Sovaldi's Patent War

| About: Gilead Sciences, (GILD)


Now that Sovaldi is a success, a number of companies want a piece of it.

Gilead will spare no expense in this fight.

Expensive court fights are part of the reason for high drug prices.


Now that Sovaldi, Gilead Sciences (NASDAQ:GILD) hepatitis C drug is approved and selling well, a number of companies remember that they have invented the drug. Lawsuits are flying back and forth and patent attorneys are busy.

Cambridge drug developer, Idenix (NASDAQ:IDIX) in December 2013 filed two lawsuits against Gilead: a patent infringement lawsuit in the U.S. District Court in Boston, (involving Idenix U.S. Patents 6,914,054 and 7,608,597) and a separate patent infringement and interference lawsuit in the U.S. District Court in Delaware (regarding Idenix U.S. Patent 7,608,600 and Gilead U.S. Patent 8,415,322).

Patent interference: In an earlier patent interference procedure Idenix claimed that its patent No. 12/131,868 covered Sovaldi, but the USPTO appeals board ruled that Gilead had filed its patent No. 7,429,572 first.

In January the USPTO determined that Idenix is not entitled to priority of invention and judgment was entered in favor of Gilead. Idenix intends to challenge the decision in the courts.

The primary outcome of the decision is that Gilead is now the senior party and Idenix the junior party. From here on the junior party bears the burden of proof to demonstrate that it invented the technology in question before the senior party.

An interference proceeding, also known as a priority contest, is a procedure to determine the priority in patent disputes where multiple patents cover the same application.

The proceeding is conducted by a panel of administrative patent judges of the USPTO (the U.S. Patent and Trademark Office).

Most other countries have a first-to-file system to determine priority. The U.S., until the Leahy-Smith America Invents Act of 2011, has allowed the party which has filed late, to challenge the winner, provided that it can document that it was the first to invent the idea.

Leerink Swann analyst Howard Liang believes that Gilead has the upper hand in this first battle with Idenix.

"We believe the USPTO Trial and Appeal Board decision in March 2013, the first independent ruling from a third-party authority on this matter, provided important technical details that appear to favor Gilead."

"Based on our review, the Merck and Idenix patents do not appear to specifically provide examples of nucs with 2'-methyl, 2'-fluoro-substituted sugar, the class of nucs including Sovaldi that Pharmasset had focused on."

In response to the USPTO decision Ronald Renaud, CEO of Idenix said this:

"We intend to challenge this decision in proceedings outside the USPTO. We are confident in our patent portfolio and will continue to defend it vigorously, and this specific matter before the USPTO represents just one part of our overall effort. Idenix has several patent families that provide coverage for 2'-methyl nucleoside compounds and 2'-methyl, 2'-fluoro nucleoside compounds specifically."

Which means that more battles are coming. In the second interference case, filed in December, the claim is that Idenix' patent No 7,608,600 was filed earlier by about two weeks than the Gilead's 8,415,322 patent.

But if Gilead can prove that the invention process has started earlier by presenting publications or possibly internal records about ongoing lab work, that could affect the priority issue.

Companies usually start work on a new drug with a library of compounds and do a series of experiments before selecting the lead compound. This selection process could be prior art to the Idenix patents.

In March Idenix has filed lawsuits in Europe charging that Gilead has infringed on Idenix's recently-granted European patent EP 1 523 489 by selling Sovaldi in England, France, and Germany. The claim covers 2'-methyl-2'-fluoro nucleosides for treating the hepatitis C virus. Idenix co-owns the patent with universities.

Separately, in August 2013 Idenix filed a request with the Chinese Patent Office's Patent Re-examination Board to invalidate Gilead's Chinese Patent No. ZL.200480019148.4.

Roche and others

Besides Idenix, other companies are also trying to get a piece of Sovaldi.

Roche (OTCQX:RHHBY) has argued that it had partnership with Pharmasset since 2004 and that gives it an exclusive license to the drug. Gilead rejected the argument by pointing out that the partnership has ended long before Gilead's acquisition of Pharmasset.

Abbvie (NYSE:ABBV) has filed suit against Gilead in February in a Delaware court for infringement of its patent Nos. 8,466,159 ("Methods for Treating HCV," issued in June, 2013) and 8,492,386 (same title, issued in July, 2013) based on Gilead's anticipated manufacture and sale of its combination therapy of Sovaldi and ledipasvir.

