Image source: Ionis Pharmaceuticals, Inc.

A spat between Merck & Co. (NYSE:MRK) and Gilead Sciences (NASDAQ:GILD) that could have a big impact on Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) has taken a turn for the worse for Ionis' investors. Last night, a judge overturned a prior patent-infringement award against Gilead Sciences, derailing tens of millions of dollars in revenue for Ionis in the process.

Gettin' paid

After determining earlier this year that Gilead Sciences violated two Merck patents that it co-owns with Ionis earlier, a jury awarded Merck $200 million plus 4% royalties on future sales of Gilead Sciences' hepatitis C drugs. 

Specifically, the jury found Gilead Sciences to have infringed on two patents stemming from the work that Merck and Ionis Pharmaceuticals did together in the late 1990s on the use of nucleotides to inhibit hepatitis C viral replication -- an approach that Gilead Sciences' top-selling Sovaldi and Harvoni rely on.

Because Ionis will get 20% of whatever monies Gilead Sciences pays to Merck, the jury's finding, had it stood, would have been needle-moving for Ionis, which would have received $40 million in up-front money as compensation for past sales, along with ongoing annual revenue of about $40 million, based on historical U.S. sales of Gilead Sciences' drugs. Since Ionis lost $88 million last year because of spending on its R&D program, that money would have been quite a windfall.

Not so fast

Although the jury found in favor of Merck, Gilead Sciences requested the case be reopened, citing conflicting statements by a key Merck employee regarding his access to information regarding the design of Gilead Sciences' hepatitis C drugs when they were under development at Pharmasset, a company Gilead Sciences acquired for over $11 billion in 2012.

Before Gilead Sciences' acquisition, Merck scientist Phil Durette, who also served as Merck's patent lawyer, participated in a call with Pharmasset in which details of Pharmasset's hepatitis C R&D was disclosed. During a pretrial deposition, Durette said he wasn't on that call. However, he later admitted on the stand that he had participated on it.

After reviewing the case, judge Beth Labson Freeman wrote, "Dr. Durette's lying at his deposition, recanting that testimony at trial without proper prior notice to Gilead, and further untruthful testimony at trial all support the court's conclusion that Merck did intend to deceive Gilead and the court."

Her determination that Merck and Durette's hands were unclean because of his access to the scientific make-up of Pharmassset's drugs led her to conclude that Merck's patents were invalid, and that there was therefore no misconduct by Gilead Sciences.

Looking ahead

Merck will appeal Labson Freeman's decision, so this story isn't over yet. But the outcome in round one of this trial is definitely in favor of Gilead Sciences. As such, Ionis investors shouldn't bank on seeing any money come its way from Gilead Sciences anytime soon.

Instead, Ionis investors need to hope that Ionis' extensive pipeline of drugs that interfere with messenger DNA will produce some winners. Unfortunately, a bit of cold water was thrown on that hope when collaborator GlaxoSmithKline pressed the pause button on development of Ionis' TTRrx. GlaxoSmithKline opted to wait for additional ongoing trial data, rather than rush TTRrx into phase 3 studies. 

Ultimately, the pipeline, not patent suits, will determine whether Ionis is worthy of owning in portfolios. Nevertheless, this is an intriguing story that's worth keeping an eye on over the coming one to two years as it unfolds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.