regulatory guidance through “Good Guidance Practice” documents, which are seen as the minimum criteria with which to align. Good Guidance Practice is the FDA’s mechanism of communicating how industry players can comply with the CFR. It is a vehicle for driving voluntary compliance.

[39] Laboratories can monitor their own compliance with good practices through a quality assurance process (“QA”). A QA involves a CRO routinely reviewing for adherence to its own standard operating procedures (“SOPs”) and the standards of the industry. SOPs outline how a given laboratory will uphold its regulatory requirements in executing specific activities. Additionally, laboratories can engage in corrective and preventative action (“CAPA”) which provides a way to systematically review deviations from SOPs or specific regulations, identify how to appropriately correct for it and identify how to prevent it from reoccurring in the future.

[40] Laboratories that conduct bioequivalence studies for submission to the FDA are subject to inspection by the FDA and potential enforcement action in the event the FDA determines that the laboratory is not complying with U.S. regulatory requirements. The FDA communicates its concerns in different ways, depending on the severity.

[41] When the FDA initiates an inspection, it first notifies the party to be inspected in advance. Its inspector(s) than come onsite and gather information. During or after the inspection, an inspector may issue a Form 483 identifying areas where the inspector believes that the practices at the facility do not align with the regulatory framework. A Form 483 is solely the opinion of the inspector. It is endorsed by the FDA through the issuance of an “Untitled Letter” which provides the FDA’s position on the objectionable observations and typically recommends corrective action. The next level of severity is a “Warning Letter” which is similar to an Untitled Letter but requires immediate remedial action.

[42] Responding to each of the above FDA communications by the party to whom they are directed is standard in the industry, but a Warning Letter is the only communication that formally requires a response to the FDA.

c) The Drugs In Issue

[43] The two drugs or molecules as they are referred to in issue in the Action are amoxicillin-clavulanic acid (“Amoxi-Clav”) and levodopa-carbidopa immediate release (“Levo-Carb IR”).

i. Amoxi-Clav

[44] Amoxi-Clav contains the active ingredients amoxicillin and clavulanic acid. It is used to treat a wide range of infections caused by bacteria. These infections may infect, for example, the chest, bladder, sinuses, ears, tonsils, or the skin. Amoxicillin is a type of penicillin antibiotic and the clavulanic acid is used to help the amoxicillin work better against certain types of bacteria.

[45] Amoxi-Clav was developed and marketed in the US by GlaxoSmithKline (“Glaxo”) as Augmentin. Augmentin came off patent in 2002.

[46] Apotex proposed to market three different doses of Amoxi-Clav in the US – 875/125 mg; 500/125 mg; and 250/125 mg.- reflecting the dosage for the two active ingredients, amoxicillin/clavulanic acid.

ii. Levo-Carb IR

[47] Levo-Carb IR contains two medications, levodopa and carbidopa. It is used to treat Parkinson’s disease. Levodopa helps to control the symptoms of the disease by correcting the chemical imbalance in the brain that produces symptoms. Adding carbidopa lowers the amount of levodopa required and may reduce some of the side effects that are associated with levodopa.

[48] Levo-Carb was developed and marketed in the US by DuPont Pharmaceuticals as Sinemet. Sinemet came off patent in 1992.

[49] Apotex proposed to market three doses of Levo-Carb IR in the US – 10/100 mg; 25/100 mg; and 25/250 mg.

I. The Agreements

[50] At issue in the Action are four agreements: the Master Laboratory Services Agreement (the “MLSA”) which governed the relationship between the parties generally in respect of laboratory research studies and three separate Project Agreements which dealt with the specific bioequivalence studies for the two drugs in question and which were incorporated by reference into the MLSA.

d) The Master Laboratory Services Agreement

[51] By agreement in writing signed May 12, 1999, Apotex Research entered into the Master Laboratory Services Agreement with Phoenix (the “MLSA”).

[52] As noted, MDS was the successor to Phoenix.

[53] The MLSA sets out the general terms and conditions pursuant to which Phoenix would provide laboratory research services in analytical fields to Apotex Research.

[54] The MLSA contains the following relevant provisions:

a) Phoenix would perform the services in accordance with a protocol document (“Protocol”) provided by Apotex Research or prepared by Phoenix under Apotex Research’s direction (Sect. 3.1);

b) Phoenix did not warrant that the Project design and/or results would satisfy the requirements of any regulatory agencies at the time of submission (Sect. 3.2);

c) Each project or task to be performed by Phoenix would be governed by a Project Agreement that was made part of the MLSA (Sect. 4.1);

d) The Project Agreement shall be construed to include the names of the Parties, their subsidiaries, affiliates or divisions and other matters (Sect. 4);

e) Apotex Research will pay Phoenix all amounts owing within 30 days of receipt of the draft or final report or termination of the Project (Sect. 4.4);

f) Phoenix will perform the Project in accordance with the current state of the laboratory research art and the Protocol. Phoenix will also comply with all applicable current government regulatory requirements, including United States standards of Good Laboratory or Clinical Practices as appropriate to the Project (Sect. 8.1);

g) Apotex Research’s representatives could visit Phoenix’s premises at reasonable times and with reasonable frequency during normal business hours to observe the progress of the Project (Sect. 9.1);

h) In the event of a material error by Phoenix in the performance of the Project which renders the Project invalid, Apotex Research shall have the option, at its sole discretion to either (a) request Phoenix to repeat the Project at Phoenix’s own cost, or (b) require Phoenix to refund Apotex Research the contract price paid to Phoenix (Sect. 16.1);

i) Section 20 deals with termination. Apotex Research shall have the right at any time to terminate the Project prior to completion by giving 30 days advance written notice to Phoenix (Sect 20.1(c)). Phoenix shall have the right at any time to terminate the Project prior to completion on 90 days written notice (Sect 20.1(d));

[55] Section 4 of the MLSA contemplates the parties will enter into a Project Agreement in respect of each project (i.e., bioequivalence study) to be performed by Phoenix and that each project agreement “shall be made part of the [MLSA]”. In order to initiate a bioequivalence study under the MLSA, Apotex Research contacted MDS about a particular drug product and proposed an approximate timeline for the study to take place.

e) The Project Agreements

[56] In early 2003 and again in 2004, Apotex contacted MDS about conducting bioequivanence studies for Levo-Carb IR and Amoxi-Clav respectively. Apotex did not have the assay in-house to do the studies and MDS had, having previously done work on the two drugs for Apotex in respect of Canadian approvals. MDS was also able to accommodate the studies within Apotex’s timelines.

[57] The three Project Agreements entered into between Apotex Research and MDS follow a standard template that was attached to the MLSA and have many identical terms, including that the study was for “FDA submission”; the “sample analysis will be performed according to [MDS] SOPs”; the reports to be provided would be “quality assured (QA’d) clinical, analytical, and pharmacokinetics reports combined into one (1) integrated report that is known to be acceptable to regulatory bodies”.

Levo-Carb IR

[58] On May 13, 2003, Apotex Research and MDS entered into a Project Agreement for a bioequivalence study under fasted conditions in respect of Levo-Carb IR. The scope of the work provided for 54 subjects to be dosed (52 analyzed) using the 25-250mg product strength. The estimated cost of the study was $391,865.

[59] MDS provided the results of the Levo-Carb IR study, titled a Clinical Study Report, to Apotex on February 26, 2004 and the final report on March 1, 2004 (the “Levo-Carb IR Study”).

[60] On April 2, 2004, TorPharm Inc., on behalf of Apotex, submitted its ANDA for Levo-Carb IR 10/100mg, 25/100 mg and 25/250 mg to the FDA. Based on experience, Ms. Tao estimated that the FDA would take approximately 16 months from the time of filing to approve the ANDA, on a best case scenario.

Amoxi-Clav

[61] On May 10 and August 5, 2004 respectively, Apotex Research and MDS entered into two separate Project Agreements for two bioequivalence studies of Amoxi-Clav using the 875-125mg product strength. The May 10^th^ Agreement provided for 105 subjects to be dosed and analyzed under fed conditions at an estimated cost of $1,004,189. The August 5^th^ Agreement provided for 58 subjects to be dosed and analyzed under fasted conditions at an estimated cost of $588,857.

[62] The FDA requires both fed and fasted studies to be conducted where the drug is impacted by food or is a modified release. Further, the studies were conducted sequentially (the fed study first) rather than concurrently due to the highly variable nature of clavulanic acid, which increased the risk that the study would not meet the bioequivalence criteria.

[63] MDS delivered a draft version of its Amoxi-Clav fed study on October 25, 2004 and the final Clinical Study Report to Apotex on January 5, 2005. The draft Amox-Clav fasted study was completed on January 26, 2005. On February 28, 2005, MDS delivered the final Amoxi-Clav fasted study to Apotex (together the “Amoxi-Clav Studies”) (the Levo-Carb IR Study and the Amoxi-Clav Studies will be referred to collectively as the “Studies”).

[64] On March 31, 2005, Apotex’s U.S. regulatory affairs group submitted the Amoxi-Clav ANDAs to the FDA. The ANDAs consisted of 33 volumes. Because Glaxo had originally submitted two separate applications for different strengths, Apotex was required to submit two separate ANDAs for Amoxi-Clav, one for the 875/125 mg strength and one for the two lower strengths, 500/125 mg and 250/125 mg. As a result, each ANDA had a different review group at the FDA which in turn resulted in different review schedules for the two ANDAs.

II. MDS’ Issues with the FDA

[65] On July 7-11, 2003 and again on July 14-17, 2003, the FDA conducted an inspection of MDS’ Montreal Facility. On July 9, 2003, the inspectors issued a Form 483 which listed three observations implicating MDS’ good clinical practices: contamination of samples; failure to document storage conditions for samples and failure to preserve samples. The observations related to cross-contamination issues from a study of a drug called loratadine which was not conducted for Apotex. MDS responded to the first Form 483 on July 10, 2003, addressing the specific observations of the inspectors.

[66] On July 17, 2003, the FDA issued a further Form 483, raising additional concerns about MDS’ bioanalytical methods. MDS responded to the second Form 483 on July 29, 2003, again addressing the specific observations by the FDA inspectors.

[67] As Ms. Crain stated, MDS’ responses to the FDA were very much focused on the specific observations and failed to address the corrective or preventative actions that could be taken to understand the totality of the situation beyond the specific matter and how to correct it.

[68] The FDA conducted another inspection of the Montreal Facility on February 2-6 and 9-13, 2004 and issued a further Form 483 on February 13, 2004. The third Form 483 listed several observations, including failure to resolve known contamination issues through a systemic investigation and failure to validate the long-term frozen stability of samples. As Ms. Crain observed, these observations were significant issues for MDS because they focused on the failure of MDS to address previously known issues identified by the FDA.

[69] Following the inspection, MDS conducted a debriefing of the entire bioanalytical team at the Montreal Facility. On March 5, 2004, it delivered its response to the third Form 483 which contained more of a combative tone than a focus on proactive collaboration with the FDA to prevent the issue from being systemic.

[70] On April 26, 2004, the FDA issued an Untitled Letter to MDS (the “First Untitled Letter”). It was the first Untitled Letter the Montreal Facility had received.

[71] In the First Untitled Letter, the FDA arrived at the following determinations, among others:

a) MDS failed to demonstrate that the analytical method used in the bioavailability study in respect of the generic drug product loratadine was accurate to measure the actual concentration of the product in the body, as required by 21CFR 320.29(a);

b) The limited steps undertaken by MDS to investigate and address the source of contamination identified in the loratadine study failed to provide assurance of the accuracy of its analytical method, as required by 21CFR 320.29(a); and

c) The FDA’s inspections indicate that the Facility lacks adequate policies and procedures to address contamination issues, and the manner in which MDS investigated the contamination problem caused the FDA to have concerns with the validity of other bioequivalence data generated by MDS.

[72] 21 CFR 320.29(a), Analytical methods for an in vivo bioavailability or bioequivalence study, provides as follows:

(a) The analytical method used in an in vivo bioavailability or bioequivalence study to measure the concentration of the active drug ingredient or therapeutic moiety, or its active metabolite(s), in body fluids or excretory products, or the method used to measure an acute pharmacological effect shall be demonstrated to be accurate and of sufficient sensitivity to measure, with appropriate precision, the actual concentration of the active drug ingredient or therapeutic moiety, or its active metabolite(s), achieved in the body.

[73] As is its practice, the FDA posted the First Untitled Letter on its web site.

