Gilead Weakened After Loss To Merck In HCV Dispute

Merck might be one step closer to Bogarting a sizeable piece of the HCV market. Tuesday, a federal jury upheld the validity of Merck’s MRK HCV patents in its dispute with Gilead GILD.

A jury has decided that Merck’s 2002 patents related to sofosbuvir are valid, lending credence to Merck’s argument that Gilead is infringing via its Pharmasset unit, acquired in 2011. Gilead’s Sovaldi and Harvoni were ruled last month to infringe on Merck patents, and the next step was to decide the validity of the Merck patents.

The case now proceeds to damages owed. Sovaldi and Harvoni brought $19.2B in global sales last year. Merck has demanded more than $2B in damages and 10% of Gilead’s sales of the products going forward.

In morning trading on Wednesday, GILD was down 2.5% and MRK was up nearly 1% on the news.

The Situation

Merck is claiming that Pharmasett, Inc. used patents it published in 2002 to develop sofosbuvir, the compound used in Gilead’s HCV regimens Sovaldi and Harvoni. Gilead acquired Pharmasett in 2011. It launched Sovaldi in 2013 – one of the most successful drug launches in history. While it paid $11 billion for Pharmasett, Gilead has garnered over $30 billion in HCV sales. Merck made its first royalty claim in 2013 just prior to the launch of Sovaldi. The jury decision gives credence to that claim.

Potential Impacts

The next step is for a jury to determine how much Gilead owes. That could potentially involve Merck having to prove how it was financially injured by Gilead’s use of its patents. There is no guarantee that [i] Merck could have developed a HCV regimen on par with Sovaldi in terms of efficacy or limited side effects or [ii] garnered the amount of sales Gilead has achieved.

Upfront Payment To Merck

An upfront payment of 10% of Gilead’s HCV sales would equate to about $3 billion. Gilead has about $12 billion in marketable securities and generates annual cash flow of $11 billion. While painful, a $3 billion one-time payment to Merck would not sink the company. When one considers that the pharma has peaked, its ambitious share buyback program and bulls’ longing for another sizeable acquisition, such a large royalty payment could loom large, though.