Gilead And The $3 Billion Merck Issue

Summary

Merck seeks a ten percent royalty fee from Gilead.
The case is not clear, Gilead claims Pharmasset developed the component before Merck got its patent.
Even in a worst case scenario Gilead would not be threatened and could easily cover the cash expenses with its $26 billion cash pile.
Final decision on this case is very likely years away.

Gilead (NASDAQ:GILD) is very successful with its HCV drugs Sovaldi and Harvoni, which made Merck (NYSE:MRK) attack Gilead over patent issues with these drugs. Merck seeks a $3 billion payment from Gilead. Such a decision in court is not very likely, and even if Gilead was forced to pay, this wouldn't be a huge problem for the company.

In 2002 Merck was awarded patent rights the company seeks to enforce now, claiming it deserves ten percent of Gilead's total HCV revenues derived from its drugs Sovaldi and Harvoni. Gilead, on the other hand, claims that development of its HCV drugs started in 2001, i.e. one year before Merck got its patent. Gilead thus believes it is not infringing on Merck's patent and will not agree to pay the $3 billion in question.

In February a judge ruled that the case would go to court, the decision about potential royalty payments lies with a jury now. This jury would also decide on how high the royalty payments would have to be. There are several possible outcomes to this case:

- The jury rules that the patent is not valid anymore -- Gilead would not be forced to make any payments at all, for past or future revenues of its HCV drugs -- this obviously is the best outcome for Gilead and its shareholders. A jury ruling that Pharmasset developed the drug on its own would be seen as a precedent for other possible patent claims by other companies, i.e. this would strengthen Gilead's claim that its drugs belong to Gilead solely.