[74] On June 7, 2004, MDS delivered its response to the First Untitled Letter.

[75] In the summer of 2004, in response to the FDA’s concerns, MDS developed an “Event Resolution SOP” which was a global bioanalytical SOP for anomalous event resolution that triggered a laboratory investigation should unexpected results occur.

[76] The FDA conducted a further inspection of the Montreal Facility from September 13 to October 1, 2004. The inspection involved five inspectors and the review of multiple studies. On October 1, 2004, the inspectors issued a further Form 483 (4^th^). It contained repeated references to issues previously raised by the FDA including concerns with respect to the completeness of investigations by MDS.

[77] MDS responded to the fourth Form 483 on October 26 and November 12, 2004. Ms. Crain testified that in her opinion, the response contained more references to an acknowledgement of overall process enhancement via the SOPs.

[78] On December 21, 2004, the FDA issued a further Untiled Letter (the “Second Untitled Letter”) which stated in part:

Following our review of the establishment inspection report and related documents, including the letters from you and redacted dated November 12, 2004, in the response to form FDA 483, we conclude that you failed to demonstrate that the analytical methods used in several in vivo bioavailability studies conducted in your facility could accurately measure the actual concentration of the active drug ingredient or its active metabolite achieved in the body as required by 21 CFR 320.

As a result, FDA has concerns about the validity of other bioequivalence data generated by MDS, including data submitted in support of currently approved applications. The FDA recommends that you review the validity of bioequivalence studies you’ve conducted within the last five years. We suggest that you meet with the FDA to discuss a plan to address our concerns.

[79] On February 2, 2005, MDS met with the FDA and discussed MDS’ proposed plan for the five-year review (“FYR”) in response to the Second Untitled Letter. The FDA indicated that it concurred with the overall approach of MDS’ FYR plan with some minor modifications which MDS agreed to incorporate.

[80] The FYR plan provided for a standardized mechanism for conducting a comprehensive review of human bioequivalence studies for which the drug or active moiety was measured at the Montreal Facility. Results would be monitored and periodically audited by QA and Lachman Consultant Services Inc. (“Lachman”) “a highly knowledgeable and respected advisor”. Findings which raised questions about the reliability of the study were to be evaluated by a Study Review Board composed of experts from several areas (Bioanalytical, Instrumentation, Pharmacoketics and QA). The review teams were also assisted by another FDA and QA consultant.

[81] The FDA conducted a further inspection of the Montreal Facility in February 2006 while the FYR was going on. On March 24, 2006, the inspectors issued a Form 483 (5^th^) which set out 32 observations, including:

• False reporting of the study status in the FYR (item 1);

• MDS’ failure to inform the FDA that their FYR of the method validation projects for carbidopa/levodopa found significant issues that compromise the data validity of all studies using those methods, and failing to include the relevant levo-carb study in the FYR (item 2);

• Failure to perform effective Retrospective Reviews (item 3);

• Failure to establish procedures to accurately determine which studies should be included in the FYR and failure to document the decision making process for including/excluding studies (items 7&8).

[82] On April 1, 2006, although it continued with the FYR, MDS voluntarily shut down its Montreal Facility.

[83] MDS delivered its response to the fifth Form 483 to the FDA on April 21, 2006.

[84] On August 31, 2006, the FDA delivered yet another Untitled Letter (the “Third Untitled Letter”) to MDS which stated, in part:

The results of these inspections and our review of related documents lead us to conclude that you failed to demonstrate that your five-year retrospective review is effective and capable for discriminating between valid and invalid study data. […]

Based on FDA’s multiple inspections of these facilities (July 2003, February 2004, March 2006) and our evaluation of numerous studies, we conclude that you failed to systematically investigate contamination and anomalous results, conduct an effective retrospective review and demonstrate that your retrospective review is capable of discriminating between valid and invalid study data.

[85] MDS provided responses to the Third Untitled Letter on September 13 and October 6, 2006, in essence defending the FYR and its determinations therein that the studies done by it were valid. In the letter of September 13, 2006, MDS acknowledged “that prior inspections under FDA’s bio-research monitoring program identified deficiencies in our analytical laboratory that raised questions about the validity of bioequivalence data reported by MDS.”

[86] On October 19, 2006, a meeting was held between representatives of MDS and the FDA during which MDS provided information to the FDA to support its position that the FYR validated the studies reviewed.

[87] On January 10, 2007, the FDA delivered a letter to MDS stating, in part:

[W]e remain concerned about the effectiveness of the FYR to resolve the issues regarding data validity [….]. [I]mprovements made in your standard operating procedures (SOP) to address integrity issues in future studies do not address our concerns regarding the effectiveness of the FYR [….]. [F]ollowing our evaluations of your responses dated September 13, 2006, October 6, 2006 and December 7, 2006, the information you presented during the October 19, 2006 meeting with the FDA and based on the findings of the FDA’s March 2006 inspection, we remain concerned that MDS is not capable of completing a reliable retrospective review. Because of this concern, and the need for timely action, we are working with sponsors directly on ways to ensure that any pending and approved applications with MDS studies conducted during the period of the FYR contain valid data.

[88] On January 10, 2007, the FDA sent two letters to Apotex Corp., one concerning approved products and the other in respect of pending approvals based on MDS studies done between 2000 and 2004. The letters advised that Apotex would be required to follow one of three options in respect of each of the products involved:

1. Repeat the Studies – provide the FDA with a fresh study, statistical analysis and report;

2. Re-analyze – use the original samples at the Montreal Facility and re-analyze them, assuming the samples have been stored correctly; and

3. Certification – engage an independent third party to review MDS’ validation and study data to ensure there are no issues with the prior results.

[89] The FDA set a six-month deadline for Apotex to respond to it with an action plan for approved products.

III. The Status of Apotex’s ANDAs for Levo-Carb IR and Amoxi-Clav

a. Levo-Carb IR

[90] Subsequent to the filing of the Levo-Carb IR ANDA, the FDA advised Apotex that a non-fasted study was also required. As a result, Apotex retained BA Research India Limited (“BA Research”), a CRO in India, to conduct the non-fasted bioequivalence study.

[91] On July 29, 2005, Apotex filed a “major amendment” to the Levo-Carb IR ANDA which included BA Research’s non-fasted study. The major amendment resulted in the time for approval of the ANDA being re-started from the initial filing date of April 2, 2004 to July 25, 2005.

[92] On December 27, 2005, Apotex received a deficiency notice from the FDA in respect of the Levo-Carb IR ANDA. Apotex responded to the notice on January 13, 2006 by filing a Bioequivalent Amendment to the ANDA.

[93] On February 6, 2006, Apotex filed a second amendment addressing various deficiencies in the chemistry, manufacturing and controls section of the ANDA.

[94] On April 24, 2006, Apotex received a deficiency letter from the FDA in respect of the Amoxi-Clav ANDAs. The letter stated:

The FDA Division of Scientific Investigations (DSI) has significant concerns over many bioanalytical assays conducted by MDS, Inc., specifically at its Montreal bioanalytical facility. Operations at the MDS Montreal laboratory were voluntarily suspended on April 1, 2006. To date, MDS has not satisfied DSI’s concerns. Until this is resolved, we cannot proceed with your application.

[95] Although the FDA’s deficiency letter was in respect of the Amoxi-Clav ANDAs, Apotex expected that the FDA’s position applied to the Levo-Carb IR ANDA as well.

[96] On May 20, 2006, in response to its inquiry to MDS concerning the details of the FYR, Apotex received a letter from MDS setting out some detail and, for the first time, advising Apotex of studies that MDS had done for it that were part of the FYR. As previously understood by Apotex, the Levo-Carb IR study was on the list.

[97] On October 24, 2006, Apotex visited MDS to determine the status of the FYR. During that visit, Apotex was advised that the closure report for its review of the Levo-Carb IR Study was before its review board.

b. Amoxi-Clav

[98] As mentioned earlier, the Amoxi-Clav ANDAs were submitted on Apotex’s behalf to the FDA on March 31, 2005. Apotex was projecting an approval date of August 2006.

[99] On September 9, 2005, Apotex received a minor deficiency notice from the FDA for the higher strength ANDA relating to the chemistry, manufacturing and controls section. Apotex responded to the notice on February 28, 2006.

[100] On February 13, 2006, Apotex received a minor deficiency notice in respect of the ANDA for the two lower strengths raising the same issue concerning the chemistry, manufacturing and controls section as the prior deficiency notice. Apotex filed a response to the notice on February 28, 2006.

[101] At this point, Apotex considered that approval of the Amoxi-Clav ANDAs were proceeding as expected and within the timelines expected.

[102] As noted above, on April 24, 2006, Apotex received a deficiency letter from the FDA advising that the Amoxi-Clav ANDAs were on hold pending resolution of the MDS issues.

[103] The next day, April 25, 2006, Ms. Tao noted in an email to Apotex personnel involved in the Amoxi-Clav ANDAs that notwithstanding the FDA deficiency letter, the projected approval date for the Amoxi-Clav ANDAs remained August 2006 until Apotex gets further information from MDS.

[104] Apotex immediately advised MDS of the deficiency letter and requested its response to the FDA’s position. On May 5, 2006, MDS provided its response which stated in part:

The studies referenced in the deficiency letter are within the scope of our 5-review review of studies… Once a thorough review of the assays in question is complete, a report adequately addressing data validity determinations will be submitted to the FDA. To make sure that we can do that at the earliest time possible, we have raised the review to a high priority within the 5-year review project. We expect the data validity issues will be addressed in a manner acceptable to DSI and OGD in order to satisfy their concerns.

[105] Apotex (Ms. Marner) immediately responded to MDS and advised that it did not consider MDS’ response an acceptable response to the FDA’s deficiency letter. At a minimum, Apotex required a commitment to a timeline to address the studies in issue immediately. Ms. Marner stated: “As this has now impacted our approval, we cannot wait weeks for you to communicate your commitment to the dates. Please advise as to what actions MDS will take to address our concerns and to address the outstanding FDA deficiency response.”

[106] On June 20, 2006, MDS advised Apotex that its investigation had concluded that the data for the Amoxi-Clav Studies was valid and that its internal review board had confirmed the finding. MDS stated that it believed that it could have a completed response to the FDA’s deficiency letter by the end of June 2006.

[107] MDS submitted its closure report in respect of the Amoxi-Clav Studies to the FDA on July 7, 2006. The report validated the bioequivalence studies based on a review by Lachman.

[108] On September 29, 2006, the FDA contacted Apotex’s regulatory affairs group concerning the “dissolution specifications” for Amoxi-Clav. Ms. Tao testified that Apotex was aware that the FDA’s division of bioequivalence would only issue feedback or questions on dissolution specifications upon completion of the bioequivalence review. As a result, Apotex interpreted the inquiry to mean that the Amoxi-Clav Studies were no longer an issue for the ANDAs.

[109] As of October 12, 2006, Apotex understood that there were two deficiencies that remained to be resolved in respect of the Amoxi-Clav ANDAs: the dissolution specifications inquiry noted above and a labelling issue which was directly related. Apotex targeted an approval date of late November, early December, 2006.

[110] On November 15, 2006, Apotex was informed by the FDA for the first time since the FDA had started its re-review of the Amoxi-Clav ANDAs that the issues with MDS were not fully resolved and the FDA still had some concerns with the Amoxi-Clav ANDAs.

IV. MDS’ Communications With Apotex Concerning Its FDA Issues

[111] There is no evidence that Apotex was aware of the FDA inspections and subsequent Form 483’s that MDS received in July 2003 and February 2004.

[112] On May 11, 2004, five days after MDS had received the First Untitled Letter, Siobhan Barr, the person at MDS responsible for Apotex’s business, sent an email to Apotex informing it that MDS had received the Letter and attaching a copy of it. The email stated: “[w]e believe the FDA is concerned with our process for responding to ‘unexpected variances’ and we are addressing this with a new SOP in ways that should satisfy the FDA.” MDS proposed a follow-up call to discuss what an Untitled Letter is; the suggestion that study data was lost; MDS’ new SOP to handle unexpected variances (the Event Resolution SOP); and Apotex’s ongoing work with MDS.

[113] On May 15, 2004, Gilbert Godin, an MDS Group Vice-President, again wrote to Apotex about press reports on the FDA’s enforcement activity and explained that the Untitled Letter “is not a warning letter and no response was requested by the agency. We intend to respond fully and thoughtfully to the concerns raised by the letter and have informed them by letter of our intent to respond.”

