Merck Gilead Patent Trial 3/11/16

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1. Merck Demands $3 Billion In HCV Royalties From Gilead

   Mar 11, 2016 | Seeking Alpha

   Gilead (NASDAQ:GILD) has had a target on its back from regulators, competitors and politicians ever since its blockbuster HCV regimen hit the market. An $18 billion pie is way too big for one company to enjoy alone. Earlier this week a judge ruled that Sovaldi and Harvoni infringed on Merck's (NYSE:MRK) patents, and now Merck is demanding $3 billion in royalties.
2. Pharmaceutical sector round-up: Legal action dominates

   Mar 11, 2016 | Digital Journal

   By Tim Sandle
   
   
   As we do at regular intervals, Digital Journal dips into the latest news stories relating to the colorful world of pharmaceuticals. This week there are new drugs announced and old scores to settle.

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Client Attorney Privileged/Attorney Work Product/At Request of Counsel

Online Sources

1. Merck Demands $3 Billion In HCV Royalties From Gilead

   Mar 11, 2016 | Seeking Alpha

   Summary 

   ·         A judge recently ruled that Sovaldi and Harvoni infringed on Merck's patents.

   ·         Merck wants to Bogart a $3B royalty payment equal to 10% of the $31.7B Gilead has made from HCV sales.

   ·         A large one-time payment could impact Gilead's stock buyback program or acquisition strategy.

   ·         Declining HCV prices, more competition and the "Merck overhang" make GILD a sell

   Gilead (NASDAQ:GILD) has had a target on its back from regulators, competitors and politicians ever since its blockbuster HCV regimen hit the market. An $18 billion pie is way too big for one company to enjoy alone. Earlier this week a judge ruled that Sovaldi and Harvoni infringed on Merck's (NYSE:MRK) patents, and now Merck is demanding $3 billion in royalties:
   

    Gilead plans to show jurors that scientists were working on the foundation for its medicine at least as early as 2001, a year before Merck got the patent rights that it's seeking to enforce in the case ...

    Merck's lawyer countered that the key invention at issue derived from work by his Kenilworth, New Jersey-based client "before it was ever even a figment of the imagination at Pharmasset." Merck alleges that immediately after the company published its patent in 2002, Pharmasset used it to develop what would later become the compound sofosbuvir.

    I get the feeling that a strong case could be made for both sides. After AbbVie (NYSE:ABBV) attempted to extract HCV royalties from Gilead a few years ago, Gilead should be battled-tested by now. It begs the question, "Who hasn't developed the patent for Sovaldi?"

   The Situation

    Merck's two HCV drugs Victrelis and PegIntron generated combined sales of $1.2 billion in 2012. Sovaldi, which cured HCV with minimal side effects, launched in 2013. At the time it was one of the most successful drug launches in history. It also wiped out the competition. According to Bloomberg sales from Victrelis and PegIntron have now free fallen to $200 million. Merck made its first royalty claim in 2013 just before Sovaldi was launched. The current judge's ruling appears to give credence to that claim.

    That said, Merck has found another way to torment Gilead. In late January GILD fell 5% in one day on the news that Merck had garnered approval for its HCV regimen Zepatier. Zepatier's list price undercuts Gilead and AbbVie by over 30%. There is a potential for Merck to garner $2 billion in sales (by 2020) by also focusing on HCV patients with high unmet needs. GILD's sharp reaction implied that Merck would Bogart or take outsized market share. If Zepatier's sales pan out and Merck's lawsuit holds up in court, Merck could potentially muscle in on Gilead.

    Potential Impact On Gilead

    Merck wants a 10% royalty payment on the $31.7 billion Gilead has made from sofosbusir meds (Sovaldi and Harvoni). With nearly $12 billion in cash and marketable securities, and annual free cash flow of $11 billion Gilead could afford a $3 billion royalty payment. However, a one-time hit to cash flow would be one of many issues facing the company.

    Prices are declining in Europe (18% of Q1 2016 HCV sales) due to budget constraints in certain European countries. Market chatter suggests Japan (29% HCV sales) might demand price concessions due to the rapid sales growth of Sovaldi/Harvoni. Meanwhile, the company has come under fire in the U.S. (49% of HCV sales) for the huge disparity in prices vis-a-vis emerging markets like Egypt and India.

    Potential price concessions combined with a large royalty payment to Merck could crimp Gilead's cash flow and force it to reduce its stock buyback program. In 2015 the company engaged in $5.3 billion of share repurchases; bulls have talked this up as a positive feature of the stock. Secondly, any large, game-changing acquisition longs have fantasized about may be put on hold.

   Even more damning would be if a court ruled that Gilead would have to pay ongoing royalties to Merck. Gilead has a 66% operating margin; every dollar it loses in revenue could have a major impact to the company's bottom line. Moreover, the pool of HCV infected declines each year as more patients are cured. In my opinion, ongoing royalties to Merck, amid lower prices and a shortened HCV runway could be devastating for GILD. I remain negative on the stock.
   

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2. Pharmaceutical sector round-up: Legal action dominates

   Mar 11, 2016 | Digital Journal

   By Tim Sandle

   Starting off with new products, a flu drug made by AstraZeneca has been given fast-track status through the clinical trial process by the U.S. Food and Drug Administration (FDA). The approval is for an investigational human monoclonal antibody (mAb) product called MEDI8852. The novel drug is designed for the treatment of patients hospitalized with Type A strain influenza.

   Speaking with Pharmaceutical Manufacturing magazine, Steve Projan, Senior Vice President, R&D and Infectious Diseases & Vaccines, stated: “We are pleased that the FDA has granted Fast Track designation for MEDI8852 as it recognizes the importance of accelerating the development of new medicines for the prevention and treatment of challenging infectious diseases.”

   In another new move, the FDA has approved a Zika virus diagnostic test kit for emergency use, in sign of continued global concern about the spread of the disease. The test, called the Zika Immunoglobulin M (IgM) Antibody Capture Enzyme-Linked Immunosorbent Assay, was developed by the U.S. governmental organization the Centers for Disease Control and Prevention (CDC) and is intended to detect the presence of anti-Zika antibodies in a patient's blood or cerebrospinal fluid.

   With acquisitions and mergers, the Indian pharma company Lupin has acquired a U.S. based company called privately-held GAVIS Pharmaceuticals and Novel Laboratories (GAVIS). This gives the Indian manufacturer its first foothold on U.S. soil. Lupin makes dermatology products, controlled substance products, and niche generic drugs.

   On the legal battle front, German based pharmaceutical giant Merck is demanding another pharmaceutical company called Gilead pay out a colossal $3 billion in royalties for an anti-hepatitis B product. This is because a compound in Gilead’s products, called Sovaldi and Harvoni, have been found by a judge to have infringed Merck’s patents. The issue centers on whether the patents are still valid.

   As a sign that pharma companies can sometimes get on, AstraZeneca and Roche are to get together for a cancer project. The companies are to jointly fund PatientsLikeMe, a cancer patient outcomes study. The study will examine patients' experiences with cancer treatments.
   
   

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