Eteboxagu AB v Cycle Pharmaceuticals Ltd

For a royalty calculated by reference to contractual “gross income”, revenue ordinarily means the economic inflow actually received. Where a sale is accompanied by a rebate, the rebate is deducted before calculating the royalty, even if the transactions involve several linked parties and the rebate is paid through a pharmacy benefit manager. The court may assess the transactions compendiously by reference to their commercial substance.

A distribution partner clause applies only where sale is outsourced, the partner recognises the sales revenue, and the partner shares that revenue with the contracting party. An auditor-certificate obligation may be unqualified as to substance while leaving the form and delivery arrangements open. The counterparty has an implied duty not unreasonably to withhold cooperation where cooperation is essential.

Eteboxagu AB, as assignee of Dr Staffan Strömberg, claimed further royalties from Cycle Pharmaceuticals Ltd under agreements concerning the development and sale of the nitisinone product NITYR.

The parties agreed that the court should determine the principal issues of construction and certification before resolving quantum. The issues were whether US rebates were deductible from “Relevant Revenues”; whether Cardinal Health or Diplomat was a “distribution partner”; whether Cycle was estopped by convention from deducting rebates; and the nature of Cycle’s obligation to provide an annual auditor’s certificate.

1. Construction of Relevant Revenues. The objective task was to ascertain what a reasonable person, with the relevant background known or reasonably available at the date of the Original Agreement, would understand the words to mean. The relevant factual matrix was that existing in January 2013. The later Amended Agreement could not inform the construction of the Original Agreement.
2. “Gross income” was informed by the agreement’s starting point of revenues generated from sales. Revenue meant an inflow of money, not a payment out. In the US pharmaceutical distribution model, the price paid through Cardinal, less the rebate paid to the PBM for the relevant Health Plan, represented Cycle’s effective economic income. The linked transactions were properly treated as a compendious package. Rebates were therefore deductible under paragraph 8 of both agreements.
3. Distribution partners. The clause required: (i) outsourcing of sale to a distribution partner; (ii) recognition by that partner of the revenues from sale; and (iii) sharing of those revenues with Cycle. Neither Cardinal nor Diplomat satisfied those requirements. Cardinal supplied importation, storage and distribution services and shared no revenues. Diplomat purchased the product for supply to its customers and recognised no revenues shared with Cycle.
4. Estoppel. The requirements identified in HMRC v Benchdollar Ltd, [2009] EWHC 1310 (Ch), as qualified in Tinkler v HMRC, [2021] UKSC 39, were not established. In particular, there was no proved common assumption that rebates were not deductible, no representation crossing the line, and no reliance. The alternative acquiescence argument also failed because Cycle had not been shown to know what it was allegedly acquiescing in.
5. Certification. Paragraph 12.1 imposed an unqualified obligation to provide a certificate certifying the calculation of Relevant Revenues, prepared consistently with normal accounting standards. The agreement did not prescribe the certificate’s form or require delivery directly to Eteboxagu. Eteboxagu owed an implied duty not unreasonably to withhold cooperation if its cooperation were essential. Questions of breach, loss, quantum and interest were reserved.