[114] Ms. Marner testified that following the May 2004 letter, Apotex had a number of meetings with MDS during which MDS assured it that it was taking the steps necessary to address the FDA’s complaints.

[115] On December 24, 2004, following receipt of the Second Untitled Letter requesting the FYR, MDS wrote to Apotex acknowledging that it had received the Second Untitled Letter and attaching a press release. MDS advised Apotex that its ongoing discussions with the FDA relate to a series of bioequivalence studies performed during 2000 to 2003 at the Montreal Facility. The letter emphasized that MDS had addressed the FDA’s concerns for studies on a go forward basis and had in place new SOPs designed specifically to investigate such events. The letter went on to state: “MDS-PS will continue to work diligently and openly with the FDA and to understand and resolve their remaining issues as quickly and effectively as possible.”

[116] The MDS press release attached to the letter affirmed that MDS would continue to fully cooperate with the FDA to address any data issues and advised that the FDA recommended “an expanded review of bioequivalence studies conducted at the Montreal facility over the last five years”. It went on to say that MDS was committed to meeting with the FDA to discuss the content, scope and protocol for the FYR and that it had engaged an independent “FDA compliance expert” to assist in the review. MDS provided further assurances that it was also conducting a comprehensive review of its quality assurance practices and put procedures in place in the summer of 2004 to investigate any potential data issues.

[117] On January 5, 2005, MDS sent a form letter to “Valued Customers”, including Apotex, assuring its customers that it was working diligently with the FDA to resolve the issues as quickly as possible. The letter stated in part:

MDSPS has a strategic commitment to enhance our quality improvement efforts. We now have a global Event Resolution SOP to systematically handle events as they occur. The SOP and real examples were presented to the FDA during their latest inspection. After a very thorough review of our new procedures and their applications, no official observations were noted. We are confident that our new procedure will allow us to adequately conduct real time investigations of future unexpected events.

[118] Internally, Ms. Marner was telling Apotex personnel to remain unbiased concerning MDS. She felt that the issues were between MDS and the FDA and did not impact Apotex which continued to receive FDA approvals.

[119] On January 21, 2005, MDS wrote to Apotex. The letter advised that the FDA’s concerns originally related to a single study and described MDS’ meetings with the FDA in August 2004 to address the actions that MDS had taken to prevent the same thing from occurring in the future (the Event Resolution SOP). MDS assured Apotex that the Second Untitled Letter had a limited scope and that MDS was dealing with the FDA’s concerns expressed in the letter. MDS further stated:

Because of the redacting necessary to protect client confidentiality, it is difficult to tell that this correspondence concerns two generic compounds in five bioequivalence applications for three customers conducted in VSL [Montreal Facility] between 2000 and 2003. Note that the first compound mentioned is the same compound that has been discussed with the FDA since the first audit communication. For the second compound, we believe we have identified the root cause but we are still in the midst of that investigation. The correspondence was not a warning letter. MDS Pharma Services has never received a warning letter from the FDA.

[120] On February 7, 2005, MDS again wrote to its “Valued Customers”. The letter spoke of the meeting with the FDA on February 2, 2005, to discuss MDS’ proposed FYR plan. It outlined the FYR plan in general and concluded: “we are confident that our plan is robust, comprehensive and realistic, and that our use of dedicated resources will preclude any negative impact on your ongoing bioanalytical work at MDSPS.”

[121] On May 20, 2005, following a request from Apotex for information on the FYR plan, MDS wrote to Apotex providing some details as to the review process and how studies were selected and ordered. The letter enclosed a list of all Apotex projects included in the review which was the first time Apotex had received this information. The Levo-Carb IR Study and the Amoxi-Clav Studies were on the list.

[122] On February 6, 2007, following the FDA’s January 10, 2007 letters, David Spaight, President of MDS, wrote to Apotex characterizing the FDA’s measures as “precautionary”. He stated that “[c]lients whose work falls into the timeframe and locations of regulatory concern … will receive our full support to help respond to the FDA requirements.” Mr. Spaight concluded: “[w]e are personally committed to resolving the issues identified with the FDA, working with you to get your ANDA submissions approved, and making it easier and more rewarding for you to do business with us in the future.”

V. Apotex’s Responses to the FDA’s Issues with MDS

[123] In January 2005, Apotex Research commissioned a full written analysis of the Montreal Facility as a result of the Second Untitled Letter requiring the FYR and the media attention that arose therefrom. The analysis identified the historical summary of events over the previous year and a half leading up to the Second Untitled Letter. The analysis noted the FDA concerns with the anomalous analytical results and further noted the FDA’s concerns with MDS’ practices which could result in rejection of the data where circumstances warrant.

[124] Between August 15 and 17, 2005, Apotex sent an audit team to the Montreal Facility to carry out an audit of the MDS studies done for it. The purpose of the audit was to assess the risk to Apotex ANDAs approved or pending which were supported by MDS studies. The report of the analysis was completed in December 2005.

[125] In respect of the Levo-Carb IR Study, the audit team reported that it “…ran out of time to review the Carbidopa-Levodopa study in enough detail to make a definitive assessment of risk to Apotex.” Nevertheless, the team concluded, based on the data examined, that the Levo-Carb IR study should be considered “moderate to high risk” to Apotex pending further evaluation of the data.

[126] With respect to the Amoxi-Clav Studies, the audit team reported that due to time constraints, very little data was reviewed and therefore no assessment of risk to Apotex could be made.

[127] After the audit, Ms. Marner testified that Apotex continued to receive assurances from MDS that the FYR was going well and it was resolving its issues with the FDA.

[128] As noted, on November 15, 2006, Apotex was informed by the FDA for the first time since the FDA had started its re-review of the Amoxi-Clav ANDAs that the issues with MDS were not fully resolved and the FDA still had some concerns with the Amoxi-Clav ANDAs.

[129] On December 11, 2006, Ms. Tao spoke to the FDA and was advised that in regards to the MDS issues, it was considering a number of options for firms to get product approval, including repeating the study, re-analyzing the samples and having a third party auditor conduct a review of the samples.

[130] As a result of this information, Apotex (Ms. Marner) immediately began to develop an action plan to determine which of the three FDA options Apotex should pursue in respect of each product involved. Ms. Marner directed Ms. Makocatic to put together an audit team to attend at the Montreal Facility to review MDS’ data to determine the appropriate course of remediation for each study. In total, there were 40 studies involved. In addition, Ms. Marner contacted other CRO’s with the appropriate assets available to discuss repeating both the Levo-Carb IR and the Amoxi-Clav studies if required.

[131] The Apotex audit of the MDS studies at the Montreal Facility began in late January 2009 and lasted four to six weeks. Although the plan was for the team to focus initially on the studies done for approved products given the FDA’s six-month deadline for submission of an action plan for approved products, Ms. Marner instructed the team to look first at the Amoxi-Clav Studies.

[132] The audit team developed a “checklist” to ensure that the studies were reviewed in a consistent fashion and sorted the studies based on whether they were “certifiable”, may be certifiable and not certifiable. The checklist integrated the specific issues raised in the FDA’s letters with related issues set out in a guidance or manual the FDA field investigators used. The team operated on the basis that if the study indicated any of the issues of concern identified by the FDA, the quickest way to remediate was to either repeat the study or reanalyze. If the study didn’t have any of the items of concern identified by the FDA, the study could probably be certified quite quickly.

Amoxi-Clav Repeat Studies

[133] In December, 2006, Ms. Marner instructed the project management group at Apotex to contact Anapharm, a CRO that had the assay available to conduct the studies for Amoxi-Clav. By January 8, 2007, Apotex had received quotes from Anapharm to conduct the Amoxi-Clav repeat studies with dosing dates in late February or early March, 2007.

[134] After reviewing the Amoxi-Clav Studies in January/February 2007, Ms. Macokatic recommended that Apotex look at repeating them or reanalyzing the samples.

[135] Ms. Marner considered using MDS to repeat the Amoxi-Clav Studies at a different facility but its timelines were not as expeditious as Anapharm’s. Accordingly, by the end of February 2007, Apotex had entered into agreements with Anapharm to carry out the Amoxi-Clav repeat studies.

[136] On April 24, 2007, Apotex was advised by Anapharm that the Amoxi-Clav fasted study had passed and the results of the fed study were expected by mid-May. However, on May 28, 2007, Apotex was advised by Anapharm that the fed study failed. Apotex immediately asked Anapharm to repeat the fed study as quickly as possible. It was subsequently scheduled for dosing in mid-August with the results expected in late October. On November 6, 2007, Anapharm advised Apotex that the repeat fed study had passed.

[137] In June 2007, because the repeat study was taking longer than expected, (and because Apotex was concerned that the further repeat fed study could again fail) Apotex decided to revisit the option of auditing the studies done by MDS.

[138] In the interim, Apotex had been working with an independent expert, AccuReg Inc. (“AccuReg”), to conduct audits of MDS studies which its audit team had determined in February 2007 were or may be certifiable. Of the approximately 30 studies AccuReg audited, between 20 and 25 ended up being certified.

[139] By June 2007, because the repeat Amoxi-Clav studies were taking longer than expected and it was not certain given the variability of clavulanic acid that the Amoxi-Clav repeat fed study would pass, Apotex decided to revisit the option of auditing the MDS studies for Amoxi-Clav.

[140] When Ms. Macokatic and AccuReg returned to the Montreal Facility from August 13 to 17, 2007 for the audit, they were provided with new validation data that MDS had generated or was in the process of generating utilizing a different study method than it had used initially for the Amoxi-Clav Studies.

[141] AccuReg was concerned that using the new method to evaluate the stability of the samples might distort the results of the original analysis leading to serious complications. MDS advised, however, that it had additional data to bridge the studies to show that the two study methods were equivalent for the purpose of analyzing the samples. MDS provided some of the data to be reviewed following the August 2007 audit and the remainder in October 2007.

[142] As a result of the additional data, AccuReg’s initial estimate of work was significantly expanded and the audit took approximately four months. AccuReg certified the Amoxi-Clav studies on December 14, 2007.

[143] Apotex filed its amendment to the ANDAs for Amoxi-Clav on December 27, 2007 based on the certification by AccuReg. Apotex decided to use the certified study over Anapharm’s repeat studies because it represented a much smaller amount of data for the FDA to review.

[144] Apotex received FDA approval for the Amoxi-Clav 875/125 mg strength on October 20, 2008. The FDA approval for the two lower strengths was received on February 24, 2009.

[145] Apotex, through Apotex Corp. began selling Amoxi-Clav in the U.S. in June 2009.

[146] On September 4, 2009, the FDA issued a ban on imports against Apotex, bringing to a halt the Apotex’s shipments of Amoxi-Clav to the U.S. Sale of the drug in the U.S. came to an end shortly thereafter.

[147] The total costs to Apotex of both the Anapharm repeat studies, the AccuReg certification and storage costs were $2,802,760.39.

Levo-Carb IR Repeat Study

[148] The January/February 2007 audit of the Montreal Facility did not include the Levo-Carb IR Study. As a result of the August 2005 audit which concluded the Levo-Carb IR Study was at risk, Apotex had concerns about the validity of both the reassay and certifications options. Accordingly, from the outset, Apotex chose to repeat the Levo-Carb IR Study.

[149] On January 10, 2007, Apotex contacted BA Research in India to conduct the Levo-Carb IR repeat clinical study. As noted, BA Research was the CRO that conducted the non-fasted Levo-Carb IR study. Apotex subsequently retained Cetero Research (“Cetero”) in Canada to do the analysis. As a result of a delay in the approvals required to conduct the study in India, formal agreements were not finalized with BA Research until June 25, 2007 and with Cetero until September 11, 2007.

[150] The Levo-Carb IR repeat study passed and on February 7, 2008, the Levo-Carb IR ANDA was resubmitted to the FDA. On June 8, 2008, the FDA approved Levo-Carb IR, all strengths, for sale in the U.S.

[151] Apotex Corp. launched the sale of Levo-Carb IR in the U.S. in October 2008. Sales continued until September 2009, when as noted, the FDA banned Apotex imports into the U.S.

[152] The total cost of the Levo-Carb IR repeat study by both BA Research and Cetero plus storage costs was $161,169.92.

