West Coast Editor

To more quickly "address [the] global public health need" of a vaccine against the avian flu, Gilead Sciences Inc. and F. Hoffmann-La Roche Ltd. are ending their dispute over Tamiflu, and $62.5 million is changing hands.

Basel, Switzerland-based Roche has agreed to pay that amount in adjusted royalties, laying to rest a squabble that began last summer, when Gilead claimed its overseas partner failed to adequately promote the flu pill (which has come to be considered the best candidate against the avian form of the disease) or pay fair royalties. (See BioWorld Today, June 27, 2005.)

Gilead's stock (NASDAQ:GILD) closed Wednesday at $55.63, up $3.99, after trading as high as $55.78.

Could Gilead have done better, given the serious claims against Roche? Maybe, said analyst Katherine Xu, with Pacific Growth Equities in San Francisco but, thanks to increased publicity around the bird flu, both firms were "under pretty strong pressure since [Gilead] submitted the termination" notice.

"It doesn't look good at all" to drag out the conflict, she noted.

Analysts had estimated the arbitration, starting in September, would take no longer than 18 months, and some targeted mid-2006 for completion, but Gilead CEO John Martin said the firm is ending the skirmish with Roche ahead of that time frame "in an effort to work together, with the utmost diligence, to address this global public health need" of adequate medicinal weaponry not only against human flu but against the advancing bird-flu threat.

Under the terms of the altered Tamiflu pact, Gilead and Roche will set up joint committees to oversee manufacturing, commercial and pandemic planning for the neuraminidase inhibitor, with Gilead having the option to co-promote the compound in some areas in the U.S., although Gilead will not co-promote Tamiflu in 2006 and has not yet determined whether it will exercise its option in 2007 or beyond.

Alleging that Roche failed to launch Tamiflu (oseltamivir phosphate) in markets where it has been approved and blaming Roche for shortages of the drug in the past, Gilead, of Foster City, Calif., wanted to take back all rights, but that won't be happening now.

Gilead gets a blended royalty on sales of Tamiflu, tiered from 14 percent to 22 percent based on Roche's annual net sales. That works out to 14 percent of the first $200 million in worldwide net sales in a given calendar year, 18 percent of the next $200 million in worldwide net sales during the same year and 22 percent of worldwide net sales beyond $400 million during the year.

In the new deal, Roche has agreed to eliminate the pre-existing contractual cost of goods adjustments from the royalty calculations, retroactive to calendar year 2004 and for all future tallies. Without the cost of goods adjustments, based on actual sales for the first nine months of 2005 - along with estimated pandemic sales for the fourth quarter - Gilead expects the blended royalty for Roche's full year 2005 sales to be in the range of 18 percent to 19 percent.

This means Gilead will get $50.7 million in royalties for the first nine months of fiscal year 2005, and $11.8 million in cost-of-goods adjustment retroactive to 2004. Going forward, Roche will pay Gilead at the contractually specified royalty rate based on the level of sales achieved, instead of the prior year's effective royalty rate.

Within 15 days after the change in terms becomes effective, Roche will pay Gilead the $62.5 million. Roche also agreed to scrap a disagreement focused on another $18.2 million paid to Gilead between 2001 and 2003.

The only oral antiviral for the treatment and prevention of influenza strains A and B, Tamiflu was invented by Gilead and licensed to Roche in 1996. The companies collaborated on the development of the product, advancing Tamiflu through clinical trials that began in 1997, with the first market approval approximately two-and-a-half years later. (See BioWorld Today, Oct. 29. 1999.)

"From our estimate perspective, we've been very conservative," Xu told BioWorld Today. "The clarity is a lot better now on the royalty rate, and we were able to tick our numbers up."

Xu targets earnings per share for fiscal year 2005 of $1.65, up from $1.53, on royalties of $162.2 million, up from $78.7 million. In 2006, the EPS number is $2.16, up from $1.92, and in 2007, $2.68, up from $2.34, on total expected royalties of $321.5 and $440.2 million, respectively.