Impact Of Merck Litigation On Ionis Pharmaceuticals

| About: Ionis Pharmaceuticals, (IONS)

Summary

Ionis may turn profitable with Gilead verdict.

Ionis has the cash necessary to advance its pipeline, so it is not necessarily reliant upon a verdict with Gilead in order to meet targets.

Ionis is entitled to 20% of any judgment less Merck's attorney fees.

Image courtesy of Ionis Pharamceuticals The much watched litigation between Gilead Sciences (NASDAQ:GILD) and Merck (NYSE:MRK) appears as though it is rapidly heading towards a jury verdict. However, the market seems to be paying much less attention to a smaller player in the litigation, Ionis Pharmaceuticals (NASDAQ:IONS), which could stand to benefit greatly from the litigation. While I have previously discussed the potential next options that Gilead could take assuming an unfavorable verdict, this article will focus on the impact of the litigation for Ionis Pharmaceuticals and Ionis' important part in the litigation.

Without Ionis There Is No Case

Many of the patented claims that are now being disputed are the result of collaboration between Merck and Ionis Pharmaceuticals (at that time Isis Pharmaceuticals). In 1998 the companies agreed to a partnership agreement to jointly discover and develop modified nucleosides that benefit patients with HCV. The companies ended up deriving a series of patents which today are the very patents that Gilead has been found to be infringing.

Ionis' Stake In the Litigation

While Ionis is not only a partner with Merck in the aforementioned collaboration, Ionis also has a stake in the outcome of the litigation. Ionis is set to receive 20% of the total award that Merck receives, less the amount that Merck spends on its attorneys. Essentially, Ionis will be receiving 20% of the net award. This includes both the past and future damages that the jury is expected to award. The benefit is that Ionis does not have to currently pay for the expenses incurred (the bill is being paid for by Merck), while at the same time collecting part of the reward. The fact that the company is able to essentially save up its cash and potentially receive a royalty check every quarter from Gilead pharmaceuticals should be big news to Ionis investors.

Ionis is currently unprofitable, as it is focused on driving its drugs through the approval process. The process of running the requisite clinical trials is incredibly expensive, and costs very large amounts of money upfront with no guarantee of a return. However, by now potentially having a revenue stream coming in, Ionis has meaningfully changed the game. Ionis already has a very large cash pile, and I would expect for this verdict to, after it makes its ways through the appeals courts, add to the large cash pile. Having a revenue stream means that the company will be able to burn cash at a lower rate which extends its current cash runway and potentially brings it to a point where it is able to stave off the risk of dilution. With multiple products in phase III testing, this windfall could be very timely for Ionis shareholders.

How Much Money Ionis Could Receive?

In terms of past damages, Merck and Ionis are asking for a 10% royalty on past sales. The numbers become quite substantial when you realize that Harvoni and Sovaldi brought in $12.4 billion in revenue from 2014 and another $19.1 billion in revenue for 2015. This could represent a substantial windfall for Ionis, as even though Merck's lawyers are sure to be expensive, Ionis will receive 20% of the award for past infringement and then 20% of the award for future infringement. This could lead to a potential lumpsum payment of over $600 million based on over $3 billion in damages. Should sales continue at their current clip, the revenue for Ionis would be a game changer with a check for over $350 million coming in every year (should Harvoni and Sovaldi maintain their market leading positioning). This would take the company into profitability and would add to the company's substantial cash pile. It would also substantially de-risk the company. One of the biggest concerns in a pharmaceutical stock is the failure of key products in the pipeline, but by having a solid revenue stream from which it is already profitable, and would make Ionis less reliant upon the key drugs in its pipeline. It should be noted that Ionis has done a remarkable job about having a large and diverse pipeline as a result of its many collaboration agreements, so it is not as reliant as typical pharmaceutical companies on one drug. The verdict has the potential to be a game changer for Ionis Pharmaceuticals and could even help to encourage the company to look at outside assets to acquire in order to further expand its pipeline.

Financial Position

Despite its net losses, Ionis is in a solid financial position. Ionis' biggest cost by far is its R&D, for which it spent $323 million last year. However, the company has been able to generate substantial revenue from achieving milestones in its partnership agreements. Last year this amounted to revenue of over $284 million. After taking into account SG&A, Ionis reported an operating loss of $76 million.

While this may sound like a very big net loss, Ionis is very well positioned to be able to ride out the storm. As of December 31, 2015, Ionis had cash and cash equivalents of over $779 million. This cash pile makes Ionis less reliant upon the litigation with Gilead, and also means that Ionis will not have to rely upon the litigation in order to be able to effectively execute its plans for its pipeline.

Conclusion

Ionis may be a very sneaky way to play the litigation between Gilead and Merck. While Ionis does not have to pay out the immediate cash costs of litigation, it could turn profitable as a result of the litigation. While Ionis may not receive a check for several years, it has the cash pile to be able to wait and not have to worry about the risk of dilution. Ionis may become a profitable company out of a result of the litigation with Gilead, and the litigation is looking more and more like a potential game changer for Ionis.

Disclosure: I/we 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.