The Issues

[153] The following are the main issues raised by the parties in the Action:

1. Was MDS in breach of contract and/or negligent in respect of its performance of the Project Agreements;

2. Does Apotex have any standing to bring the Action;

3. Is the Action statute barred as a result of the expiry of the limitation period;

4. What are Apotex’s damages.

Breach of Contract

[154] In Sattva Capital Corp. v. Creaston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, Rothstein J., on behalf of the court, discussed the current approach to contractual interpretation at paras. 47 and 48:

47. … the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27 per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65 per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

No contracts are made in a vacuum: there is always a setting in which they have to be placed.... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

(Reardon Smith Line, at p. 574, per Lord Wilberforce)

48. The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Geoffrey L. Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115]

[155] Apotex submits that as a result of its issues with the FDA resulting in Apotex having to either repeat or certify the Studies, MDS breached s. 8.1 of the MLSA for each of the three Project Agreements.

[156] Section 8.1 of the MLSA provides:

8.1 Phoenix will perform the Project in accordance with the current state of the laboratory research art and the Protocol. Phoenix will also comply with all applicable current government regulatory requirements, including United States standards of Good Laboratory or Clinical Practices as appropriate to the Project. In the event Sponsor requires any special procedures to be undertaken by Phoenix (e.g. to satisfy foreign standards or requirements or otherwise) such procedures will be provided in writing by Sponsor to Phoenix.

[157] MDS submits that the Project Agreements and the obligations thereunder, including s. 8.1, all came to an end (apart from confidentiality) when MDS delivered the Studies to Apotex and Apotex paid MDS. In support of that submission, it relies on ss. 2.8, 4.4, 5.3, 10.5, and 24.0 of the MLSA.

[158] There is no provision in the MLSA or the Project Agreements which provides that all of MDS’ obligations under the Agreements come to an end at the time of delivery of the final report and payment. There is a termination provision but it was not exercised in this case.

[159] Further, while the Project Agreements set out the specific terms of the project or study in question, Article 4 of the MLSA which provides for incorporation of the Project Agreement makes it clear that the MLSA is the governing master agreement. As a result, MDS’ obligations under the MLSA and specifically under s. 8.1 are continuing. MDS is required to comply with “all applicable current government regulatory requirements...” In this case, because the Project Agreements specifically provided that the Studies were for submission to the FDA, the regulatory requirements were those of the FDA.

[160] I am satisfied from the evidence that, as a result of its issues with the FDA, MDS breached s. 8.1 of the MLSA in respect of each of the three Project Agreements. The evidence of Ms. Crain, which as I’ve noted, I accept in its entirety, was that MDS failed to comply with U.S. regulatory requirements as determined by the FDA at the Montreal Facility; that the lack of compliance was serious in nature; and MDS ought to have foreseen that its lack of compliance had the potential to cause damage to its customers including Apotex. Further, MDS failed to comply with U.S. industry standards and good practices in the manner in which it handled the FDA’s concerns during the period.

[161] In the Second Untitled Letter of December 21, 2004, which gave rise to the FYR, the FDA noted that several in vivo bioavailability studies at the Montreal Facility were not conducted in accordance with 21 CFR 320.29(a). After referring to the studies (none of which were for Apotex), the letter stated in the last paragraph: “We believe that these findings may indicate a more widespread problem at your facility. As a result, FDA has concerns about the validity of other bioequivalence data generated by MDS, including data submitted in support of currently approved applications.”

[162] The FDA concluded (and Ms. Crain confirmed) that there were multiple systemic deficiencies in MDS’ operation of the Montreal Facility which impacted on the performance of all the studies done by MDS at that Facility between 2000 and 2004, including, as it turned out, the Studies done for Apotex pursuant to the Project Agreements.

[163] As the evidence establishes, the results of the FYR were not accepted by the FDA and eventually lead to the requirement in January 2007 that sponsors, including Apotex, remediate the bioequivalency studies conducted at the Montreal Facility from 2000 through 2004.

[164] I am also satisfied that MDS further breached s. 8.1 of the MLSA by failing to respond to the FDA’s concerns in accordance with industry standards and good practices, including good practices codified in the U.S. regulations. Ms. Crain testified MDS’ at times hasty, protracted, defensive and/or non-responsive dealings with the regulator, at each stage of the escalation of the enforcement activity were not in accordance with industry standard and good practices. MDS’ mishandling of the FDA’s concerns over the course of their dealings led to the FDA’s January 2007 requirement and directly impacted Apotex.

[165] The above breaches concern issues which MDS had at the Montreal Facility. MDS submits that it has no liability under s. 8.1 of the MLSA for such issues because that section applies soley to the performance of the individual Studies and not to the facility as a whole. I disagree.

[166] In my view, the wording of s. 8.1 is broad enough to extend to the running of the facility as a whole. The section provides that MDS must comply “with all applicable current government regulatory requirements …. as appropriate to the Project.” The regulatory obligations that MDS is obligated to comply with most certainly include the operation of the facility. That interpretation also gives effect to the purpose of the MLSA which is to govern the carrying out of bioequivalency studies for regulatory approval. Further, the obligation of regulatory compliance is in the MLSA master agreement as opposed to being a specific requirement in the Project Agreements.

[167] In addition, and contrary to MDS’ submission that Apotex failed to prove that the Studies were in breach of s. 8.1, in my view, the evidence establishes that MDS breached the Agreements by failing to comply with s. 8.1 in conducting the Studies themselves.

[168] In relation to the Levo-Carb IR Study, Apotex determined in January 2007, following the FDA’s January 10, 2007 letter, that as a result of its August 2005 audit, the Levo-Carb IR Study done by MDS was not certifiable and would need to be repeated. MDS has produced no evidence to challenge that decision. I conclude, therefore, that MDS’ Levo-Carb IR Study was not done in compliance with U.S. regulatory standards resulting in a breach of s. 8.1 of the MLSA in respect of the Project Agreement for Levo-Carb IR.

[169] In respect of the Amoxi-Clav Studies, as a result of Apotex’s audit in January 2007, Ms. Makocatic concluded, based on the data provided by MDS that they had to be repeated as well. Again, MDS has provided no evidence to challenge that decision. Later, when Ms. Makocatic and AccuReg returned to the Montreal Facility in the spring of 2007, AccuReg concluded that MDS’ Amoxi-Clav Studies had a major issue that constituted “significant non-compliance with good laboratory practices.” It was only as a result of new data provided to Apotex and AccuReg by MDS in August and October 2007 that the Amoxi-Clav Studies were able to be certified. I conclude, therefore, based on the evidence that the MDS Amoxi-Clav Studies were not done in compliance with U.S. regulatory standards resulting in a breach of s. 8.1 of the MLSA for each of the Project Agreements for Amoxi-Clav.

[170] MDS submits that s. 3.2 of the MLSA limits its liability to Apotex arising out of any actions by the FDA.

[171] Article 3 of the MLSA deals with the study protocol. Specifically, s. 3.2 provides:

3.2 If requested by Sponsor, Phoenix will assist Sponsor in developing the Project design and purpose, in a manner consistent with current regulatory guidelines. Phoenix does not warrant that the Project design and/or the Project results will satisfy the requirements of any regulatory agencies at the time of submission. However, Phoenix represents it will provide all reasonable efforts to advise Sponsor in a manner consistent with current regulatory guidelines. [Emphasis added.]

[172] As noted, Article 3 of the MLSA deals with the study protocol. Section 3.1 provides that the services to be performed by Phoenix [MDS] are in accordance with a “protocol document” which sets out the project design, the purpose, information desired, experimental procedures, estimated duration and “all other relevant matters.” The protocol document is provided by the sponsor [Apotex] or is prepared by Phoenix [MDS] under the sponsor’s direction.

[173] Having regard to the wording of the MLSA as a whole and Article 3, what is not warranted is the project design (which is the sponsor’s responsibility) or that the project results will satisfy the regulator. On both a direct reading of the words in s. 3.2 and in the context of Article 3, the exclusion of warranty in s. 3.2 of the MLSA does not extend to exclude MDS’ obligation to comply with applicable government regulations in s. 8.1.

[174] Finally, MDS submits that Apotex is estopped from claiming a breach by MDS of s. 8.1 based on the fact that Apotex reviewed the Studies in draft and accepted them before they were finalized by MDS.

[175] The evidence does confirm that Apotex did receive a draft of the Studies prior to MDS finalizing them. There is no evidence, however, of what Apotex reviewed or approved. Nor is it likely, given MDS’ responses to the FDA, that its regulatory compliance issues would have been the subject of the Studies.

[176] For the above reasons, therefore, I am satisfied that MDS was in breach of s. 8.1 of the MLSA in respect of each of the three Project Agreements.

Negligence

[177] While the Action is primarily framed as a breach of contract claim, Apotex has also pleaded that MDS is also liable to it in negligence. They submit that MDS owed it a duty of care and warranted that they would provide FDA or industry standard compliant bioequivalent testing services. MDS submits that in failing to meet the custom, industry and statutory or regulatory standards in carrying out the Studies, MDS breached its duty of care and Apotex has suffered damage as a result.

[178] Apotex’s claim in negligence is in effect an alternate claim in the event that MDS is successful in its defence of the breach of contract claim or its defence that Apotex is not a party to the Project Agreements and therefore has no status to bring the Action. I have already found that MDS was in breach of the Project Agreements and I will shortly deal with the issue of Apotex’s standing to bring the Action.

[179] It has long been decided that concurrent liability can exist in both contract and tort except where the contract indicates that the parties intended to exclude liability in tort: Central & Eastern Trust Co. v. Rafuse, 1986 CanLII 29 (SCC), [1986] 2 S.C.R. 147 at para. 59; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12.

[180] There is nothing in the MLSA or the Project Agreements that excludes liability in tort.

[181] The evidence establishes that MDS performed its work pursuant to the Project Agreements for the Apotex group and not merely Apotex Research. In that regard, MDS worked directly with both Apotex and Apotex Research and actually addressed some of the Studies directly to Apotex. Given the sufficiently close relationship that existed between MDS and Apotex in respect of the Studies, I have no trouble concluding that MDS owed Apotex a duty of care in respect of the them.

[182] Further, by not complying with the FDA regulations which resulted in the FDA not accepting the Studies, I find that MDS breached its duty of care to Apotex which has resulted in Apotex suffering damages which were a reasonably foreseeable consequence of the breach.

[183] In my view, therefore, Apotex has established a concurrent claim in negligence against MDS.

[184] As I understand its argument, MDS does not submit that it has no liability in tort. Rather, it submits that Apotex’s claims in tort are limited by the terms of the MLSA, specifically ss. 3.2 and s. 16.1. In that regard, I have addressed s. 3.2 and will deal with s. 16.1 when I discuss damages. Neither, in my view, effect MDS’ liability.

MDS’ Further Defences

[185] MDS submits that Apotex has no standing to bring the Action and further that the Action is statute barred by virtue of it being commenced outside the limitation period.

a) Standing

[186] MDS submits that each of the three Project Agreements giving rise to the Studies was entered into between MDS and Apotex Research, not Apotex. Accordingly, Apotex Research is the proper and the only party entitled to bring the Action. As Apotex is not a party to the Project Agreements, it has no standing to bring the Action.

[187] The preamble to the MLSA provides that it is entered into between “Phoenix and its affiliates and Apotex Research and its affiliates”. Further, s. 4.2 of the MLSA provides:

4.2 The Project Agreement shall be construed as to include the name of the Parties, of their subsidiaries, affiliates or divisions, a statement of the scope of work, a time line for performance of services, a compensation schedule, and execution by each party.

[188] The MLSA contains a definition of “affiliate” but it applies only to Phoenix, the corporate predecessor to MDS. I agree with MDS, therefore, that it is appropriate to look outside the MLSA to determine what an “affiliate” of Apotex Research is. In that regard, I turn first to Apotex Research’s incorporating statute, the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”).

[189] Section 1. (4) of the OBCA deems one body corporate to be affiliated with another body corporate if, but only if, “…both are subsidiaries of the same body Corporate...”

[190] Mr. Fahner gave evidence concerning the corporate structure of the Apotex group based on his review of the corporate records. Specifically, Mr. Fahner testified that Apotex, an Ontario corporation, is wholly owned by Apotex PHI which is in turn wholly owned by Apotex HI. Mr. Fahner produced copies of the share certificates issued to Apotex PHI by each of Apotex and Apotex Research in 1996 and testified that the shares represented by the certificates constituted the only issued and outstanding voting shares of the respective corporations.

[191] Apotex Research, which carried on the bio-clinical business under the direction of Apotex, is also wholly owned by Apotex PHI. In 2006, Apotex assumed the bio-clinical business and Apotex Research’s employees and assets. Apotex Research continues to exist today as a shell company not carrying on any business.

