Don't Give Up on Gilead Following a Weak Q1
Keep an eye on Gilead Sciences ( (GILD) - Get Report ), whose shares are likely to reverse some of their recent losses amid news that its patent lawsuit with Merck ( (MRK) - Get Report ) over a hepatitis C drug will be re-opened.
The case is back in play following assertions that a Merck employee lied to the jury about the work behind the original patent, as initially reported by Bloomberg.
"Although not an outright victory, the news is incrementally positive after Gilead suffered a number of setbacks in its long-running dispute with Merck over the patents in the U.S. covering sofosbuvir and related HCV nucleoside antiviral drugs," wrote Leerink analyst Geoffrey Porges in a May 2 report.
Shares of Gilead remained relatively flat Tuesday after losing about 9% of their value on Friday due to its disappointing first quarter results.
Included in its quarterly results for the period ended March 31 was a $200 million litigation charge associated with the jury's decision ruling in favor of Merck in March.
Should the court ultimately side with Gilead, the company's first quarter cost of sales would be trimmed by $200 million, implying a boost to pro forma EPS to $3.17, from $3.03, while raising gross margins to 89.8%, from 87.2%, wrote Porges.
The Foster City, Calif, biopharma company would also avoid a royalty payment to Merck of about $700 million, assuming the consideration would be based upon about 4% of U.S. sales generated by the drug through its patent life, Porges said.
"The judge's concurrence with this argument by Gilead, and the apparent weakening of the Merck case (so soon), is an unexpected boost for Gilead and should offer some respite after a negative week of news," Porges wrote.
The conflict over Gilead's Sovaldi and Harvoni products began in late 2013, when Merck first claimed Gilead had infringed on two of its patents that at the time it owned together with Ionis Pharmaceuticals.
The likelihood for further appeals by the losing side means a final judgement probably won't occur for another few years at least, according to Porges.
Gilead and Merck reportedly have until today to file additional arguments.
The case is Gilead Sciences Inc. v. Merck & Co., 13-cv-04057, U.S. District Court, Northern District of California (San Jose).
Beyond the latest court developments, investor eyes will likely remain fixed on Gilead's pipeline amid continued concern around Hep C pricing, RBC Capital Markets analyst Michael Yee wrote in a Friday note.
While shares of the company rallied over the last quarter amid $8 billion in stock buybacks, Yee suggested that the company still has a lot of cash to put to work.
Gilead had a total of $21.3 billion of cash, cash equivalents and marketable securities as of March 31.
He sees investor confidence in the pipeline growing, but notes that execution, including FDA approvals, along with re-ignited enthusiasm for the "next best thing" will take at least one to two years.
Gilead posted adjusted EPS of $3.03 for its first quarter, falling short of analysts expectations for $3.15 per share. Revenue came in at a less-than-expected $7.79 billion, below the Street's anticipated $8.12 billion.