Merck (NYSE:MRK) last summer contacted Gilead by phone calls and email and asked for a 10 percent royalty, maintaining that the drug infringes on its patent Nos. 71,905,499 and 8,481,712, a claim that Gilead considers a threat to the company.

Instead of waiting for Merck's lawsuit, Gilead filed preemptively, seeking a court order to determine that Sovaldi is not infringing on Merck's patents or that the patents are invalid.

Merck sells its own Hep C drug, Victrelis, which is likely to be swept away by Sovaldi and the newer combinations coming to market.

Remarkably, according to the Gilead suit, Merck claimed that it has already lined up a 10 percent deal with an unspecified company.

Gilead strikes back

Besides the Merck suit, Gilead is suing Idenix in various jurisdictions outside the U.S. (Canada, Norway and Australia) to invalidate granted Idenix patents covering certain 2'-methyl-2'-fluoro nucleoside compounds and their use in treating HCV or other Flaviviridae viruses.

The other side of this is that all Idenix or any of the other plaintiffs has to show is infringement in a single claim to be eligible for damages.

Investors' view

Idenix at the end of 2013 had cash and cash equivalents totaling $122.0 million, but its operations are loss making.

Baupost Group, a Boston hedge fund led by Seth Klarman, is a large shareholder of Idenix. The fund disclosed in a recent SEC filing that it holds 53.33 million shares of the company, equivalent to 35.38 percent of the common stock. Baupost has been granted observer rights, with respect to meetings of the board of directors of Idenix and the committees of the company's board of directors.

Bain Capital's Brookside Capital is another hedge fund with large holdings: it has accumulated 12.66 million shares at the end of the third quarter of 2013. West Capital Management holds 1.78 million shares.

Since Idenix is a loss-making enterprise, one wonders, what is the hedge funds' real interest in the company. Could it possibly be a win in the patent suits against Gilead and the chance of gaining some fat royalty contracts?

In January Idenix raised $106.7 million from a share offering and it will use the proceeds for clinical trial costs and for patent litigation expenses.

Gilead had $2.13 billion in cash in early 2014.

Gilead has acquired Sovaldi through the 2011 acquisition of Pharmasset in an $11 billion transaction. The astronomical price was questioned at the time by analysts and although it is not disclosed, it must have involved a heavy bidding process by major players of the industry behind the scenes to justify the high price.

Gilead is not a pushover when it comes to legal fighting. It sharpened its skills in the cut-throat HIV drug business. It did win most its battles against other companies and non-profits and lost occasionally against governments, but never gave up on a fight.

For example, in 2007, the Public Patent Foundation filed requests to the USPTO for the re-examination of four of Gilead's crucial patents related to tenofovir disoproxil fumarate, which is the active ingredient in Atripla, Truvada, Complera/Eviplera and Viread.

The USPTO granted these requests and issued non-final rejections for the four patents, but a year later it reversed and confirmed the validity of all four patents.

Gilead was not as successful in disputes with the Brazilian and Indian governments.

In 2008, the Brazilian Health Ministry, citing the patent re-examination proceedings in the U.S. as grounds for rejection, requested that the Brazilian patent authority does not support Gilead's patent application in Brazil. In August 2008, an examiner in the Brazilian patent authority issued a final rejection of the company's fumarate salt patent application.

Since Gilead does not have a patent in Brazil, in 2011 the Brazilian government purchased all of its supply of tenofovir disoproxil fumarate from generic manufacturers.

In India the company had faced a similar situation. Certain countries in Africa and Asia, including China, do not provide effective enforcement of Gilead's patents, and third-party manufacturers are able to sell generic versions of its products.

Regarding the matter at hand, a number of companies are developing drugs in the "nuc" class for hepatitis.

The main debate probably will focus on whether the patents include something new that is not obvious. Given all the work being done by different companies, to invalidate their patents Gilead could use the argument that what they claim is obvious, or that they don't show anything specific that describes Sovaldi in chemical terms and/or the description in the patent is so vague that a skilled practitioner of the art could not reproduce it and would end up in endless experimentation if tried to follow the instructions.

Generally speaking, a patent is not a perfect protection against imitation. It merely grants the patent holder the right to sue infringers once they can be identified, which means that the patent holder must constantly survey the market and react to infringers.

When an innovator applies for a patent, there is a good chance that firms in the same industry will try to "invent around" the patent or gain a piece of it through the courts.

Patent wars are tremendously complicated and expensive. But Gilead Sciences has both the money and the fighting spirit to successfully fight them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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