[192] As both Apotex and Apotex Research are subsidiaries of Apotex PHI and therefore “affiliates”, I am satisfied that Apotex is an affiliate of Apotex Research within the meaning of that term in the MLSA and pursuant to s 4.2 of the MLSA, is a party to the Project Agreements.

[193] MDS submits that Apotex has not met its burden of proof by adducing evidence that, on a balance of probabilities, establishes that Apotex and Apotex Research are “affiliates” by reason of their common ownership by Apotex PHI. MDS takes issue with Mr. Fahner’s evidence in respect of Apotex’s corporate structure. It submits that the share certificates, by themselves, prove nothing and Mr. Fahner’s evidence in respect of them is inadmissible as hearsay and not the “best evidence.” MDS submits that Apotex should have produced the share registers or minute books of Apotex and Apotex Research.

[194] In my view, Mr. Fahner’s evidence is admissible and is sufficient to establish that Apotex and Apotex Research are wholly owned subsidiaries of Apotex PHI. No objection was taken to his evidence as hearsay at the time it was given. To the extent that it is hearsay, I am satisfied that it is admissible under the principled exception to that rule. It is both necessary and reliable. Mr. Fahner was not challenged in cross-examination in respect of his evidence.

[195] Further, in the circumstances, I have no problem in accepting the share certificates together with Mr. Fahner’s evidence as to where he obtained them and that there are no other shareholders of either Apotex or Apotex Research, as proof that both Apotex and Apotex Research are subsidiaries of Apotex PHI.

[196] MDS submits that by failing to produce the share registries, I should draw an adverse inference that Apotex and Apotex Research are not subsidiaries of Apotex PHI. In support of that submission, MDS relies on the decisions in R. v. After Dark Enterprises Ltd., [1994] A.W.L.D. 1006 (Alta. C.A.) at para. 7; Roopchand v. Chau, 2012 ONSC 1461 (S.C.J.) at para. 39; and Export Brewing and Malting Co. Ltd. V. Dominion Bank, 1934 CanLII 108 (ON CA), [1934] O.R. 560 (H.C.) at para. 7; aff’d [1934] O.R. 570 (C.A.); rev’d 137 CarswellOnt 97 (Jud. Comm. Of the P.C.). Those cases, however, are very different than this one. In all three of the above cases, which were shareholder disputes, the party seeking to prove their shareholding failed to produce any corporate records. Further, the Export Brewing case is of no support given that the trial decision, which MDS relies on, was reversed by the Privy Council.

[197] The issue of Apotex’s status to bring the Action has been present from the beginning of the Action. MDS has had ample opportunity to discover Apotex’s corporate structure and have produced the corporate records to establish it.

[198] Finally, although not determinative of the issue, there is also evidence of how the parties conducted themselves in carrying out the Project Agreements and thereafter which confirms that Apotex was a party to the Agreements. Specifically, MDS treated Apotex interchangeably with Apotex Research. It listed Apotex, not Apotex Research, as the study sponsor in the relevant MDS protocols; the Amoxi-Clav Studies were addressed to Apotex as study sponsor; MDS regularly communicated with Apotex as well as Apotex Research; and MDS dealt with Apotex exclusively after Apotex Research no longer had any continuing operations.

[199] Accordingly, I conclude that Apotex has standing to bring the Action and is a proper plaintiff.

b) Statute Barred

[200] MDS submits that Apotex had knowledge of the breaches of contract and duty and the adverse impacts they could have on it well before November 10, 2006, which is the date two years before Apotex commenced the Action. Accordingly, MDS submits that Apotex’s claim was commenced outside the two-year period and is statute barred.

[201] Apotex complains about the bona fides of MDS’ limitation defence given that it was raised for the first time on the eve of trial when MDS amended its defence to first plead it. Notwithstanding the late arrival of the defence, Apotex raised no issues of prejudice and consented to the amendment. Further, the defence relies on facts which have been known to the parties since discoveries at least. I consider Apotex’s complaint about MDS’ late addition of its limitation defence to be a non-issue.

[202] Sections 4 and 5 of the Limitations Act, S.O. 2002 (the “Act”) provide:

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[203] MDS submits that the limitation period began to run at the earliest when the Studies were delivered by MDS to Apotex (Levo-Carb IR on March 1, 2004; Amoxi-Clav fed on January 5, 2005; and Amoxi-Clav fasted on February 28, 2005) and at the latest on April 24, 2006 when Apotex received the deficiency letter from the FDA in respect of Amoxi-Clav which advised that until MDS satisfied its concerns about the Montreal Facility, it could not proceed with the ANDAs.

[204] Within the above time period, MDS submits that the limitation period began to run on a number of alternative dates. First, it submits that because the Project Agreements ended when MDS delivered the final Studies, the limitation periods in respect of each of the Project Agreements began on those dates. As I understand that submission, because the Agreements ended, the limitation period begins to run at that time regardless of discoverability. I have already addressed MDS’ submission that the Project Agreements together with MDS’ obligations, except for confidentiality, came to a complete end at the time of the delivery of the Studies. Further, discoverability is an essential component of s. 5 (1) of the Act and MDS’ submission totally ignores that issue.

[205] MDS’ further submits that as of the dates of delivery of the Studies, Apotex knew that they were not useable for the purpose agreed to; that at a minimum it had suffered injury or damage by virtue of having paid for Studies that were not useable for the intended purpose; and that the damage was attributable to MDS’ failure to operate the Montreal Facility in compliance with FDA regulatory standards.

[206] In my view, the evidence does not establish that Apotex knew of the breaches or that they had suffered damage as at the dates of the delivery of the Studies. Apotex first became aware that MDS was having issues with the FDA in respect of its Montreal Facility at the time of the First Untitled Letter at the end of April 2004. Both the FDA’s letter and MDS’ information to Apotex at that time indicated that the issues were limited to a bioanalytic study in respect of a drug called loratadine which did not involve Apotex. Further, MDS advised Apotex that it was responding to the FDA’s concerns. Apotex was certainly not aware at the time the Studies were delivered to it that they were “unusable”.

[207] MDS next submits that Apotex knew following receipt of the Second Untitled Letter dated December 21, 2004, requesting the FYR, that the Studies were not useable. Once again, based on the evidence, I do not accept MDS’s submission. Following receipt of the Second Untitled Letter, MDS again contacted Apotex to assure it that the FDA’s concerns related to a series of bioequivalence studies conducted during 2000 and 2003 (outside the dates of the Studies). It further stated that MDS had addressed the FDA’s concerns on a go forward basis.

[208] As mentioned earlier, on January 21, 2005, MDS advised Apotex in a letter that the FDA’s concerns related to a single study and that in August 2004 it had implemented the Event Resolution SOP to prevent the issues the FDA was concerned about from occurring in the future.

[209] MDS called no evidence to contradict both its written communications and Apotex’s evidence that it was being assured by MDS that there was no issue with the Studies and it was responding to the FDA.

[210] As Apotex points out in its argument, the purpose of the FYR was to try to resolve FDA’s concerns about MDS’ studies so that the sponsors would not have to remediate the studies. Further, the FDA continued to approve MDS studies that were subject to the FYR.

[211] Apotex was not advised by MDS that the Levo-Carb IR and Amoxi-Clav Studies were part of the FYR until May 2005.

[212] Although Apotex conducted an audit at the Montreal Facility in August 2005, due to time constraints and late delivery of the information by MDS, it was unable to make a definitive risk assessment with respect to the Levo-Carb IR Study and no assessment with respect to Amoxi-Clav Studies.

[213] Nor, in my view, were MDS’ issues with the FDA delaying the approvals of Apotex’s ANDAs at this stage. Because the Levo-Carb IR ANDA underwent a major amendment on July 29, 2005, the best case scenario for its approval, based on Ms. Tao’s 16-month timeline, was November 2006. Similarly, the targeted best case approval date for Amoxi-Clav was also forecasted to be August of 2006.

[214] I do not accept MDS’ submission that it was Ms. Cain’s evidence that it was foreseeable to Apotex as a result of the Second Untitled Letter (requiring the FYR) that the FDA would not accept the Studies without them being repeated or verified. When viewed in its context, the proper characterization of Ms. Cain’s evidence is that the rejection of the study data was only one of several possible outcomes of the FYR.

[215] Based on the evidence, therefore, I conclude that prior to April 24, 2006, while Apotex was aware that MDS was having issues at the Montreal Facility concerning adherence to FDA regulations, it had no knowledge that those issues impacted the Studies (apart from being part of the FYR) or that they were causing any delay in the approval of its ANDAs. Apotex had every reason to believe, based on its communications with the FDA in respect of the ANDAs, what it understood about the MDS’ FDA issues and what MDS was telling it, that the Studies would pass the FYR and be accepted by the FDA. Further, notwithstanding the FYR, based on its dealings with the FDA, Apotex understood that the FDA’s review of the ANDAs was proceeding as expected and within Apotex’s time estimates for obtaining the approvals.

[216] MDS’ final submission is that the limitation period began to run on April 24, 2006, which is the date when Apotex received a deficiency notice from the FDA concerning the Amoxi-Clav ANDAs stating that until the FDA satisfied its concerns about the Montreal Facility, “we cannot proceed with your application.” This was the first notice that Apotex had from the FDA that MDS’ issues at the Montreal Facility were directly impacting the approval process for Amoxi-Clav (it also assumed from the notice that the approval of Levo-Carb IR was similarly impacted).

[217] MDS submits that upon receipt of the April 24, 2006 notice, Apotex knew that the MDS’ Studies could not be used. I disagree. There is no basis in the evidence to support that submission. The Studies were still part of the FYR and no final conclusion had been reached in the FYR that demonstrated the Studies could not still support the ANDAs.

[218] Rather, Apotex recognized that the approvals of the ANDAs were at risk. As noted, Ms. Marner immediately contacted MDS seeking a response to the FDA notice. MDS’ response was unsatisfactory prompting Ms. Marner to insist on a proper response. Following that, on May 8, 2006, in an internal email chain within Apotex, Ms. Tao noted that if MDS was able to submit a response to the FDA’s notice by the end of May 2006, the projected approval date for Amoxi-Clav which was then set for August 2006 should be moved to November 2006.

[219] Accordingly, as of May 8, 2006, I am satisfied that the three factors in s. 5(1)(a) (i) – (iii) of the Act were present for the first time: Apotex knew that damage has occurred (delay of approval = loss of profit); and that the delay had been caused by MDS’ failure to comply with the FDA regulations.

[220] Apotex submits that the April 24, 2006 deficiency notice did not cause it damage due to delay because the delay from August to November 2006 was because of Apotex issues regarding dissolution specifications and labeling. While those issues did result in a delay of the final approval for Amoxi-Clav, they did not arise until the fall of 2006, long after Ms. Tao extended the targeted approval date to November 2006. Notwithstanding the subsequent reasons for delay in approvals, the evidence establishes that as of May 8, 2006, Apotex was of the view that MDS’ failure to follow FDA regulations was causing delay in it obtaining FDA approval of Amoxi-Clav and that delay was impacting its ability to sell the drug giving rise to loss of profit (the very claim being asserted in the Action).

[221] Notwithstanding I have found that as of May 8, 2006, each of s. 5(1)(a) (i)-(iii) were met, it remains necessary to consider s. 5(1)(a) (iv) of the Act: “having regard to the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”.

[222] The application of s. 5(1)(a) (iv) of the Act has been recently considered by the Court of Appeal in two cases: 407 ETR Concession Company Limited v. Day, 2016 ONCA 709, 133 O.R (3d) 762 and Presidential MSH Corporation v. Marr Foster & Co. LLP, 2017 ONCA 325, 135 O.R. (3d) 321.

[223] In 407 ETR, the Court noted that s. 5(1)(a) (iv) can have the effect of postponing the start date of the two-year limitation period beyond the date when a plaintiff knows it has incurred a loss because of the defendant’s actions. Laskin J.A. for the Court noted that the question of whether a plaintiff ought to have known whether a proceeding would have been an appropriate means to seek to remedy damage, injury or loss will turn on the facts of each case and the abilities and circumstances of the particular plaintiff.

