On June 6, 2016, Merck’s jury verdict against Gilead was voided by a federal judge who found that Merck’s scientist and lawyer gave untruthful testimony during the trial. On March 24, 2016, a jury ruled against Gilead in Hep C patent suit and ordered the company to pay $200 million in damages to Merck, approximately 4% royalty of $5 billion Hep C US sales…
Patent Litigation and EPS Impact. Gilead proved that when applying for a patent, Merck used confidential information obtained from Pharmasset when Merck was interested in acquiring the company. Based on the judge’s ruling, we are updating our model by adding back $200 million on our 2016 EBITDA of $21.5 billion, resulting in $0.10 positive impact on our previous 2016 EPS of $12.15. Our projections from 2017-2020 are unchanged, as we assumed no royalty needs to be paid going forward.
Declining but Still Large Hep C Market. Gilead dominates the $23 billion Hep C market with over 90% of patient share in 2015. Its leading drugs, Sovaldi and Harvoni, generated $19.1 billion of revenue in 2015. Sovaldi was acquired from Pharmasset in 2011 for $10.4 billion and became the foundation of Gilead’s Hep C franchise. We expect Gilead’s Hep C revenue to decline at 17% through 2020 due to lowering cost-per-patient and shrinking patient population as more patients are cured by these drugs. However, the Hep C market is expected to be $10 billion by 2020, still attractive for companies to take share. Merck’s own Hep C drug, Zepatier was approved in January 2016 but generated only $50 million of sales in the first quarter of 2016.
Our 2017 PMV of $109 per share is based on 10x our 2017 legacy EBITDA of $8.7 billion and 3.5x our 2017 Hep C EBITDA of $11.6 billion. We believe the company is the most undervalued stock in the biotechnology industry. Although we expect Gilead to continue to face headwind from pricing regulations, we believe the downside is limited as its drugs are already offered at deep discounts.
Patent Litigation and EPS Impact. Gilead proved that when applying for a patent, Merck used confidential information obtained from Pharmasset when Merck was interested in acquiring the company. Based on the judge’s ruling, we are updating our model by adding back $200 million on our 2016 EBITDA of $21.5 billion, resulting in $0.10 positive impact on our previous 2016 EPS of $12.15. Our projections from 2017-2020 are unchanged, as we assumed no royalty needs to be paid going forward.
Declining but Still Large Hep C Market. Gilead dominates the $23 billion Hep C market with over 90% of patient share in 2015. Its leading drugs, Sovaldi and Harvoni, generated $19.1 billion of revenue in 2015. Sovaldi was acquired from Pharmasset in 2011 for $10.4 billion and became the foundation of Gilead’s Hep C franchise. We expect Gilead’s Hep C revenue to decline at 17% through 2020 due to lowering cost-per-patient and shrinking patient population as more patients are cured by these drugs. However, the Hep C market is expected to be $10 billion by 2020, still attractive for companies to take share. Merck’s own Hep C drug, Zepatier was approved in January 2016 but generated only $50 million of sales in the first quarter of 2016.
Our 2017 PMV of $109 per share is based on 10x our 2017 legacy EBITDA of $8.7 billion and 3.5x our 2017 Hep C EBITDA of $11.6 billion. We believe the company is the most undervalued stock in the biotechnology industry. Although we expect Gilead to continue to face headwind from pricing regulations, we believe the downside is limited as its drugs are already offered at deep discounts.
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