Gilead Vs. Merck: What To Know

Gilead Sciences, Inc. (NASDAQ: GILD) and Merck & Co., Inc. (NYSE: MRK) on Monday stepped into court again, trying to settle a dispute regarding the validity of the latter's '499 and '712 patents, which Gilead’s Hepatitis C treatments Sovaldi/Harvoni were found to infringe.

Analysts at Jefferies realized an extensive review of hearing documents and transcripts from court proceedings, and shared a few key issues to pay attention to and “potential impact of an adverse ruling” for Gilead. The analysts see a reasonable possibility of Merck prevailing, however, they forecast impact for Gilead would be "relatively modest."

Key Details

During the first phase of the trial, Gilead will argue why Merck's claims are invalid. Most of these arguments revolve around questioning if Merck actually invented the subject-matter of its patents or if Merck got this information from confidential interactions with Pharmasset before Gilead bought it.

If Merck prevailed "with fact-based validity, and the case proceeds to damages," focusing on both companies' damages analyses will be central prior to the bench trial, in which a judge will determine if such damages are actually awarded, Jefferies' report explained.

Potential Impact

The analysts then looked into the potential impact of the legal proceedings for Gilead. In the worst-case scenario envisioned by Jefferies, Merck received 10 percent royalties on Sovaldi/Harvoni U.S. sales. "This would retroactively cover total U.S. net revenues amounting to about $2.3B in monetary relief, and a similar ongoing royalty on all future U.S. sales, impacting our DCF valuation for GILD by $3.20 (3.2%)," the analysts said. However, a more realistic scenario includes a low single-digit ongoing royalty (for example, 3.5 percent). About $800 million in damages lowers DCF by $1.50 (1.5 percent), instead of 3.2 percent.

Jefferies rates Gilead a Hold with a $100 price target.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.