One measly percent. That's how much Gilead Sciences' (GILD -2.13%) revenue increased in the second quarter of 2022 compared to the prior-year period. And its earnings declined by a double-digit percentage year over year.
That sort of financial performance gives investors reason to be moderately concerned about Gilead over the near term. But what about the long term? Here's my biggest worry about Gilead.
The cost of a cure
Gilead remains heavily dependent on its HIV therapies. In Q2, HIV drugs generated more than two-thirds of its total revenue. If you delve further into the details, you'll see that two drugs -- Biktarvy and, to a lesser extent, Descovy -- appear to be cannibalizing sales of Gilead's other HIV drugs.
It's not unusual for new-and-improved drugs to grow their sales at the expense of older products. That's not problematic for a company as long as its overall sales increase. But what Gilead could have coming in the future could be a totally different story.
The big biotech's pipeline includes three different candidates in phase 2 testing that hold the potential to cure HIV. Gilead is also partnering with Gritstone Bio to evaluate an experimental HIV therapeutic vaccine in an early-stage clinical study.
A cure for HIV would effectively eliminate the need for ongoing therapies. Sure, Gilead could make a boatload of money selling HIV cures at first. However, after the initial wave, the company's revenue would likely fall off a cliff. My biggest worry about Gilead is that it could become the victim of its own success.
History repeating itself?
As an investor, I have ample reason for this concern. Gilead has seen a similar scenario unfold in its not-too-distant past.
The company's revenue absolutely skyrocketed in 2014 and 2015 after the initial approval of Sovaldi as a treatment for the hepatitis C virus (HCV). However, Sovaldi and its successors were more than just treatments: They cured HCV in most cases.
But beginning in 2016, Gilead's revenue started to steadily decline. Sure, the company faced competition from Merck, which also marketed a drug that cured HCV. The primary culprit behind Gilead's fading fortunes, though, was that there weren't many new patients for its HCV drugs.
This narrative is reflected in Gilead's stock performance. The biotech stock peaked in mid-2015 as investors anticipated the HCV market losing steam. Even after HCV treatment sales declines leveled off somewhat, Gilead's stock performance lagged well behind that of the S&P 500.
Gilead used its cash stockpile to acquire other companies and form partnerships to expand beyond HIV and HCV. However, some of those efforts went down in flames -- in particular, Gilead's once-promising collaboration with Galapagos on the autoimmune-disease drug filgotinib.
Perhaps the company would have more success in using money generated from a potential future HIV cure. Unfortunately, Gilead's history doesn't exactly provide a warm-and-fuzzy feeling about its chances.
In the meantime
So should you avoid Gilead stock? Not necessarily. There's a pretty good argument for buying Gilead if you're a dividend investor. At the current share price, the big biotech's yield of 4.5% is attractive. Its dividends are dependable as well.
Maybe Gilead's growth could pick up somewhat. Long-acting HIV therapy lenacapavir should be yet another big winner for the company's HIV franchise. Sales of several of Gilead's cancer drugs are gaining momentum. Additional COVID-19 waves could boost sales for Veklury.
It's also possible that Gilead's experimental HIV cures will all flop. But that won't eliminate the threat. Moderna, for example, is developing a messenger RNA HIV vaccine that could prove disruptive to Gilead's business if it succeeds.
I'm rooting for Gilead to score with its own efforts to cure HIV. But based on the company's experience with HCV, the good news for patients might not be so great for shareholders over the long term.
