Merck wins first round in $3B-plus hep C royalty fight with Gilead

Merck & Co. ($MRK) scored a hepatitis C patent win against Gilead Sciences ($GILD) on Tuesday. And if the jury verdict stands, Merck could collect big royalties on Gilead's megablockbuster hep C drugs Sovaldi and Harvoni.

It would be a coup for Merck, which recently won FDA approval for its own hep C contender, Zepatier--which, as a third-to-market product, has sales expectations much more modest than Sovaldi and Harvoni's.

The jury will next weigh in on damages Merck and its partner Ionis should collect from Gilead. As Merck noted in a Tuesday statement, the companies haven't asked that Sovaldi and Harvoni be taken off the market, but "for due compensation for the use of our intellectual property rights." The company initially requested 10% royalties from Gilead.

Gilead says it will appeal, which stands to extend the legal battle for several more years. Leerink Partners analyst Geoffrey Porges says Gilead will ask for a bench trial, thinking that a panel of judges--who'd be better versed in patent questions than a jury--would view Merck's patent claims differently.

Bernstein analyst Tim Anderson pointed out that pharma patent fights often lead to royalty deals, and such payments are often booked as part of ongoing operations. If Merck were to win 5% royalties on the two meds, its earnings per share could get a lift of about 4% over five years, he said in a Tuesday investor note.

If Gilead's meds hit consensus sales forecasts--which amount to $17 billion this year, declining to $9.9 billion in 2020--a 5% royalty stream would start at $863 million this year and end the decade at about $500 million, he estimated. Total for the period: More than $3 billion. Analysts figure that a single-digit royalty percentage is more likely than Merck's requested 10%.

Gilead sued in 2013 after receiving Merck's royalty demand, asking the court to declare two patents invalid: No.7,105,499 and No. 8,481,712. Merck said the jury verdict reflected the evidence and validated the company's "many years of research and significant investment" by it and its partners, including Ionis Pharmaceuticals.

"Strong patent protection is essential to innovation," the company said in a statement. "Given that it guarantees a firm period of return on investment, patent protection provides the research-based pharmaceutical and biotechnology industries with an incentive to invest in research and development."

- read the Merck statement

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