Merck's $200M damages in Gilead hep C case falls far short of expectations

Merck

Merck & Co. won a hepatitis C patent fight with Gilead Sciences last week, but if the jury's first damages award is any indication, the score could be much smaller than the $3 billion analysts had predicted at the high end.

The California jury awarded $200 million to Merck ($MRK) and its partner Ionis Pharmaceutical, covering what it considered a fair share of Gilead's ($GILD) sales for sofosbuvir-based drugs through Dec. 31, 2015. Hep C market-watchers know Gilead collected many billions of dollars after its sofosbuvir monotherapy, Sovaldi, launched in 2013, and even more after it rolled out the combo med Harvoni the next year.

U.S. sales for the two drugs from launch through Dec. 31: $12 billion for Sovaldi and almost $11 billion for Harvoni. Together, more than $23 billion.

Analysts had theorized a royalty for Merck of around 5%. At that level, the payment through Dec. 31 would have been $1.15 billion. Merck had asked for twice as much in its original demand to Gilead--10%, or $2.3 billion.

But as Leerink Partners analyst Geoffrey Porges pointed out after the ruling, the jury factored out Gilead's R&D investment when figuring the damages. With Gilead's $11 billion deal for Pharmasset--bringing it sofosbuvir--and follow-up studies costing $7 billion, that left $5 billion. And the jury used a 4% royalty figure, less than analysts estimated.

Next, the jury will deliberate payments for Merck going forward. If the panel follows its previous logic, Gilead's sales would be cut by ongoing R&D before applying any royalty. And the percentage after that could well be the 4% it previously used.

That calculation--plus the promise of a years-long appeal process--puts Gilead in a strong position, Porges figures. Plus, the jury was as reasonable as a judge or appeals panel was likely to be, he said--which is always a question when juries take on pharma damages.

"[T]he results are a positive for Gilead and a setback for Merck, with Gilead gaining considerable leverage should the two parties settle," he said in a note to investors. "Overall, this judgment was de minimis, and consistent with our original assessment that the impact was likely to be minor."

Porges estimates the value of 4% royalties at 44 cents per share for Merck; combined with the $200 million in damages, the value would be 59 cents per share. Bernstein analyst Tim Anderson figured last week that a 5% royalty award going forward would boost Merck's earnings by about 4% over five years.

In a statement about the ruling, Merck called it a victory for the patent-based system of rewarding pharma for R&D. "The jury's verdict upholds patent protections that are essential to the development of new medical treatments," the company said.

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