Patent risk is one of the biggest risks in biotech, but patent risk isn't limited to the just patent expiration. Other patent risks can also cause revenue to slip or a company's shares to drop. For example, patent infringement cases can force drugmakers to pay royalties to competitors that they weren't paying previously. Last week, a jury decision in a patent infringement case could put Gilead Sciences (NASDAQ:GILD) on the hook for hundreds of millions of dollars in royalties owed to Merck & Co (NYSE:MRK) and Ionis Pharmaceuticals (NASDAQ:IONS).
Patent threats can also come from unexpected places, too. For instance, this week members of Congress asked the National Institutes of Health to revoke Medivation's (NASDAQ:MDVN) patent exclusivity on Xtandi, a popular prostate cancer drug that was developed partially using taxpayer money.
These instances of patent risk may not end up taking a big toll on these companies, but investors still need to understand the implications associated with them. In this episode of the Motley Fool's Industry Focus: Healthcare, Kristine Harjes and Todd Campbell explain these patent risks and what they may mean for investors.
A full transcript follows the video.
This podcast was recorded on March 30, 2016.
Kristine Harjes: A patent debate and a pricing battle, just another day in healthcare on this edition of Industry Focus.
It is Wednesday, March 30th. Welcome to the show! I'm your host Kristine Harjes and I have The Motley Fool's healthcare guru Todd Campbell on the phone. It's been a few weeks since we've done the show together, Todd. It's good to join forces again.
Todd Campbell: We missed you here. Hopefully, you won't disappear on us soon.
Harjes: Yeah. We'll see about that. Vacation is a good thing.
Campbell: True, true.
Harjes: Give it six months or so. Anyhow, we're going to get into two newsy topics in this episode, but, first, I think we owe our listeners an update on Portola Pharmaceuticals (NASDAQ:PTLA), which we covered a month ago. What has happened since then?
Campbell: It was a busy month. We anticipated that it would be, right? We knew that they had a study that was going on for a drug that is designed to prevent blood clots in medically ill patients. We knew that the data from that trial was going to get released probably by the end of March. Sure enough, that happened. Unfortunately, it wasn't the slam dunk that investors were hoping for.
Harjes: The stock itself lost 29% in one day when this study was released. I can honestly say I was pretty shocked.
Campbell: It's disappointing. Full disclosure: I'm a shareholder. I haven't made any changes to my position since the news came out. With that being said, bear that in mind. There are some reasons to think that all is not lost for the drug and for the company.
Harjes: All right. Just as a quick recap, the drug that we're talking about that caused this share price decline is Betrixaban, which was definitely the drug with the larger market opportunity but is actually, for me at least, not quite the reason that I became interested in the company to begin with. There is still hope, not only for Betrixaban, but for this other drug which is Andexanet Alfa. If you're interested and you're not sure what we're talking about go check out our episode from pretty much exactly a month ago, probably four episodes ago. We dig in a little bit more about Portola, or shoot us an email if you have any questions: email@example.com.
Todd, you mentioned that you haven't made any changes to your position, I haven't either, I'm also a shareholder. I'll remind everybody that people on the show, we could have interest in the stocks that we talk about, and we do. The Motley Fool also could have formal recommendations for or against them, don't buy or sell based solely on what you hear or what Todd and I say that we're doing. Definitely do your own research. Yeah, we wanted to give you all the heads up that there was new news about Portola since we did talk about them.
Campbell: Kristine, I think just really quickly because we've got a lot to talk about today, just to give people a flavor for what we're talking about as far as it being disappointing. It was a huge trial, 7,500 people. The way the trial was designed was a little bit odd; in order to test the entire group to see how well the drug did, it had to first be statistically significant in improving blood clots in a intent to treat population, which was about 62% of the 7,500 people in the study. You needed to have p-value, which is a measure of significance, of .05 or less to test the greater group. They came in at .054.
