Gilead Sciences, Inc.: The Bear Case From a Bull

A pessimistic view of Gilead Sciences' prospects from a long-time fan of the big biotech.

Keith Speights
Keith Speights
Jun 9, 2017 at 8:03AM
Health Care

It's been hard to be bullish on Gilead Sciences (NASDAQ:GILD) over the last year or so. The big biotech's stock has plunged more than 30% since the beginning of 2016. 

Still, though, I have held on to the Gilead shares I bought several years ago. I've remained positive about the company's long-term prospects. That being said, a reasonable bear case against Gilead comes pretty easily -- even from a bull like me. Here's my best shot at explaining why Gilead Sciences stock isn't a good pick for investors right now.

Toy bear and bull.

Image source: Getty Images.

No light at the end of the hep-C tunnel

There's simply no way to make the ugly truth for Gilead look pretty. Its two top-selling drugs of 2015 and 2016 are in free fall. In the first quarter, sales for Harvoni dropped 54% year over year, while sales for Sovaldi plummeted 75%. And those declines follow a combined 32% year-over-year sales decrease in 2016.

Granted, some of the drop in sales for the two hepatitis-C drugs has been offset by increased revenue from Epclusa. While Epclusa has been a winner, though, its success hasn't been nearly enough to make up for the hemorrhaging experienced by Harvoni and Sovaldi.

Gilead has one final hep-C drug potentially on the way. The biotech awaits regulatory approval for a combination of sofosbuvir (Sovaldi), velpatasvir, and voxilaprevir in treating all genotypes of hepatitis C. Even with Epclusa and this new combo, however, the reality is that there's no light at the end of Gilead's hep-C tunnel right now. Even the company's management admits it doesn't know when sales for the hepatitis-C franchise will stabilize.

Gilead's silver linings have clouds

At least Gilead Sciences has its HIV drugs that it can count on, right? Certainly, HIV is the main bright spot for Gilead right now. Sales for Genvoya, Descovey, and Odefsey are soaring. Gilead also appears to have a robust pipeline, with eight late-stage candidates and 18 programs in phase 2 development. Unfortunately, though, even Gilead's silver linings have clouds.

While it's true that Gilead's newer HIV drugs, especially Genvoya, are performing very well, much of that success comes at the expense of the biotech's older drugs. Sales for Truvada, Atripla, Stribild, and others, are falling. Although Gilead's overall HIV sales are increasing, the first-quarter combined year-over-year increase totaled less than 13%. That's not nearly enough to overcome the hepatitis-C headwinds that Gilead faces.

Most of Gilead's late-stage pipeline candidates are still several years away from reaching the market. And that's if all goes well in clinical studies and the regulatory approval process, which is never a sure thing. Gilead's bictegravir/F/TAF combo for treating HIV is promising, but it could face stiff competition from GlaxoSmithKline's Viiv Healthcare subsidiary. 

Drawing of big fish about to eat little fish.

Image source: Getty Images.

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No deals in sight

Gilead Sciences has plenty of money to make an acquisition. The company has plenty of motivation to make an acquisition. Its management has even said that it wants to make an acquisition -- and hinted at the possibility of a major purchase. But there have been no deals, so far. There aren't even any juicy rumors that an acquisition is imminent.

There really aren't too many biotechs on the market that would move the needle for Gilead. The potential acquisition target most often mentioned is Incyte (NASDAQ:INCY). Gilead would have to pay a premium above Incyte's current $25 billion or so market cap to reel in the smaller company. If it did buy Incyte, Gilead would add Jakafi and promising experimental cancer drug epacadostat to its lineup. 

So why hasn't Gilead bought Incyte yet? It could be that the big biotech doesn't think the numbers add up. Last year, Gilead CEO John Milligan said that some deals "might look good on spreadsheets," but would be difficult to manage. It's possible that Gilead instead could turn to a "string of pearls" strategy, buying multiple smaller biotechs. However, that approach might not be enough to satisfy investors. Regardless, nothing has happened yet -- leaving Gilead stuck in the mud.

But still...

All of these bearish arguments are true, but I'm still a bull on Gilead Sciences. Even though no one knows when hep-C sales will bottom out, it will happen sooner or later. Gilead's HIV sales might not be growing enough to offset the hep-C declines, but they're still growing. It might take a few years for the pipeline to produce, but I think it will deliver winners -- especially with the bictegravir combo and in the lucrative non-alcoholic steatohepatitis (NASH) indication.

And while there might not be any deals in sight, that doesn't mean Gilead isn't working furiously behind the scenes on the acquisition front. I'd be surprised if it isn't doing so. I also wouldn't be surprised if Gilead decides to buy Incyte and, perhaps, other smaller biotechs.

In the meantime, Gilead continues to spin off impressive cash flow and pay out increasingly higher dividends. I'm sticking with Gilead to see what happens. I suspect the bears will be forced into hibernation in the not-too-distant future.