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The Surprising Winner in Merck's Patent War With Gilead Sciences

By Todd Campbell - Mar 23, 2016 at 12:01PM

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A jury decision against Gilead Sciences in a patent trial has big implications for Ionis Pharmaceuticals.

Image source: Gilead Sciences. 

Merck & Co.'s (MRK -1.45%) recently launched Zepatier is challenging Gilead Sciences' (GILD -1.07%) dominance in the hepatitis C marketplace, but an equally important challenge by Merck is occurring in California courts.

This week, a California District Court jury determined Gilead Sciences' blockbuster hep C drugs Sovaldi and Harvoni infringe on two Merck patents, and that decision could lead to billions of dollars in payments to Merck.

However, Merck isn't the only company that would come out ahead if the courts tell Gilead Sciences to fork over a truckload of cash. Ionis Pharmaceuticals (IONS -1.44%) would land a windfall, too. That's because Ionis Pharmaceuticals, formerly Isis Pharmaceuticals, co-owns the patents Gilead Sciences is said to have violated.

How much are we talking about?
According to Ionis Pharmaceuticals, its deal with Merck means it will receive 20% of whatever is awarded to Merck by the court, minus whatever legal expenses were incurred by Merck during the lawsuit.

Ionis Pharmaceuticals is also entitled to 20% of any future royalties Gilead Sciences must pay on future sales of Sovaldi and Harvoni.

Since Sovaldi and Harvoni are multi-billion per year blockbusters, the amount of money that could be paid to Merck and Ionis Pharmaceuticals is substantial. Industry watchers estimate that royalties could amount to 10% of past and future sales.

Gilead Sciences brought in $12.4 billion in sales from its two hepatitis C drugs in 2014, and it hauled in another $19.1 billion in sales from them in 2015, so Gilead Sciences could end up paying Merck $3.16 billion for its sales so far. Legal fees in court cases like this can run into the millions of dollars, but even so, that still suggests Ionis Pharmaceuticals could end up getting a lump sum check for somewhere in the neighborhood of $600 million.

Importantly, Sovaldi and Harvoni's current sales pace suggests that Ionis Pharmaceuticals could also receive an ongoing royalty stream of about $380 million per year.

Moving the needle
Multibillion-dollar payments to Merck would be great news for investors, but Merck's size means Gilead Sciences payments won't have nearly as big of an impact on it as they do on the much smaller Ionis Pharmaceuticals.

Despite researching therapies since the 1990s that exploit the body's gene messaging system, Ionis Pharmaceuticals' revenue still comes mostly from upfront licensing and clinical-stage milestone payments from drugmakers like Merck.

Image source: Ionis Pharmaceuticals. 

Those upfront and milestone payments resulted in Ionis Pharmaceuticals reporting total revenue of $284 million last year and $203 million in 2014.

That's a solid amount of revenue, but Ionis Pharmaceuticals' research pipeline is packed with expensive mid- and late-stage studies that are causing expenses to soar and losses to mount. Last year, Ionis Pharmaceuticals spent $323 million on R&D, $37 million on general and administrative expenses, and lost a total of $88.3 million.

Since Gilead Sciences' royalty payments could conceivably more than cover Ionis Pharmaceuticls operating expenses, propelling the company into the black, this could be a game-changing win for the company's investors.

Looking ahead
However, Gilead Sciences isn't going to just roll over and pay Merck royalties, and no one knows what the court may decide Gilead Sciences owes Merck and Ionis Pharmaceuticals.

Yes, there's a chance Gilead Sciences management settles with Merck, but a more likely scenario is for management to file an appeal in hopes of getting a different verdict.

Obviously, no one knows how all of this will shake out, but I think this week's news tilts the balance in Merck's favor, and if that's true, Ionis Pharmaceuticals shares are more attractive now than they were a week ago.

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$91.17 (-1.45%) $-1.34
Ionis Pharmaceuticals, Inc. Stock Quote
Ionis Pharmaceuticals, Inc.
$37.02 (-1.44%) $0.54
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$61.81 (-1.07%) $0.67

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