Gilead Sciences(NASDAQ:GILD) rocket-like growth rate is starting to slow due to pushback from payers over the price of its flagship hepatitis C drugs Harvoni and Sovaldi, along with AbbVie's competing combo drug, Viekira Pak, beginning to capture a somewhat bigger slice of the market. Put simply, we may have already seen the high-water mark for Gilead's hep C franchise.

Digging into the details, Gilead's total annual revenues grew by 127% last year, but management has been guiding for a far more modest 10% rise in revenue this year. For what it's worth, the Street is projecting a 21.8% jump in annual revenue to around $30.3 billion for 2015.     

While double-digit annual-sales growth is certainly nothing to sneeze at, Gilead's hep C and HIV franchises are both facing serious threats to their overwhelming dominance that could bring this period of ample cash flows to a sudden halt.

On the HIV front, for instance, the biotech presently owns about 85% of the global market. But sales are expected to peak as soon as 2017, given that some of the company's key patents are set to expire over the period of 2018 to 2022, allowing for a major influx of generic competitors thereafter. 

Harvoni

Source: Gilead

And the situation for its hep C franchise, which presently gobbles up a staggering 90% of the market, looks even more dire. Several big and little pharmas have been making steady progress toward developing drugs with shorter treatment cycles. Gilead has even been burning the midnight oil to generate a new combo therapy with a treatment duration that is roughly half that of its current products. As less time on a drug logically translates into markedly lower revenues, the Street is starting to suspect Gilead's sales growth could drop into the low single digits within the next year or so. 

How can Gilead stave off a drop in revenue?
These headwinds have analysts and investors calling for Gilead to play the growth-by-acquisition game that's worked so well for the biotech in the past. After all, Gilead now has over $14 billion in cash and cash equivalents at last count, and could very well end the year with over $20 billion, depending on how management puts its share buyback program to work. In short, they certainly have the resources to go after a decently sized company with products already on the market to keep the growth party going.

That's why the rumor mill has repeatedly linked Gilead to buyouts of companies such as Bristol-Myers Squibb, Celgene, Receptos, and Vertex Pharmaceuticals.

A few months back, though, I pointed out that a big name acquisition is probably not in the cards for Gilead, and so far, I've been right. My belief stems from the fact that Gilead tends to go after small, clinical-stage companies where it can employ its vast experience to rapidly develop key experimental products.

Martin

Source: Gilead

Since Dr. Martin took over as CEO, for example, Gilead has executed an average of 0.87 buyouts per year, at an average cost of about $1.3 billion. If we subtract the monstrous $11 billion Pharmasset buyout, though, the average falls to a mere $574 million. So, in light of this track record, this speculation about Gilead pursuing a big pharma like Bristol-Myers is out of character to say the least, and misleading at worst (investors may be expecting too much in terms of short-term value creation).

So, what will be Gilead's next big move be?
I personally think a small oncology company like Bellicum Pharmaceuticals would be a good addition to Gilead's emerging cancer pipeline, as it fits the mold of the biotech's past acquisitions (small in size, early-stage assets with huge revenue potential). But investors might want to prepare themselves for a far duller outcome -- namely, that Gilead stands pat for the most part.

After all, Gilead's management believes in its pipeline as currently constructed, shown by its commentary at several recent investors conferences. The Phenex Pharmaceuticals buyout, for example, could produce multiple megablockbuster drugs for various liver diseases, with few to no treatment options, such as nonalcoholic steatohepatitis. So, I think Gilead will end up sticking to its strategy of taking out small companies in the $500 million-ish range, and building value for shareholders mainly through its clinical activities.

While that sounds boring, Gilead has proven, time and again, that it knows how to develop early-stage assets into game-changing therapies, making this a great stock to hold for the duration.

 

George Budwell owns shares of AbbVie Inc. and Gilead Sciences. The Motley Fool recommends Celgene, Gilead Sciences, and Vertex Pharmaceuticals. The Motley Fool owns shares of 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.