[224] In Presidential, the Court again considered the application of s. 5(1)(a) (iv). After agreeing with the statements in 407 ETR concerning the approach to considering the section, Pardu J.A., on behalf of the Court, conducted an extensive review of the case law to identify the general principles behind a determination that resort to legal action may not be appropriate. The learned Judge identified that the section has been applied in circumstances where an expert professional has attempted to remedy his or her wrongdoing; where the plaintiff is relying on the superior expertise and knowledge of the defendant; and where there exists some alternative process with the potential to resolve the dispute, statutory administrative or otherwise and which has a reasonably ascertainable end date.

[225] On the facts of this case, I am satisfied that it would not have been appropriate for Apotex to have commenced a proceeding against MDS as at May 8, 2006. Rather, given what it knew at that date, it was more appropriate for Apotex to await the FDA’s response to results of MDS’ review of the Studies. Apotex and MDS had a long standing relationship regarding MDS conducting bioanalytical studies. Although the Studies were part of the FYR, Apotex had no indication that they would not be accepted by the FDA. MDS had been assuring Apotex that its issues with the FDA did not involve the Studies. What needed to happen was for the regulatory process involving the FYR to be concluded. Further, Apotex needed MDS’ assistance to enable it to respond to the April 26, 2006 deficiency notice. Commencing an action could have jeopardized that assistance.

[226] As it turned out, on June 20, 2006, MDS advised Apotex that the Amoxi-Clav Studies had passed its FYR. MDS subsequently submitted its closure report for the Amoxi-Clav Studies to the FDA on July 7, 2006. Based on the results of MDS’ review and Apotex’s subsequent communications with the FDA concerning other issues arising from the FDA’s review of the Amoxi-Clav ANDAs, Apotex understood that the MDS Studies were no longer an issue for the FDA in respect of its approvals and they were back on track.

[227] All of which combine to establish, in my view, that it was not appropriate for Apotex to have commenced a proceeding against MDS in May 2006 but rather to do as it did and await the outcome of MDS’ review of the Studies and the FDA response. Further, had the FDA approved the ANDAs with the MDS Studies, I am satisfied that it would have avoided a legal proceeding because the early delays caused by the FDA April 26, 2006 Deficiency Notice were subsumed by the later delays occasioned by Apotex issues, thereby eliminating the earlier delay damages caused by MDS.

[228] In Markle Insurance Company of Canada v. ING Insurance Company of Canada, 2012 ONCA 218, 109 O.R. (3d) 652, Sharpe J.A. noted that the term “appropriate” in s. 5(1)(a) (iv) of the Act means “legally appropriate” to prevent a party from delaying a proceeding for “some tactical or other reason beyond the two years from the date the claim has fully ripened…” MDS submits that the delay occasioned by Apotex was tactical in that it sought to increase its claim for lost profits arising from the delay. For the reasons advanced, I reject that submission. The delay occasioned was to enable MDS to complete the review of the Studies and obtain FDA approval thereby avoiding a claim for damages, not an attempt to increase damages.

[229] MDS relies on Cargojet Airways Ltd. v. Aveiro Constructors Ltd., 2016 ONSC 2356, [2016] O.J. No. 2557 (SCJ) which is factually distinguishable. Cargojet was a dispute about deficiencies arising from the construction of a hanger. For approximately four years after the construction was finished, the contractor kept returning to repair the problem at its own expense, without success. At some point, the contractor sent Cargojet a bill to rectify the problem. Cargojet argued that its cause of action arose only when the contractor refused to pay for further work. The Court disagreed. It held that the fact that the contractor assisted Cargojet in an attempt to fix the problem did not postpone the running of the limitation period.

[230] As Pardu J.A noted in Presidential at para. 48, where a plaintiff relies on the exhaustion of some alternate process to suspend the discovery of its claim, the date on which the alternate process has run its course must be reasonably certain or have run its course. The end of Cargojet’s interaction with its contractor was not reasonably certain. By contrast with this case, the inadequacy of the Studies became reasonably certain when the FDA refused to accept them and required Apotex to repeat, re-analyze or certify them.

[231] As a result, while the FDA’s decision rejecting the MDS Studies was on January 10, 2007, based on the evidence, I find that while Apotex knew that the FDA still had issues with MDS in mid-November 2006, it was not until December 11, 2006 when Ms. Tao spoke to the FDA and learned that it was considering a number of options in respect of studies done by MDS, including repeating them, re-analyzing them or having them reviewed by a third party auditor that Apotex knew that the MDS Studies would not be accepted by the FDA, resulting in delay and damage.

[232] Nor do I consider that Apotex’s demand letter to MDS on January 8, 2007, claiming $9 million in damages establishes that Apotex had knowledge of its claim at some earlier date. It is the underlying facts concerning Apotex’s knowledge that are important not some date based on an extrapolation of the damages claimed in the letter. I also do not consider that Apotex had any obligation to call the individuals who were involved in computing the damage number in the letter to explain how it was arrived at.

[233] Would a reasonable person with the abilities and circumstances of Apotex, have known about the issues concerning its claim earlier? For the reasons above noted, I conclude not. Although Apotex is a sophisticated and knowledgeable drug manufacturer who conducts its own bioequivalence studies, it was never in a position to assess whether the FDA’s concerns involving the Montreal Facility directly impacted the Studies such that they would not be accepted by the FDA. The information it had from the FDA was from its Untitled Letters and the later Form 483s and what MDS told it which was that the Studies were not a problem and it was dealing with the FDA’s concerns.

[234] For the above reasons therefore, I conclude that the limitation period in respect of Apotex’s claim began to run on December 11, 2006. The Action, which was commenced on November 10, 2008, was commenced within the two-year limitation period and accordingly is not statute barred.

Damages

[235] Based on MDS’ breaches, Apotex’s claims damages both for reimbursement of monies paid to either repeat or certify the Studies and for loss of profits arising from the delay occasioned in being able to bring the two drugs to market.

[236] MDS submits that Apotex’s damages are limited by s. 16.1 of the MLSA. That section provides:

16.1 In the event of a material error by Phoenix, in the performance of the Project which renders the Project invalid, Sponsor shall have the option, at its sole discretion to either (a) request Phoenix to repeat the Project at Phoenix’s own cost, or (b) require Phoenix to refund Sponsor the contract price paid to Phoenix.

[237] Clauses that purport to exclude or limit liability are narrowly construed by the courts.

[238] In my view, the wording of s. 16.1 does not exclude Apotex’s claim. It provides options but, in the absence of clear wording, does not operate to exclude other remedies including reimbursement of third party remedial costs or loss of profits.

[239] Apotex’s evidence with respect to damages was provided primarily by Mr. Fahner (Apotex’s underlying revenue and costs information) and Mr. Sid Jaishankar of Duff & Phelps who provided an expert opinion concerning Apotex’s lost profits arising from the delay in obtaining the FDA approvals. Based on both experience and education, I qualified Mr. Jaishankar as an expert in business valuations and damages quantification.

[240] In response, MDS called Mr. Peter Steger of Cohen Hamilton Steger to provide his expert opinion concerning Apotex’s lost profits. Based on both education and experience, I qualified Mr. Steger as an expert in damages quantification, loss of profit damages, business valuations and forensic accounting.

[241] MDS also called Mr. Harry Boghigian to testify about issues concerning market share and the marketing of generic drugs in the U.S. Mr. Boghigian spent 40 years in the drug industry with Hoffman-La Roche, mainly in the marketing area. For the last 15 years he has been a consultant to the drug industry and has been involved in issues concerning the sale of generic drugs in the U.S.

[242] Although Apotex had no objection to Mr. Boghigian being qualified as an expert in respect of the sales and marketing of branded pharmaceuticals in the U.S., it objected to him being qualified as an expert on a similar basis for generic drugs. I dismissed Apotex’s objection. In my view, Mr. Boghigian’s lengthy experience in marketing and sales in the drug industry in the U.S. and his experience in that regard with generic drugs specifically both at Hoffman-La Roche and as a consultant is more than sufficient to qualify him as an expert in the subject of market share and marketing of generic drugs.

[243] Accordingly, based on experience, I qualified Mr. Boghigian as an expert in pharmaceutical marketing, sales and business development including both branded pharmaceuticals and generic drugs in the U.S.

[244] Apotex’s claim for damages arising from MDS’ breach of contract/negligence has two components: The actual costs which it incurred as a result of having to repeat or certify the MDS Studies; and its lost profits as a result of the delay it encountered in selling the two drugs in the U.S. market.

a) Repeat Study and Certification Costs

[245] Apotex’s claim for its costs of having to repeat the Levo-Carb IR fasted study and to both repeat and certify the Amoxi-Clav studies totals $2,963,930.31. That amount is made up as follows:

1. Levo-Carb IR costs of $161,169.92 (repeat study costs of $156,399.92 and storage costs of $4,670.00); and

2. Amoxi-Clav costs of $2,802,760.39 (repeat study costs of $2,471,908.80; storage costs of $238,987.66 and certification costs of $91,863.93).

[246] MDS does not contest the cost of the repeat study for Levo-Carb IR. Neither at the time that Apotex determined to carry out the repeat study or in the evidence before me has MDS taken issue with Apotex carrying out the repeat study for Levo-Carb IR. It does take issue with the delay that was encountered in carrying out the repeat study but that goes to Apotex’s loss of profit claim which I will discuss in due course.

[247] The $156,399.92 which Apotex incurred to repeat the Levo-Carb IR study is less than the cost MDS charged Apotex for the study in the first place. In my view, the costs are reasonable and recoverable as a direct result of MDS’ breaches.

[248] Nor does MDS take issue with the $91,863.93 cost for AccuReg certifying the Amoxi-Clav studies. It submits, however, that it should not be liable for the $2,471,908.80 paid to Anapharm in respect of the Amoxi-Clav repeat studies because Apotex never used the Anapharm studies to obtain the FDA approval. MDS further submits that it should not be liable for the costs of the repeat fed study which was necessitated by the failure of the first repeat fed study.

[249] As noted, in January 2007, Apotex’s audit team determined, based on the data that was provided by MDS at that time, that the Amoxi-Clav studies were not certifiable and should be repeated. It was only after Anapharm’s repeat fed study failed in the spring of 2007 that Apotex considered revisiting the issue of certification. The repeat studies were taking longer than expected and given the variability of the clavulanic acid, there was no certainty that the second repeat fed study would pass. Further, certification only ended up being possible because of new validation data that MDS provided to Apotex in August 2007 and in October 2007.

[250] MDS was well aware of the variability of the clavulanic acid and the possibility, through no fault of the CRO conducting the study that the study could fail. It is a risk inherent in the study which was imposed on Apotex as a result of being required to repeat the Amoxi-Clav Studies. Further, there is no evidence that the failure was a result of any error on the part of Anapharm.

[251] Importantly, as well, is the fact that MDS has called no evidence to take issue with Apotex’s actions in both repeating the Amoxi-Clav Studies and subsequently proceeding with certification.

[252] Based on the above, therefore, I consider Apotex’s actions in pursuing both the repeat Amoxi-Clav studies and later certification to have been reasonable and a direct result of MDS’ breaches. MDS is also responsible for the costs of the second repeat fed study. It was a risk of the study and a reasonable step for Apotex to take at the time. MDS is therefore liable for the costs incurred by Apotex for both the repeat studies by Anapharm and the certification by AccuReg in the total amount of $2,963,930.31.

Lost Profits

[253] Apotex’s claim for lost profit damages arising from the delay in launching the sale of both Levo-Carb IR and Amoxi-Clav in the U.S. totals U.S. $27,016,000 and is made up as follows:

a. U.S. $1,963,000 for Levo-Carb IR; and

b. U.S. $ 25,053,000 for Amoxi-Clav.

[254] The calculation of Apotex’s lost profits involves two main determinations: the period of time Apotex would have sold the drugs in the U.S. market “but for” MDS’ breach of contract/negligence (the “Delay Period”); and the profits that Apotex would have earned on the drugs during the Delay Period for each of Levo-Carb IR and Amoxi-Clav.

Delay Periods

[255] Apotex submits that the Delay Period in respect of Levo-Carb IR commences in July, 2007 (the Launch Date – i.e., date when Apotex submits it would have received FDA approval and begun selling the drug) and ends on September 4, 2009 with the FDA Import Ban (26 months).

[256] In respect of Amoxi-Clav, Apotex submits that Delay Period begins in March 2007 and ends, as with Levo-Carb IR, on September 4, 2009 with the FDA ban (30 months).

