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: