The financial markets have been abuzz over the tete-a-tete between Merck (NYSE:MRK) and Gilead (NASDAQ:GILD). A jury upheld the validity of Merck's HCV patents and analysts went wild with scenarios of potential up front costs and future royalties to Merck. I felt vindicated for having predicted the lawsuit had legs. Then this happened:

A federal jury in California ordered Gilead Sciences Inc. to pay Merck & Co. and a partner $200 million for infringing two Merck patents in a case involving Gilead's two blockbuster drugs for treating hepatitis C, Merck said Thursday ...

"We are pleased that the jury recognized that patent protections are essential to the development of new medical treatments," Merck said in a statement. "The compounds and methods at issue in this case facilitated significant advances in the treatment of patients with HCV infection, and achieving these advancements required many years of research and significant investment by Merck and its partners."

$200 million ... is that what all the rigmarole was about? The monetary damages felt more like a mediation than an actual settlement. First of all, the up front payment is only 10% of the $2 billion Merck was seeking. Secondly, it's a pittance in comparison to Gilead's $12 billion in cash and securities. However, Gilead is still not out of the woods. Here are the real issues facing the company going forward.

Ongoing Royalties?

The jury awarded the one-time payment based on [i] Gilead's $20 billion in U.S. sales, [ii] less expenses, [iii] at a 4% royalty. It equated to about 1% of U.S. sales. A judge will determine what ongoing royalties the company will have to pay going forward. The royalty amount creates another uncertainty for GILD, and has the potential to be more damaging financially.

New Patient Starts Continue To Decline

In November I rang the alarm that Gilead's HCV sales may have peaked and that thesis appears to be materializing. According to Barron's, new patient starts are tracking 3% below last quarter's:

Gilead HCV franchise was slightly down w/w in terms of new starts and holds 94% share among the new patients. We are in week #6 of new competition launch. However, new pt. starts are tracking 3% below last Q (QTD). Total scripts are tracking ~9% below last Q and pointing to 1Q'16 sales at $2.16B vs. $2.46B consensus. VA sales are a big unknown as lack of budget impacted Q4'15 sales. We do not think IMS fully captures VA sales and their annual budget of $1.5B (for HCV) could be the differentiating factor.

Since VA sales were de minimis last quarter, a 3% decline Q/Q could be apple-to-apples if VA sales were not captured in the current IMS data. The question remains, "Where will Gilead find new patients?"

Sure, there are over three million U.S. infecteds but how many are priced out, incarcerated or restricted from having access by their health insurers? Senator Bernie Sanders lobbied for veterans to have access to Harvoni at a steep discount. Who is to say Attorneys General like Mora Healey won't lobby for steep discounts for state prisoners? If health insurers are forced to provide wider access to patients then that could represent another bloc with the heft to garner steep discounts.

Of the 150 million HCV infecteds worldwide, the majority are in foreign countries. Dollars-per-start are already trending much lower in Europe vis-a-vis the U.S. GILD bull Jim Kimmelman attributes the disparity in pricing to budget constraints and a lower GDP in Europe. The global economy is in shambles so Europe's pricing could fall further. The discount for an HCV regimen in Egypt is over 90% off the list price; Egypt's pricing may be reflective of Gilead's broader strategy for emerging countries.

To make a long story short, even if Gilead is able to find new patients, the price-per-regimen will likely be much less. That sounds problematic. Avoid GILD.