Gilead Makes Headway With Merck 'Unclean Hands' Argument

A federal judge found Gilead Sciences Inc.'s "unclean hands" argument alleging one of Merck & Co. Inc.'s patent attorneys had acted in bad faith by initially not telling the truth during a hearing reasonable enough to reopen a case in which the two firms have been fighting over whether the former company infringed on the latter's hepatitis C virus (HCV) patents.

Judge Beth Labson Freeman of the US District Court for the Northern District of California gave both sides a new opportunity to submit further evidence in the lawsuit, in which Merck asserted its California rival's HCV drugs Sovaldi (sofosbuvir) and Harvoni (ledipasvir-sofosbuvir) infringed on the New Jersey company's patents, '499 and '712.

In March, a jury sided with Merck and awarded the company $200m, although that amount was much lower than the 10% of Sovaldi and Harvoni revenues the firm sought.

But after that ruling, Gilead asserted that Merck's patent attorney, Phil Durette, had lied during the hearing when he said he wasn't on a confidential conference call with Pharmasset Inc. – later acquired by Gilead – where its investigational compound PSI-6130, the predecessor to Sovaldi, was discussed.

Notes, however, revealed Durette had indeed been on the call – something he later acknowledged.

The judge's concurrence with Gilead was an "unexpected boost" for the company, said Leerink analyst Geoffrey Porges.

The judge's comments in response to evidence and testimony suggest she increasingly feels inclined to consider this aspect of the case in Gilead's favor, potentially revoking Merck's patents, Porges said.

But Jefferies analyst Brian Abrahams said that while the judge's willingness to consider more arguments is a sign she is carefully considering the evidence in her decision, he insisted the court is not leaning toward Gilead.

Considering most of the events happened over 15 years ago, Abrahams said he didn't view it as unreasonable Durette's story had changed during the trial. And given Durette acted "ethically" when drafting the Merck patents – recusing himself and not amending the pending applications until the chemical structure was made public by Pharmasset – Abrahams contended it's unclear, even if true, whether the allegations would persuasively meet the high legal standard needed to establish "unclean hands."

Gilead also is arguing that Merck had waived the right to enforce its '499 and '712 patents because it failed to either license Pharmasset's HCV candidates or acquire the company.

Both parties already have indicated they intend to challenge different aspects of the original trial, Leerink's Porges pointed out.

Gilead had expressed optimism the appeals process would be more favorable to it, with panels of sophisticated judges – rather than less experienced lay juries – more likely to side with it about the complex technical details and procedural issues underlying the case, he said.

And Merck has signaled its intention to appeal the jury's calculations underlying the $200m judgment, Porges said.

Abrahams pointed out the judge has severed the decision on the ongoing royalty until after the appeal, although he noted the parties were working with an arbitrator in the meantime to determine an acceptable royalty rate.

The judge is expected to only intervene if a resolution cannot be met, Abrahams noted.

Should Merck, which won approval earlier this year of its latest HCV drug Zepatier (elbasvir and grazoprevir), ultimately prevail during the appeals process, Porges noted there are several remaining issues to be addressed, including supplemental damages on sales of Sovaldi and sofosbuvir-related products from the beginning of 2016 to the end of the trial; royalty obligation on future sales of the drugs and the sales base on which to apply them; and interest on the retroactive damages.

As a result – barring an agreement between the two sides, which would likely draw down Merck's current settlement – Porges said he expected the legal battle to continue for at least a few more years.

Shares of Gilead closed at $89 on May 2, up 79 cents, after gaining as much as 1.4% earlier in the day, while Merck's stock ended the day at $55.30, up 46 cents.