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A jury in Northern California has weighed in and decided that Gilead Sciences' (GILD 0.91%) mega-blockbuster drugs Sovaldi and Harvoni violate two patents co-owned by Merck & Co (MRK 0.44%) and Ionis Pharmaceuticals (IONS -0.32%). However, the $200 million check Gilead Sciences may have to write to compensate Merck and Ionis Pharmaceutical for infringing on those patents is far shy of the multibillion dollar super-sized payday these companies were hoping for. Gilead Sciences is likely to appeal the case, so let's learn more about it.

First, some background
Patent 7,105,499 and patent 8,481,712 were filed by Merck and Ionis Pharmaceuticals in 2002 and 2007, respectively, and both have a priority date of 2001. Both patents stem from work the two companies did together in the late 1990s on the use of nucleotides to inhibit hepatitis C viral replication.

SOURCE: MERCK & CO.

Gilead Sciences' Sovaldi, a prodrug, is a nucleotide inhibitor of the NS5B polymerase, a key enzyme responsible for hepatitis C replication. Gilead Sciences acquired Sovaldi when it purchased Pharmasset, Sovaldi's inventor, for $11.2 billion in 2012. After large (and costly) late-stage trials proved that Sovaldi can deliver a functional cure for hepatitis C patients, the FDA approved Sovaldi in December 2013.

Since then, Sovaldi has become the backbone of Gilead Sciences' hepatitis C franchise, which also includes Harvoni, a mash-up that combines Sovaldi with ledipasvir, an inhibitor of NS5A, another key cog in HCV replication. Harvoni won FDA approval in October 2014.

Both Sovaldi and Harvoni were instant successes, and today, they remain doctors' go-to treatment of choice. As a result, Sovaldi and Harvoni's combined sales were $12.4 billion in 2014, and $19.1 billion in 2015, including $23 billion in the U.S. sales subject to the patent case.

Billions at stake
After determining that Gilead Sciences' HCV drugs infringed upon its patents, Merck approached Gilead Sciences seeking royalties tied to Sovaldi's and Harvoni's sales. Gilead Sciences refused, leading Merck to file its patent lawsuit in hopes of being awarded 10% of Gilead Sciences' past hepatitis C revenue, and a similar royalty rate on Gilead Sciences' future hepatitis C drug sales.

If that 10% had been awarded, Gilead Sciences would have had to hand over $2.3 billion to Merck for its historical hepatitis C sales. It could have also led to Gilead Sciences paying Merck an additional $1.2 billion annually in royalties on future sales, based on last year's U.S. sales pace.

That would've been a lot of money, especially for Ionis Pharmaceuticals, which is entitled to 20% of any money paid to Merck by Gilead Sciences, after legal expenses. A 10% royalty to Merck could have meant a $460 million payday to Ionis Pharmaceuticals for past Sovaldi and Harvoni sales, and another $240 million per year in revenue going forward on future sales (again, based on 2015's U.S. sales pace).

Because Ionis Pharmaceuticals lost $88.3 million last year, the money would've been a huge windfall that would've turned it into a profitable biotech seemingly overnight.

SOURCE: FLICKR USER PICTURES OF MONEY.

Paying the piper
Instead of applying Merck's and Ionis Pharmaceuticals' 10% figure to Sovaldi's and Harvoni's total sales, the jury decided on another method to calculate Gilead Sciences' payment. The jury reduced historical sales by the amount of money that Gilead Sciences had invested in the development of Sovaldi and Harvoni, which left them with a figure of just $5 billion to calculate what was due Merck and Ionis Pharmaceuticals.

Also, they opted on a 4% royalty rate, rather than a 10% rate. As a result, they determined that a $200 million payment from Gilead Sciences to Merck for past sales was fair compensation. Legal expenses can be high in these cases, so that determination would translate into a payment to Ionis Pharmaceuticals of less than $40 million.

Looking ahead
The jury hasn't said what the royalty rate should be on future sales, but applying a 4% rate to last year's $12.4 billion in U.S. sales gets us to a figure of $500 million, of which about $100 million could end up in Ionis Pharmaceuticals' coffers. That would still be a handsome check for Ionis Pharmaceuticals investors.

Investors, however, shouldn't base their decisions to buy or sell any of these companies based on this news. Gilead Sciences has said that they will appeal this decision. If an appeals court backs up this court's decision, any checks to Merck and Ionis Pharmaceuticals could still be years away from being written or cashed.