Close enough where they still tested the entire group and across the entire universe of patients it was definitely below .05, but that still cast a little bit of doubt of how the FDA would view that information when Portola goes ahead and files for approval later this year. Of course there's question marks there on this drug, and then like you said there's also Andexanet Alfa, which would be, if approved in August, the first reversal agent for Factor Xa anticoagulants. That's big because Factor Xa coagulants are raking in $4 billion a year in sales. That's on restricted use of them, because there is no antidote yet.
Harjes: Right. Essentially all is not lost with this company, but it was disappointing news, to hear that Betrixaban didn't perform quite as well as we had been hoping. I personally still see a lot of upside to this stock, but it's definitely a hang tight and keep your eye on the news sort of situation.
Our next topic that we wanted to talk about is also something that we saw a lot of news headlines on last week. This one involves Gilead Sciences, another favorite stock of Todd and me. Hope you guys aren't sick of hearing us talk about Portola and Gilead. This one also involves Merck and Ionis Pharmaceuticals. Todd, do you want to take it from here?
Campbell: Absolutely. Essentially what we've got here is something that we don't talk a lot about, which is a patent infringement battle. Often times we'll talk about patent expiration and how shareholders need to be aware that there are patent risks associated with that, but we don't often talk about what happens when one company is found to infringe upon another company's patents. That's what happened in the case of Gilead, Merck and Ionis last week. A Northern California district court found that Gilead's Sovaldi, which is the backbone drug used in various hepatitis C drugs, did indeed infringe on some patents that Merck and Ionis co-own that stem back 2001.
Harjes: Merck was asking for a 10% royalty on previous sales of Harvoni and Sovaldi, as well as 10% going forward. I believe right now they've only decided about what will happen to the past sales, but what the jury decided was that they were going to back out the research cost that Gilead had spent on developing these drugs, in order to arrive at a sum. They arrived there at 5 billion, as their number they're going to use in the calculation. Instead of opting for a 10% royalty rate, they decided on a 4% royalty rate. If you take 4% of 5 billion, then the jury decides 200 million is the appropriate amount of money to compensate for this infringement on a historical basis.
Campbell: Essentially what we're talking about here is we're talking about patents that are based on how does the drug work. Sovaldi is a prodrug, which means that you ingest it and it turns into the active ingredient, and that active ingredient inhibits the activity of an enzyme that helps hepatitis C replicate. Research that Merck and Ionis did back in the late 1990s into using drugs basically to inhibit the replication of hepatitis C was found to be infringed upon by Sovaldi. That means that any drug that includes Sovaldi, including Gilead Sciences' Harvoni which is an other mega blockbuster. We're talking about billions of dollars in sales here people. Any drug that includes Sovaldi will thereby infringe upon it.
What the jury also said though is "OK, listen we understand that a patent is only part of what goes into making a drug work and the costs that are associated with getting a drug actually to the market. Therefore we're going to allow you to back out the cost that you had associated with developing Sovaldi in the first place." That's how we came to those numbers. It's kind of a rounding number if you will for Gilead and Merck. Gilead and Merck are huge companies. Since launching in 2013, Sovaldi-based drugs have raked in in the US about $23 billion for Gilead. For Gilead to be on the hook potentially for $500 million for future sales, and for $200 million or so on the past sales, we're not talking about a huge amount of money to those two companies. It is however more of a needle mover for Ionis.
Harjes: This is a lot smaller of a company. Gilead, they've got 14.6 some cash and equivalence on their balance sheet, but Ionis is only a 4.8 billion market cap company. Clearly they have a lot more at stake here. To me it seems like the past looking historical payment is not going to be quite as important to them. It looks like that should come out to a little less than $40 million depending on what Merck's legal fees were. But going forward you could have a pretty big needle mover for Ionis since as the co-owner of the patents they get 20% of whatever Merck winds up getting here. If the jury sticks with this 4% royalty rate and you apply that to Gilead last year's 12.4 billion in sales, assuming that that's going to remain steady going forward, which is obviously not exactly the case but we're estimating here. That would mean that Gilead would owe around $500 million going forward and that Ionis would get $100 million of that annually going forward maybe indefinitely. That's pretty huge for this company.
