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Kristine Harjes: 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? Todd 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: Yeah. 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: Yeah. 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, "Okay,
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: Yeah, 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.