[257] The key date in determining the Delay Period for each of the drugs is the projected date when Apotex would have received FDA approval and been in a position to begin selling each drug in the U.S. had MDS not breached the Agreements (the “Launch Date”). The Launch Date for both drugs was not established by Mr. Jaishankar as part of his determination of lost profits. Rather, they were provided to him by Apotex and/or its counsel and used by him in reaching his opinion. Apotex’s Launch Dates were subsequently adopted by Mr. Steger and used by him in his analysis. In determining the Delay Period for each drug, however, Mr. Steger ended his analysis on the date that Apotex actually began to sell both Levo-Carb IR (October 2008) and Amoxi-Clav (June 2009) in the U.S.

[258] The fact that Mr. Steger agreed with the Launch Dates in Mr. Jaishankar’s report does not mean that the Court must accept those dates. Neither Mr. Jaishankar nor Mr. Steger has any expertise in respect of the approval process for the sale of generic drugs in the U.S. or what is involved in Apotex bringing the drugs to market once approval is obtained. Accordingly, I conclude that in order for Apotex’s Launch Dates to be valid, they must be supported by the evidence.

[259] In that regard, the evidence of Launch Dates comes primarily from Ms. Tao who testified that in a best case scenario, the time between the filing of the ANDA and approval is 16 months. Minor amendments don’t affect the timing but a major amendment places the ANDA back at the beginning of the approval process. Further, Ms. Tao testified Apotex likes to be in a position to launch or sell the drug in the same month that it receives approval, but that does not always happen.

Levo-Carb IR

[260] The Levo-Carb IR ANDA was filed by Apotex on April 2, 2004. However, as noted, Apotex filed a major amendment to the ANDA on July 29, 2005 which would have restarted the approval process. Sixteen months from July 29, 2005 takes the time-period to the end of November 2006. But that is a “best case” scenario which may or may not have occurred. On the other hand, there is no evidence that there were any delays in the FDA review. Further, even assuming a 16-month approval time, Apotex’s projected Launch Date for Levo-Carb IR of July, 2007 infers that Apotex wouldn’t have started selling the drug for a period of 6 months following FDA approval. No explanation of the six-month delay from approval to launch was provided.

[261] In actuality, Apotex received FDA approval for Levo-Carb IR on June 8, 2008 (all strengths) and began selling it in the U.S. in October 2008, some four months later. Given the circumstances, the delay to launch likely reflects that Apotex had not progressed to preparing for launch at the time it received the approval. It is reasonable therefore to assume a delay following approval within a similar range in determining the Launch Date.

[262] Accordingly, based on the evidence, or lack thereof, I consider Apotex’s projected Launch Date for Levo-Carb IR of July, 2007 to be within the range supported by the evidence and therefore reasonable. As a result, I conclude that the Delay Period in respect of Apotex being able to bring Levo-Carb IR to market in the U.S. is from July 2007 to October 2008 (the date Apotex actually began to market Levo-Carb IR in the U.S.) or a period of 15 months.

[263] MDS submits that as a result of the delays involved in both arranging for the Levo-Carb IR repeat study and obtaining the results, that the Delay Period should be only seven months.

[264] The onus is on MDS to establish that Apotex did not mitigate the carrying out of the Levo-Carb IR repeat study. MDS led no evidence that Apotex delayed obtaining the repeat study or that another CRO could have carried out the study in a shorter time frame. While the repeat study took some time, I am satisfied from the evidence that Apotex took all reasonable steps in obtaining it. I therefore reject MDS’ submission.

Amoxi-Clav

[265] As noted, Apotex’s Launch Date for Amoxi-Clav was March 2007 resulting in a Delay Period of some 30 months to September 2009. Ms. Tao testified that the original projected FDA approval date for Amoxi-Clav was August, 2016 (16 months) – again a “best case” scenario. As noted, however, in early May 2006, Ms. Tao revised the projected approval/launch date to November 2006 as a result of MDS’ issues with the FDA.

[266] As it turned out, by late August 2006, Apotex was still responding to the FDA about deficiencies and had not manufactured any batches of Amoxi-Clav for launch. In addition, in the fall of 2006, issues arose with the FDA concerning dissolution specifications and labelling. Accordingly, Ms. Tao revised the Amoxi-Clav approval date to late November, early December 2006. The reason for a further three months from December 2006 to the projected Launch Date of March 2007 was not explained, but presumably represents the time required for Apotex to manufacture the drugs and get them to market. The March 2007 Launch Date was termed “conservative” by Apotex.

[267] As the evidence established, Apotex was required to file two separate ANDAs for Amoxi-Clav. Ms. Tao testified that resulted in separate review teams at the FDA which in turn resulted in different review time tables. That was confirmed both by the deficiency notices received by Apotex and the dates that the final approvals were received. On September 9, 2005, Apotex received a minor deficiency notice in respect of the 875/125 mg strength ANDA and on February 13, 2006, more than six months later, it received a similar deficiency notice for the lower two strengths ANDA. Further, the FDA approved the Amoxi-Clav 875/125 mg strength ANDA on October 20, 2008 and the ANDA for the two lower strengths some four months later on February 24, 2009.

[268] As a result, I do not agree that Apotex would have received the FDA approvals for both Amoxi-Clav ANDAs in late November, early December 2006 as Ms. Tao testified. The evidence indicates that it would probably have received approval for one of the ANDAs at that time (likely 875/125 mg as its approval process was proceeding faster than the two lower doses). Given what actually occurred, it is probable that the second ANDA would not have been approved until late April, early March 2007, four months later.

[269] Further, the evidence establishes that Apotex did not launch the Amoxi-Clav drugs in the U.S. until June 2009, some three to four months following the date of the approval for the two lower strength Amoxi-Clavs and eight months after it obtained approval for the higher strength Amoxi-Clav. Again, there was no explanation of why Apotex waited for the approval for the two lower strength Amoxi-Clavs before selling or the delay to market thereafter.

[270] Accordingly, based on the evidence, I am not satisfied that Apotex’s projected Launch Date for Amoxi-Clav of March 2007 is reasonable. Rather, based on the above analysis, I conclude on the evidence that a Launch Date of July 2007, some four months later, is the more reasonable date.

[271] I conclude therefore that the Delay Period in respect of Apotex being able to bring Amoxi-Clav to market in the U.S. is from July 2007 to June 2009 (the date Apotex actually began to market Amoxi-Clav in the U.S.) or a period of 24 months.

[272] MDS submits that as AccuReg’s certification study was commenced in August 2007 and completed five months later in December 2007, the Delay Period for Amoxi-Clav should only be five months given that Apotex ultimately relied upon AccuReg’s certification for approval of the Amoxi-Clav ANDAs.

[273] As noted earlier concerning Apotex’s costs of the repeat studies and certification, I consider that Apotex’s decision to proceed first with the repeat studies with Anapharm and then with the certification by AccuReg and the time period involved to be reasonable in the circumstances. MDS has led no evidence that it was not. Further, AccuReg’s certification was only possible because MDS provided Apotex with new validation data first in August 2007 and then later in October 2007. Accordingly, I reject MDS’ submission concerning the Amoxi-Clav Delay Period.

Lost Profits

[274] In determining lost profits, it is necessary to determine Apotex’s net revenue over the Delay Period in question based on its projected sales and costs of manufacturing and distribution for each of the doses of both Levo-Carb IR and Amoxi-Calv.

[275] Mr. Jaishankar’s opinion is that Apotex’s loss of profits for Levo-Carb IR (all doses) utilizing Apotex’s estimated 26-month delay period is U.S. $1,963,000 (after subtracting the actual profits over the period of time Apotex sold Levo-Carb IR in the U.S.).

[276] In respect of Amoxi-Clav, Mr. Jaishankar’s opinion is that Apotex’s loss of profits for all doses utilizing Apotex’s Delay Period of 30 months is U.S. $25,053,000, again after subtracting the actual profits earned over the period that Apotex sold the drug in the U.S.

[277] Mr. Steger provided the Court with a number of different scenarios concerning his opinion of Apotex’s loss of profits, depending on the Delay Period. Utilizing a 15-month Delay Period for Levo-Carb IR (from July 2007 to October 2008 – the date Apotex began selling Levo-Carb IR in the U.S.), Mr. Steger’s opinion is that Apotex’s loss of profit for Levo-Carb IR, all doses, is Cdn. $673,775.

[278] In respect of Amoxi-Clav, and utilizing a 28-month Delay Period (from March 2007 to June 2009 – the date that Apotex began selling Amoxi-Clav in the U.S.), Mr. Steger’s opinion is that Apotex’s loss of profits for Amoxi-Clav, all doses, is Cdn. $9,956,265.

[279] Both Mr. Jaishankar and Mr. Steger approached the determination of Apotex’s net revenues (or lost profits) during the Delay Period using the following methodology:

i. they determined the overall size of the U.S market for the drugs in question in tablets;

ii. they next determined the overall size of the generic market for the drugs in question, again in tablets;

iii. they then estimated Apotex’s market share for the drug in question within the generic market for the drug (Apotex’s percentage share of the market multiplied by the number of tablets in the generic market);

iv. they then multiplied Apotex’s market share in tablets by the net price per tablet (net of chargebacks), which leads to Apotex’s gross revenues; and

v. they deducted from Apotex’s gross revenues the amount Apotex incurred in allowances.

[280] Mr. Jaishankar and Mr. Steger agreed on both the overall size of the market in the U.S. for the two drugs in question and the overall size of the generic market. The information came from industry data compiled by IMS Health, an American company that tracks and publishes market data for the drug industry in the U.S.

[281] Further, Mr. Jaishankar and Mr. Steger also agreed on Apotex’s financial information that was provided by Mr. Fahner, the Senior Vice-President of Global Finance at Apotex.

[282] Mr. Fahner joined Apotex in 1989 and is a certified accountant. He has held a number of positions involving financial matters within the Apotex Group. In 1992-1993, he headed Apotex’s implementation of an SAP program, an enterprise management software solution which integrated all of Apotex’s business and financial information. Apotex’s SAP system contains financial information not only for Apotex but for Apotex Corp. as well (although separate financial statements are prepared for each).

[283] Mr. Fahner explained that Apotex conducts all of its business transactions including all manufacturing activities, inventory, quality controls and sales and distribution through its SAP system.

[284] Mr. Fahner, relying on excerpts from Apotex’s SAP program, testified to the financial information for both Apotex and Apotex Corp., the sales and marketing arm for Apotex in the U.S. concerning the revenues and costs involved in both the manufacturing (Apotex) and the marketing and sales (Apotex Corp.) of the various doses of Levo-Carb IR and Amoxi-Clav.

[285] Because Apotex actually manufactured the various doses of Levo-Carb IR and Amoxi-Clav and shipped the drugs to Apotex Corp. and Apotex Corp. marketed and sold the drugs in the U.S., the financial information provided by Mr. Fahner concerning revenues and costs involved the revenues and costs incurred by both Apotex and Apotex Corp. However, Mr. Fahner presented his financial information on the basis that all of the revenues and costs were those of Apotex alone.

[286] Further, both Mr. Jaishankar and Mr. Steger carried out their analysis on the basis that all the revenues and the expenses produced were Apotex’s alone. But as noted, that is not correct. All of the sales and marketing of the two drugs in the U.S. was done by Apotex Corp. All of the manufacturing of the drugs was done in Canada by Apotex. Apotex and Apotex Corp. are separate corporations. Apotex Corp.’s financial statement demonstrates that it is a substantial corporation in its own right with significant revenues and expenses. In cross-examination, Mr. Fahner testified that Apotex recovers most of the sales revenue from Apotex Corp. by selling its products to Apotex Corp. at a cost of around 93-94% of the net selling price.

[287] The only areas where Mr. Jaishankar and Mr. Steger disagreed were with respect to Apotex’s estimated market share for the two drugs in the generic market and allowances. As can be seen from the differences in each of their opinions as to Apotex’s loss of profits, the impact of those disagreements, particularly with respect to market share, is significant.

a) Apotex’s Estimated Market Share

[288] Mr. Jaishankar estimated Apotex’s market share by using what he referred to as a guideline molecule analysis (a “molecule” is a drug). Mr. Jaishankar asked Apotex to supply him with its actual penetration rate in the U.S. generic market in the timeframe involved (2005-2008) for other drugs. Mr. Jaishankar received information from Apotex in respect of 110 different drug products. He then narrowed the list of comparator molecules by excluding those molecules where Apotex was a participant in the market prior to 2005; by excluding molecules where the generic market was less than 65% of the total market; and excluding molecules where there was incomplete or inconsistent data. The exclusions resulted in 25 “guideline” molecules.