Campbell: That's a big deal. Ionis has been around for a long time. They've got a great patent portfolio but they don't have a lot of revenue other than collaboration revenue. It's not like they've been able to commercialize blockbuster drugs yet. Last year they lost $88 million, so right there by getting $100 million a year, theoretically, from Gilead, you've got a company that could go right into the black. Yes, it's a much bigger needle mover for them than it is for Gilead and Merck. But you know investors shouldn't be investing one way or the other on this decision because Gilead -- surprise, surprise -- is going to appeal.
Harjes: I'm shocked. Yeah, this is definitely not settled.
Campbell: Did anybody see that coming? Yeah, of course. It may be a rounding error for Gilead but we are still talking about hundreds of millions of dollars so they're not going to just give that up willingly.
Harjes: Yeah exactly. This is really just one battle in a long war.
Campbell: Right, stay tuned. It could be that this gets upheld and Ionis at some point gets a nice big fat check for Christmas that it can cash, but that could be years from now. We just don't know.
Harjes: Exactly. The next half of today's show is going to involve a controversy over a 6 digit cancer drug price tag, but before we get there I would to talk about something that's unquestionably a great deal. That deal is the Motley Fool's flagship newsletter Stock Advisor. We are offering a really great price to podcast listeners. If you check out focus.fool.com, you can find more information about Stock Advisor which picks new stocks every month for you, as well as releases what we call Best Buys Now. Our team of analysts look at all the stocks that we recommend and they pick the ones that are the best places for your money right now. It's a really great service for any investors of all level. It can be all yours for two years for just $129 at focus.fool.com.
Interestingly, the aforementioned cancer drug that we're about to discuss has a similar price tag but it's $129,000. Todd do you want to take it from here?
Campbell: This is a very, very interesting development in the whole peer push back, if you will, on drug prices. We're going to get into this in a minute and hopefully we won't get too wonky about it for you. What we need to understand is that drug prices can be very high, and a lot of people are very upset at their high cost. Included among those people are members of congress who just sent a letter to the National Institute of Health, asking them to conduct a hearing whether or not Medivation and Astellas Pharmaceuticals' Xtandi deserves to keep exclusivity on its patent for Xtandi.
Harjes: There are a lot of components to this story that we're going to unpack for you. First off, let's talk a little bit about these march-in rights and whether or not they can even be used in this case.
Campbell: OK, let's give a little bit of background first. Obviously, for a commercial entity to provide funding for research and development, they have to run a lot of numbers to prove to shareholders that it's actually a wise investment. As a result, a lot of things that may be scientific breakthroughs don't get funded. The federal government steps into that gap and provides a lot of funding, especially to the biotech industry, for the development of scientific breakthroughs and things like cancer. The funding that gets provided, a lot of it comes from NIH, the National Institutes of Health. As a matter of fact, they have a budget that's about $31 billion a year, and about 80% of that money gets handed out in grants to places like universities that are conducting research that hopefully will lead to game changing drugs.
Prior to 1980, money that was given via grants that resulted in a patent, those patents had to be handed back to the government. They weren't owned by the university that received the federal funding. Now you can argue that sounds great, but the problem was that because the government couldn't offer exclusive licenses, only about 5% of the 30,000 patents that it had established up to that point had ever been commercialized, just didn't happen. They passed an act in 1980 that basically granted universities that were conducting the research, the right to patent and then license their discoveries to private companies, like in the case of Xtandi Medivation.
Harjes: Right. Xtandi is the drug that we have been talking about, alluding to. This drug was developed by UCLA with grants from this money that Todd is talking about, which is taxpayer money. Then this gives the government the right to revoke the patent if they deem that the terms are unreasonable. These are the march-in rights that we've discussed, which interestingly have never been used on a drug before and potentially could set up a precedent that I'm sure a lot of drug makers would get nervous about. Medivation shares sank 10% on this news. Xtandi is their only approved product and it's a huge one for them.
