Gilead Sciences (NASDAQ:GILD) and its shareholders are unquestionably ready to put 2016 in the rear view mirror. The biotech's share price, after all, has fallen by 26% this year. 

The bright side is that Gilead is set to kick off the new year with around $35 billion in cash that could be used to make a big splash on the M&A scene, and its diverse clinical pipeline is making steady progress at potentially breaking into untapped multi-billion dollar markets, such as nonalcoholic steatohepatitis, in the near future.

So there are definitely some solid reasons to be optimistic that this top biotech may have its best year yet in 2017.  

Before investors turn the page on the host of troubles that plagued the biotech in 2016, though, there are a handful of dark storm clouds gathering that could keep Gilead from returning to its winning ways next year. In fact, the new year may turn out to be one of the biotech's worst ever -- here's why. 

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Demographics are not on Gilead's side

The underlying reason Gilead's revenue soared when Sovaldi and Harvoni entered the market is because of a phenomenon that was referred to as patient warehousing. In effect, patients who could wait for these next gen hep C drugs did so, creating a huge demand for Sovaldi and Harvoni right out of the gate. Most importantly, though, a good deal of these patients apparently had insurance that covered most of the costs associated with these pricey new medications fairly early on. 

However, the situation is drastically changing right now, thanks to both demographics and pushback from a number of payers. According to the CDC, 82% of hepatitis C patients in the U.S. are either low income individuals and/or IV drug users, meaning people who are highly likely to depend entirely on Medicaid or health plans offered on federal insurance marketplaces for coverage. 

Unfortunately, a whopping 63% of all health plans listed on healthcare.gov marketplaces now require patients to pay a third or more of the cost for specialty medicines like Sovaldi and Harvoni, according to an analysis by Kaiser Health News.

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As an added kick in the pants, Trump's healthcare team is reportedly considering rolling back the significant expansion of Medicaid under the Affordable Care Act, or Obamacare, early in the new year.

In short, the demographic that will need the most help in terms of paying for Gilead's hep C medications -- and which makes up the highest percentage of the overall market -- are the ones that are likely to be the hardest hit by payer push back and the president-elect's healthcare policies. 

Here's why Gilead could be in deep trouble in 2017

Although the real world costs of these drugs after rebates aren't public knowledge, the wholesale price for a 12-week treatment of Sovaldi is listed at a staggering $84,000, and Harvoni comes in even higher at $94,500.

So there's a good chance that a large number of potential patients may be asked to fork over something along the lines of, say, $10,000 to $14,000 out of pocket for a 3-month course of treatment next year -- even after applying a generous 50% rebate in this hypothetical example. And that's for the lucky individuals covered by health plans that are still offered through federal marketplaces right now.   

The heart of the matter is that patients who are struggling to house themselves, are incarcerated, or have a full blown drug addiction simply don't have that kind of money.

Nevertheless, the underlying demographics of the hep C population clearly show that individuals of low socioeconomic standing are Gilead's largest target population. And this particular cohort is likely going to play an increasingly important role now that the first wave of patients that presumably had the means to access these drugs are largely disease free, thanks to Sovaldi and Harvoni's greater than 90% effective cure rates.  

Take-home message

The big picture issue is that hep C infection rates have been naturally declining for decades in the U.S. as the result of better screening procedures prior to blood transfusions. So when you combine a lack of new outbreaks with a novel curative treatment coming to market, the net result is an ever-diminishing patient pool. While this is wonderful news for patients, it's been an overarching concern for investors about Gilead's all-important hep C revenues.

In other words, Gilead's rock star-like hep C franchise is clearly on the back end of its commercial life cycle -- but the decline may turn out be far steeper than many were expecting due to a substantial drop-off in affordable health insurance for the patient demographic that makes up the biggest slice of the U.S. hep C market. 

To avoid this doomsday scenario, Gilead does have the option of breaking out its mountain of cash and buying revenue-generating peers. The odd part, though, is that Gilead's management has made it clear that they're not interested in buying revenue -- even though the rapid maturation of the hep C market came as no surprise to industry insiders, and the company's pipeline has so far been unable to offset its falling hep C sales.

So if management decides to stick to their guns by refusing to crack open the piggy bank, Gilead appears to be in for an extremely rocky 2017. 

 

George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.