[289] Mr. Jaishankar next proceeded to separate the 25 guideline molecules into two categories: 1) molecules where Apotex was entering a market with only one large pre-existing generic manufacturer (similar to Amoxi-Clav 250/125 mg); and 2) molecules where Apotex was entering a market with multiple large generic manufacturers. Mr. Jaishankar then calculated the average and median market share and based on those calculations he exercised his professional judgment to create what he referred to a “smooth ram-up” of the market share for both Amoxi-Clav 250/125 mg and all the other drugs by quarter over the Delay Periods he was given by Apotex.

[290] Mr. Jaishankar’s estimated market share for Apotex in respect of both Levo-Carb IR and Amoxi-Clav by quarter is as follows:

(a) Amoxi-Clav 250/125 mg

Quarter

1

2

3

4

5

6

7

8

9

10

11

Smoothed Ramp-Up

2.5%

9.5%

19.5%

25%

25%

30%

35%

35%

35%

35%

35%

(b) All other Product Strengths

Quarter

1

2

3

4

5

6

7

8

9

10

11

Smoothed Ramp-Up

1%

3.5%

5%

6%

7%

7%

7%

7%

8.8%

10%

10%

[291] By contrast, Mr. Steger estimated Apotex’s market share for the two drugs by looking at the actual market share achieved by Apotex during the period it sold the two drugs in the U.S. He then applied a weighted average to impute Apotex’s market share over the entire Delay Periods.

[292] In the result, Mr. Steger’s estimate for market share throughout the entire Delay Period for Amoxi-Clav is: 7.99% (250/125 mg); 5.90% (500/125 mg); and 4.36% (875/125 mg) and for Levo-Carb IR is: 0.82% (10/100 mg); 3.93% (25/100 mg); and 1.87% (25/100 mg).

[293] I recognize that estimating market share is a difficult task. As Mr. Boghigian points out, it is dependant on a number of factors including the size of the market overall; the number of generic manufactures in the market at the time of entry; the length of time they have been in the market; and, importantly price.

[294] While neither is free from criticism, I prefer Mr. Steger’s opinion as to market share to that of Mr. Jaishankar. By using the actual market share that Apotex achieved during the periods it sold Levo-Carb IR and Amoxi-Clav in the U.S., it is based on actual results.

[295] Mr. Boghigian, whose evidence I accept, testified that in his opinion, Mr. Jaishankar’s 25 molecule guideline approach was an unreliable method for calculating market share in that it failed to consider a number of factors including market dynamica and order of entry; drug class and dosage forms; individual drug dosage strengths; and price.

[296] At the time of the assumed Launch Dates in 2007 for the two drugs, the markets for both were quite full. For Amoxi-Clav, in addition to the original manufacturer (Glaxo), there were seven other well entrenched generic manufacturers who had been in the market for some time, four of whom offered a full range of products, not just three doses which was what Apotex was proposing. For Levo-Carb, there were 13 generic manufacturers already in the market at the time of Apotex’s proposed launch.

[297] As Mr. Boghigian points out, the 25 molecule guideline also does not compare apples to apples. Amoxi-Clav is an antibiotic, used in acute cases for short periods. Levo-Carb on the other hand is used in the treatment of Parkinson’s which involves long term, repeat usage. The molecules (except for one) in the 25 molecule guideline were not in the same class and therefore not comparable. Nor did Mr. Jaishankar do any analysis of the price at which the molecules were being offered at or any incentives that were offered which are important considerations for obtaining market share on late entry. All of that information could have been obtained from Apotex.

[298] Mr. Jaishankar said that he did not use Apotex’s actual market share for Amoxi-Clav or Levo-Carb because, in his opinion the time periods were too short to develop meaningful penetration rates. But Mr. Jaishankar is not an expert in market penetration. Mr. Boghigian on the other hand, testified that the use of actual market share in this case could be justified and was reasonable.

[299] Apotex submits that the guideline molecule approach to determining market share has been used with approval in Apotex Inc. v. Takeda Canada Inc, 2013 FC 1237 which is a proceeding under s. 8 of the Patented Medicines (Notice of Compliance) Regulations, SOR/93-133. However, a s. 8 case differs fundamentally from this case. The analysis in a s. 8 case is an entirely theoretical “but-for” analysis. There are no actual market share numbers to rely on as here. As well, s. 8 cases involve a “one-on-one” order of entry dynamic (the brand versus the first generic) which is far from the facts of this case.

[300] The one issue that troubled me during the trial and continues to trouble me is the failure of Apotex to produce during discovery any documentation concerning its estimates of market share for the two products. Apotex is a large, highly sophisticated and very experienced generic drug manufacturer. It carries on business around the world and has operated in the U.S. for many years. With over a 100 generic drug products for sale in the U.S., it is intimately familiar with the U.S. generic markets and the impact on market share when entering mature markets. On that basis, one would have thought, given the expense involved in obtaining FDA approvals, that before deciding to proceed with both Amoxi-Clav and Levo-Carb IR, it would have conducted a thorough analysis of the markets and costs.

[301] Yet it was only on the eve of trial that it produced a few documents from Apotex Corp. relating to Amoxi-Clav market share. Then again, at trial, it produced a few more Apotex Corp. Amoxi-Clav documents. It produced no marketing documents for Levo-Carnb IR. MDS didn’t object to the documents being admitted because they wanted to rely on them.

[302] Of particular interest is an early document (Exhibit R-1) which was signed off by a number of individuals in Apotex Corp., including the director of marketing, the VP of sales, the VP of business development and the president, which showed a 5% market share for Amoxi-Clav. It is only after Apotex’s then CEO, Barry Sherman, directed that the market share be increased to 10% that a 10% market share appears in the documents. Mr. Sherman characterized the increase as “aggressive”.

[303] At trial, Ms. Beth Hamilton testified that a market share of 10% would have been a fairly typical share to go after with the number of competitors in the market place. Ms. Hamilton signed the 5% document referred to above. I do not accept her evidence.

[304] Apotex’s failure, in my view, to be open and transparent as to what it estimated the market to be for both Levo-Carb and Amoxi-Clav at the time it decided to enter the market for each of those products is another reason why I have a concern about Mr. Jaishankar’s estimate of market. I am not satisfied it is an accurate estimate. I consider to be high, especially given the actual results Apotex achieved.

[305] As MDS points out, what Apotex’s few marketing documents indicate is that what happened in the real world is what Apotex initially forecasted would happen. Mr. Steger’s 4.74% market share for Amoxi-Clav is consistent with its initial 5% forecast. Further, Apotex Corp.’s own 2009 forecast for Amoxi-Clav, a seasonally adjusted forecast, shows no increase in market share over the first 12 months.

[306] Apotex submits that Mr. Steger’s weighted average does not take into account the “smooth ramp-up”. In effect, however, I consider that it does. A weighted average is an average computed from a series of items where each item has first been multiplied by a factor indicative of its importance to the total value of the series. A weighted average therefore takes into account the initial lower market share as well as the subsequent increases.

[307] For the above reasons, therefore, I accept Mr. Steger’s estimates of market share for both Levo-Carb IR and Amoxi-Clav.

b) Allowances

[308] Mr. Fahner explained how chargebacks and allowances work. Chargebacks are an adjustment paid to wholesalers that administer contracts between Apotex Corp. and third parties. They arise when Apotex Corp. has sold products to customers for less than it sold them to its wholesaler.

[309] Allowances are a significant determinant of market share. In Apotex’s world, they take many forms such as cash discounts, rebates (volume rebates, preferred rebates paid to particular customers, etc.), bill-backs and service and administrations fees paid to wholesalers.

[310] Mr. Jaishankar applied an allowance rate for Lebo-Carb of 7.5% and for Amoxi-Clav of 5% based solely on information provided to him by Apotex (Mr. Fahner). Mr. Jaishankar undertook no independent analysis to confirm those numbers.

[311] Mr. Steger applied Apotex Corp.’s actual allowances for each of Levo-Carb and Amoxi-Clav of 7.9% and 19.9% respectively.

[312] I prefer Mr. Steger’s determination of allowances to that of Mr. Jaishankar. Mr. Steger’s analysis takes into account the actual allowances given by Apotex Corp. after the imposition of the FDA import ban in early September 2009.

[313] Based on the above analysis, I accept Mr. Steger’s approach to estimating Apotex’s lost profits for both Levo-Carb IR and Amoxi-Clav over that of Mr. Jaishankar in respect of both market share and allowances.

[314] Mr. Steger has set out in detail his analysis of Apotex’s lost profits for all doses of both Levo-Carb IR and Amoxi-Clav in his Addendum Report dated February 9, 2017, Exhibit 9 for Identification (Levo-Carb, Schedule 3; Amoxi-Clav, Schedule 2). As noted, however, those schedules set out the combined financial information of both Apotex and Apotex Corp. As Apotex Corp. is not a party to the Action, in order to determine Apotex’s loss of profit, it is necessary to adjust the revenue and expense numbers by removing Apotex Corp.’s revenues and costs that have been included to reflect Apotex’s actual net revenue or lost profit.

[315] Accordingly, I have adjusted Mr. Steger’s Schedules for both Levo-Carb and Amoxi-Clav as follows:

1. I have reduced the “Estimate of Lost Net Revenues” for all strengths, as shown on line Q by 6% to reflect the price Apotex effectively charged Apotex Corp. for the drugs as testified to by Mr. Fahner;

2. I have reduced the “Warehousing and Freight Expenses” for all strengths on line U by 75% to reflect Mr. Fahner’s evidence that Apotex had little shipping costs and that the majority of the shipping and warehousing expenses were incurred by Apotex Corp.; and

3. I then converted the resulting loss of profit amounts to Canadian dollars using the conversion rates set out by Mr. Steger in the Schedules.

[316] In Schedule 1 to his February 9, 2017 Report, Mr. Steger has set out various scenarios with respect to his conclusion regarding the loss of profit for both Levo-Carb and Amoxi-Clav, depending on the Delay Period involved. He provided an estimate for Levo-Carb involving a 15-month Delay Period which I have found. However, for Amoxi-Clav, Mr. Steger provided no estimate for a 24-month Delay Period which is what I have concluded. Accordingly, the final adjustment which I have made to Mr. Steger’s numbers is to adjust his loss of profits calculations to reflect a 24-month Delay Period for Amoxi-Clav.

[317] Based on the above adjustments to Mr. Steger’s conclusions regarding Apotex’s loss of profit for both Levo-Carb IR and Amoxi-Clav over their respective Delay Periods, I find that Apotex’s loss of profits to be as follows:

Lost Profits for Amoxi-Clav (Assessed at 24 months in CAD)

Amoxi-Clav 250-125 mg

360,184.36

Amoxi-Clav 500-125 mg

1,973,850.22

Amoxi-Clav 875-125 mg

5,395,746.62

Total

$7,729,781.10

Lost Profits for Levo-Carb (Assessed at 15 months in CAD)

Carb-Levo 10-100 mg

5,120.34

Carb-Levo 25-100 mg

578,212.95

Carb-Levo 25-250 mg

26,087.10

Total

$609,420.39

Conclusion

[318] For the above reasons, therefore, Apotex is entitled to judgment against MDS and the remaining defendants who are its successor companies for the following amounts:

1. $2,963,930.31 in respect of reimbursement costs incurred in repeating and certifying the Studies;

2. $609,420.39 on account of lost profits arising from the delay in being able to sell Levo-Carb IR; and

3. $7,729,781.10 on account of lost profits arising from the delay in being able to sell Amoxi-Clav.

[319] Apotex is also entitled to pre-judgment interest from the date the Action was commenced to today’s date in accordance with the Courts of Justice Act.

[320] The parties are encouraged to agree on costs. In that regard, Apotex should prepare a Bill of Costs and provide it to MDS within the next 20 days. Within 10 days thereafter, the parties shall meet to discuss costs view a view to reaching an agreement.

[321] In the absence of an agreement, the parties shall book a 9:30 a.m. appointment through the Commercial Office before me to arrange a timetable to resolve costs.

L. A. Pattillo J.

Released: December 22, 2017

CITATION: Apotex v. Nordion, 2017 ONSC 1323

COURT FILE NO.: CV-08-00365958

DATE: 20171222

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

APOTEX INC.

Plaintiff

– and –

NORDION (CANADA) INC., NORDION INC., NORDION (US) INC., and MDS PHARMA SERVICES INC.

Defendants

REASONS FOR JUDGMENT

L. A. PATTILLO J.

Released: December 22, 2017