Campbell: Yeah, it does $1.2 billion of sales in the United States alone. Obviously that's the only that the march-in rights would have any kind of effect. The march-in rights basically stem from that same act that was packed in 1980. Essentially what that provision simply says is that if... It's designed basically to keep a company from licensing a patent and then never acting on it. Basically you're supposed to be able to show that American consumers are being harmed because either the patent was never used to create, in this case a drug that could be marketed, or if for some reason the patent is being exploited in a way that was unsafe or somehow otherwise harmed American consumers. That's when march-in right, theoretically, could be invoked. You mentioned that they've never been invoked to this point, 40 plus years they've never been invoked.
There have been petitions, Sanders and the other congressmen, they're singling out Xtandi right now but there have been other cases in the past where petitions from non-profit groups etcetera have said, "Hey listen, you should invoke these march-in rights on this other drug." Probably the most notable one is an age drug, Norvir, that was made by Abbott Labs, which is now AbbVie, or at least the pharmaceutical unit. Sure enough the NIH looked at all that information, they digested it, they considered it and they determined that they should not be involved in the pricing aspect of drug research, or drugs that come from research and that that should be legislated by congress and not dictated by their ability to go in and do march-in rights. If anything were to change on that front, it could be a huge impact, because the reality is that there's hundreds of drugs now that are commercialized that stem from research that's been funded by federal programs.
Harjes: Yeah, indeed. It does seem like Xtandi and Medivation have a fairly good defense. This defense is coming mostly from Astellas which is a partner on the drug. Astellas says that nobody actually pays full price for Xtandi, in their response to this letter. They quote that out of 20,000 patients on Xtandi last year, 81% of the privately insured ones paid $300 or less out of pocket per year, and 79% of patients on Medicare had not out of pocket costs at all. They also mention that they have this access program that made the drug completely free for more than 2,000 patients last year. Even though you get that big sticker price, these companies are arguing that nobody actually is paying that sticker price so you can't come at us.
Campbell: Right, although that's a little bit disingenuous on their part, don't you think Kristine? Because they're looking at it, they're saying but they're only paying that out of pocket, but you certainly could argue that the high cost of drugs is influencing things like insurance cost.
Harjes: Absolutely. It goes into our healthcare bill.
Campbell: Yeah, they're going to say that. It's great that they have these programs that allow so many people to get access to the drug that may not otherwise have gotten access to it. I guess that really it's going to come down to whether or not enough harm is being done by price for the NIH to act. Based on what they've done and said in the past with Abbvie, it wouldn't seem to me that they any interest in getting involved in the price battle, but only time will tell.
Harjes: I agree with you there. I don't see enough that differentiates this case from the Abbvie case that I could see them having a different response. But if they did, it would have some pretty tremendous impacts on the industry.
Campbell: Especially in oncology. Cancer drugs, I think I saw a study that was done, it looked at 40 years post the passage of the act in 1980 and said how many drugs have been discovered using federal funding. I believe it was 40 of 153 drugs were for oncology alone. Those are big, big important drugs that have really changed outcomes for patients, and they bring in billions of dollars for the drug makers. Yeah, there could be a lot of potential problems that would stand from exercising the march-in rights. Including drug makers not wanting to license research that results in discoveries from federal funding.
Harjes: The patent landscape here is incredibly complex and definitely not something I want to dig into on this show since we're running out of time, but there definitely is an argument that because we have such a strong patent system in the United States, that's why we have so much great innovation in the healthcare sector and others. The one note that I do want to end the show on has to do with temperament, I'd like to quote Warren Buffett.
We've talked a lot about news items and people having a really strong reaction to the headlines that they read, and then ultimately it's just that you need to wait and see. We don't really know how this is going to end for Medivation or we don't know how it's going to end for Gilead and Merck. To leave you with a quote from Warren Buffett, "Success in investing doesn't correlate with IQ, once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." Remember that, calm temperament, that is where you'll find success. Thanks for listening, folks!
Kristine Harjes owns shares of Gilead Sciences and PORTOLA PHARMACEUTICALS INC COM USD0.001. Todd Campbell owns shares of Gilead Sciences and PORTOLA PHARMACEUTICALS INC COM USD0.001. The Motley Fool owns shares of and recommends Gilead Sciences and Ionis Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.