Markman Note: Merck Strikes Out Against Gilead
June 28, 2016 (IP Flow) — The patent game is a hard one, even when you are a patent owner with unlimited resources and plenty of prior experience. Merck recently learned this lesson, when it tried to assert a pair of patents against Gilead, purveyor of the blockbuster Hepatitis C treatments Solvadi and Harvoni. These drugs generate billions of dollars in sales, and even though Merck offers a competing Hepatitis C treatment, Gilead is far and away the market leader. What Merck hoped was that its patents would lead to Gilead on the hook for royalty payments. In fact, this lawsuit was potentially one of the most valuable patent lawsuits ever, considering Merck’s demand for 10% of all revenue Gilead generated from its Hep C treatments. But Merck ended up walking away with nothing. While that is not an unusual result in a patent case, the circumstances of Merck’s defeat were not typical. See our discussion on this matter here.
So what happened? Well, after a few years of discovery, the case went to a jury trial. Because Gilead had stipulated to infringement, the only issue for the jury was whether the asserted patents were valid. Proving invalidity at trial is difficult, and it was not a big surprise when the jury’s verdict on validity was in Merck’s favor. Things were a bit more interesting on the damages front, where Merck’s demands for billions was rebuffed, and the jury awarded damages of $200m — still a large patent verdict, but not enough to create a meaningful patent royalty-based revenue stream for the company. Still, $200m, and the hopes for more with respect to post-trial ongoing royalties kept Merck’s hopes up, despite the disappointment over the low jury award.
But the true hammer was yet to fall. Immediately after the jury trial, the judge held a bench trial on several equitable defenses that Gilead had raised. Those defenses centered on supposed devious prior behavior by Merck and its employees, especially around the prosecution of the asserted patents. Compounding Merck’s vulnerability were severe credibility issues with a key witness, the lawyer who was responsible for overseeing Merck’s prosecution efforts. While the determination of whether Merck’s alleged bad behavior would impact on their ability to collect anything from Gilead was left for the judge, it was clear that there were specific factual issues that made this an unusual patent case. And then the judge ruled.
The finding that Merck’s patents were unenforceable due to unclean hands — meaning Merck took nothing from Gilead — hit like a thunderbolt. Unclean hands is generally a defense that is often pled, but clean wins for defendants based on that defense are exceedingly rare. An unusual case had come to an unusual end — pending the inevitable appeals of course. That process will likely take a year or more, unless the parties are able to reach a settlement somehow. In any event, expect the appeals to attract a fair amount of interest, both from the patent and investment communities, with each constituency curious as to the ultimate result.
While the market reaction to this saga was relatively muted in the short-term, there is still plenty to watch for investors going forward. On a longer-term basis, will Merck continue to press the idea of trying to use its patents to generate royalty revenue? If so, will future results be better than the embarrassment against Gilead? For Gilead’s part, the question is reversed. As long as their Hep C treatments enjoy extraordinary sales, it seems like Gilead will be a target for royalty-seeking patent holders. While Merck’s initial salvo turned out to involve dud patents, perhaps future patent missiles launched at Gilead will carry heftier payloads. How well the company can deflect or avoid them could have significant impact on future revenues.
Ultimately, it appears that the era of Big Pharma patent lawsuits is just beginning, and investors will have plenty to monitor while the various legal teams involved do their work. Unfortunately for patients and purchasers of the drugs that are the subject of these types of lawsuits, it is unlikely that these campaigns will help lower drug prices. The more likely result is that the legal costs, and especially if royalties are ever awarded, the royalty costs, will be passed along to the end consumer.
Disclosures and Disclaimers:
Nothing in this material is intended to constitute legal or investment advice of any kind, nor is any of this material based on any non-public information of any kind. In addition to my work at Markman Advisors, I am also a name partner at a NYC-based intellectual property litigation boutique firm, Kroub Silbersher & Kolmykov PLLC (www.kskiplaw.com). Markman Advisors is affiliated with a Houston-based investment management firm, Perdix Capital Management, which may have existing or potential positions relating to situations discussed in this material. Markman Advisors also provides consulting services to buy-side investors, including hedge funds and family offices, that may also have or enter into positions relating to situations discussed in this material. Questions or comments can be directed to me at email@example.com. All suggestions are welcome.